Case: P. M. Mohammad Meerakhan Vs. Commissioner Of Income-Tax, Ernakulam

It was then contended on behalf of the appellant that even assuming that there was an adventure in the nature of trade, the profits from such an adventure have not been properly ascertained in the present case. It was said that the Income-tax authorities were wrong in holding that the value of the 23rd plot retained by the assessee represented the profit made in the transaction.The argument was that the adventure would terminate after the portion retained by the appellant was also sold and therefore the profits in the adventure could be determing only at the time of the completion of the sale of the entire estate.In our opinion, there is no justification for this argument. It is not a correct proposition to say that the profits of the assessee cannot be ascertained even on the assumption that the transaction of the adventure of trade was not completed.Under the Income-tax Act for the purpose of assessment each year is a self-contained unit and in the case of a trading adventure the profits have to be computed in the manner provided by the statute.It is true that the Income-tax Act makes no express provision with regard to the value of stock. It charges for payment of tax the income, profits and gains which have to be computed in the manner provided by the Income-tax Act. In the case of a trading adventure the profits have to be calculated and adjusted in the light of the provisions of the Income-tax Act permitting allowances prescribed thereby. For that purpose it was the duty of the Income-tax Officer to find out what profit the business has made according to the ture accountancy practice. As a normal rule, the profit should be ascertained by valuing the stock-trade at the beginning and at the end of the accounting year. In Whimster and Co. v. Commissioner of Inland Revenue, (1926) 12 Tax Cas 813 Lord President Clyde observed at page 823 :"In computing the balance of profits and gains or the purposes of income-tax .. . . two general and fundamental commonplaces have always to be kept in mind. In the first place, the profits of any particular year or accounting period must be taken to consist of the difference between the receipts from the trade or business during such year or accounting period and the expenditure laid out to earn those receipts. In the second place, the account of profit and loss to be made up for the purpose of ascertaining that difference must be framed consistently with the ordinary principles of commercial accounting, so far as applicable, and in conformity with the rules of the Income-tax Act, or of that Act as modified by the provisions and schedules of the Acts regulating excess profits duty, as the case may be. For example, the ordinary principles of commercial accounting require that in the profit and loss account of a merchants or manufacturers business the values of the stock-in-trade at the beginning and at the end of the period covered by the account should be entered at cost or market price, whichever is the lower although there is nothing about this in the taxing statutes."In Commissioners of Inland Revenue v. Cock, Russell and Co. Ltd, (1949) 29 Tax Cas 387 Croom-Johnson, J. in dealing with valuation of stock-in-trade for purposes of taxation stated as follows :-There is no word in the statutes or rules which deals with this question of valuing stock-in-trade. There is nothing in the relevant legislation which indicates that in computing the profits and gains of a commercial concern the stock-in-trade at the start of the accounting period should be taken in and that the amount of the stock-in-trade at the end of the period should also be taken in. It would be fantastic not to do it: it would be utterly impossible accurately to assess profits and gains merely on a statement of receipts and payments or on the basis of turnover. It has long been recognised that the right method of assessing profits and gains is to take into account the value of the stock-in-trade at the beginning and the value of the stock-in-trade at the end as two of the items in the computation. I need not cite authority for the general proposition which is admitted at the Bar, that for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statutes."In Commissioner of Income-tax, Madras v. A. Krishnaswami Mudaliar, 1964-53 ITR 122 =(AIR 1964 SC 1843 ) it was observed by this Court that whichever method of book-keeping was adopted in the case of a trading venture for computing the true profits of the year the stock-in-trade must be taken into account. At page 132 of the report Shah, J., speaking or the Court stated the principle as follows:"These observations do not affect the true character of the profit of a business. Adjustments may have to be made in the principle having regard to the special character of the assets, the nature of the business and the appropriate allowances permitted, in order to arrive at the taxable profits. They do not support the proposition that, in the case of a trading venture you can arrive at the true profits of a year by ignoring altogether the valuation of the stock-in-trade at the end of the year, while debiting its value at the commencement of the year as an out-going; for determination of the profits by ignoring the valuation of the stock at the end of the year and debiting the value of the assets at the commencement of the year would not give a true picture of the profit for the year of account."In view of this principle we are of the opinion that the Income-tax Authorities have correctly estimated the profit of the assessee by treating the land as stock-in-trade and valuing it according to the normal accountancy practice.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]3. The question whether a transaction is an adventure in the nature of trade must be decided on a consideration of all the relevant facts and circumstances which are proved in the particular case. The answer to the question does not depend upon the application of any abstract rule or principle or formula but must depend upon the total impression and effect of all the relevant facts and circumstances established in the particularour opinion, there is no justification for this argument. It is not a correct proposition to say that the profits of the assessee cannot be ascertained even on the assumption that the transaction of the adventure of trade was not completed.Under the Income-tax Act for the purpose of assessment each year is a self-contained unit and in the case of a trading adventure the profits have to be computed in the manner provided by the statute.It is true that the Income-tax Act makes no express provision with regard to the value of stock. It charges for payment of tax the income, profits and gains which have to be computed in the manner provided by the Income-tax Act. In the case of a trading adventure the profits have to be calculated and adjusted in the light of the provisions of the Income-tax Act permitting allowances prescribed thereby. For that purpose it was the duty of the Income-tax Officer to find out what profit the business has made according to the ture accountancy practice. As a normal rule, the profit should be ascertained by valuing the stock-trade at the beginning and at the end of the accountingview of this principle we are of the opinion that the Income-tax Authorities have correctly estimated the profit of the assessee by treating the land as stock-in-trade and valuing it according to the normal accountancy practice.5. As we have already said it is not possible to evolve any single legal test or formula which can be applied in deterture in the nature a transaction is an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction. What then are the material facts found in the present case?6. It is clear from the recital of the agreement dated 15th October (August?), 1955 that the intention of the assessee in purchasing the estate was to resell it at a profit. An advance of Rs. 11,000 was paid by the assessee on that date, the balance of Rs. 5,89,000 was to be paid on or before 25th September, 1955. It was one of the terms of the agreement that Mr. A. V. George was to execute the sale deed either favour of the assessee or his nominees. It was also found that the assessee did not have the resources to buy any estate worth a lakh rupees when he entered into the agreement for the purchase of Kutikal Estate for an amount of Rs. 6 lakhs. In the intervening period between 15th August, 1955 and 31st March, 1956, the assessee divided the estate into 23 plots and arranged for the sale of 22 plots to different purchasers. The division of the land into 23 plots and the sale to the various purchasers indicate that the was scheming and organisation on the part of the assessee. It was found that the assessee did not have the means and resources to cultivate the land himself and that he had arranged for the sale of 22 plots to different purchasers. Having regard to the total effect of all these circumstances we are of the opinion that the High Court was right in its conclusion thatthe transactions of the assessee constituted an adventure in the nature of trade and were in the course of a profit making scheme and the question was rightly answered by the High Court against the assessee.