Case: Commissioner Of Income-Tax Central, Calcutta &amp; Anr Vs. Amalgamated Development, Ltd

2. The respondent company purchased the assets and liabilities of the firm, Mugneeram Bangur and Co. (Land Department), hereinafter referred to as the firm on July 7, 1968 for a consideration of Rs. 34,99,300. The consideration was paid by the issue of shares to the vendor or its nominees in the share capital of the respondent company. The assets included land at cost, Rupees 12,68,268 as also goodwill and certain other assets subject to certain liabilities incurred by the firm. By the time the respondent company took over the land, the firm had sold a number of plots in respect of which part of the consideration money had been realised and for the balance Mortgage Bonds had been executed by the purchaser. In respect of those plots there was an undertaking to lay out roads, etc. The respondent company took over the debts as well as the liabilities. After the purchase, the respondent company itself sold certain other plots. The purchaser paid a percentage of price in cash and undertook to pay the balance with interest at a specified rate in annual instalments which was secured by creating a charge on the land purchased. The sales made by the respondent company were in all material respects similar to the sales made by the firm. A specimen copy of the Sale-Deeds executed by the firm or the respondent company is Annexure A to the Statement of the Case. The relevant provisions of the sale-deed are as follows"........And whereas the said Vendor hath agreed with the Purchaser to sell him the said land hereunder written at the rate of price or sum of Rs. 3,000 per cotta free from all encumbrances. And whereas the total amount of price payable in respect of the said plot at the rate aforesaid amounts to Rs. 8,708-5-6. And Whereas at the treaty for sale it was agreed by and between the parties hereto that one-third or thereabout of the total price will be paid at the time of execution of these presents and the payment of the balance will be secured in the manner hereinafter appearing. Now, This Indenture Witnesseth that in pursuance of the said Agreement and in consideration of the sum of Rs. 8,708-5-6 whereof the sum of Rs. 2,908-5-6 of lawful money of India to the said Vendor in hand well and truly paid by the Purchaser at or before the execution of these presents (the receipt whereof the said Vendor doth hereby as well as by receipt hereunder written admit and acknowledge) and the payment of the balance namely the sum of Rs. 5,800 being secured under a security deed of even date with these presents and executed by the Purchaser in favour of the Vendor creating First Charge upon the said land ;" . . Memo of ConsiderationBy amount paid as earnest money on 5th August, 1948 By Cheque (part) No. 6985706 on The Bank of India Ltd.Rs. 501-0-0on 30th January 1949.Rs. 2,407-5-6By amount secured under Security Deed of even date being these presents and executed by the Purchaser in favour of Vendor..Rs. .5,800-0-0A specimen copy of the Mortgage Deeds is Annexure B to the Statement of the Case. The relevant provision of the said Mortgage Deed are to the following effect :"... and by the said Indenture of Conveyance it was provided that the payment of the balance of the consideration money, namely, the sum of Rs. 5,800 owing by the said mortgagor to the said mortgagee should be secured by an Indenture of Security Deed of even date beliving these presents to be executed by the said mortgagor in favour of the said mortgagee immediately after the execution of Conveyance now in recital. Now this Indenture Witnesseth and declares as follows :-(1) In consideration of the said premises the said mortgagor doth hereby covenant with the said mortgagee that the said mortgagor will pay to the said mortgagee the said sum of Rs. 5,800 within ten years to be computed from the date of these presents together with interest thereon at the rate of 8 per cent per annum calculated from the date of these presents upto, the date of payment payable monthly...................................................."3. We are concerned in this case with the assessment of the respondent company for two periods. The first period is the accounting year ending June 30, 1949 corresponding to the assessment year 1950-51 and the second period is the accounting year ending June 30, 1950 corresponding to assessment year 1951-52. For the assessment year 1950-51, the respondent company was maintaining its accounts in the mercantile system. According to this system, the value of the land sold was credited at Rs. 3,73,375 against which the unpaid balance was debited in the debtors account and shown under the heading "book; debts considered good-secured against mortgage of land."Against this sale, there was an item of expenses aggregating to Rs. 2,77,047 of which the actual expenses paid out in cash was Rs. 1,12,577 and the estimated expenses against future development was Rupees 1,44,470. Out of the actual expenses paid out in cash amounting to Rs. 1,12,577, a sum of Rs. 48,238 was expended for lands sold by the respondent company and a sum of Rs. 64,340 for expenses incurred by the respondent company on account of land already sold by the vendor. As already stated, the accounts were kept in the account books of the respondent company on a mercantile system, for this period. Later on, the respondent company adjusted its accounts on a cash system and submitted a revised return showing a loss of Rs. 11,583. The Income-tax Officer in assessing the income for the assessment year 1950-51, originally accepted the cash basis and computed the income. On appeal, the assessment was set aside and the case was remitted to the Income-tax Officer for a fresh assessment. In this fresh assessment, the Income-tax Officer adopted the mercantile basis on which the books of the respondent company had actually been kept. Thereafter, the Income-tax Officer allowed the sum of Rs. 48,238 which was the expenses actually incurred by the respondent company in respect of the lands sold by it but disallowed the sum of Rs. 64,340 which was the expenditure in respect of the lands which had already been sold by the firm before the respondent companys purchase. With regard to the sale price of the plots, the Income-tax Officer held that the entire amount of consideration was to be treated as income, though only a portion of the consideration was realised in cash and the other portion was left outstanding after taking a mortgage on the plots sold from the purchaser as security. With regarded to the next assessment year, 1951-52, the respondent company kept its accounts on the cash system and not on mercantile system. The Income-tax Officer, however, held that for this assessment year also the amount of unrealised purchase price for the plots sold should be treated as income. As regards expenses, the Income-tax Officer allowed a sum of Rs. 56, 953 being the expenditure in respect of the lands actually sold by the respondent company but disallowed the amount of Rs. 87,517 being the expenses incurred in respect of the lands already sold by the firm when the respondent company took over. Against the orders of the Income-tax Officer the respondent company preferred appeals to the Appellate Assistant Commissioner who dismissed the appeals by a consolidated order, dated November 7, 1956 . The respondent company thereafter took the matter in appeal before the Appellate Tribunal. The view taken by the Appellate Tribunal was that the Income-tax Officer should have made the assessment on the basis of cash system for the year 1951-52 and for that year only the cash receipts and disbursements should be considered. With regard to the question of unrealised consideration money, the Appellate Tribunal held that for both the assessment years the unrealised consideration should be treated as income. With regard to expenses incurred, the Appellate Tribunal upheld the finding of the Income-tax Officer. In other words, for both the assessment years it was held that the expenses incurred in respect of lands already sold before the respondent company took over should be disallowed. At the instance of the respondent company the Appellate Tribunal stated a case to the High Court on the following questions of law:"1. Whether on the facts and circumstances of the case the entire sums of Rs. 1,12,577 and Rs. 3,43,155 for the assessment years 1950-51 and 1951-52, respectively, spent in carrying out the obligations subject to which lands were sold by the assessee were allowable in computing the assessees profits from the land business2. Whether on the facts and circumstances of the case the assessee was liable to be taxed only on the actual realisation of sales in cash subject to the allowances admissible under the Indian Income-tax Act?"By its judgment, dated December 4, 1962 the High Court answered both the questions in favour of the respondent company.

Reasoning:
We are unable to accept this argument as correct. It is not, in our opinion, a right approach to examine the question as if all revenue expenditure must be equated with expenditure in connection with the stock-in-trade. In the present case, the sale-deed, dated July 7, 1948 shows that the respondent company purchased from the firm a whole running business with all its goodwill and stock-in-trade and including its liabilities.The respondent company had taken over undeveloped land and the idea was to develop the same by making roads, installing a drainage system, street lighting, etc., and then selling the same in small plots at a profit. The principal inducement, therefore, for the purchasers was that the respondent company would develop the land and the purchasers would be able to pay by instalments spread over a number of years. At the time the respondent company took over the lands a portion thereof had already been sold by the firm but the development had not been completed and in the sale-deeds entered into by the respondent company with the subsequent purchasers the respondent company expressly undertook the liability to complete the development within a reasonable time.The argument that the respondent company had nothing to do with the lands already sold which did not form part of its stock-in-trade is not correct. In the present case, the development of the entire hand is an integrated process and cannot be sub-divided into water-tight compartments as the making of the roads and the provision for drainage and street lighting, etc., cannot be related to any particular piece of land but the development has to be made as a whole as a complete and unified scheme.In our opinion, there is justification in the argument put forward by Mr. Asoke Sen and the principle of the decision inl Insurance Co. v. Watson (Surveyor of Taxes), (1897) 3 Tax Cas500, has no application to the present case. There is nothing to show in the present case that the obligation incurred under Cl. 5 of the sale-deed was quantified and formed part of the consideration amounting to Rs. 34 lakhs and odd mentioned in the sale-deed as paid by the respondent company. We accordingly reject the argument put forward by Mr. Mitra on behalf of the appellants on this aspect of the caseWe are unable to accept this argument as correct. The Memo of Consideration in the sale-deed reproduced above shows that there was cash payment of the earnest money on August 5 1948 (Rs. 501) and a cheque was paid as part of the consideration on January 30, 1949 for a sum of Rs. 2,407-5-6 and the balance of the amount "secured under Security Deed of even date". It is, therefore, impossible to hold in this case that there was any cash payment by the purchasers to the respondent company on the date of the execution of the sale-deed and the execution of the mortgage-deed on the same date by the purchasers cannot be treated as equivalent to payment of cash. In the circumstances found in the present case it cannot be said that the mere giving of security for the debt by the purchaser was tant amount to payment. We accordingly hold that, in the circumstances of this case, the amount of consideration not received and which the purchasers agreed to pay in future for which lands were mortgaged in favour of the respondent company, cannot be considered to be taxable income for the assessment periods in question.