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

. In this case the appellant (hereinafter called the assessee) was assessed for the assessment yearon a total income of Rs. 8,400. TheOfficer later on came to know that the assessees income from the sale of estates had escaped assessment. TheOfficer took action under Section 34. (1) (a) of theAct, 1922 (hereinafter called the Act) for the assessment yearon 13th August, 1959.2. Under an agreement dated 18th May, 1955, a company called Mundakayam Valley Rubber Co. Ltd., sold and delivered an estate called Kuttikal Estate to one Mr. K. V. George. The area of the estate was 477 acres and 71 cents.Mr. A. V. George had entered into the agreement in his own name and on behalf of another company called the Kailas Rubber Co. Ltd. It was agreed that the vendor would execute the necessary conveyance in favour of Mr. A. V. George or his nominees. On 15th August, 1955, the assessee entered into an agreement with Mr. A. V. George whereby the assessee agreed to purchase 477:71 acres forming part of Kuttikal Estate for Rs. 6 lakhs. An advance of Rs. 11,000 was paid by the assessee. The balance of Rs. 5,89,000 was to be paid by the assessee on or before 25th September, 1955. It was agreed that Mr. A. V. George should execute ahimself or cause it to be executed by Kailas Rubber Co. Ltd. on whose behalf he was acting in favour of the assessee or his nominees. The assessee subsequently divided the area of 477:71 acres into 23 plots and found purchasers for 22 of these plots. The total extent of 22 plots for which be found purchasers was 373:58 acres, and the total price paid by the 22 purchasers was Rs. 5,18,500. Awas executed by the Mundakayam Valley Rubber Co., Ltd., on 31st March, 1956. It covered all the 23 plots. The 22 plots for which the assessee found purchasers were conveyed to the respective purchasers and the 23rd plot was convey to the assessee himself. Mr. A. V. George and the Kailas Rubber Co. Ltd., were parties to this document. The plot which the assessee had retained for himself was 104: 13 acres in extent. Its value was estimated by theOfficer at Rs. 2,08,000. TheOfficer worked out the profit from the transaction of purchase and sale of land asprice of 373 acres Rs. 5,18,500Value of 104 acres retained by the assessee at Rs. 2,000 per acre Rs.2,08,000 Rs. 7,26,500 Less Cost Rs.6,00,000 Rs.1,26,500 TheOfficer held that a sum of Rs. 1,25,000 in round figures represented the assessees profit from an adventure in the nature of trade and included this amount in his total income under Section 34 (1) (a) of the Act. The assessee appealed to the Appellate Assistant Commissioner who rejected the appeal. The assessee took the matter in further appeal to the Appellate Tribunal which also rejected the appeal holding that the amount of Rs. 1,25,000 represented profit from an adventure in the nature of trade. At the instance of the assessee the Appellate Tribunal stated a case to the High Court on the following question of law:"Whether on the facts and in the circumstances of the case, the transactions constituted a venture in the nature of trade and the surplus of Rs. 1,25,000 was assessable to tax?"its judgment dated 10th October, 1966, the High Court of Kerala answered the question in the affirmative and against the assessee. This appeal is brought by special leave from the judgment of the High Court of Kerala dated 10th October, 1966 inReference No. 18 of 1965.

Court's reasoning:
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.