Adventure in the nature of trade and closing stock inclusion upheld in taxable income computation.

A purchase and resale of estates was treated as an adventure in the nature of trade because the surrounding circumstances showed an intention to resell for profit rather than retain the property as a capital asset; the excess realised was therefore assessable as business income. In computing profits from raising and selling produce, where no regular method of accounting had been maintained, the mercantile basis could be applied and closing stock of unsold produce brought in at cost to reflect true yearly profits. Both points were answered against the assessee, and the Revenue's computation was upheld.

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Issues: (i) whether the excess realised on the purchase and resale of the estates was a revenue receipt assessable as business income; (ii) whether, for computing profits from raising and selling produce, the value of unsold produce at the end of the accounting year had to be taken into account.

Issue (i): whether the excess realised on the purchase and resale of the estates was a revenue receipt assessable as business income.

Analysis: The question turned on whether the transaction of purchase and resale was an adventure in the nature of trade within the meaning of the income-tax definition of business. An isolated transaction may still amount to business if the surrounding circumstances show that the purchase was made with a view to resale at a profit. The Court examined the short interval between purchase and resale, the contemporaneous negotiations for sale, the assessee's commercial background and knowledge of estate values, and the fact that the improvement plans were not carried through. These circumstances supported the Tribunal's inference that the dominant intention was resale for profit rather than retention as a capital investment.

Conclusion: The excess of Rs. 3,00,000 was rightly treated as revenue receipt from an adventure in the nature of trade, and the finding was against the assessee.

Issue (ii): whether, for computing profits from raising and selling produce, the value of unsold produce at the end of the accounting year had to be taken into account.

Analysis: Under the statutory rule governing computation of income, profits and gains are to be computed in accordance with the method of accounting regularly employed by the assessee, and where no such method has been regularly employed the Income-tax Officer may determine the basis. The assessee maintained no separate accounts of his own for the estates, and the authorities adopted the mercantile basis. On that basis, closing stock of unsold produce had to be brought into account at cost in order to ascertain the true profits of the year. The value of the unsold produce was therefore properly included in the computation.

Conclusion: The Tribunal was right in upholding inclusion of the value of produce remaining unsold at the end of the year of account, and the finding was against the assessee.

Final Conclusion: Both referred questions were answered against the assessee, and the Revenue's computation of taxable income was upheld.

Ratio Decidendi: A purchase and resale transaction becomes taxable business income when the surrounding facts show an adventure in the nature of trade, and where no regular method of accounting has been employed, the taxing authority may compute profits on the mercantile basis including closing stock at cost.

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