1952 (4) TMI 35 - HC - Income Tax

Court rules on revenue receipt from estate sale, upholds inclusion of unsold stock cost in income computation

MRS. D.M. ALEXANDER Versus COMMISSIONER OF INCOME-TAX, MADRAS

MRS. D.M. ALEXANDER Versus COMMISSIONER OF INCOME-TAX, MADRAS - [1952] 22 ITR 379 (Mad) Issues Involved:1. Whether the sum of Rs. 3,00,000 received by Captain T.P.M. Alexander by the sale of Cottangady estate in excess of its purchase price was a revenue receipt.2. Whether the value of the produce which remained in hand unsold at the end of the year of account should be considered for the proper ascertainment of the profits and gains in respect of raising and selling coffee, tea, and other produce of the estate.Issue 1: Rs. 3,00,000 as Revenue ReceiptThe core issue is whether the Rs. 3,00,000 received by Captain T.P.M. Alexander from the sale of Cottangady estate was a revenue receipt. The Tribunal found that Captain Alexander's intention at the time of purchase was to resell the property at a profit, thus making the profit a business transaction. The Tribunal noted that almost simultaneously with the purchase and improvement negotiations, Captain Alexander was negotiating the sale of the estate. Letters dated 8th February 1943, to Harrisons and Crossfield and Davidson & Co. suggested that the sale negotiations were complete by that date. Thus, the Tribunal concluded that the profit was derived from a business transaction.The High Court upheld this view, noting that the purchase and resale of the Cottangady estate constituted an adventure in the nature of trade. The Court emphasized that Captain Alexander's conduct, including his plans for estate improvements and long-range manuring, was consistent with a desire to keep the estate or make it more attractive for resale. The Court also considered the purchase and sale of the Umbidikhan estate, which occurred around the same period, as relevant evidence of Captain Alexander's intent to engage in business transactions for profit. The Court concluded that there was sufficient evidence to support the Tribunal's finding that the Rs. 3,00,000 profit was a revenue receipt.Issue 2: Valuation of Unsold ProduceThe second issue involves whether the value of the unsold produce at the end of the accounting year should be considered for determining the profits and gains from raising and selling estate produce. The Tribunal upheld the decision of the Appellate Assistant Commissioner, who included the cost price of the unsold stock in the income computation. The Tribunal rejected the argument that businesses of this type need not consider the value of unsold stock for determining income.The High Court noted that the assessee did not maintain separate accounts for the estates and that the agents managing the estates used the mercantile system of accounting. The Court observed that if the system of accounting adopted by the assessee was mercantile, then the value of the unsold produce at the end of the year must be taken into account. The Court found that the Income-tax Officer had the statutory right under Section 13 of the Income-tax Act to adopt the mercantile basis for computation when the assessee had not regularly employed any method of accounting. The Court concluded that the Tribunal was correct in upholding the inclusion of the value of unsold produce for the proper ascertainment of profits and gains.Conclusion:The High Court answered both questions in the affirmative and against the assessee. The sum of Rs. 3,00,000 received by Captain Alexander was deemed a revenue receipt, and the value of the unsold produce at the end of the accounting year was correctly included for determining the profits and gains from the estate. The assessee was ordered to pay costs of Rs. 250 to the Commissioner of Income-tax.