Real value of land received for debt settlement governs taxable profit, with final adjustment deferred until sale

For income-tax purposes, land taken in satisfaction of a money-lending debt must be valued at its real worth in the accounting year, and not merely at the book figure or the amount of the discharged debt. Where the land is worth less than the principal advanced, no taxable profit arises solely because part of the debt is treated as satisfied. The revaluation applies to the year in which the land is received, while any final adjustment is deferred until the land is later sold and its actual result can be determined.

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Issues: (i) Whether the assessee was entitled, for income-tax purposes, to revalue lands taken over in satisfaction of money-lending debts and claim loss on the basis of their true value. (ii) Whether the revaluation and resulting adjustment were confined to lands taken over in the accounting year.

Issue (i): Whether the assessee was entitled, for income-tax purposes, to revalue lands taken over in satisfaction of money-lending debts and claim loss on the basis of their true value.

Analysis: Section 13 required income to be computed according to the method of accounting regularly employed, but the computation still had to reflect the real profits and gains of the accounting year. Book entries were not conclusive where they did not represent the true value of the asset received. In transactions where a money-lender took land in liquidation of a debt, the decisive question was the real value of the land at the time of receipt, not the amount of the debt or the figure entered in the books. If the land was worth less than the principal advanced, no taxable profit arose merely because part of the debt was treated as discharged.

Conclusion: Yes. The assessee was entitled to have the lands valued at their true worth and to claim the resulting loss or absence of profit, rather than being bound by the book figure.

Issue (ii): Whether the revaluation and resulting adjustment were confined to lands taken over in the accounting year.

Analysis: The accounting year is a separate and self-contained unit for determining profits and gains. Where the land is not sold in that year, the estimate made on receipt is provisional, and the assessment remains open to final adjustment when the land is ultimately sold and its true result can be ascertained. The revaluation therefore relates to the accounting year in which the land is received, while the final adjustment is made in the year of sale.

Conclusion: Yes. The revaluation was to be confined to lands taken over in the accounting year, with final adjustment deferred until sale.

Final Conclusion: The reference was answered in favour of the assessee by holding that taxable profit or loss must be determined on the true value of the land received in the relevant accounting year, subject to later adjustment when the land is sold.

Ratio Decidendi: For income-tax purposes, an asset received in satisfaction of a money-lending debt must be valued at its real worth in the accounting year, and the assessable profit or loss depends on that value rather than on the debt amount or the entry in the books.

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