Business income on stock in trade cannot include unrealised development gains until the right is actually realised.

Land held as stock in trade was treated as business inventory, so capital gains provisions and the statutory concept of transfer were inapplicable to any notional profit arising from the development agreement. For business income, the assessee obtained only a future right to receive and sell constructed area, and profit could arise only when that right was exercised and realised. The accepted rule of valuation requires closing stock to be taken at cost or market value, whichever is lower, and does not allow taxation of anticipated appreciation. The principles of conservatism, prudence, and the bar on taxing unrealised profits therefore prevent immediate assessment of the expected gain.

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Issues: Whether anticipated business profits arising from a development agreement in respect of land held as stock in trade could be brought to tax in the year of the agreement by treating the transaction as a taxable transfer and by enhancing closing stock.

Analysis: The land transferred under the development agreement was held as stock in trade and therefore did not constitute a capital asset. The provisions dealing with capital gains and the concept of transfer under the Income-tax Act had no application to the taxability of such notional business profits. For business income, the right received by the assessee was only a right to obtain and sell constructed area in future, and any profit could arise only when that right was actually exercised and realised. The settled rule of accounting requires closing stock to be valued at cost or market price, whichever is lower, and does not permit taxation of anticipated appreciation in stock value. The principles of conservatism and prudence, as well as the rule against taxing unrealised profits, barred immediate taxation of the notional gain.

Conclusion: The anticipated business profit could not be taxed in the relevant year, and the addition made on that basis was deleted.

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