Stock-in-trade under development arrangements is taxed only on realisation, not on mere execution of the agreement.

Where land is held as stock-in-trade, mere execution of a joint development arrangement does not, by itself, trigger taxation of anticipated business profit. The taxable income arises only on realisation, such as when the constructed villas are actually sold and the right under the arrangement is monetised. The transfer provisions applicable to capital assets were inapplicable because the land was not a capital asset. Applying prudence and conservatism in closing stock valuation, unrealised profits could not be brought to tax in the year of agreement execution.

---

---

Issues: Whether anticipated business income arising from a joint development arrangement in respect of land held as stock-in-trade was taxable in the year of execution of the agreement, or only in the year when the constructed villas were actually sold.

Analysis: The land in question was treated by the assessee as stock-in-trade and not as a capital asset. The provisions dealing with transfer of a capital asset were therefore held to be inapplicable. On the facts, the assessee had only contributed the land to the development arrangement and had not realised any business receipt during the relevant year. The taxable business profit would arise only when the right acquired under the arrangement was exercised and the villas were sold. The principle of valuation of closing stock, supported by prudence and conservatism, does not permit taxation of anticipated profits before actual realisation.

Conclusion: The addition of business income for the relevant assessment year was not sustainable, and the assessee succeeded on this issue.

Final Conclusion: The appeal failed because the revenue could not tax unrealised business profit merely on the execution of the development arrangement when the asset remained stock-in-trade and sale had not yet taken place.

Ratio Decidendi: Where land is held as stock-in-trade, mere contribution under a development arrangement does not by itself create taxable business income; profit is taxable only on realisation through sale or equivalent monetisation.

---