1968 (11) TMI 1 - HC - Income Tax

High Court rules profits from property sale not income under Indian Income-tax Act

The High Court of Madras ruled in favor of the Hindu undivided family, holding that the profits from the sale of properties were not liable to be assessed ... Profit on sale of immovable properties - not income liable to assessment under the IT Act Issues:1. Whether the profits made by a Hindu undivided family from the sale of immovable properties are liable to be assessed as income under the Indian Income-tax Act for the assessment years 1951-52 and 1952-53Rs.Analysis:The judgment delivered by the High Court of Madras pertained to a consolidated reference concerning the assessment years 1951-52 and 1952-53. The case revolved around determining whether the profits of $1,00,455 and $71,460 derived from the sale of properties were subject to assessment under the Indian Income-tax Act. The Hindu undivided family in question, comprising the father as the karta and his sons, had acquired sites in 1919 and constructed houses on them in 1928. The family was engaged in a money-lending business and owned an estate. The properties were eventually sold in 1951 and 1952, resulting in profits. The revenue authorities contended that these profits should be included in the total income of the family for tax purposes, considering the properties as part of the firm's stock-in-trade.The Tribunal's decision was based on the premise that the properties were integral to the money-lending business, as evidenced by the accounting treatment and utilization of income. However, the High Court disagreed with this conclusion. It emphasized that the characterization of an asset as capital or stock-in-trade is a mixed question of fact and law. While the court generally respects the Tribunal's findings, it found the inference drawn in this case to be unsubstantiated. The court highlighted that the mere absence of separate accounts for the properties and their inclusion in the business accounts does not automatically convert capital assets into stock-in-trade.The court further elucidated that the conversion of capital into stock-in-trade requires specific factual indicators, such as the nature of the properties and their utilization in the business. In this instance, the absence of evidence showing a business of buying and selling properties or the direct reinvestment of sale proceeds into the money-lending business led the court to rule in favor of the assessee. The court distinguished this case from precedents cited by the revenue, emphasizing the lack of conduct indicating the properties were treated as stock-in-trade. Ultimately, the court concluded that the immovable properties and their proceeds did not possess the character of stock-in-trade in the money-lending business, thereby ruling in favor of the assessee.In conclusion, the High Court answered the reference in favor of the assessee, holding that the profits from the sale of properties were not liable to be assessed as income under the Indian Income-tax Act. The court awarded costs and counsel's fee to the assessee, highlighting the insufficiency of evidence to establish the properties as stock-in-trade.