UMAMAHESWARAM J. - This reference arises under section 66(2) of the Indian Income-tax Act. The two questions referred to for decision are as follows :
'(1) Whether, on the facts and in the circumstances of the case, there was material before the Appellate Tribunal to hold that the transaction of purchase and sale of land was not an adventure in the nature of trade and
(2) If it was an adventure in the nature of trade, whether, on the facts and in the circumstances of the case, the Tribunals decision holding that the profit on account of sales in the year of account alone would be assessable this year and was according to law ?'
We have perused the decision of the Appellate Tribunal and find that it was not held that the sale of land was not an adventure in the nature of trade. Consequently, the first question does not arise for decision on the admitted facts of the case.
The main question that arises for decision is question No. 2. It is necessary to set out a few facts for the purpose of appreciating the second question. The assessee is an unregistered firm and the assessment year is 1945-46. The firm purchased a piece of land measuring acres 9.23 for Rs. 20,000. The land was parcelled out into 31 different plots. Even the first year, i.e., between June 20, 1941, and March 16, 1942, the entire sum of Rs. 20,000 that was invested for the purchase of the land was realised and the transaction ended in a profit of Rs. 3,411. During the subsequent years, further plots were sold and profits realised. According to the Commissioner of Income-tax, the entire profits should be treated as having accrued during the previous year ending March 31, 1945, when the sale of sites was completed and the transaction came to an end. The contention of the assessee is that it is only the profit that was realised during the previous year that should be taken into account. The question for consideration is, whether the contention raised by the Commissioner of Income-tax is borne out by the Act or by the decisions relied on by the learned advocate for the department. It is no doubt true that the transaction entered into is a single venture. Section 2(4) of the Act defines business as including any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The decision of the Supreme Court in Raja J. Rameshwar Rao v. Commissioner of Income-tax illustrates this proposition. Hidayatullah J., delivering the judgment of the Supreme Court, held that when a person acquires land with a view to selling in later after developing it, he is carrying on an activity resulting in profit, and the activity can only be described as a business venture. It was further observed that where the person goes further and divides the land into plots, develops the area to make it more attractive and sells the land not as a single unit as he bought it, but in parcels, he is dealing with the land as his stock-in-trade, and that he is carrying on business and making a profit. Section 3 of the Act enacts that where any central Act enacts that income-tax shall be charged for any year at any rate or rates, tax at that rate or those rates, shall be charged for that year in accordance with and subject to the provisions of this Act in respect of the total income of the previous year of every individual, a Hindu undivided family, company and local authority and of every firm and other association of persons or the partners of the firm or the members of the association individually. Section 4 provides that subject to the provisions of the Act, the total income of any previous year of any person includes, all income, profits and gains from whatever source derived which are enumerated therein. The assessment is now sought to be made in respect of the profits of the business made by the assessee for the assessment year 1945-46. The learned advocate for the Income-tax department has not been able to refer us to any provision of the income-tax Act under which all the profits from June 20, 1941, to December 10, 1944, should be assessed in the year 1945-46. In support of his contention, reliance was placed upon the decision of the Bombay High Court in K. H. Mody, In re. We have carefully perused the decision and we find that decision has no application to the facts of the present case. Beaumont C.J. held at page 185 that, on the facts of that case, it was not possible to determine the profits for the year of assessment. Kania J. (as he then was) held at page 186 as follows :
'The first part of the question is whether there is profit in the business of purchasing and selling this land and if so Rs. 47,533 is the amount as mentioned by the Assistant Commissioner. We are not prepared to answer it. The reason is, that proceeding on the footing that this is an adventure in the nature of trade, the profits can be ascertained normally when the adventure comes to an end. The figures mentioned in the order of the Assistant Commissioner clearly disclose that he has taken Rs. 68 per acre for the non-developed area as a hypothetical figure. The cases to which our attention has been drawn show that when there is a single venture, i.e., a single transaction which is treated as having been entered into in the nature of trade, the question of assessing the profits arose when the venture came to an end, i.e., when the goods purchased were all sold. It is admitted here that about three-fourths of the area originally purchased is still there. Under the circumstances it is not possible for the court to state on the materials put before us whether there is any profit and if so whether the amount of Rs, 47,533 is the profit as mentioned in the question.'
The observations of Kania J. (as he then was) make it clear that on the facts of the case, he was not prepared to hold that it was possible to ascertain the profit during the assessment year. The learned judge observes that normally the profits cannot be determined till the adventure comes to an end. But there may be cases in which the capital value has been realised and the profits are capable of ascertainment as in this case even before the determination of the venture. It is clear, on the facts of this case, that during the period June 20, 1941, to March 16, 1943, the assessee had realised the entire sum of Rs. 20,000 expended for the purchase of the land and made a profit of Rs. 3,411. It is not a case in which it was not possible to determine the profits during the various years the plots were sold.
The next case to which reference was made by the learned advocate for the income-tax department is Commissioner of Income-tax v. A.K.A.R. Family. That decision also has no application to the facts of the present case. Dunkley J. held, on the facts of that case, that until the entire land of acres 63.34 and the house which were purchased in settlement of a debt of Rs. 9,000 were sold, it was not possible to ascertain the loss to be set off. Reference was no doubt made to the decision, K.H. Mody, In re, in support of the proposition that no assessment can be made until the whole transaction was completed. We are inclined to take the view that there is no warrant for the proposition that until the whole transaction is completed, the liability to assessment does not arise if profits had accrued in respect of the entire transaction during the years previous to the year of assessment. This view is correctly expressed by the learned authors, Kanga and Palkhivala, in their Commentary on the Indian Income-tax Act, at page 162 (volume I, fourth edition). They state that 'if the entire cost is recouped earlier, the profits may be assessed even before the venture comes to an end'. The view taken by us is also supported by the decision of the Allahabad High Court in Lalit Ram Mangilal v. Commissioner of Income-tax. The decisions of the Bombay High Court and the Rangoon High Court are distinguished by the learned judges as being restricted to the particular facts of those cases. Seth J. lays considerable emphasis on the expression 'normally' used by Kania J. in K.H. Mody, In re. The passage is as follows :
'.... Kania J. only says that the profits can be ascertained normally when the adventure comes to an end, which presupposes that cases may exist where profits may be ascertained even before the entire property purchased had been disposed of.'
We respectfully follow this decision and answer the second question against the department. The assessee will be entitled to his costs and the advocates fee is fixed at Rs. 250.