1981 (3) TMI 56 - HC - Income Tax

Summary

Issues involved: The judgment involves the following issues: 1. Tax liability on profit earned by the assessee in different assessment years, 2. Treatment of rights to purchase land as stock-in-trade, and 3. Justification of working out notional profit for closing stock without owning the land.

Issue 1: Tax liability on profit earned by the assessee in different assessment years
The assessee, a partnership firm dealing in land, entered into agreements for purchase and sale of land without actually owning the land. The Income Tax Officer (ITO) computed the profit earned by the assessee in different assessment years. The Appellate Authority Commission (AAC) confirmed the ITO's assessment for one year and set aside the assessment for another year. The Income Tax Appellate Tribunal held that only a portion of the profit was taxable in a specific assessment year. However, the High Court disagreed with the Tribunal's reasoning, stating that the entire profit accrued in the year of sale and should be taxed accordingly.

Issue 2: Treatment of rights to purchase land as stock-in-trade
The assessee valued its rights to purchase land as stock-in-trade and disclosed a profit based on this valuation. The ITO and AAC held that since the assessee did not acquire title over the land, the profit disclosed was not valid. The Tribunal, however, upheld the valuation of the rights as stock-in-trade. The High Court disagreed with the Tribunal, stating that without actual ownership of the land, there was no stock to value, and therefore, the profit disclosed based on such valuation was not permissible under the law.

Issue 3: Justification of working out notional profit for closing stock without owning the land
The assessee worked out a notional profit for closing stock without owning the land based on the rights to purchase. The Tribunal accepted this approach, considering the rights as a valuable asset. However, the High Court ruled that without actual ownership of the land, there was no stock to value, and therefore, the notional profit calculated in this manner was not justified. The High Court emphasized that income was earned only when the sale deed was executed, and no profit could be attributed to the valuation of non-existent stock.

In conclusion, the High Court held that the entire profit accrued in the year of sale should be taxed, rejecting the bifurcation of profit and valuation of non-existent stock. The judgment clarified the treatment of rights to purchase land and emphasized the importance of actual ownership in determining taxable income.