1965 (7) TMI 4 - HC - Income Tax

Summary

Issues Involved:
1. Whether the excess realization of $8,200 on the sale of house property No. 186 Kotha Road, Taiping, is a revenue profit (receipt) and valid in law.

Detailed Analysis:

Issue 1: Nature of Excess Realization
The primary question addressed by the court was whether the excess realization of $8,200 on the sale of house property No. 186 Kotha Road, Taiping, should be treated as a revenue profit (receipt) or a capital accretion not chargeable to tax. The matter pertains to the assessment year 1958-59, with the accounting period ending on May 31, 1957.

The assessee, who was the karta of a joint Hindu family, was allotted certain properties upon the partition of family assets on June 1, 1951. The family had been involved in money-lending and property dealings. Post-partition, the assessee opened his own books of account and ceased money-lending activities by 1952, with the last realization of outstandings occurring on May 31, 1956. He sold the property in question on November 23, 1956, realizing $8,200 in excess of the purchase price.

The Income-tax Officer treated this excess realization as a revenue receipt, considering the assessee as a dealer in properties during the accounting year. This view was supported by an earlier order of the Appellate Assistant Commissioner. On appeal, the Appellate Assistant Commissioner held that the property constituted stock-in-trade in the assessee's money-lending business and that the profits from its sale were assessable to tax. The Tribunal agreed, finding that the assessee continued to deal with the properties as stock-in-trade, as evidenced by his accounting practices.

Assessee's Argument:
The assessee contended that the properties obtained at the family partition were capital assets and not stock-in-trade. He argued that since no new properties were purchased post-partition and the money-lending business ceased by 1952, the properties should retain their character as capital assets. The assessee's counsel argued that there was no evidence to suggest that the property in question was ever part of the stock-in-trade of the money-lending business or any business in property.

Revenue's Argument:
The revenue argued that the question of whether the property was stock-in-trade was a matter of fact. They contended that the Tribunal's factual conclusions, drawn from the evidence, were reasonable and should not be interfered with by the court. The revenue emphasized that the properties were treated as stock-in-trade in the assessee's accounts and that the income from these properties was merged with the money-lending business.

Court's Analysis:
The court noted that the revenue did not argue that the properties continued to have the same character post-partition solely because the joint family had been involved in money-lending. The court emphasized that the burden was on the revenue to establish that the properties were converted into stock-in-trade based on clear evidence.

The court found that the assessee had ceased money-lending activities by 1952 and had realized the last of the outstandings by May 31, 1956. The sale of the property occurred after this date. The court questioned whether the assessee was carrying on a business in property or money-lending at the time of the sale. The court found no evidence that the properties were treated as stock-in-trade in the money-lending business.

The court referred to similar cases, such as Kannappa Chettiar v. Commissioner of Income-tax and Murugappa Chettiar v. Commissioner of Income-tax, where properties obtained at partition were not treated as stock-in-trade in the hands of the individual post-partition. The court concluded that the circumstances in the present case were similar and that the properties retained their character as capital assets.

Conclusion:
The court held that the facts did not support the Tribunal's finding that the assessee was a dealer in properties during the accounting year. The court found that the properties were not treated as stock-in-trade in the money-lending business and that the excess realization from the sale of the property was a capital accretion, not a revenue receipt.

The question was answered in favor of the assessee, with costs awarded to the assessee. The court emphasized that the revenue failed to establish that the properties were converted into stock-in-trade based on clear evidence. The court's decision was guided by precedents and the specific facts of the case.