TMI Blog1981 (3) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of Rs. 38,539 was rightly taxed by the Income-tax Officer in the assessment year 1970-71 ? 2. Whether the assessee is entitled to value its rights to purchase the land and, consequently, deduct Rs. 38,539 declared as income in the assessment year 1970-71 from the income for the assessment year 1971-72 ? 3. Whether the assessee was justified in working out the notional profit for the assessment year 1970-71, in respect of closing stock, when the assessee had not owned any land but had acquired only the right to purchase the land ?" The assessee is a partnership firm which was constituted on July 4, 1968. The firm is constituted to carry on business of purchase and sale of land. In other words, the assessee-firm is a dealer in land. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase the land from M/s. Shah Co. and in turn executed the agreement dated November 7, 1969, to sell the land to the society at the rate of Rs. 3.15 per sq. ft. The society purchased the land for Rs. 3,37,888. As pointed out above, M/s. Shah Co. had agreed to sell the land to the assessee-firm at Rs 2,30,622. Therefore, as a result of the above transactions, the assessee-firm -earned a profit of Rs. 1,07,266. The question which arises for our consideration is whether the entire profit earned by the assessee-firm, is, chargeable to income-tax in the assessment year 1971-72 ? The assessee-firm treated the right which it acquired under the agreement for sale with M/s. Shah Co. as its stock-in-trade, and valued such stock at the end of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er deducting expenses as income arising from the above transaction. The ITO did not accept the bifurcation of profit made by the assessee-firm. He was of the view that the assessee-firm having not acquired, any title over the land, it did not possess any stock, which it could have valued in the manner it, had done at the end of the year of account relevant to the assessment year 1971-72. The ITO held that the, profit which the assessee-firm had earned out of the above transaction was the difference between the price at which M/s. Shah Co. had agreed to sell the land to it and the price at which the land was sold to the society. According to the ITO, the entire profit accrued in the year in which the sale was completed, that is, in the y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the effect that the right which the assessee-firm had acquired under the agreement for sale from M/s. Shah Co. was its stock-in-trade and it was open to it to value such stock as it had done at the end of the year of account relevant to the assessment year 1970-71. In the view of the Tribunal, the right which the assessee had acquired under the said agreement was a valuable right and the assessee-firm was fully justified in showing the value of such right as closing stock. In the result, the Tribunal held that the income of Rs. 38,539 was rightly taxed by the ITO in the assessment year 1970-71. The Tribunal further held that an income of only Rs. 67,190 and not Rs. 1,06,866 was liable to be taxed in the assessment year 1971-72. In the view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, all that the assessee-firm did was to enter into an agreement with M/s. Shah Co. to purchase certain land, which in fact it did not. Had the sale been completed in favour of the assessee-firm, it would have acquired land or stock-in-trade, but unless and until the sale was complete, it had no stock which could be said to have come into existence and which could be valued. The Tribunal, it would seem, labouring under a basic misconception, has fallen into an error in reaching the conclusion that the assessee-firm had acquired valuable right under the agreement with M/s. Shah Co. and such right was its stock which could be valued. There was no stock at all and, consequently, the question of valuing it did not arise. The profit which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of such stock. As pointed out above, the assessee-firm valued its right under the agreement with M/s. Shah Co., which it treated as its stock and valued at 37 paise per sq. ft., i. e., Rs. 39,688. As result of such valuation, it disclosed the profit of Rs. 38,539. As observed above, no profit could be said to arise on account of the valuation of the closing stock. The valuation of the unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period and can in no sense be regarded as the situs of their accrual. The Tribunal's reasoning in holding that a profit arose to the assessee-firm on account of the valuation of its closing stock proceeds on misconception. There ..... X X X X Extracts X X X X X X X X Extracts X X X X
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