1998-VIL-364-MAD-DT

Equivalent Citation: [2000] 243 ITR 431, 171 CTR 237, 111 TAXMANN 13

MADRAS HIGH COURT

Date: 07.09.1998

COMMISSIONER OF INCOME-TAX

Vs

AMBADI ENTERPRISES LTD.

BENCH

Judge(s)  : R. JAYASIMHA BABU., MRS. A. SUBBULAKSHMY 

JUDGMENT

These questions have been referred to us at the instance of the Revenue and relate to the assessment years 1974-75 and 1977-78. The question referred are :

" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee's computation of business profits on the sale of lands at Nawab Gardens was proper ?

2. Whether the Tribunal's view that for finding out the business profit for the sale of lands, the market value on the date of conversion of the asset from investment to business asset should be taken and not the original price for which the assessee purchased the property is sustainable in law.

3. Whether, on the facts and in the circumstances of the case, the computation of profit as made by the Income-tax Officer was not correct and valid in law ?"

The answer to all the questions referred is dependent on the answer to the question as to whether after the acquisition of the land to an extent of 170.5 grounds situated in Nawab Gardens, Adyar, by the assessee on February 13, 1968, the assessee had intended to hold that land as stock-in-trade and, therefore, by the sale of that land in the years subsequent to 1972, it should be valued at the market rate with reference to consideration paid by it in the year 1968 as its cost of acquisition or whether as claimed by the assessee the cost of acquisition should be computed with reference to July 6, 1972, on which date the company decided to treat this investment as its stock-in-trade by developing the land into plots and selling the sites so formed in the lay out.

The Tribunal, as a question of fact, held that the development of the land was in fact carried on only after 1972 when the company resolved to treat this land as its stock-in-trade after revaluing the lands at Rs. 7,000 per ground, the lands having been acquired in the year 1968 at Rs. 5,000 per ground. The Tribunal has also found that the land had not been developed earlier and that the investment made by the assessee in the year 1968 was only by way of investment and not to treat the lands as its stock-in-trade. The money required for the purchase of the land had come out of the funds which had been lent to it by a sister company as loan or deposit. Instead of keeping the money as deposit or by lending the money to others, it had chosen to invest that money on land, and holding the land as an investment. It was only in the year 1972, the company decided to treat the same as its stock-in-trade, developed the same and after effecting such development, the land was sold in small parcels on a profit. The tribunal has also observed in its order that lands as in the year 1972 could be held either as an investment or stock-in-trade and that the assessee had held it as investment till July 6, 1972, and it is only thereafter that it bid treated that land as its stock-in trade. The Tribunal has held that :

"No development activity was undertaken until the assessee chose to convert them into stock in trade in July 6, 1972. Such Conversion is also supported by a resolution, entries in books, representation ill balance sheet and directors' report (as detailed in paragraph 3 supra). These again confirm the assessee's earlier claim that the lands were held as investment till then."

The Tribunal placed reliance on the decision of the apex court in CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86. It was held by the court in that case that where the assessee who held by way of investment several shares in companies commenced a business in shares converting the shares into stock-in-trade of the business, and subsequently sold these shares at a profit, the assessee's taxable profit on the sale of the shares was the difference between the sale price of the shares and the market price of the shares prevailing on the date when the shares were converted into stock-in-trade of the business in shares, and not the difference between the sale price and the price at which the shares were originally purchased by the assessee.

What was said in that case in relation to shares could also be said in relation to any other form of investment which is subsequently converted into stock-in-trade. That is exactly what the assessee had done in this case, though it initially purchased the land as its investment but, subsequently, decided to use it as its stock-in-trade, carried on business in land and sold the lands which it had earlier acquired as an investment.

All the questions referred to us are therefore, required to be answered in favour of the assessee and against the Revenue and they are answered accordingly.

 

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