RAMJIBHAI DAHYABHAI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessment year under reference is 1970 -71, the corresponding previous year being calendar year 1969. The assessee is an individual and he purchased a field bearing S. No. 624, admeasuring 67,716 sq. yards situate within the revenue limits of village Dudhraj in Surendranagar district jointly with one Shri Pranlal D. Pancholi for a sum of Rs. 6,400 from Jhala Ladhaji Deepsangji and his sons by a registered deed of conveyance of July 8, 1948. When they purchased the said land, it was in the possession of the mortgagee of the vendors who were cultivating the same. The assessee and the said Shri Pranlal Pancholi being virtually vendees of the right of redemption, filed a suit for redemption of the mortgage in which a preliminary decree was made on April 24, 1951, while the final decree was passed on November 20, 1952. There is no clear evidence to show as to what steps were taken by these vendee -decree holders for obtaining possession of the land after the final decree was passed in their favour. There were some proceedings under the Saurashtra Agricultural Debtors Relief Act, 1954, by the sellers which are not of much consequence in the present reference. It appears that out of the aforesaid land, a portion admeasuring 18,272 sq. yards was acquired by the Government for constructing staff quarters for the Western Railways. The assessee and Shri Pancholi received compensation for the acquisition of the said land from the Government. This compensation was sought to be taxed in the hands of the association of persons comprising of the assessee and Shri Pranlal Pancholi in the assessment year 1956 -57. In the course of assessment, a question arose whether the surplus arising out of the compensation paid by the Government for acquisition of the said portion of land was taxable as business profit or capital gains. The question was ultimately determined by the Appellate Tribunal which by its order of October 4, 1969, held that the land purchased by the said association of persons was stock -in -trade and the surplus arising being the compensation paid by the Government was business income of the said association However, the Tribunal concluded that the surplus arising out of the compensation paid by the Government was not taxable in the assessment year 1956 -57. The assessee sought reference in this matter which was however, not granted by the Tribunal. It appears that by a dissolution deed of March 7, 1965, the remaining portion of the land was divided equal] y between the assessee and said Shri Pranlal Pancholi. Two divisions were made pursuant to this dissolution. Each division admeasured 14,399 sq. yards and consisted of three plots of land. Division 'A' which inter alia, consisted of one plot admeasuring 5,203 sq. yards and two plots each admeasuring 4,598 sq. yards came to the share of the assessee. Division B land consisting of three plots went to the share of Shri Pranlal Pancholi. It appears further that out of Division 'A' land which went to the share of the assessee. two plots each admeasuring 4,598 sq. yards were again acquired by the Government for railway quarters The relevant notification under sections 4 and 6 in respect of these two plots were made respectively on November 18, 1966, and December 19,1966. The possession of these two plots of land was taken during the year of account, namely, 1969. The total area of land thus acquired was 9,196 sq. yards for which the assessee was paid compensation at the rate of Rs. 7.50 per sq. yard. The assessee was thus paid an aggregate compensation of Rs. 63,970 for the acquisition of the two plots of land besides the solatium amount of Rs. 10,345 -50.

(2.) A question arose in the course of assessment as to whether the surplus arising out of the compensation is to be treated as a business profit or capital gains. The Income -tax User held that the surplus arising out of the sale of the land was business income since the land in question was the stock -in -trade of the assessee. He, therefore, held that the aggregate surplus of Rs. 78,115 arising out of the compensation received by the assessee was taxable as business income.

(3.) THE Department, therefore, preferred an appeal before the Income -tax Appellate Tribunal which reversed the order of the Appellate Assistant Commissioner and held for the reasons stated in the order that the land which came to the share of the assessee continued to be stock -in -trade and, therefore, the surplus arising out of the acquisition of such land was taxable as business income of the assessee.