COMMISSIONER OF INCOME TAX Vs. MAHALINGAM CHETTIAR MLM

JUDGEMENT

(1.) THESE tax cases relate to the assessment years 1960-61 and 1961-62. The assesssee is a Hindu undivided family which returned property income as well as its various other business incomes. During the accounting years relating to these assessment years there were certain transactions of sale of plots in the area known as Mahalingapuram in Madras. It was claimed by Sri Mahalingam Chettiar, the karta of Hindu undivided family, that these lands had been inherited by him from his father, who in turn had purchased the same in court auction in 1925. The money-lending business of the family was closed some time in the year 1940. It is common ground that though these properties were originally acquired in the course of the family money-lending business, as far as the assessee was concerned these properties were inherited not as assets of any business. The total extent of the lands measured 503 grounds. The assessees prepared a lay out for disposing of these lands some time in 1958 and paid the centage to the Corporation on December 10, 1958. He then entered into an agreement with M/s. Ramanathan & Company which is a partnership, on February 5, 1959, for the sale of the above plots measuring about 490 grounds for a consideration of Rs. 7,90,000. As per the agreement the assessee is bound to execute the sale deeds in favour of the firm or its nominees. Any profit or loss arising by reason of the sales was to be that of the firm and the assessee was only entitled to receive the sum of Rs. 7,90,000. The liability for payment of any dues to the Corporation or improvement charges or any expenditure for laying out roads, of lighting or any other expenditure in connection with the said property was also to be borne by the firm. During the accounting year relating to the assessment year 1960-61, 29 grounds were sold at the rate of Rs. 2,300 per ground. Thus, a sum of Rs. 64,271 was realised during the assessment year 1960-61. In the assessment year 1961-62, 127 grounds were sold at the same rate of Rs. 2,300 per ground, thereby realising a sum of Rs. 2,92,667. The assessee claimed that the sale was of agricultural lands and that, therefore, the assessee had not derived any taxable profit. The Income-tax Officer was of the view that up to the moment of plotting out the property into various house sites, the character of these lands was agricultural, but as soon as the idea of plotting out entered the picture, the agricultural lands became converted into housing sites. In particular he relied on the payment of the centage as evidencing a conversion of the agricultural land into a trading asset and stock-in-trade and coming to the conclusion that the sales were adventures in the nature of trade. He then proceeded to consider whether the sale values mentioned in the various documents represent the correct consideration and ultimately on certain probabilities and conjectures held that the market value of the lands during the assessment year 1960-61 was not less than Rs. 5,000 per ground and in the assessment year 1961-62, it was not less than Rs. 6,000 per ground. Since the properties were purchased in the year 1925, the Income-tax Officer valued the cost of the land as on January 1, 1954, at Rs. 4,000 in respect of the assessment year 1960-61. After allowing some rebate for improvement and other incidental expenses he arrived at the figure of Rs. 1,16,778 as the profit on the sale of these lands in 1960-61, and Rs. 7,41,250 for 1961-62. He accordingly assessed tax including these amounts also in the assessment. It may be mentioned that the Income-tax Officer also thought that the firm of M/s. Ramanathan and Company was a fictitious firm and created for the purpose of transferring the tax liability. The Income-tax Officer also made a protective assessment treating the lands as capital assets and subjected to tax the difference between the sale value as fixed by him and the costs as determined by him as on January 1, 1954. The assessee preferred an appeal. The Appellate Assistant Commissioner held that the land in question was not cultivated during the relevant assessment years and that, therefore, they were not agricultural lands. In that view he said that these lands could not be excluded from the category of capital asset as referred to in Section 2(4A) and Section 12B(1) of the Indian Income-tax Act, 1922. The Appellate Assistant Commissioner, however, accepted the contention of the assessee that the transaction could not be treated as a sale of a trading asset. Relying on the decision of this court in Commissioner of Income-tax v. Kasturi Estates (P.) Ltd. [1966] 62 ITR 578 (Mad) he held that the gains arising out of the sale in both the years had to be treated as capital gains arising out of a transfer of a capital asset. But the Appellate Assistant Commissioner confirmed the view of the Income-tax Officer that the land must have been sold at a higher price than that disclosed in the document, and sustained the sale estimates. He also confirmed the view that the agreement between the firm of M/s. Ramanathan & Co. was a sham transaction. On a further appeal, the Tribunal, relying on the receipt of agricultural income during the assessment year 1960-61, held that in respect of that assessment year the lands will have to be treated as agricultural lands. Therefore, the Tribunal held that it would not be a capital asset as it is exempted from that category by virtue of Section 2(4A) of the Indian Income-tax Act, 1922. So far as the assessment year 1961-62 was concerned there was no evidence of deriving of agricultural income and that, therefore, it could not be excluded from the category of capital as referred to in Section 2(4A) of the Act. The Tribunal then went into the question of computation of capital gains in the assessment year 1961-62. The Tribunal after noting that there is absolutely no evidence to show that the sale price disclosed in the documents were not the real price, accepted the consideration noted in the document as the correct amount that was realised and held that the difference between the sale price and the market value as on January 1, 1954, is liable to be included as capital gains. But, for the purpose of determining the market value as on January 1, 1954, the Tribunal remanded the matter to the Income-tax Officer. It may be mentioned that against the view of the Appellate Assistant Commissioner holding that the transactions were not adventures in the nature of trade and also challenging the view that there was no conversion of the agricultural lands into stock-in-trade, the revenue preferred appeals to the Tribunal. In those appeals, the Tribunal relying on the decision of this court in Commissioner of Income-tax v. Kasturi Estates (P.) Ltd. [1966] 62 ITR 578 (Mad) held that the transaction was not an adventure in the nature of trade and it was merely a transaction by way of realisation of capital investment. In that view, the appeal preferred by the department was dismissed. The revenue sought to refer a number of questions to this court under Section 66(1) of the Act. But the Tribunal referred only the following question:

(2.) THIS is the subject-matter of the reference in T.C. No. 282 of 1969. On a petition filed by the revenue under Section 66(2) this court directed the following 4 questions also to be referred and, accordingly, they have also now been referred and they are the subject-matter of the reference in T.C. No. 2 of 1975: