P. M. MOHAMMAD MEERAKHAN vs. COMMISSIONER OF INCOME-TAX, ERNAKULAM

CIVIL APPEAL No. 1230/1967Supreme Court[1969] 3 S.C.R. 65912 February 1969Bench: 3 JudgesAuthor: J.C. SHAH, V. RAMASWAMI, A.N. GROVER A P. M. MOHAMMAD MEERAKHAN10 pages
AI SummaryDismissed

What were the facts?

The assessee entered into an agreement to purchase an estate for Rs. 6 lakhs, paying Rs. 11,000 as advance. The sale deed was to be executed in favour of the assessee or his nominees. The assessee lacked the financial means to purchase the land or cultivate it himself. He divided the land into 23 plots, found purchasers for 22 plots, and sold them. The 23rd plot was conveyed to the assessee. The Income-tax authorities assessed the profit from this transaction, including the estimated value of the retained plot. The assessee's income for assessment year 1956-57 was initially assessed at Rs. 8,400, but later action was taken under Section 34(1)(a) of the Income Tax Act, 1922, due to escaped assessment.

What did the Supreme Court hold?

The Tribunal held that the question of whether a transaction is an adventure in the nature of trade must be decided on a consideration of all relevant facts and circumstances, not by an abstract rule. Based on the total effect of the circumstances, the assessee's transactions constituted an adventure in the nature of trade and were taxable. Regarding the ascertainment of profits, the Tribunal held that there was no justification for the argument that profits could only be determined upon the sale of the retained plot. It was held that for assessment purposes, each year is a self-contained unit, and profits of a trading adventure must be computed as provided by the statute. The profit was correctly estimated by treating the retained land as stock-in-trade and valuing it according to normal accountancy practice, which involves valuing stock-in-trade at the beginning and end of the accounting year. The High Court's decision was upheld.

What were the issues?

1. Whether the transaction constituted a venture in the nature of trade, and the surplus of Rs. 1,25,000 was assessable to tax, under Section 34(1)(a) of the Income Tax Act, 1922. The assessee contended that the transaction did not constitute a venture in the nature of trade. The revenue contended that it did. 2. If the transaction constituted a venture in the nature of trade, whether the profits were correctly ascertained, considering the assessee's argument that the adventure would only terminate upon the sale of the retained plot. The assessee argued that profits could only be determined upon the completion of the sale of the entire estate. The revenue argued that profits could be estimated based on the value of the retained plot as stock-in-trade.

Which sections of the Income-tax Act were involved?

Section 34(1)(a)

AI-generated summary — verify with the full judgment below

659 A P. M. MOHAMMAD MEERAKHAN v. COMMISSIONER OF INCOME-TAX, ERNAKULAM February 12, 1969 B (J.C. SHAH, V. RAMASWAMI AND A. N. GROVER, JJ.) c D E F G H Income-tax Act (II of 1922)-Sing/e Transaction to purchase estate-- No means to buy-Purchasers found-Plots sold and one retained- whether transaction constituted trade-Value of plot retained added for estimate profit., whether correct.

The assessee entered into an agreement to purchase a land for Rs. 6 lakbs. He paid Rs. 11,000/- as advance and it was agreed that the sale deed was to be executed by a specified date either in favour of the assessee or his nominees. The assessee did not have resources to buy land even worth a lakb nor could cultivate the land himself. He divided the land into 23 plots and found purchasers for 22 of these plots. These 22 plots were conveyed to the respective purchasers and the 23rd plot was conveyed to the assessee.

The Income-tax authorities brought to tax the sum representing the assessee's profit (after including the estimated value of the plot retained by him). The assessee contended that ( !) the tran- saction did not constitute a venture in the nature of trade; and (ii)

The order continues below.

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