Decided on June 25,1963



CHANDRA REDDY, CJ - (1.) THE question to be answered by us in this reference i : "Whether, on the facts and in the circumstances of the case, the surplus as estimated by the assessing authority on the sale of certain lands should be considered as capital accretion or as taxable profits earned in the course of the assessees money-lending business."
(2.) THE reference relates to the assessment year 1956-57, the relevant accounting year being the Telugu year ended April 11, 1956. THE assessee is a Hindu undivided family and carries on money-lending business. In satisfaction of the debts due to him, the assessee had been taking lands from his debtors. Some of these lands were sold by the assessee during the accounting year for Rs. 30,800. THE Income-tax Officer treating these lands as stock-in-trade of the assessee, i.e., as part of the assets of the money-lending business, brought the profits made by the assessee out of this transaction to tax. He estimated the profits at Rs. 24,640 which amount on appeal was reduced to Rs. 20,533. "In treating the lands as forming part of the stock-in-trade of the money-trading business, the Income-tax Officer took into consideration the circumstances that the income from these lands was credited in the books of the money-lending business and that right from the beginning the sale proceeds of these lands were being credited and utilized for re-lending in the assessees money-lending business. On appeal, the Appellate Assistant Commissioner agreed with the conclusion of the Income-tax Officer that these lands constitute the assets of the money-lending business but reduced the estimate of profits to the amount mentioned above. On further appeal to the Income-tax Appellate Tribunal, the assessment made by the Appellate Assistant Commissioner was affirmed. The Tribunal, in its order, observe : "Nevertheless, the assessee continues to spend money on these lands, which are mostly agricultural, for the purpose of cultivation, etc. All these funds have come out of the assessees money-lending circulating capital. Similarly, the assessee realises some income by sale of the produce from these lands. The sale proceeds also are inextricably mixed up with the assessees money-lending working capital. Further, in each years account books, one finds village-wise accounts maintained for recording income derived from such lands as well as the expense incurred in connection with the earning of the income..." Aggrieved by this order, the assessee requested the Tribunal to make a reference to this court under section 66(1) of the Indian Income-tax Act. As the Tribunal did not comply with this request, the assessee had recourse to section 66(2) and this court called upon the Tribunal to state a case for the opinion of this court on the question stated above. It is argued by Sri. M. Suryanarayanamurty, learned counsel for the assessee, that the statement of the Income-tax Officer that the income from the lands was credited in the account books of the money-lending business, that "right from the beginning the sale proceeds of these lands were credited and utilized for re-lending in the assessees money-lending business" and that cultivation expenses were met out of the money-lending business, is not correct, as could be seen from the assessees account books. We do not think that we could accede to this argument. No exception was taken to the statement of the fact made by the Income-tax Officer in this behalf by taking a ground in the memorandum of grounds of appeal before the Appellate Assistant Commissioner or even before the Appellate Tribunal. Even in the petition before us under section 66(2) no exception was taken to this statement. Moreover, these facts are contained in the agreed statement of facts of the case. There is, therefore, no substance in the argument that these statements are incorrect. They do not seem to have been challenged at any time. Sri Suryanarayanamurty then fell back upon the contention that these factors are not sufficient to show that the lands taken in lieu of the debts due to the assessee formed part of the stock-in-trade of his business. As substantiating this proposition, the learned counsel has placed reliance on the following passage from the "judgment of Subba Row C.J. in A. Trisulapani v. Commissioner of Income-ta : "The value of the property may be added in the accounts to that of the assets of the business. The income from it and the expenditure incurred in respect thereof may be brought into the business accounts as cross items. It may be mortgaged or otherwise charged to swell the capital of the business. It may be part of an integrated scheme of buying and selling systematically followed, depending upon the ebb and flow of the tide of the market not only as a means of realization of the debts but a device to earn profits. The said dealings do not exhaust the modes of acquisition of properties by a money-lending..."
(3.) THE learned counsel for the assessee urges on the basis of the above passage that unless all these elements exist in the transaction a purchase by the money-lender of properties in discharge of loans taken by third parties could not be regarded as forming part of the stock-in-trade of his money-lending business. We do not think that we can assent to this view. THE learned Chief Justice has indicated several of the modes of making an acquisition of lands as forming part of the stock-in-trade. THE passage does not lay down that it is the cumulative effect of all these ingredients that would go to make the lands thus acquired the assets of the money-lending business, if any one of the elements indicated above is present that suffices to make the lands the stock-in-trade of the business. That this is so appears from paragraph 15 of the judgment in which his Lordship observe : "In the present case, the department has proved only two facts namely, that the assessee purchased some times and sold them in some cases after 11 years and in others after more than 20 years. Though after the purchase, the assessee continued to do money-lending business and though the properties were of an appreciable extent, it has not been established that either the properties or the income therefrom and the expenditure incurred on them were brought into the business accounts..." The test propounded by the learned Chief Justice in the latter part of the paragraph has been satisfied in this case. The judgment of a Division Bench of this court to which one of us was a party in Varada Reddy v. Commissioner of Income-tax does not lay down any proposition different from the one enunciated in A. Trisulapani v. Commissioner of Income-tax. The rule stated there is in consonance with the ruling in A. Trisulapani v. Commissioner of Income-tax. It follows that the conclusion of the department as affirmed by the Income-tax Appellate Tribunal is not in disharmony with the principle adumbrated in both the cases cited above and it could not, therefore, be successfully challenged. The question referred to us is answered against the assessee and in favour of the department. The assessee will pay a sum of Rs. 100 (one hundred) by way of costs to the respondent. ;

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