Commissioner of Income Tax vs Motilal C. Patel and Co.

R.C. Mankad, J.—The Tribunal has referred to us for our opinion following questions u/s 256(1) of the income tax Act, 1961 (''the Act''): 1. Whether, on the facts and in the circumstances of the case, the amount of Rs. 66,066 received by the assessee-firm during the Samvat year 2027 (previous year relevant to the assessment year 1972-73) is includible in the assessment for the assessment year 1973-74?

Whether, on the facts and in the circumstances of the case, the conclusion of the Tribunal that the receipt of Rs. 66,066 became taxable as business income of the assessee-firm for the assessment year 1972-73 and that the said amount was not again includible in the assessee''s total income for the assessment year 1973-74 in question is correct in law and sustainable from the material on record?

The assessment year under reference is 1973-74, the previous year being Samvat year 2028 which commenced on 20-10-1971 and ended on 6-11-1972. The assessee is a registered partnership firm consisting of 10 partners. It is a dealer in land and it was constituted under a deed of partnership dated 25-5-1971. Clause 5 of the partnership deed enumerates the business for which the partnership was formed. One of the such businesses stated in sub-clause (a) thereof is ''purchase of land or building or rights therein by agreement or outright purchase and sale of the rights acquired or the property''. On 28-5-1971 the assessee entered into an agreement with one Mrs. Sharda Raje for purchase of land admeasuring approximately 1,20,120 sq. ft. at the rate of Rs. 2 per sq. ft. and paid earnest money of Rs. 48,000 to her. It was agreed that the assessee would pay further sum of Rs. 1 lakh to Mrs. Raje by 15-7-1971 and the balance of sale price on completion of sale on or before 31-8-1971. The sale was to be completed on or before 31-8-1971. The vendor agreed to sell the land either to the assessee itself or its nominee or assignee. On 31-5-1971, that is, three days after Mrs. Raje executed the agreement in favour of the assessee as aforesaid, the assessee entered into an agreement with Shri Krushnakunj Co-operative Housing Society Ltd. (''the Society'') to sell the said land to the society at the rate of Rs. 3.10 per sq. ft. Under this agreement, the society paid to the assessee earnest money of Rs. 20,000 on the date of the agreement, that is, 31-5-1971. The society further agreed to pay to the assessee Rs. 1 lakh on or before 15-7-1971 and the balance of the sale price on or before 31-8-1971 on completion of the sale. Under this agreement also the sale was to be completed on or before 31-8-1971. It would, therefore, appear that the terms regarding payment of consideration and completion of sale were identical in both the aforesaid agreements.

Mrs. Raje executed in favour of the society eight deeds of sale on 25-10-1971, 26-10-1971, 27-10-1971, 28-10-1971, 30-10-1971, 1-11-1971, 2-11-1971 and 3-11-1971. The assessee was a party to these sale deeds as confirming party. The sale deeds were registered on 4-11-1971.

The assessee, in addition to the earnest money of Rs. 20,000 received from the society on 31-5-1971, the date of the agreement as aforesaid, received from the society four further amounts on 14-10-1971, 15-10-1971, 16-10-1971 and 19-10-1971 totalling to Rs. 46,066. Thus, the assessee in all received Rs. 66,066 before the end of Samvat year 2027 which is the previous year relevant to the assessment year 1972-73. This receipt of Rs. 66,066 was disclosed as its income by the assessee in its return for the assessment year 1972-73. The assessment for the assessment year 1972-73 was completed by the ITO on 25-9-1973 assessing the assessee''s total income at Rs. 61,366 after allowing deduction of business expenses incurred during Samvat year 2027.

The assessee received from the society four amounts of Rs. 16,516.50 each totalling to Rs. 66,066 during Samvat year 2028 which is previous year relevant to the assessment year under reference. This amount of Rs. 66,066 was offered for taxation when the assessee filed its return for the assessment year under reference, that is, 1973-74. The ITO while framing assessment for the assessment year under reference held that the amount of Rs. 66,066 which the assessee had received in Samvat year 2027 was merely an advance towards expected profits and, therefore, it did not constitute assessee''s income in Samvat year 2027. The ITO was of the view that Rs. 66,066 which the assessee had received in Samvat year 2027 and the four amounts totalling to Rs. 66,066 received in Samvat year 2028, represented the assessee''s income earned in Samvat year 2028. The ITO, therefore, brought to tax the entire amount of Rs. 1,32,132 in the assessment year under reference.

The assessee carried the matter in appeal before the AAC. One of the contentions which was raised before the AAC was that amount of Rs. 66,066 having already been taxed in the assessment year 1972-73 it could not again be subjected to tax in the assessment year under reference. In other words, according to the assessee, the said amount of Rs. 66,066 could not be doubly taxed. The AAC, however, took the view that whether or not said amount of Rs. 66,066 was taxed in the earlier year that is 1972-73 was not relevant and that it was open to the assessee to take appropriate remedy in case the said amount was held to be includible in the assessee''s total income for the assessment year under reference. The AAC held to the effect that the assessee could not be said to have earned profits till the sale deeds were executed and registered and since the sale deeds were executed and registered in the previous year relevant to the assessment year under reference, the entire profit of Rs. 1,32,132 was taxable in the assessment year under reference, that is, 1973-74.

Being aggrieved by the order of the AAC the assessee carried the matter in further appeal before the Tribunal. The assessee''s argument that amount of Rs. 66,066 which was already taxed in the earlier assessment year, that is, assessment year 1972-73, could not again be taxed in the assessment year under reference did not find favour with the Tribunal also. It was, however, stated on behalf of the income tax Department that in case it was held that the said amount of Rs. 66,066 was taxable in the year under reference, steps would be taken to suitably amend the assessee''s assessment for the assessment year 1972-73. The Tribunal held that the assessee had not acquired the right to receive consideration from the society during Samvat year 2027. It further held that as a result of the agreement between the assessee and the society, the society did not step into the shoes of the assessee so far as Mrs. Raje''s obligation under the agreement dated 28-5-1971 was concerned. The Tribunal further held that by agreement dated 31-5-1971, the assessee passed or conveyed no interest to the society and, therefore, the assessee could, merely on the basis of that agreement, claim no payment from the society. After reaching the above conclusions, the Tribunal, however, held that the amount of Rs. 66,066 which the assessee had received during Samvat year 2027 could not be said to be unrelated to the business activity of the assessee. Therefore, held the Tribunal, the said receipt became the assessee''s income taxable in the assessment year 1972-73, and it was not again includible in the assessee''s total income for the assessment year under reference, that is, 1973-74. In this view of the matter, the Tribunal directed exclusion of the said amount of Rs. 66,066 from computation of the assessee''s total income for the assessment year 1973-74. It is in the background of the above facts that the questions set out above are referred to us at the instance of the revenue.

The question which we have to consider is whether amount of Rs. 66,066 which the assessee received in Samvat year 2027 represented the assessee''s income earned in that year. In other words, whether the said amount is included in the assessee''s total income for the year under reference. The Tribunal has hardly given any reason for holding that the said income was the assessee''s business income taxable in the income tax assessment for the assessment year 1972-73 which is relevant for Samvat year 2027 in which, as stated above, the said amount was received. The only reason given by the Tribunal is that ''the said amount could not be said to be unrelated to the said business activity of the assessee-firm''. The question was not whether the amount was related or unrelated to the business activity of the assessee, the question was whether it was income of the assessee earned in Samvat year 2027. Even if the amount is not related to business of the assessee, it would not necessarily become the income of the assessee in Samvat year 2027. In our opinion the reason which the Tribunal has given in including the said amount in the assessee''s total income for the assessment year 1972-73 is no reason and even if it is considered to be one, it is not convincing. The question which the Tribunal had to address itself was whether the amount of Rs. 66,066 which the assessee received from the society in Samvat year 2027 could be considered to be profit or income by it in that year.

The assessee entered into agreement dated 28-5-1971 with Mrs. Sharda Raje to purchase approximately 1,20,120 sq. ft. of land bearing S. No. 128 situate in Jetalpur in Vadodara District at the rate of Rs. 2 per sq. ft. Thus, the total price which the assessee was required to pay to Mrs. Raje for the land worked out to Rs. 2,40,240. We have already stated as to how the said price was to be paid by the assessee. Now, within three days after the agreement with Mrs. Raje, the assessee entered into agreement with the society on 31-5-1971 under which it agreed to sell the said land at Rs. 3.10 per sq. ft. It is pertinent to note that the assessee did not sell its rights and interest under the agreement with Mrs. Raje to the society, but it agreed to sell the land to the society at the rate stated above. The price which the society had to pay to the assessee under the said agreement worked out to Rs. 3,72,372. Thus, the assessee was to earn profit of Rs. 1.10 per sq. ft. on the sale being made to society. The assessee paid earnest money of Rs. 48,000 to Mrs. Raje on 28-5-1971, the date on which agreement was entered into with her and received Rs. 20,000 as earnest money from the society on 31-5-1971 the date of the agreement with the society. The assessee received further amount totalling to Rs. 66,066 as stated above in Samvat year 2027. Thus, the total sum which the assessee received in Samvat year 2027 which ended on 19-10-1971 came to Rs. 66,066. This amount, which the assessee received from the society was towards the price of the land of Rs. 3,72,372, which the assessee was to receive from the society on completion of sale in its favour. Unless and until the sale in favour of the society was completed, the assessee could not have claimed any part of the amount which it had received by way of earnest money and towards the price as its profit. The assessee would have earned profit only on completion of the sale in favour of the society. The Tribunal has also found that the assessee had not acquired right to receive consideration from the society during Samvat year 2027. The only right which the assessee had in Samvat year 2027 was to receive full consideration for sale of the land on completion of the sale as provided in the agreement with the society. The assessee had acquired the right to purchase land from Mrs. Raje under the agreement with her and it in turn had agreed to sell the land to the society under the agreement with it. Unless and until the sale transaction was completed only right which the assessee had qua Mrs. Raje was to obtain sale deed from her either in its favour or in favour of its nominee or assignee on payment of full consideration and qua the society it had right to receive full consideration on execution of the sale deed either by itself or by Mrs. Raje. What the assessee received from the society in Samvat year 2027 was earnest money and the amount towards the price. The money which the assessee received in Samvat year 2027 would become profit in its hands only on completion of the sale in favour of the society; and till such time the sale was completed, this amount remained only advance towards the price or consideration. It is true that the amount which the assessee had received in Samvat year 2027 were not unrelated to the assessee''s business which was to deal in land, but they had not become the assessee''s profit of income in Samvat year 2027. We fail to understand as to how the Tribunal could have reached the conclusion that the amount which the assessee had received in Samvat year 2027 was its income after holding that (7) the assessee had acquired no right to receive consideration from society in Samvat year 2027; (2) the society did not step into shoes of the assessee as a result of the agreement dated 31-5-1971; and (3) the assessee had not passed or conveyed any interest to the society under the agreement dated 31-5-1971. After correctly appreciating the position in law and holding that only right which the agreement for sale confers is right to obtain another document, namely, sale deed, the Tribunal fell into an error in reaching the conclusion that the amount of Rs. 66,066 which the assessee had received in Samvat year 2027 represented its income earned in that year. Such conclusion could not have been reached without first deciding whether the said amount of Rs. 66,066 represented profit earned by the assessee in Samvat year 2027. As already observed above, the amounts which the assessee had received in Samvat year 2027 were amounts or advance towards the price of the land and they would not become or represent the assessee''s profit unless and until sale transaction in favour of the society was completed as provided in the agreement dated 31-5-1971. It is not disputed that the sale transaction was completed in Samvat year 2028 the previous year relevant to the assessment year under reference. The assessee received balance of the sale price in Samvat year 2028 on completion of sale. It was on completion of the sale that the amounts which the assessee had received in Samvat year 2027 and the balance of the sale price which it had received in Samvat year 2028 became profit of the assessee. The amounts which the assessee received from the society after deducting the price of the land paid to Mrs. Raje represented the assessee''s profit or income earned by it in Samvat year 2028. In our opinion, therefore, the entire amount of Rs. 1,32,132 which includes Rs. 66,066 received by the assessee in Samvat year 2027 was the income earned by the assessee in Samvat year 2028. This amount, as stated above, represents the difference between the price paid by the society to the assessee and the price paid by the assessee to Mrs. Raje. In other words, this difference is the profit which the assessee earned on completion of the sale transaction with the society. The ITO and the AAC were, therefore, right in including the amount of Rs. 66,066 in the assessee''s total income for the assessment year under reference. The Tribunal after correctly appreciating and stating law on the subject erred in holding that the said amount represented the assessee''s income earned in Samvat year 2027.

Mr. S.N. Soparkar, the learned counsel appearing for the revenue, reiterated the assurance which was given by the income tax Department before the Tribunal by stating that if the amount of Rs. 66,066 received by the assessee in Samvat year 2027 was held to be includible in the assessee''s total income for the year under reference, the assessee''s assessment for the assessment year 1972-73 would be suitably amended. In view of this statement made by Mr. Soparkar, the grievance which the assessee had made regarding double taxation before the AAC and the Tribunal does not survive. It may, however, be clarified that the assessee had not sought any reference on the view taken by the Tribunal to the effect that inclusion of Rs. 66,066 in the assessee''s total income for the assessment year 1972-73 was not relevant. However, the interest of the assessee is sufficiently protected by the statement made on behalf of the revenue.

In the view which we are taking, we answer question No. 1 in the affirmative and against the assessee and question No. 2 in the negative and against the assessee. Reference answered accordingly with no order as to costs.