Gujarat H.C : Whether, on the facts and in the circumstances of the case, the amount of Rs. 66,066 received by the assessee-firm during the S.Y. 2027 (previous year relevant to asst. yr. 1972-73) is includible in the assessment for the asst. yr. 1973-74 ?

Counsel Appeared

S.N. Soparkar i/b R.P. Bhatt & Co., for the Revenue

R.C. MANKAD, J.:

The Tribunal (“Tribunal” for short), has referred to us for our opinion the following questions under s. 256(1) of the IT Act, 1961 :

” (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 S.Y. 2027 (previous year relevant to asst. yr. 1972-73) is includible in the assessment for the asst. yr. 1973-74 ?

(2) 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 asst. yr. 1972-73 and that the said amount was not again includible in the assessee’s total income for the asst. yr. 1973- 74, in question is correct in law and sustainable from the material on record ? “

2. The assessment year under reference is 1973-74, the previous year being S.Y. 2028 which commenced on October 20, 1971, and ended on November 6, 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 May 25, 1971. Clause 5 of the partnership deed enumerates the businesses for which the partnership was formed. One of such businesses stated in sub-cl. (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 May 28, 1971, the assessee entered into an agreement with one 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 a further sum of Rs. 1,00,000 to Raje by July 15, 1971, and the balance of sale price on completion of sale on or before August 31, 1971. The sale was to be completed on or before August 31, 1971. The vendor agreed to sell the land either to the assessee itself or to its nominee or assignee. On May 31, 1971, viz., three days after Raje executed the agreement in favour of the assessee as aforesaid, the assessee entered into an agreement with Shri Krushnakunj Cooperative Housing Society Ltd. (proposed) (” society ” for short), to sell the said land to the society it the rate of Rs. 3.10 per sq ft. Under this agreement, the society paid to the, assessee earnest money of Rs. 20,000on the date of the agreement, viz., May 31, 1971. The society further agreed to pay to the assessee Rs. 1,00,000, on or before July 15, 1971, and the balance of the sale price on or before August 31, 1971, on completion of the sale. Under this agreement also, the sale was to be completed on or before August 31, 1971. It would, therefore, appear that the terms regarding payment of consideration and completion of sale were identical in both the aforesaid agreements. Raje executed in favour of the society 8 deeds of sale on 25th, 26th, 27th, 28th and 30th October and 1st, 2nd and 3rd November,1971. The assessee was a party to these sale deeds as confirming party. The sale deeds were registered on November 4, 1971.

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

The assessee received from the society four amounts of Rs. 16,516.50 each, totalling Rs. 66,066 during S.Y. 2028, which is the 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 S.Y. 2027, was merely an advance towards expected profits and, therefore, it did not constitute the assessee’s income in S.Y. 2027. The ITO was of the view that Rs. 66,066 which the assessee had received in S.Y. 2027 and the four amounts totalling Rs. 66,066 received in S.Y. 2028, represented the assessee’s income earned in S.Y. 2028. The ITO, therefore, brought to tax the entire amount of Rs. 1,32,132 for 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 the amount of Rs. 66,066 having already been taxed in the asst. yr. 1972-73, 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 the 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 the amount of Rs. 66,066, which was already taxed in the earlier assessment year that is, asst. yr. 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 IT 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 asst. yr. 1972-73. The Tribunal held that the assessee had not acquired the right to receive consideration from the society during S.Y. 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 Raje’s obligation under the agreement dated May 28, 1971, was concerned. The Tribunal further held that by agreement dated May 31, 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 S.Y. 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 asst. yr. 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 the exclusion of the said amount of Rs. 66,066 from the computation of the assessee’s total income for the asst. yr. 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 the amount of Rs. 66,066 which the assessee received in S.Y. 2027 represented the assessee’s income earned in that year, in other words, whether the said amount is includible 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 asst. yr. 1972-73, which is relevant for S.Y. 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 S.Y. 2027. Even if the amount is not unrelated to the business of the assessee, it would not necessarily become the income of the assessee in S.Y. 2027. In our opinion, the reason which the Tribunal has given for including the said amount in the assessee’s total income for the asst. yr. 1972-73, is no reason and even if is considered to be one, it is not convincing. The question to which the Tribunal had to address itself was whether the amount of Rs. 66,066 which the assessee received from the society in S.Y. 2027 could be considered to be profit or income earned by it in that year.

The assessee entered into an agreement dated May 28, 1971, with 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 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 Raje, the assessee entered into an agreement with the society on May 31, 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 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 the society. The assessee paid earnest money of Rs. 48,000 to Raje on May 28, 1971, the date on which the agreement was entered into with her and received Rs. 20,000 as earnest money from the society on May 31, 1971, the date of the agreement with the society. The assessee received further amount totalling Rs. 46,066 as stated above in S. Y. 2027. Thus, the total sum which the assessee received in S. Y. 2027 which ended on October 19, 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 the 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 any right to receive consideration from the society during S.Y. 2027. The only right which the assessee had in S.Y. 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 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, the only right which the assessee had qua Raje was to obtain the 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 a right to receive full consideration on the execution of the sale deed either by itself or by Raje. What the assessee received from the society in S.Y. 2027 was earnest money and the amount towards the price. The money which the assessee received in S.Y. 2027 would become profit in its hands only on completion of the sale in favour of the society ; and till such time as the sale was completed, this amount remained only as an advance towards the price or consideration. It is true that the amounts which the assessee had received in S.Y. 2027 were not unrelated to the assessee’s business which was to deal in land, but they had not become the assessee’s profit or income in S.Y. 2027. We fail to understand as to how the Tribunal could have reached the conclusion that the amount which the assessee had received in S.Y. 2027 was its income after holding that (1) the assessee had acquired no right to receive consideration from the society in S.Y. 2027 ; (2) the society did not step into the shoes of the assessee as a result of the agreement dated May 31, 1971 ; and (3) the assessee had not passed or conveyed any interest to the society under the agreement dated May 31, 1971. After correctly appreciating the position in law and holding that the only right which the agreement for sale confers is the right to obtain another document, namely, the 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 S.Y. 2027 represented its income earned in that year. Such a conclusion could not have been reached without first deciding whether the said amount of Rs. 66,066 represented profit earned by the assessee in S.Y. 2027. As already observed above, the amounts which the assessee had received in S.Y. 2027, were amounts or advances towards the price of the land and they would not become or represent the assessee’s profit unless and until the sale transaction in favour of the society was completed as provided in the agreement dated May 31, 1971. It is not disputed that the sale transaction was completed in S.Y. 2028, the previous year relevant to the assessment year under reference. The assessee received the balance of the sale price in S.Y. 2028 on completion of the sale. It was on completion of the sale that the amounts which the assessee had received in S.Y. 2027 and the balance of the sale price which it had received in S.Y. 2028 became the profit of the assessee. The amounts which the assessee received from the society after deducting the price of the land paid to Raje represented the assessee’s profit or income earned by it in S.Y. 2028. In our opinion, therefore, the entire amount of Rs. 1,32,132, which included Rs. 66,066, received by the assessee in S.Y. 2027 , was the income earned by the assessee in S.Y. 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 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 the law on the subject, erred in holding that the said amount represented the assessee’s income earned in S.Y. 2027. S. N. Soparkar, learned counsel appearing for the Revenue, reiterated the assurance which was given by the IT Department before the Tribunal by stating that if the amount of Rs. 66,066 received by the assessee in S.Y. 2027 was held to be includible in the assessee’s total income for the year under reference, the assessee’s assessment for the asst. yr. 1972-73, would be suitably amended. In view of this statement made by 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 the inclusion of Rs. 66,066 in the assessee’s total income for the asst. yr. 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.

[Citation : 173 ITR 666]