2006 (9) TMI 135 - HC - Income Tax

Trading additions - colonization business - Amount received by the assessee-colonizer by way of advances or earnest money as a result of agreements to sell plots did not constitute revenue receipts in its hands as no sale deed had yet been executed? - HELD THAT - In the present case the Tribunal held that unless the title of the assessee was extinguished the land was to be treated to continue as stock-in-trade of the assessee and the amounts received on account of sale of plots were not trading receipts. In view of law laid down by the hon ble Supreme Court in CIT v. Podar Cement P. Ltd. 1997 (5) TMI 2 - SUPREME COURT this view cannot be approved. Once the possession of plots was transferred and the transferees even made constructions the dominion over the property passed on to the transferees and the amounts received by the assessee could not be held to be mere deposits and property transferred could not be held to be stock-in-trade of the assessee. The amount received by the assessee had thus to be revenue receipt in its hands. Thus we answer the question in favour of the Revenue and against the assessee - Reference is disposed of accordingly.

Summary

Issues:
1. Whether the amount received by the assessee-colonizer as advances or earnest money constitutes revenue receipts in its hands?
2. Whether the possession of plots being transferred and construction made by transferees affects the characterization of amounts received by the assessee?

Analysis:
1. The Tribunal considered whether the amount received by the assessee-colonizer as advances or earnest money from agreements to sell plots constituted revenue receipts. The assessee, a private limited company, had developed colonies and sold plots on an installment basis. The Income-tax Officer viewed these amounts as trading receipts, but the Commissioner of Income-tax (Appeals) vacated the additions. The Tribunal noted that no registered sale deeds were executed, and possession was handed over without registration due to legal restrictions. Refunds were made, and the Tribunal cited precedents to conclude that without registered sale deeds, the amounts could not be considered revenue receipts, aligning with the Transfer of Property Act and Registration Act.

2. The Tribunal further analyzed the impact of possession transfer and constructions made by transferees on the characterization of amounts received by the assessee. Citing the Supreme Court's interpretation, the Tribunal disagreed with the view that the land continued as the assessee's stock-in-trade. Once possession was transferred, and construction occurred, the dominion over the property shifted to the transferees. Therefore, the amounts received could not be deemed mere deposits, and the property transferred could not be classified as stock-in-trade. Consequently, the Tribunal held that the amounts received were revenue receipts in the hands of the assessee, contrary to its initial assessment.

3. Referring to legal precedents, including judgments by the Supreme Court and Kerala High Court, the Tribunal emphasized that the receipt of earnest money had legal implications related to contract performance and was not refundable. The Tribunal highlighted the nexus between the earnest money received and the business activities of the assessee. Ultimately, based on the legal principles and factual circumstances, the Tribunal ruled in favor of the Revenue, determining that the amounts received by the assessee were revenue receipts and not merely deposits, disposing of the reference accordingly.