2009 (7) TMI 25 - HC - Income Tax

When to compute - Sale of Land Advance Money Receive Transfer of Assets Tribunal held that amount received as advance money towards sale price of land was not be considered as assessee s income till the sale was complete and title passed to the buyers under registered sale deeds though possession of land had been given - the moment an earnest money or deposit is received certain legal incidents are attached to it. It is a security received for due performance of the contract. If the purchaser commits breach of the agreement earnest money can be forfeited. Once earnest money or deposit is received it is not a refundable amount. This is a great factor to be reckoned in determining whether the receipt of earnest money is a trading or revenue receipt or a capital receipt. Held that Tribunal Order is not correct and answered in favor of revenue.

Summary

Issues:
Interpretation of advance money towards sale price of land as assessable income under Income Tax Act, 1961.

Detailed Analysis:
1. Background: The case involved a dispute regarding the treatment of advance money received towards the sale price of land by an assessee engaged in land transactions. The Assessing Officer treated the amount as revenue receipt, while the assessee contended it was advance money as the sale had not been completed.

2. Assessing Officer's View: The Assessing Officer and the Appellate Authority considered the receipt as assessable income, emphasizing that the assessee had made profits by selling parcels of land before obtaining legal possession. They rejected the argument that the advances were 'Amanat' with the firm, stating that possession of land had been given and the balance was to be received at the time of registration.

3. Tribunal's Decision: The Tribunal reversed the lower authorities' view, holding that the receipt should be considered as advance money until the sale transaction was completed through a registered sale deed. The Tribunal noted that the assessee had duly disclosed income in subsequent assessment years after the sale deeds were executed, indicating that the transaction had reached maturity.

4. Legal Precedents: The revenue argued that possession being handed over and a substantial amount being received justified treating the amount as trading receipt, relying on legal precedents emphasizing the entitlement to receive income as a determining factor of ownership for tax purposes.

5. Judicial Interpretation: Citing judgments from the Supreme Court and High Courts, the revenue contended that the principles of common law, Transfer of Property Act, and Registration Act were not conclusive in determining ownership for income tax purposes. The Kerala High Court's observations highlighted the legal incidents attached to earnest money and its relevance in distinguishing between trading revenue and capital receipts.

6. Conclusion: The Court agreed with the revenue's argument, emphasizing that the receipt of earnest money had a direct nexus with the business carried out by the assessee-company. Therefore, the Court ruled in favor of the revenue, considering the advance money as assessable income under the Income Tax Act, 1961.

7. Disposition: The Court disposed of the reference accordingly, upholding the revenue's position on the treatment of advance money received towards the sale price of land as assessable income.