TMI Blog1981 (7) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... his land, a portion of the land was sold by the assessee to a housing society in 1968, but that sale is not relevant for the purpose of this reference. On November 14, 1970, the assessee entered into an agreement to sell a certain number of plots out of the said land to Avinash Co-operative Housing Society (hereinafter referred to as " the society "). At the time of the agreement, the assessee received Rs. 5,000 by way of earnest money. Between December 25 and 28, 1970, the assessee received a further sum of Rs. 2,08,772 towards the sale price from the society and handed over the possession of some of the plots out of the plots agreed to be sold to the society. The total sum of Rs. 2,13,772 received by the assessee from the society was credited to the trading account in the previous year relevant to the assessment year 1971-72. The question which arises for our consideration whether the receipt of the amount of Rs. 2,13,772 represents the assessee's income earned in the said year. The relevant year of account is the calendar year 1970. In its return of income for the assessment year 1971-72, the assessee disclosed a net profit of Rs. 90,403 derived from the receipt of the aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same in accordance with law. Being aggrieved by the order passed by the Commissioner, the assessee went in appeal before the Tribunal. The Tribunal held that having regard to the method of accounting followed by the assessee, the amount of Rs. 2,13,772 received under the agreement dated November 14, 1970, in the calendar year 1970 represented the assessee's income earned in the said year, even though the actual sale deeds for a total consideration of Rs. 4,40,939 were executed and registered in favour of the society only-in the year 1971. In the result, the Tribunal allowed the assessee's appeal and set aside the order passed by the Commissioner. It is in the background of these facts that the question set out above has been referred to us for our opinion under s. 256(1) of the Act. Section 4 of the Act imposes income-tax upon a person in respect of his income. In other words, the income-tax is a tax on a person in relation to his income. " Income " as defined in s. 2(24) includes profits and gains. Section 14 of the Act enumerates six heads under which the income of an assessee falls to be charged. One of such heads is " Profits and gains of business or profession ". So fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock-in-trade of the assessee would not, as observed above, cease to be so unless the assessee sells it. And sale would not be complete unless it executes a registered sale deed. Admittedly, no sale transaction took place in the previous year relevant to the assessment year 1971-72. All that happened in that year was that the assessee entered into an agreement to sell certain plots of land out of the land purchased by it in 1967 to the society under the agreement dated November 4, 1970. Since no actual sale took place in that year, land or any portion thereof which was the subject-matter of the agreement did not cease to be the stock-in-trade of the assessee in that year. It is, however, contended on behalf of the assessee that in pursuance of the agreement for sale, it had received Rs. 5,000 by way of earnest money and Rs. 2,08,772 as advance towards the total sale price of the land agreed to be sold. These receipts, says the assessee, are its trading receipts and, therefore, they represent its gross income earned in the previous year relevant to the assessment year 1971-72. It is contended that since the business of the assessee is to purchase and sell land, it is immaterial as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f price coupled with the parting of possession of some portion of the land agreed to be sold would not confer, any title on the purchaser, i. e., the society, even in respect of the land of which possession is given to it. Doctrine of part performance cannot be brought into aid to treat the receipt of Rs. 2,13,772 as a trading receipt. Doctrine of part performance embodied in s. 53A of the Transfer of Property Act has a limited application and it affords only a good defence to the person put in possession under an agreement in writing to protect his possession to the extent provided in the said s. 53A of the Transfer of Property Act; but, in any case, the agreement in writing to sell, coupled with parting of possession, would not confer any legal title on the purchaser and take the land out of the stock-in-trade of the seller if he is a dealer in land. If a mere agreement of sale were to be treated as creating any such right as contended by the assessee, it would create many complications which would be difficult to resolve. For example, can a person who has agreed to sell his property, exclude the value of such property from his net wealth while filing return of his net wealth ? W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the method of accounting which the assessee follows is the cash method, it would have a bearing only in respect of completed business transactions. If the method followed is the cash method, only amounts which the assessee has received will form part of its income, but that would be so only after the transactions in respect of which the amounts are received are legally completed. Such amounts cannot be treated as trading receipts till the title passes to the purchaser and the land for which the amount is received goes out of the stock-in-trade of the assessee. If the method of accounting followed is mercantile, on completion of the transaction the entire sale price will become the income of the assessee irrespective of the fact whether or not he actually received it. But, in either case, there is no question of the receipt becoming an income before the completion of the transaction and a transfer of the title. The real test in deciding whether the receipt is the assessee's income or not, is whether the assessee continues to be the owner of the land, or whether he is divested of such ownership. The land of which the assessee is the owner is its stock-in-trade and the land which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived by it towards the sale price should be treated as its income. As pointed out above, the land does not cease to be the stock-in-trade of the assessee unless and until the sale is completed. Therefore, the amount received by the assessee by way of earnest money and part payment of the purchase price cannot be treated as its trading receipt. A question similar to the one which has arisen before us had come up for consideration in the case of Chidambaram Chettiar v. CIT [1936] 4 ITR 309 (Mad). That was a case, in which the assessee, who was carrying on business at Klang (in Burma), had entered into an agreement with oil(, S. A. Rm., who carried on business at Penang, for the purchase of house sites belonging to S. A. Rm in British India. On 3rd April, 1929, a sum of Rs. 50,000 was paid to S. A. Rm at Penang by the assessee's Klang firm towards the price and the assessee was debited with this amount on that date. The sale deed was executed on 8th May, 1929. In the assessment for the accounting year 13th April, 1929, to 12th April, 1930, the assessee contended that this sum of Rs. 50,000 must be deemed to have, been remitted to him on 3rd April, 1929, and not on 8th May, 1929, an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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