Hasmukhlal M. Parikh Vs. Commissioner of Income-tax, Bombay North - Court Judgment

Shah, J.

1. The assessee derived income from house property and a share in partnership and from interest and dividends. On 8th October, 1938, the assessee purchased the leasehold interest in Survey No. 45 of village Paladi from one Bhudarbhai who had obtained a lease from the original owner of the land on 26th September, 1938. Under the lease Bhudarbhai had a right to purchase the land, and that right was also assigned to the assessee. On 14th September, 1945, the assessee purchased a half share in the reversion from the original owner, and on 5th May, 1946, he entered into an agreement with a housing society for sale of his rights in the land and obtained Rs. 60,000 as earnest money. Under another conveyance, dated 24th September, 1947, the assessee purchased from the original owner of the land his right of reversion in the remaining half share. On 1st October, 1947, the society executed in favour of the assessee a lease in respect of the entire land, and in 1950, the assessee executed a conveyance in favour of the society in pursuance of the covenant under the deed of lease conveying the land S. No. 45 to the society for Rs. 1,23,677-2-0. In the year of assessment 1951-52 the Income-tax Officer did not include in computing the total income of the assessee the profit of Rs. 96,796 made by the assessee in this transaction. But the Commissioner of Income-tax took action under section 33B of the Income-tax Act and brought the amount to tax. The matter was then taken to the Income-tax Appellate Tribunal, and the Tribunal was of the view that in acquiring the right of Bhudarbhai the assessee was indulging in a trading venture and that the profit of Rs. 96,000 odd made by the assessee accrued in the year 1950. The Tribunal negatived the contention that the amount of Rs. 60,000 received by the assessee on 5th May, 1946, was part of the sale price under the agreement dated 5th May, 1946. In this reference under section 66(2) of the Income-tax Act, the question which falls to be determined is whether on the facts and in the circumstances of the case the amount of Rs. 96,000 odd, which is the profit made by the assessee, is taxable in the assessment year 1951-52 or is liable to be apportioned as income for the assessment years 1946-47 and 1951-52.

2. Mr. Palkhivala for the assessee contends that as the assessee received a part of the price on 5th May, 1946, and the balance of the price in the year 1950, even if the assessee was liable to pay tax on the profit accruing under the transaction on the footing that it was a trading venture, the profit therein had to be apportioned between the assessment years 1946-47 and 1951-52 for assessing tax liability. Counsel submits that tax appropriate to the amount of Rs. 60,000 received by the assessee in the year 1946 was payable in the assessment year 1947-48 and the tax on the balance was payable by the assessee in the year of assessment 1951-52. That the venture of the assessee was a trading venture has been found by the Tribunal and that question is not open to be canvassed and has not been canvassed before us. It is evident that the assessee had purchased the leasehold rights in the land, which were purchased by Bhudarbhai, only ten days after the latter had obtained the same. Thereafter the assessee purchased the rights of the owner in two instalments, and in the venture he has undoubtedly made a profit exceeding Rs. 96,000. In the agreement, dated 5th May, 1946, it was recited that the assessee had agreed to sell to the housing society absolutely the land held by him for Rs. 1,23,677-2-0 and that if the housing society desired to take on lease the rights of the assessee in all the land with a covenant to purchase, the assessee undertook to give the society a lease for three years with a covenant to purchase on the society paying him Rs. 60,000 at the time of executing the lease deed 'out of the sale price' of Rs. 1,23,677-2-0. It was then recited that the assessee will, at the time of executing the sale deed account and give a set off of Rs. 60,000 'paid as earnest money out of the sale price' and if the housing society failed to get the sale deed executed of the rights of the assessee during the period of the lease on payment of the remaining consideration, then the amount of Rs. 60,000 paid by the society as 'earnest money' will stand forfeited. It is undisputed that the amount of Rs. 60,000 was paid by the housing society to the assessee; and this amount is expressly designated at two places in the agreement as 'earnest money'. In the opening sentence of paragraph 4 of the agreement the amount is, it is true, referred to as 'out of the sale price of Rs. 1,23,677-2-0'; but the assessee has in this agreement expressly designated the amount of Rs. 60,000 as 'earnest money'. He has also reserved a right to forfeit the amount in the event of failure on the part of the society to complete the contract. This agreement, as is evident from the recital contained therein, was drawn up by an advocate. If in a document drawn up by a lawyer the expression 'earnest money' was used in referring to the amount of Rs. 60,000 received by the assessee, we would require much stronger evidence than is to be found in this case to justify us in holding that the expression 'earnest money' in the agreement was not intended to have the meaning which it normally has, and it was used in the sense of 'part payment of the price' : and the circumstance that this amount of Rs. 60,000 was liable to be forfeited in the event of the housing society failing to carry out its part of the contract makes the conclusion inevitable that the amount was intended to be earnest money and not part payment of the price. The Tribunal has taken the view that the amount of Rs. 60,000 paid in 1946 by the housing society to the assessee was earnest money, and we agree with that view.

3. Mr. Palkhivala has contended that even if the amount of Rs. 60,000 was earnest money, when the sale deed was executed, and the assessee received the full price of Rs. 1,23,677-2-0, in the amount of Rs. 60,000 which was appropriated towards the price at the date of the sale deed must be regarded as embedded the characteristic of income received in the year 1946 and that amount was liable to be taxed in the year in which it was initially received and not in the year in which the sale deed was executed and the amount was appropriated towards the price. In support of that contention, our attention was invited to a judgment of their Lordships of the Supreme Court in Turnover Morrison & Co. Ltd. v. Commissioner of Income-tax. That was a case in which a non-resident association had effected sale on salt in Indian through brokers. The sale proceeds of the salt were collected by the assessees and credited to the amount kept in their own name with a bank and after deducting the expenses including their commission the balance was remitted to the association in Egypt. The Income-tax authorities treated the assessees as the agents of the non-resident association under section 43 of the Indian Income-tax Act and assessed them to income-tax under section 4(1)(a) or, in the alternative, under section 4(1)(c). It was held by their Lordships of the Supreme Court that the income, profits and gains derived from the sale of salt in British India were assessable to income-tax under section 4(1)(a) as income, profits and gains received by the company in British India on behalf of the association. In dealing with the question as to when the income may be deemed to be received, their Lordships observed (at page 160 of the report) :

'There can, therefore, be no question that when the gross sale proceeds were received by the agents in India they necessarily received whatever income, profits and gains were lying dormant or hidden or otherwise embedded in them. Of course, if on the taking of accounts, it be found that there was no profits during the year then the question of receipt of income, profits and gains would not arise but if there were income, profits and gains, then the proportionate part thereof attributable to the sale proceeds received by the agents in India were income, profits and gains received by them at the moment the gross sale proceeds were received by them in India and that being the position the provisions of section 4(1)(a) were immediately attracted and the income, profits and gains so received became chargeable to take under section 3 of the Act.'

4. But in the case before us, the assessee did not in the year 1946 receive any part of the gross profits; and we are unable to appreciate how the principle in Turner Morrison & Co.'s case will apply to the facts of this case. When sale proceeds, gross or net, are received by the assessee, evidently section 4 is immediately attracted, and the income, profits and gains embedded therein became chargeable to tax; but in our judgment that principle will not apply to an amount left in deposit with the assessee for due performance of a contract which amount is subsequently appropriated towards the price on the execution of a sale deed.

5. On the view taken by us, the answer to the question referred is that the amount of Rs. 96,000 odd, which is the profit made by the assessee in the transaction, is taxable in the year of assessment 1951-52 and is not liable to be apportioned as income for the assessment years 1946-47 and 1951-52. The assessee to pay the costs of the Commissioner of Income-tax.

6. Reference answered accordingly.