Sale consideration taxable in the year in which sale transaction Completes

Issue before tribunal:

• whether the definitions of transfer as embodied in section 2(47) and section 269UA(f) of the Act would be applicable or not and what should be the correct year of taxing the receipt of ‘on money’ and recorded consideration.
• Whether CIT(A)has erred in reducing the undisclosed income worked out at Rs.3,08,01,600/-, as per the seized materials and as admitted by the working partner of the assessee firm, Shri Sunil H. Desai, to Rs.2,29,20,847/-.
• Whether CIT (A) erred in law and on facts in confirming the additions on account of profit alleged to have been earned by the appellant firm from construction and sale of flats at various sites.

Brief facts of the case:

• These matters were earlier remitted to the ITAT by Hon’bleGujrat High Court.
• Assessee is engaged in the business of construction activities. A search under section 132 of the Act took place on 29.10.1999 at the business and residential premises of the assessee which was concluded on 03.11.1999.
• Assessee filed a return disclosing undisclosed income of Rs.10,86,199/- on 17.02.2000 in response to notice under section 158 BC of the Act. The appellant constructed a residential complex namely Chandan Park, City Light Road, Surat during the period relevant to block assessment.
• The appellant received ‘on money’ of Rs.5,39,63,889/- which was detected during the search through an independent and exclusive evidence. The receipt of ‘on money’ and income of Rs.3,08,01,600/- was admitted by the working partner during a statement on oath under section 132(4) of the Act.
• However, the appellant retracted from the statement on oath and truth of the seized material while declaring undisclosed income of Rs.10,86,199/- only through the block return
• During the post search period the appellant has shifted a stand that income is disclosed on accrual basis. The main issue is regarding receipt of ‘on money’ which has been accepted by the appellant.
• On appeal CIT (A) partly allowed the appeal and directed the AO to adopt the Net Profit at Rs.2,29,20,847/- and after allowing the benefit of undisclosed income of Rs.10,86,199/- in the block returns, take the total undisclosed income at Rs.2,18,34,648/- and accordingly charge tax.

Contention of the revenue:

• AO has observed that the assessee had received ‘on money’ of Rs.5,39,63,889/-. Working partner of the assessee-firm accepted the receipt of this ‘on money’ and admitted income during the course of search of Rs.3,08,01,600/-.
• However, against this undisclosed income, the assessee had filed only undisclosed income of Rs.10,86,199/-, mainly on the basis that the sale-deed or possession was not handed over to the flat owners till the date of search in all cases.
• On the basis of the seized material and the statement of the partner on the said seized paper, the undisclosed income was determined at Rs.3,08,01,600/-.
• In earlier round of litigation, this Tribunal had held that in view of section 2(47) of the Act, effective transfer is taken place and the assessee has received the net profit of Rs.2,29,20,849/-.

Contention of the assessee:

• The controversy in all these appeals is with regard to the fact whether the sale consideration received by the assessee can be subjected to tax in the year under appeal and/or otherwise same is to be taxed as declared by the assessee on the basis of registration of the sale-deed.
• Assessee has treated the flats as stock-in-trade and not as capital asset, therefore the provisions of section 2(47) of the Act would not be applicable in the case of the assessee.
• The issue is squarely covered in favour of the assessee by the decision of Coordinate Bench (ITAT “D” Bench Ahmedabad) in the case of ITO vs. ShriSiddharthS.Patel passed in ITA Nos.1852 & 1853/Ahd/2003 for AYs 1997-98 & 1998-99, dated 23/04/2010.
• For AYs 2001-02, 2002-03, 2003-04, 2004-05 & 2006-07 the entire receipts received by the assessee both recorded in the books of accounts and ‘on money’ has been offered for tax.
• The income should not have been taxed in the year under appeal as the assessee is engaged in the business of purchase and sale of the land.
• Assessee is that the entire receipts have been disclosed and declared in the income-tax return in the subsequent years. It is the contention of the assessee that against the total sale consideration adopted by the AO at Rs.7,88,02,178/-, the assessee had disclosed the sale consideration at Rs.8,68,55,671/- and the taxes on such income has been paid.

Held by the tribunal:

• The assessee has been showing the flats in question as stock-in-trade, therefore in view of the decision of the Coordinate Bench rendered in the case of ITO vs. ShriSiddharthS.Patel in ITA Nos.1852 & 1853/Ahd/2003 the provisions of section 2(47) would not be applicable.
• The assessee has disclosed the ‘on money’ in the return of income in the year in which the sale-deed was executed. The Revenue has not rebutted this contention. Reliance was placed on the judgement of Hon’ble Gujarat High Court in the case of CIT vs. MotilalC.Patel173 ITR 666 (Guj.) where court held that such amount can be subjected to tax when sale-deed is actually executed.
• In view of the binding precedent, we are of the considered view that the authorities below were not justified in taxing the amount including ‘on money’ during the year under appeal.
• The assessee has offered the amount in the year in which the sale-deed was executed then the AO would delete the addition made in this year.

Conclusion:

‘On money’ received by the assessee did not have the character of income but was only an advance like the one received through cheque. Both will become part of the sale consideration to the assessee simultaneously on either handing over the possession of the flats or on execution of transfer deed whichever happens earlier. Hence, the sale consideration is entitled to be taxed in the year in which sale was actually executed.