On-Money' received by a builder on sale of flats held as stock-in-trade is taxable only in the year of sale of the flats and not in the year of offer/ disclosure

Pursuant to a search, the assessee admitted to having received ‘on-money’ of Rs. 3 crore for sale of flats. However, it claimed that as the assessee is engaged in the business of purchase of land and construction and the flats are shown as stock-in-trade, the said ‘on money’ was taxable only in the year in which the sale-deed or possession is handed over to the flat owners. The assessee placed reliance on CIT vs. Ashaland Corporation reported at 133 ITR 55(Guj.) where it was held that unless the title of the assessee was extinguished, the title of the purchaser could not arise. Both could not be the exclusive owners of the same property at the same time. So long as the assessee continued to be the owner, it could not be said that his title was divested and that the sale had resulted in any profit to him. Reliance was also placed on the judgement of the Hon’ble Gujarat High Court in CIT vs. Motilal C.Patel & Co. 173 ITR 666(Guj.) where it was held that the only right which the agreement for sale conferred was the right to obtain another document, namely, the sale deed. It was held that it was only on the completion of the sale that the amounts which the assessee had received in Samvat year 2027 and the balance of the sale price which it had received in Samvat year 2028 became the profit of the assessee. HELD by the Tribunal:

The assessee is engaged in the business of construction. 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. Shri Siddharth S. Patel in ITA Nos.1852 & 1853/Ahd/2003(supra), 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. Therefore, in the light of the judgement of Hon’ble Gujarat High Court rendered in the case of CIT vs. Motilal C.Patel and Co. reported at 173 ITR 666 (Guj.), such amount can be subjected to tax when sale-deed is actually executed. Since the Hon’ble Gujarat High Court has held that the amount would become for the assessment year in which the sale transaction is completed. In the case in hand, it is not disputed that sale deeds were executed in the year subsequent to the year under appeal. Therefore, 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. Further, the assessee has submitted that it has offered for tax the amount including ‘on money’ in the year whenever sale-deed was executed. This fact is also not controverted by the Revenue by placing any contrary material on record.