SALEEM AKHTAR, J.~ 1. The applicant is a firm of Builders which has acquired the land and constructed apartment for sale. During the calendar year ending 31st December, 1973 the applicant received advances against booking aggregating to Rs. 6,56,770/- from the purchasers of the apartments. The apartments were to be built according to specification as laid down by the Karachi Development Authority and were offered for sale at a price fixed by KDA. The purchasers had the option to withdraw at any time and obtain the refund of the advances after deduction of the establishment/service charges. The applicant maintained the account on cash basis. It filed return for assessm ent year 1974- 75 originally declaring loss of Rs. 74,969/-. Subsequently a revised return declaring loss of Rs. 32,254/- was filed. The applicant had calculated gross profit @ 10% of the receipts after deducting the cost of land. The Income Tax Officer determined the method of accounting employed by the appellant as mercantile but proceeded to apply cash receipt basis.
He calculated gross profit at Rs. 6,20,706/- less expenses. The applicant filed an appeal before the Appellate Assistant Commissioner of Income Tax Act mainly on the ground that the Income Tax Officer had not deducted the amount representing cost of land from the total advances received.
The learned Appellate Assistant Commissioner by his order dated 29th January, 1976 held that the cost of land should be excluded from the total receipt. The department then filed an appeal before the Tribunal which after examining the case issued show cause notice to the applicant for enhancement of its income. After hearing the parties the Tribunal enhanced the income at Rs.
1,58,350/-. The applicant made an application under section 66(1) of the Income Tax Act raising four questions l?Ut by order dated 9th March, 1980 it was rejected on the ground that the question of law does not arise.
2. Mr. Iqbal Naeem Pasha has contended that out of the four questions mentioned in the application under section 66(2) only one question will be pressed by him which reads as follows:- "Whether the advances received by the applicant from participating buyers were in the nature of income of the applicant"?
3. The main contention of the learned counsel for the applicant is that the amount received from the purchasers was in the nature of deposit which was liable to be refunded in case the contract could not be executed and therefore, it could not be treated as an income. This question entirely depends upon appreciation of fact about the nature of the amount received by the applicant.
While revising the return the applicant had written a letter to the Income Tax Officer in which it was stated as follows:-- "Our clients are carrying on business on Housing Scheme. The houses or apartments are constructed and sold to different individual on instalments basis. The total receipts amounting to Rs. 6,56,700/- received during the assessment year 1974-75 had been credited to advance booking account and shown in the Balance Sheet accompany with the Original Return of income as no construction was carried out in this year. As the Books of accounts are maintained on cash basis the amount received by our client on account of the booking of apartments and credited to advance book account in fact represents receipts of our client. The Return of income is therefore, revised treating the amount of advance booking as receipts for the year".
4. The applicants on its own showing had accepted and kept the amount as advance received from the purchasers.
5. Mr. Iqbal Naeem Pasha has contended that the amount deposited by the purchasers were refundable after deducting the administrative or service charges, and therefore, it could not be treated as an income. The amounts were received by the applicant from the purchaser which were initially towards the I price of the flat. It was not an amount which was a fixed deposit as security liable to-be forfeited or refunded in the : given circumstances. The amount so deposited by the purchasers could be returned in case the project was not ; completed or the purchasers did not want to purchase it. However, if the purchaser wanted to complete the contract, the 'balance amount was to be paid by him and the amount so deposited was to be adjusted in the sale price.
Therefore, from the very beginning the amount was paid as advance and not as a security amount exclusively for the purposes of refund. This was an advance payment being part of the sale price of the flat and could be refunded only in case the purchaser did not agree to go ahead with his contract or the project was not completed. These intervening factors cannot change the initial character of the receipt which was in the nature of a revenue receipt.
6. In KMS. Lakshmanier arid Sons Vs. CIT (1953) ITR 202 (S.C.) the assessee were the sole telling agents of yarn manufactured by a mill. They distributed yarn to customers on forward contracts in respect of which customers were required to pay advances of money adjustable towards the final payment of purchase price at the time of delivery of goods. From 5th May, 1944 the assessee changed the arrangement and they treated the amount as advance payment and kept them under heading "Contracts Advance Fixed Deposit Account". Under this changed arrangement customers had to pay the price of goods in full and deposit was to be returned on delivery under the contract. From 14th February, 1945 this arrangement was again changed and assessee demanded security deposits from the customers which was to be returned on due performance of the forward contracts. On these facts it was observed as follows:-- Turning now to the deposits received by the appellants from 5th May, 1944 to 14th February, 1945, we are of the opinion that, having regard to the terms of the arrangement then in force, they partake more of the nature of trading receipts than of security deposits. It will be seen that the amounts received were treated as advance payments in relation to each "Contract number" and though the agreement provided for the payment of the price in full by the customer and for the deposit being. Returned to him on the completion of delivery under the contract, the transaction is one providing in substance and effect for the adjustment of the mutual obligation on the completion of the contract".
7. In the Punjab Diesel Industries Ltd. Vs. Commissioner of Income Tax Simla (1953) 24 ITR 597 the assessee distilled liquor and sold it in sealed bottles. In order to ensure the return of the empty bottles the assessee collected from the purchaser a certain sum fixed called "empty bottles return security deposit", in addition to the price of the bottle of liquor. If the empty bottles were returned within a reasonable time the security deposit representing the price of the empty bottles was, to be refunded. Certain percentage empty bottles were returned but some percentage of empty bottles were not returned and the security deposits remained in the hands of the assessee. The Court held that the collection made by the assessee and described in its account as empty bottles return security deposits were income assessable under section 10 of the Indian Income Tax Act, 1922.
8. Mr. I.N. Pasha has referred to Hasmukh Lal vs. Commissioner of Income Tax Bombay North (1959)
37 ITR 359 where it was observed that "when the sale proceeds gross or the net are received by the assessee independently 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 of the execution of sale deed". This principle will apply where initially the amount has been paid as deposit and not as a price of the goods sold or for adjustment towards the sale price. In the present case the amount was not deposited as a security but was paid towards the sale price and the balance was to be paid later. It was only on happening of certain event subsequently that refund could be claimed. The nature of receipt is to be ascertained not with reference to the subsequent changes but is "to be gathered as at the inception of the receipt". Reference can be made to Morley (Inspector Taxes) vs. Tettersall (1938) 3 All. E.R. 296. In our view the Tribunal has taken a correct view of the matter and no question of law arises from its order.
9. The application is dismissed.