Earnest money is not taxable as income on receipt if it remains a contractual deposit until completion of sale.

An amount received as earnest money was not income at the time of receipt where the agreement expressly treated it as a refundable or forfeitable contractual deposit rather than part payment of the sale price. The principle that income embedded in sale proceeds is taxable on receipt did not apply, because no part of the gross profit had been received in 1946 and the sum remained a deposit until it was adjusted against the price on completion of the conveyance. The profit was therefore taxable only in assessment year 1951-52 and was not apportionable between assessment years 1946-47 and 1951-52.

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Issues: Whether the amount of Rs. 96,000 odd arising from the transaction was taxable only in assessment year 1951-52 or was liable to be apportioned between assessment years 1946-47 and 1951-52.

Analysis: The amount of Rs. 60,000 received in 1946 was expressly described in the agreement as earnest money and was subject to forfeiture if the contract was not completed. That character was inconsistent with treating it as part payment of the sale price at the time of receipt. The principle that income embedded in sale proceeds may be taxable when the proceeds are received did not apply, because no part of the gross profits was received in 1946 and the amount remained only a contractual deposit until it was adjusted against the price on execution of the conveyance.

Conclusion: The profit was taxable in assessment year 1951-52 and was not apportionable between assessment years 1946-47 and 1951-52.

Ratio Decidendi: An amount received and retained as earnest money is not income at the moment of receipt merely because it is later adjusted towards the sale price on completion of the contract.

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