Income Tax Appellate Tribunal - Mumbai
Pancard Clubs Ltd, Mumbai vs Assessee
1
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "B", MUMBAI
Before Shri J. Sudhakar Reddy, Accountant Member,
and Shri. R.S.Padvekar, Judicial Member.
I.T.A. No. 2389/Mum/2009.
Assessment year : 2004-05.
AND
I.T.A. No. 2418/Mum/2009.
Assessment year : 2005-06.
Pancard Clubs Ltd., Dy. Commissioner of Income Tax,
111, Kalyandas Udyog Bhavan, Vs. 7(1), Mumbai.
Nr. Century Bhavan,
Prabhadevi, Mumbai-400 0025.
PAN AAACP9093R.
Appellant by : S/Shri S.E. Dastur/Nitesh Doshi/
D.V. Lakhani.
Respondent by : Shri Naresh Kumar Balodia.
ORDER
Per J. Sudhakar Reddy, A.M. :
These appeals filed by the assessee are directed against the order of the Commissioner of Income Tax-7, Mumbai passed u/s 263 of the Income Tax Act on 16-03-2009 for the assessment year 2004-05 and on 17-02-2009 for the assessment year 2005-06. As the issues arising in both the appeals are common, for the sake of convenience they are heard together and disposed of by way of this common order.
2. Both the parties before us submitted that the order of the CIT u/s 263 for the assessment year 2005-05 passed on 17-2-2009 is the main order and that the same 2 may be taken up first. It is also submitted that the issues arising in the 263 order for the assessment year 2005-06 are same as in A.Y. 2004-05, and the decision taken on the validity of the order u/s 263 for the assessment year 2004-05, can be followed for the assessment year 2005-06. Thus we take ITA No. 2418/Mum/2009 first.
3. Facts in brief:
The facts are brought out at para 3 to para 3.3 of the assessment order for the assessment year 2004-05. They are extracted below for ready reference:
"3. Pancard Club is a company of Panoramic Group of companies having business interests and activities in the fields of Hotel Industries, Resorts, Clubs, etc. Assessee company offers card facilities which includes savings and discounts on purchases made by Card Members plus club facilities which includes Health Facilities, Gymnasium, Sports, Restaurant, Swmming pool, Sauna, Jacuzzi, Water Park, Choldren game, video parlour etc. to its members.
3.1 The company offers Holiday Scheme to card members at a discounted/special price on account of advance Room Nights marketed through its agents. The agents are entitled to a commission on the offer price collected by them. The assessee had deducted tax on commission payments and paid it on 2.9.2005. The company charged Membership Entrance Fee which is non-refundable to its members to cover the initial administration cost. The entrance fee is linked to each membership application, irrespective of the number of Room Nights purchased under the application. 3.2 The member is entitled to utilize the Room Nights as per the terms of entitlement of the scheme. Utilisation can be made at any of the hotels/clubs owned by PCL or its subsidiaries and also at other affiliated destinations. Members shall commence utilization of their room nights entitlement after 60 days from the date of the membership (subject to maximum utilization of 25% of the total room nights bought by the member).
3.3 The card members are entitled to surrender the room nights in case they do not utilize them. The members may surrender their unused entitlement of room nights in writing to the company and opt for surrender value. The actual surrender value shall be determined at the time of surrender of room nights and shall be paid on the expiry of membership. In 3 lieu of surrender value members may opt to buy or utilize the products and services of the company and its group companies. The products and services interalia includes Herban products, Food and Frozen yogurt coupons of TCBY/Nathan's IT Training, Software Development, Auditorium/Hall at Clubs."
4. For the assessment year 2005-06, the assessee filed its return of income on 31-10-2005 declaring a total loss of Rs.46,34,99,474/-. The return was accompanied by a profit & loss account, balance sheet and a tax audit report in Form No. 3CD. The appeal was processed u/s 143(1) on 5-4-2006 and thereafter it was selected for scrutiny by issue of notice u/s 143(2) on 30-10-2006 which was served on 31-10-2006. The AO on 27-4-2007, passed an assessment order u/s 143(3), inter alia, disallowing interest on interest paid loans and advances. He further made proportionate disallowance from NUCA from out of preoperative expenses. He made a disallowance of surrender value, which is in the form of interest expenditure. The disallowance was restricted to 6% of cash balance in hand which works out to Rs.1,66,24,356/-. Thus he worked out the preoperative expenses under NUCA for the year for Rs.49,09,70,168/-. He further disallowed the short term capital loss claimed by the assessee on the ground that the assessee has indulged in illegal construction activity and hence the same is not allowable as there was contravention in law. Thus the AO assessed the total loss at Rs.48,09,14,236/-.
5. The CIT-7, Mumbai vide order dated 17-2-2006, passed u/s 263 of the Act, set aside the assessment order dated 27-4-2007, with a direction to the AO to pass a fresh assessment order in conformity with the directions contained in the 263 order.
6. The CIT held that the order is erroneous and prejudicial to the interests of the Revenue for the reason that :
4a) the assessment order was passed prior to the date of final hearing, hence the same is erroneous and prejudicial to the interests of the Revenue.
b) that proceeds from "Advance sale room nights" is a taxable receipt u/s 5 of the Act and that the assessee has not offered advance sale of room nights as income, but is deducting all the expenses such as, marketing expenses, Holiday membership surrender value, administrative expenses and personal expenses which give a distorted picture and is not in consonance with the matching principles. The CIT directed the AO to include the entire amount of Rs.88,00,09,610/-, received by the assessee as "Advance sale of room nights" as income.
c) that no deduction is allowable on "Holiday membership surrender value", as it is a contingent liability as for accrual of surrender value, certain conditions are to be satisfied. He held that prorata allocation of the surrender value, on tenure basis, is not a scientific basis, for the reason that, the surrender value in question is payable only after the expiry of the tenure of the option i.e., when option to avail of is not exercised. That deduction on account of surrender value is not allowable for the reason that the assessee has not offered the receipts, on advance sale of room nights. The CIT directed the AO to disallow the deduction amount of Rs.22,09,84,169/-, claimed as Holiday membership surrender value.
d) Deduction of marketing expenses cannot be allowed for the reason that the assessee has debited entire expenses which goes against his own theory that the expenses should be amortized. That the AO was duty bound to look into the expenditure claimed by the assessee, as incurred towards awards and prizes and towards payment to Insurance Companies. The AO did not properly examine the expenditure claimed by the assessee towards performance bonus, development bonus and field allowances, with a view to finding out the genuineness of the said 5 expenditure as well as the allowability of the same. The CIT directed the AO to look into this aspect and allow the expenditure only after proper verification.
e) that the non-utilization compensation allowance (hereinafter referred to as NUCA), which is paid by the assessee to the customers, for non-utilization of the services/facilities as on 31st March, 2005 was Rs.133,38,73,874/- and whereas the total membership fund was Rs.153,91,08,673/- and that the assessee failed to offer the difference amount as income, thus making the assessment order erroneous, in so far as it was prejudicial to the interests of the Revenue. He held that the AO has to examines the statement of the assessee that, non taxability of the difference between membership funds received from NUCA. He held that the AO has never examined the accounting of the amount received by a member under these schemes and also whether, the same can be taxed as revenue receipts and whether the provisions of NUCA was an allowable expenditure. He directed the AO to examine the assessability of Rs.20,52,34,763/- which is the difference between the total membership fund and the amount payable to NUCA as on 31st March, 2005, as per law and in accordance with the available facts in this regard.
f) that the AO has not examined, as to whether the assessee has complied with the TDS provisions. He observed that the AO has not examined whether the TDS has been deposited within the stipulated time. He directed the AO to examine whether any expenditure is disallowable u/s 40a(ia).
6. The learned CIT at para 3 and 4 page 17 and 18 held as follows :
" I have considered the aforesaid submissions of the assessee. As has already been discussed in the preceding paragraphs, the dominant purpose of the Holiday Membership Scheme was to provide accommodation to the members on the concessional price referred to as "offer price". The surrender value on expiry of the scheme in the event of a member not availing of the option to use the room nights already sold is inclusive of the accretion in the offer price in the tenure of the scheme. The difference 6 between the estimated surrender value and the offer price is being debited as expenditure on pro rata basis. The documents enumerate conditions for availability of the room nights as already stated. In case of non availing of the option also, the member or a nominee has the option to buy products of the company or could be compensated in some other ways. For the surrender value to accrue, certain conditions are to be satisfied. Therefore, the liability to pay the surrender value on expiry of the tenure of the scheme is only a contingent liability. Secondly, the pro rate allocation on tenure basis is also not a scientific basis to claim the expenditure because, the surrender value is payable only after expiry of the tenure of the scheme when option to avail of is not exercised. The manner in which a particular liability is provided for on the preparation of accounts is not a determining factor as regards its allowability under the I.T. Act. The reliance placed by the assessee on the ratio of decision in the case of CIT vs. Swaroop Vegetable Products (supra) is also not correct since the facts in that case are different. In that case, as per terms and conditions of the manufacturer, certain amount was payable on the sugarcane purchased by them. The assessee was supposed to pay additional amount as per Govt. rules. Inspite of the dispute on the issue of payment of additional amount, the assessee had claimed the same as an allowable deduction. The claim was held allowable on the basis of mercantile system followed by the assessee. It is evident from this that the liability in the said case was not contingent but only a disputed liability. In the present case, the surrender value being provided would become payable only on the happening or non happening of certain events. Hence, the liability had not accrued. Without prejudice to the same, the assessee had not offered the corresponding receipts as advance sale of room nights either. Hence, the claim of deduction against the surrender value was not allowable. In view of the foregoing, I hold that the assessee was not entitled to deduction of Rs.22,09,84,169/- claimed under the "Holiday Membership Surrender Value" and the assessment order dated 27.4.2007 was erroneous in so far as it was prejudicial to the interest of revenue on this account. The A.O. is directed not to allow the said amount as expenditure while determining the income from business for the A.Y. 2005-06."
Aggrieved, the assessee filed this appeal on the following ground :
1. The Commissioner of Income-tax has erred in assuming the jurisdiction u/s 263 of Income-tax Act, 1961 in respect of six items mentioned in his 7 order. The basic conditions of issue of notice are not satisfied. The appellant submits that the order passed by the Assessing Officer is not erroneous and prejudicial to the interest of the revenue.
2. The Commissioner of Income-tax has overlooked that even after the issue of the notice u/s 263 the Assessing Officer has completed the assessment for the A.Y. 2006-07 and did not felt it necessary to take a different view.
3. The Commissioner of Income-tax has erred in concluding that the sum of Rs.73,31,23,220/- received by the appellant as advances towards sale of room nights is its income assessable for A.Y. 2004-05.
4. The Commissioner of Income-tax has erred in directing the Assessing Officer to include the amount of Rs.73,31,23,220/- as income of the appellant chargeable to tax for A.Y. 2004-05.
5. The Commissioner of Income-tax has erred in concluding that the appellant was not entitled to deduction of Rs.11,66,60,401/- being the prorata amount relatable to the present year, of the difference between the office price as collected by the appellant and the surrender value as determined by the management.
6. The Commissioner of Income-tax has erred directing the Assessing Officer to disallow deduction of Rs.11,66,60,401/- as claimed by the appellant for A.Y. 2004-05.
7. The Commissioner of Income-tax has erred in directing the Assessing Officer to examine the assessability of Rs.64,70,32,729/- being the difference between Rs.159,99,63,858/- (total membership funds) and Rs.95,29,31,129/- (the Non Utilisation allowance payable by the appellant). The Commissioner of Income-tax has erred in directing the Assessing Officer to examine the chargeability to tax of Rs.64,70,32,729/- without recording a finding as to how any part thereof could at all be subjected to tax.
8. The Commissioner of Income-tax has erred in directing the Assessing Officer to allow the marketing expenses of Rs.14,46,76,029/- after proper verification and "looking into this aspect".
9. The Commissioner of Income-tax has erred in stating that it was not the appellant's case that the expenditure had been allowed by the Assessing Officer after proper examination.
10.The Commissioner of Income-tax has erred in restoring the issue of allowability of the marketing expenditure without stating specifically how the Assessing Officer had erred in allowing the same.
11.The Commissioner of Income-tax has erred in concluding that the disallowance of Rs.3,64,10,160/- should have been considered while working out the assessed loss. The conclusion reached by the 8 Commissioner of Income-tax that the Income-tax Officer has not given proper treatment to this disallowance is not justified. The appellant submits that the direction given by the Commissioner of Income-tax is not justified.
12.The Commissioner of Income-tax has erred in concluding that the disallowance of Rs.1,69,85,568/- should have been considered while working out the assessed loss. The conclusion reached by the Commissioner of Income-tax that the Assessing Officer has not given proper treatment to this disallowance is not justified. The appellant submits that the direction given by the Commissioner of Income-tax is not justified.
13.The appellant craves the permission to add, alter or amend the grounds of appeal which are without prejudice to each other.
7. The learned Senior Advocate, Shri S.E. Dastur, appeared on behalf of the assessee along with Mr. Nitesh Joshi and Mr. D.V. Lakhani. Mr. Dastur explained the various schemes operated by the assessee. He submitted that the Member makes a upfront payment, a certain amount and is allowed to stay for a certain period, in a resort, subject to certain terms and conditions. He pointed out that if the person, does not avail the facility of stay in the resort, the amount will be paid back to him along with certain compensation, which is worked out as per the scheme. After explaining the scheme, Mr. Dastur challenged the validity of the order passed u/s 263 by the CIT on 17-02-2009. The submissions are as follows:
i) That the AO has examined the schemes run by the assessee in detail and has thereafter allowed the claims made by the assessee. That the CIT passed an order u/s 263 holding that the entire amount of advances received, is to be taxed as income, ignoring the fact that the assessee has to return the amount and also ignoring the fact that the assessee has to incur expenditure in future years.
ii) that the CIT was wrong in holding that the AO passed an order before waiting for the details and prior to the date of final hearing, as the assessment order 9 was passed on 27-4-2007 and thereafter the AO, who becomes a functus officio, wrongly issued a notice on 30-4-2007, calling for details and fixing the case for hearing. He pointed out that in the copy of the order-sheet entry, the last noting of the date of hearing was recorded as 26-4-2007 and that there are no entries thereafter except that the assessment was completed on 27-4-2007. The learned counsel filed a paper book running into 379 pages and submitted that all the details called for, vide notice dated 30-4-2007, had already been furnished to the A.O. during the original assessment and that this is evident from the paper book pages 20 to 277. His case is that the A.O., after receiving all the information and documents, has once again called for the same after completing the assessment.
iii) that in the notice dated 30-4-2007, the AO referred to four items , i.e.
a) Disallowance u/s 40A(2)(b).
b) Details of marketing expenses.
c) Production of bank account, and
d) The addition to the block assets.
He pointed out that the CIT in his 263 order has not touched upon the issue of disallowance u/s 40A(2)(b), the issue of addition to block assets nor found any discrepancy in the bank accounts. Thus, he submits that these information sought by the A.O. post assessment have no bearing on the revision under section 263. He submitted that the CIT considered only one item i.e. evidences in respect of marketing expenses. He submitted that consequent to the passing of an order by the CIT u/s 263, the AO has made a further assessment and that in this assessment, the AO has not made any disallowance on account of marketing expenditure. Thus he submits that the information called for by the AO on 30-4-2007, subsequent to the completion of the assessment, has not resulted ultimately, any disallowance or addition, and hence, this ground for re-opening is devoid of any merit.
10iv) that in the fresh assessment order passed by the AO, consequent to the original order u/s 143(3) being set aside by the CIT in 263 proceedings, only two additions were made i.e. on account of - (a) advance rent received on account of sale of room nights and (b) disallowance of expenditure in the form of surrender value. On all other issues, on which the CIT revised the 263 order, the AO, ultimately did not make any additions/disallowance. Thus he submitted that he would advance arguments only on these two issues only.
8. The learned Counsel for the assessee submitted that the receipt of advance on sale of room nights, amounting to Rs.88 crores is not income, as the assessee has a contractual liability / obligation to return the amount, with certain compensation. He emphasized the fact that the assessee has an obligation to refund this advance amount received on sale of room nights and hence argued that the same cannot be treated as income. He relied on the order of the Special Bench of the Tribunal in the case of Mahindra Holidays & Resorts (India) Ltd. in ITA Nos. 2412 to 2416/Mds/2005 and C.O.Nos. 7 to 11/Mds/2006 dated 26-5-2010 reported in 132 TTJ 1 and submitted that the Special Bench has held, that the entire receipt cannot be taxed in the year of receipt for the various reasons given therein, and that in the case of Mahindra Holidays & Resorts (India) Ltd., there was no provision whatsoever or an obligation on behalf of the assessee to refund the amount. He submits that the case of the assessee stands on a stronger footing, for the reason that there is an obligation to refund the amount, unlike in the case of Mahindra Holidays & Resorts (India) Ltd.. He further pointed out that in the case of Mahindra Holidays there was an annual payment to be made by the assessee and whereas in the case of the assessee there is no such annual payment.
9. The learned counsel furnished a chart giving facts and figures, to demonstrate that less than 0.5% of the persons who have paid advances for room 11 night, have actually utilized the room, and to demonstrate that in almost all the cases, the assessee was bound to refund the advances, along with a marked up compensation. Thus he submitted that even on facts, the advances cannot be taken as income as ultimately they had been returned.
10. On the second issue of provision for expenditure by way of surrender value, the learned counsel submitted that based on the facts and figures, hardly any customer who has paid advance for room night, has actually utilized the room and that the assessee was forced to refund the amount of advance with compensation and hence looking at the experience and the facts and figures, the provision made by the assessee as surrender value is correct. He pointed out to the scheme and submitted that there is a cap on the number of room nights that the assessee can utilize in a year and the cap varies from 25% to 33%.
11. He submitted that the direction of the CIT that the entire amount of Rs.22 crores is not deductible, is not sustainable in law. He relied on the judgment of the Hon'ble Supreme Court in the case of Metal Box Company of India vs. Their Workmen reported in 73 ITR 53 (SC). He submitted that all the decisions on the issue of taxability of advance sale of room nights and the provision for expenditure, have been referred to in the decision of the Special Bench of the Tribunal in the case of Mahindra Holidays.
12. The learned counsel submitted that the order passed u/s 263 is bad in law as the AO has called for all the details as per his letter which is at page 78 of the paper book and only on receipt of the entire details he had passed the assessment order. While submitting that the AO has not asked any specific question as to why Rs.88 crores was not taxable in this year, he submitted that this the aspect was considered by the AO in the earlier assessment years and an opinion from a leading Chartered Accountant Firm, A.F. Ferguson & Co. was filed and that this is at page 12 358 and 367 of the assessee's paper book. He submitted that the AO discussed the scheme fully and applied his mind and thereafter came to a considered possible view and hence the CIT was wrong in invoking the provisions of section 263. He relied on the following case laws, for the proposition as to what is income.
i) CIT vs. Max India Ltd. 295 ITR 282.(SC)
ii) CIT vs. Punjab Tractors Co-operative Multipurpose Society Ltd.
234 ITR 105 (P&H)
13. He submitted that on the issue of allowability of marketing expenses, the CIT has given a open remand and there is no finding as to any infirmity in the marketing expenses. He submits that, such directions to look into the matter cannot be given u/s 263 as there is no finding that the order is erroneous and prejudicial to the interest of the Revenue. He vehemently contended that a revision u/s 263 cannot be done just to ask the AO to verify certain heads of account. He relied on the judgment of the full Bench of the Hon'ble Delhi High Court in the case of Kelvinator India 256 ITR 1 at page 19 for the proposition that there is a presumption in law that the AO has properly verified all the claims of the assessee.
14. Similarly he submitted that the addition on account NUCA there was no collection or payment in the year and that NUCA stopped in June, 2002 and here also the issue is just set aside to the AO with a direction to look into the matter and ultimately the AO has not made any addition. Thus he submits that the order of the CIT is erroneous.
15. Lastly, Mr. Dastur submits that setting aside the issue to the file of the AO for examining the disallowance u/s 40a(ia) is erroneous as there is nothing pointed out by the CIT as to what constitutes an error and what prejudice is caused to the Revenue. He submitted that the assessments cannot be set aside just to enable the 13 AO to once again examine the issue by making roving enquiries. He submitted that the orders u/s 263 for both the assessment years have to be quashed as illegal and without jurisdiction. He relied on certain case laws which we will be discussing during the course of this order.
16. The learned CIT-DR, Mr. Naresh Kumar Balodia, on the other hand, opposed the contentions of the assessee. At the outset he pointed out that there are certain discrepancies in the paper book filed by the assessee, i) the first being that in item No.3 of the Index for the assessment year 2005-06, total to 258 pages and whereas at page 290, the written submissions of the assessee to CIT during 263 proceedings are included, the number of pages were 201 pages. Thus there is a discrepancy of 57 pages in the paper book filed before the ITAT, ii) referring to item No.17, which is a copy of the opinion regarding, policies of holiday membership fees, M/s A.F. Fergusons, C.A, Mumbai page No. 358-379 and page 213 of the paper book, it was submitted that the copies of the opinion was filed with the AO in the assessment proceedings for the assessment year 2003-04 and not during the current assessment year 2005-06. He pointed out that purported report of M/s. A.F. Fergusons, was not filed even during the previous assessment year 2004-05, wherein the CIT allowed the Authorized Representative to inspect all the records of the earlier year; iii) that the AS-29 was not considered by M/s A.F Fergusons & Co. in its report and the report was marked by inadequacy, deficiency and incompleteness and is unreliable and hence is invalid, iv) that pages 20, 78, 89, 109 and 206 which are copies of the letters dated 6-3-2007, 29-3-2007, 10-4-2007, 24-4-2007 and 26-4-2007 filed by the assessee before the AO during the assessment, are letters filed by the assessee during assessment and they contains list of details and documents submitted during assessments. In none of 14 these documents the report of Fergusons appears. Thus his case is that the report of A.F. Fergusons & Co. should not be taken into account.
17. Coming to the other issues, the submissions of Mr. Balodia, are summarized as under :
i) 263 proceedings are initiated as the assessment was done in a summary manner, with undue haste and in an irregular manner, without conducting, relevant, necessary, proper and requisite enquiries. The submissions made by the assessee were accepted at face value without adequate enquiry.
ii) At page 19 of the assessee's paper book the assessee's reply to the query of the AO dated 30-4-2007 mentions the date of submissions by hand against each item for requisition and that these dates mentioned, contradict the dates in the assessment order sheet entries. That the CIT has noted some of these contradictions in his order clearly. Thus no evidence as mentioned in item 4 to 13 of the requisition made by the AO on 30-4-2007, were ever produced as per the order sheet.
iii) The AO has not examined the details of NUCA, the provision for surrender value. That business development expenses of Rs.12.96 crores, consists of insurance premium of Rs.5.67 crores and the AO has not enquired into the genuineness and allowabilities of these expenses with respect to inter alia matching concept.
iv) That the AO in the assessment order has not discussed the various issued raised by the CIT in his 263 proceedings and the order is stereo type and mechanical.
v) Marketing expenses have not been properly examined by the AO. The basis of quantification, was not examined by the AO, warranty an order u/s 263 by the CIT. That the number of holiday time shares scheme launched are more than 15 what the assessee has declared on page 294 of the paper book. The number of schemes are tabulated by the CIT in Annexure I as 9 schemes. That a verification of the chart, giving the amounts refunded during the year, discloses that the payment of refund in different years is not as per the scheme of membership. A table has been given to demonstrate that on a comparison of factual refunds of subscription on maturity, its surrender value, it reveals that the amount refunded is much lesser than what is refundable as per the scheme. He submitted that the provision made on estimate basis do not match actual and the variation is large. A calculation was submitted to demonstrate that the actual refunds given by the assessee is only of about 1/3rd of the subscription that has matured.
vi) Calculations are submitted to prove that there is some discrepancy in arriving at the provision of surrender value. It was pointed out that when the schemes started in July, 2002 and has a grace period of 60 days, the assessee chose to make a provision right from July, 2002, when the customer is not entitled to utilize the total nights purchased. That for the assessment year 2002-03, no scheme had completed one year by March, 2003, for the reason that all the schemes were launched in July, 2002 and the question of subscriber not using hotel nights is entitled to within one year of subscription does not arise. Thus the liability to refund subscription of surrender value did not arise. That the calculation and estimation of surrender value is not in line with the proposition laid down by the Hon'ble Supreme Court in the case of Bharat Earth Movers vs. CIT 245 ITR 428.
Reference is made to AS38 and note to the accounts Schedule XIV which is at page 13 of the paper book. That provision for surrender value has been made as if it is a provision for interest on borrowed funds.
vii) In certain schemes the tenure is four years and cap for utilization of room nights is 25% and the assessee is entitled to avail the room nights before the 16 closure of the accounting year and thus making a provision of the scheme in the initial year cannot be justified and that the AO has not examined these aspects at all.
viii) Direct expenses like commission at the rate of 25%, additional commission under the head business development expenses, insurance premium etc. are debited to the profit & loss account and claimed as expenses but no corresponding revenue has been credited. In addition, provisions for surrender value of Rs.417/- has also been made. Thus merely on advance sale of room night, a loss of Rs.1042/- has been booked where an amount of Rs.3000/- is collected as advance sale for a period of 3 years, allowing 5 nights stay and in the alternative, total surrender value of Rs.4250/-. The learned DR submits that the AO has not examined the matching concept inasmuch as the corresponding credits of revenue has not been offered to tax. As far as the provision for surrender value is concerned, the learned DR submits that the subscriber is entitled to utilize 25% of the night i.e. one night in each year and in case he does not utilize the same, he is entitled for Rs.250/- per room night as surrender value. On completion of each year of membership, a provision of unutilized room night is made for every completed year. His case is that, though the assessee is bound Accounting Standard 29, the method of computation of such provision should be on reliable, historical and statistical data and that such thing was not done. The computation of the provision for surrender value is not done scientifically and that the AO has not examined this aspect.
ix) That there is no submission regarding the taxability of the surplus in NUCA. He submitted that the AO has not examined the taxability of receipt, allowability of deduction and also taxability of surplus in NUCA account and thus the order is prejudicial and erroneous.
17x) That the submission of the assessee that the year in which the expenditure is incurred, need not necessarily be the year in which there is corresponding income, is against the matching concept.
18. On the first ground of a revision i.e. passing of assessment order prior to the date of final hearing on 15th May, 2007, the learned DR submitted that:
a) Notice has been issued on 30-4-2007 seeking details and posting the case on 15-5-2007 and whereas the assessment was completed on 27-4-2007, which shows that the assessment order was passed prior to date of hearing.
b) At page 13 of the written submissions the learned DR in block letters states as follows:
"IRREGULAR, ARBITRARY MANNER IN WHICH ASSESSMENT HAS BEEN COMPLETED AND ASSESSMENT ORDER BEING ANTEDATED."
The learned DR's case is that the assessment order, demand notice were dated prior to issual of notice u/s 142(1) on 30-4-2007 and this can be ascertained from the fact that in the computation sheet ITNS 150A there is overwriting and the date has been changed from 26-4-2007 to 27-4-2007. For making this allegation, the learned DR also relies on "Current Demand and Collection Register" and submits that it is an established procedure of Department that all the assessments completed in an year are to be entered into this register in seriatum and chronologically. He points out that in the register, entry is made on 24-5-2007 and submits that this proves that the assessment order is not passed on 27-4-2007. Thus he submits that from examination of the entries in the DCR, the assessment has been completed on or after 18-5-2007 but on or before 24-5-2007. Thus he submits that the AO is not functus officio after 24-4-2007, as the assessment was never completed on that date and as the assessment order is antedated. He relied on the procedure 18 prescribed by the CBDT, to be followed by the Assessing Officers on completion of assessment and submitted that the entry in the DCR should be made on the date of passing the assessment order.
19. The learned DR submits that the AO has passed an order acting in defiance of all binding guide lines and instructions and completed the assessment without conducting necessary and relevant enquiries in a hurried and highly irregular manner which is prejudicial to the interest of the Revenue. He submitted that the request of the AO dated 30-4-2007, for filing details of payment u/s 40A(2b) along with supporting evidence was not filed as the assessee has only given details vide letter dated 6-4-2007, which are similar to the details in the tax audit report but also that the assessee has not enclosed any evidence with the reply.
20. The learned DR submits that though the assessee claims proof, produced purchase bills in respect of addition to fixed assets, no such recording is there in the order sheet entry and hence the claim is incorrect and the AO has not applied his mind. That though the AO has directed the assessee to produce cash book, accounts, etc., from the order sheet, it does not seem that the same are produced. Hence the AO failed to examine the books of account. Thus he claims that the order is not only erroneous but also prejudicial to the interest of the Revenue.
21. On the issue of accounting of advance sale of room nights of Rs.88,00,09,610/-, the learned DR submitted that, the CIT has examined the features of the scheme and the contract entered by selling the room nights. He submitted that the predominant purpose of sale of room nights is not, to refund the sale proceeds at surrender value but is for actual utilization of the room nights by the subscriber. The refund can be claimed only after the expiry of the tenure of the scheme. That the period of the scheme vary from 3 to 10 years and the question of refund, if any, arises only after a long period of 9 to 10 years in most of the cases.
19That the assessee has not followed the matching concept as he has booked expenditure but not recognized corresponding income. That if the sale is recognized only on actual utilization of the room nights, then expenses should also be debited accordingly. That the claim of the assessee that the AO has examined all these aspects during the scrutiny proceedings for the assessment year 2003-04, is not borne out of record. That the CIT considered the arguments of the assessee that:
a) money collected does not have the character of income;
b) is not assessable unless the room nights are actually utilized;
c) the receipt cannot be unconditionally appropriated;
d) the propositions laid down by the judgment of Punjab & Haryana High Court in the case of Punjab Tractor Coop. Multipurpose Society Ltd . 142 CTR 20 and the judgment of Hon'ble Supreme Court in the case of Siddheshwar Sahakari Sakhar Karkhana Ltd. 270 ITR 1 and held that these case laws are not applicable and also that the claims of the assessee are wrong.
e) that the CIT held that the primary purpose of the scheme was only to attract subscriber and that the refund clause in the scheme is immaterial and that the judgment of the Hon'ble (Supreme Court?) Court in the case of CIT vs. Bazpur Co-op. Sugar Factory Ltd. 172 ITR 321 is applicable.
f) that the CIT has recorded that the assessee on the one hand has not credited its accounts with the sale proceeds of room nights but on the other hand, debited direct expenses on account of marketing etc.
g) that the CIT has clearly recorded that the AO has not raised any queries in this regard and hence there is no application of mind.20
22. On the issue of allowability of Rs.22.10 crores under the head "Holiday Membership surrender value", the learned DR submitted that:
a) the AO has not raised any query in this regard nor examined the method of computation or the allowability on the ground of matching concept.
b) that the CIT has recorded that certain conditions are to be fulfilled as per the scheme and the contract, before the claim of surrender value can be made by the subscriber and hence it is at best a contingent liability.
c) that the CIT has also held that the prorata allocation of the surrender and offered price on tenure basis to claim the expenditure on this account because the surrender value is payable only after expiry of the tenure of the scheme when no utilization is made.
d) that the liability has not accrued and the judgment of the Hon'ble Court in the case of CIT Swarup Vegetable Products 210 ITR 716 does not apply.
e) that the CIT has also recorded that the deduction of surrender value was claimed without offering corresponding income and hence the assessment order is erroneous and prejudicial to the interest of the revenue.
22. On the issue of marketing expenses, the learned DR submitted :
i) that the CIT has noted that the assessee has not disputed the fact that all these expenses were not properly examined by the AO with respect to their genuineness and allowability.
ii) that the assessee has debited all expenses in contradiction of its theory that direct expenses should be amortized over the period of the scheme and hence the order is erroneous and prejudicial to the interest of the Revenue.21
23. On the difference of membership funds collected and NUCA payable, the learned DR submitted that the AO has not examined the assessability of the different amount under this head, and hence the order is erroneous and prejudicial to the interest of the Revenue. He further points out that the AO has never examined whether the provision for NUCA is an allowable deduction and as to the taxability of the amounts received from the members under the scheme.
24. On the payment of TDS liabilities as on 31-3-2005 and applicability of section 40a(ia), the learned DR submitted that the assessee furnished the details during 263 proceedings, regarding TDS, and that these details were not produced before the AO and hence the AO has not examined it resulting in an erroneous order being passed which is prejudicial to the interest of the revenue.
25. Thus the learned DR supported the order of the CIT passed u/s 263, on all the points raised by the CIT in the 263 order.
26. In addition, the learned DR made the following submissions in support of the order u/s 263.
i) that the order was passed by the AO, without making any enquiry regarding the taxability of various receipts and liabilities, pre-operative project expenditure etc. and that the assessment order is stereo type and a mechanical assessment order. Reliance was placed on the judgment of the ITAT, Mumbai Bench in the case of Arvee International vs. Addl. CIT 101 ITD 495.
ii) Reliance was placed on the full Bench Judgment of the Delhi High Court in the case of Kelvinator of India Ltd. 256 ITR 1 for the proposition laid down in para 15 where it is held that the CIT is empowered u/s 263 to review the order of the Revenue.
22iii) that reliance is placed on Sohamn Data Processing & Finance P. Ltd., ITA No. 774/Mum/2009 order dated 26-10-2010 wherein the Mumbai Bench considered the judgment in the case of Kelvinator of India Ltd. (supra) and held that the CIT has power of revision u/s 263 where the AO has overlooked a vital aspect of assessment and that the proposition laid down in the case of Kelvinator of India Ltd. is for proceedings under section 147 and not for proceedings under section 263.
iv) Reliance is placed on the decision in the case of Tata Bp Solan India Ltd. in ITA No. 3381/Mum/2009, order dated 30-9-2010 for the proposition that if the AO did not raise any specific query, and having not done so, it was a failure on the part of the AO to make enquiry which was necessary in the facts and circumstances of the case and hence the CIT was right in exercising jurisdiction u/s
263.
v) that failure to examine any claim made by the assessee, would tantamount the order being prejudicial and erroneous to the interest of the Revenue.
vi) that the judgment in the case of Malabar Industrial Co. Ltd. 243 ITR 83 (SC) is in his favour as the Hon'ble Court held that incorrect assumption of facts or incorrect application of law or non application of mind to something which was obvious and required application of mind or based on no, or insufficient material so as to affect the merits of the case and thereby caused prejudice to the interest of the Revenue.
vii) that the submissions of the assessee have been accepted at face value without enquiry or application of mind and hence it cannot be said that a conscious view is taken by the AO. Thus the question of forming a possible judicial view does not arise. Reliance is placed on the judgment of Green World Corporation vs. 23 ITO & Ors. 285 ITR 118 for the proposition that office record and office note can be relied for the purpose of upholding 263 order and in this case entries in the DCR should be considered and 263 order should be upheld.
vii) that assessment order does not become invalid, just because it is antedated or passed in an irregular manner. That antedating of an assessment order would merely vitiate the course of the proceedings but supervening irregularity or illegality has to be set right by putting the proceedings back on right.
viii) that when the order is curable , it is the duty of the Court to cure it. Reliance was placed on Sewuttory Rambullav & Son 204 ITR 580 (Cal.). That Hyderabad Bench of the ITAT in the case of Treasure Island Resorts (P) Ltd. vs. DCIT 90 ITD 814 rejected the contention that the order is antedated by relying on the entry made in DCR register. Reliance is placed on the judgment of the Chennai Special Bench of the Tribunal in the case of Rajlakshmi Mills Ltd. vs. ITO 121 ITD 343.
ix) that the AO having failed to make enquiries as regards allowability of provision for gratuity, the order is erroneous and prejudicial to the interest of the Revenue and that it is incumbent on the AO to investigate the facts stated in the return. Reliance is also placed on the judgment of Allahabad High court in the case of Jagdish Kumar Gulati vs. CIT 269 ITR 71 (All.) for the proposition that when the assessment order is very brief and it is evident from the assessment order that the AO did not try to make any enquiry on the relevant issue and the details furnished by the assessee, the order is prejudicial and erroneous. Reliance is placed in the case of Saipem S.P.A. vs. CIT reported in 123 ITD 153 for the proposition that a view taken by the AO without proper enquiry cannot be regarded as a plausible view.
24x) that the AO failed to take into consideration the decision of the Tribunal in the case of Sterling Holiday Resorts (India) Ltd. vs. ACIT 295 ITR 162 (AT), order dated 19th January, 2007, which was a decision applicable at the time of passing of the assessment order, wherein the Bench held that there is absolutely nothing in the Act to permit the assessee to treat part of the income as deferred income and hence the order is prejudicial.
xi) that the AO has not examined the abnormal result thrown up in the profit & loss account, for the reason that the matching concept has not been followed. For the principles of matching concept, reliance is placed on the judgment of Hon'ble Bombay High Court in the case of Tparia Tours Ltd. 260 ITR 102 and the order of the Hyderabad Bench of the Tribunal in the case of Treasure Island Resorts (P) Ltd. vs. DCIT (supra). In this order, emphasis was placed on the finding that the issue whether the amount is refundable or not, is not relevant. Reliance is also placed on the decision in the case of DCIT (IT) vs. Speco Electric Power Construction Corpn. Ltd. 126 TTJ 539. Reliance is placed on the decision of Chennai Bench of the Tribunal in the case of ACIT vs. Mahindra Holidays & Resorts (India) Ltd. 131 TTJ 1 and submitted that even in the case of Mahindra Holidays & Resorts (India) Ltd. there was a refund clause and to demonstrate, attention was drawn to para 13 and 22 of the order. In this case, law was also relied upon for the proposition that there is no basis for recognizing of income in the ratio of 40s to 60s. Reliance was also placed on para 30 and 31 of that order.
xii) that marketing expenses including business development expenses etc. have to be amortized for the period of the scheme to avoid distortion of profits and reliance placed was on the judgment of Hon'ble Madrs High court in the case of Mangal Tirth Estates Ltd. 303 ITR 366 and ACIT vs. Asia Resorts Ltd. 96 TTJ 909 (Ch.).
25xiii) Reliance was placed on AS9 and it was argued that the advance sale of room nights is income. Reliance was placed on AS29 for the proposition that the provision made for surrender value is wrong.
27. The DR tabulated the data in Annexure 1, 2 and 3 for demonstrating that the provision for surrender value was wrongly made and that historical data has not been considered. It is pointed out that the Special Bench in the case of Mahindra Holidays & Resorts (India) Ltd. held that, it is not possible to estimate such liability reasonably on scientific basis.
28. Thereafter the learned DR controverted the various submissions made by the assesse's counsel by repeating his contentions that matching concept has to be considered that provision has been made for all room nights sold, in advance, irrespective of whether there has been utilization or not.
29. That the learned senior counsel Mr. Dastur had submitted that the maximum utilization of room night in a year in case of comfort scheme is 33% and whereas the brochure of this scheme suggests that the subscriber can utilize only 25% of the total room nights in a year and, therefore, the scheme is unworkable from conception itself.
30. That distinguishing the decision of Mahindra Holidays's case on the ground that, there is no annual maintenance change in the case of the assessee and on the contrary, a refund obligation is existing in the case of the assessee and not in the case of Mahindra Holidays, the learned DR submitted that the room rent collected includes AMC and hence such distinguishing is destructions uncalled for. Regarding refund obligation, his case is that in para 24 of the order of the Special Bench, it is made clear that there are certain rules wherein refund has to be given.
2631. That the Special Bench has examined the guidance note issued by ICAI and held that the goal of accrual basis of accounting is to relate the accomplishment and efforts so that the reported net income measures an enterprise's performance during the period. He submits that crux of the international accounting standard (IAS 18) is that, when the outcome of a transaction of running of services can be estimated reliably, revenue associated with the transaction should be recognized by reference to the stage of completion of the transaction as at the balance sheet date and submitted that the assessee could not demonstrate as to how this standard applies to it. On the statement of refund filed by the assessee, the learned DR submitted that, it is not clear whether the refunds and surrender value is on maturity or it is on cancellation of subscription. He pointed out that the assessee has created provisions for the same but reversal of provision in case of cancellation of subscription was not indicated and the AO has not examined the same.
32. That the refunds are only about 1/3rd of amount payable as per the scheme. While submitting that the argument of the counsel that the rate of utilization of accommodation is low, is good for accounting, the learned DR submits that it is not enough to claim deduction as per law.
33. Referring to the reliance placed by the assessee on the judgment of the Supreme Court in the case of Metal Box Co. 73 ITR 53, in support of their claim that liability on account of refund at surrender value has to be allowed as a deduction, the learned DR submitted that it is possible only if the corresponding benefits are credited to the account. He gave a table to demonstrate that the assessee has created the provision immediately after the sale of room nights and has not given any consideration for the initial waiting period of 60 days prescribed in the scheme, nor did the assessee wait for the completion of one year from the 27 date of enrolment in the scheme so as to conclude that the subscriber had actually not used the room and chose to surrender his entitlement. He distinguished the judgment of the Supreme Court in the case of Rotork Controls India P. Ltd. vs. CIT 314 ITR 75 by submitting that warranty in that case was an integral part of the sale price, which has been fully credited to the books of account and as the income was taken into account, the Supreme Court stated that future warranty expenses are to be estimated on a scientific basis, utilizing historical statistical data and whereas in the assessee's case the income is not taken into account. He also disputed the claim of the senior counsel that a scientific method has been used by the assessee for estimation of liability. He submitted that the grounds of review taken by the CIT was correct and the quantum is not material and what is material is the foundation of the order.
34. The learned DR made an alternative submission that 60% of the gross receipts of advance sale of room nights may be considered as income affront, by following the ratio of the Special Bench of the Tribunal in the case of Mahindra Holidays & Resorts (India) Ltd. (supra).
35. The learned DR also filed written submissions running into 70 pages and attached four Annexures and three other loose sheets. He also filed a paper book running into 343pages, consisting of copies of 19 case laws relied upon by the Revenue.
36. The learned Senior Counsel, Mr. Dastur, in his rejoinder, submitted that the order of the CIT has to be judged on the reasons given by the CIT. He contended that the Bench has to see the reasons recorded by the Commissioner in exercising his power of a revision u/s 263 and that it is not open to the DR to lead arguments contrary to the facts recorded by the CIT. He submitted that the CIT did not say, that the order is antedated and that it is not for the DR to give an entirely different 28 version and entirely different reasons for justifying the revision u/s 263. He submitted that if the argument of the learned DR, that the assessment order is not passed on 27-4-2007, and that the order would have been passed on any of the dates between 18th May, 2007 and 25th May, 2007, then it should be held that there is no order passed on 27-4-2007 and hence the illegal order of that date has to be discarded and that the consequential revision order under section 263, should also be nullified. He referred to the charts filed by him and submitted that the assessee has refunded all the money that has been collected by way of advance sale of room night and factually the learned DR is wrong in submitting that only 30% of the amount has been refunded. He submitted that less than 1% of the subscriber who paid advance for room night, actually availed stay in the room and that more than 99% of the subscriber had actually collected back not only the contribution but also surrender value. He submitted that the assessee had data to demonstrate that in almost of the cases, where the subscriber has paid advance for room night, have preferred to take back the advance along with surrender value and that based on such historical data, the assessee has estimated the refunds. Thus he emphasized that this is nothing but advance and the question of treating the advance as income does not arise. He emphasized that the receipt in question is not income per se. On the argument that the decision of the Tribunal in the case of Sterline Holiday Resorts (India) Ltd. 111 ITD 116 is available at the time of passing of the assessment order and that the A.O. ignored the proposition in the same, the learned Senior Counsel submitted that there were other contrary decisions of the ITAT on that date and the AO has raised the specific query on this issue which is at page 78 of the paper book and the assessee had replied vide page 78, 88 and 279 of the paper book. He pointed out that factually it is incorrect to say that the AO has not exercised his mind on this issue. He pointed out that the entire scheme was understood by the AO and the scheme was brought out in brief in the assessment 29 order. He reiterated that the AO has taken a permissible view after application of his mind. He submitted that there is a presumption that the AO has applied his mind and seen all the aspects and for this he relied on the judgment of Supreme Court in the case of CIT vs. Kelvinator of India Ltd. 256 ITR 1 (SC) at page 19. He referred to the judgment of the Supreme Court in the case of CIT vs. Bazarpur Cooop. Sugar Factory Ltd. 172 ITR 321 (SC) and submitted that this was explained by the Supreme Court in the case of Siddheshwar Sahakari Sakhar Karkhana Ltd. v.s CIT 270 ITR 1 at page 30 and submitted that refund of deposit was not the issue there. On the provision made, the learned counsel submitted that the liability is spread over the period of the scheme and in each year the right to recover the surrender value accrues to the subscriber. He relied on the decision in the case of Madras Industrial Investment Corporation Ltd. vs. CIT 225 ITR 802 (SC).
37. Mr. Dastur referred to the judgment of the Special Bench of the Tribunal in the case of Mahindra Holidays & Resorts (India) Ltd. (supra) and submitted that the Special Bench held that no part of the receipt is taxable for the reason that, the expenditure is yet to be incurred. He referred to para 27, 29 and 30 of the said order.
38. On advance room nights received, Mr. Dastur submitted that the directions of the CIT to the AO is very clear that the entire amount of Rs.88 crores is to be taken as income and submitted that the Tribunal does not have the right to modify the order of the CIT u/s 263. For the submissions that the order of the CIT passed u/s 263, has to be examined on the strength of the reasons given in that particular order and for the proposition that the Tribunal cannot modify the orders of the CIT, the learned counsel relied upon certain case laws which we will be dealing with in due course.
3039. Mr. Dastur emphasized that in the case on hand, a refund obligation is fastened on the assessee and no such obligation is there in the case of Mahindra Holidays and Resorts (India) Ltd. Referring to the decision in the case of Taparia Tools 260 ITR 302 relied upon by the learned DR, the learned counsel submitted that this case law deals with spreading over of expenditure and has nothing to do with the issue whether income has accrued. He submitted that the case law deals with period cost. Similarly he submitted that the Tribunal decision in the case of JCIT vs. Tirrumalai Chemicals Ltd. 9 SOT 744 is not applicable. Referring to AS9, he submitted that the accounting standard proceeds on the footing that there is income and accrual of income is assumed. He pointed out that in the case on hand the issue is whether there is income at all.
40. On the second issue of disallowance of Rs.22 crores, the learned counsel submitted that the CIT's directions are relevant and that this cannot be modified by the Tribunal and has to be tested on the reasons given in the order. He submitted that the assessee is not only required to refund the amount to the subscriber but was also required to pay on additional amount from time to time. He once again took this Bench through the reasons given by the CIT and submitted that by the time the CIT passed the order, the data relevant for 6 ½ years was available and that he should have considered the historical data for examining the adequacy of the provision. He submitted that it is not correct to say that the liability was provided from the first month itself as it was only in the end of the year, that the assessee was estimating the liability and for making the calculation, certain amount was also considered from the initial or first months. He relied on the judgment of the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. 225 ITR 802 and submitted that the decision in the case of- ITO vs. Tungabhadra Industries Ltd. 207 ITR 557 relied upon by the learned DR is no more good law and for the 31 same, he referred to the judgment in the case of National Engineering Industries Ltd. vs. CIT 236 ITR 577 specifically at page 579. On the submission that the provision is not made on a scientific basis, Mr. Dastur filed a calculation sheet and submitted that based on historical data and customer beheviour, the estimate is made, as the entire amount is to be returned with premium. He pointed out that the CIT has no basis for issuing the directions to disallow the provisions. In respect of the first sixty days, he submitted that once the moratorium is over i.e. on 60 days, the liability would arise for that first 60 days also. On the submission of the DR that certain schemes are unworkable, he submitted that this is all the more reason to justify the provision made by the assessee. On the allegation that the amount was collected prior to the launch of the scheme, the learned counsel produced further pamphlets and submitted that many schemes are pre-launched year after year and the DR was factually incorrect and that he had a wrong impression.
41. Mr. Dastur vehemently contended that the CIT has not referred to any of the reasons mentioned by the learned DR and alleged that the learned DR wanted to pass afresh order under section 263, by giving his own set of reasons and submitted that this is not permissible. He submitted that the judgment of the Supreme Court in the case of Bharat Earth Movers Ltd. vs. CIT 245 ITR 428 very much applies to the case of the assessee. On the other issues, he submitted that the CIT has simply restored these matters to the file of the AO for fresh verification and that such a direction is not permissible. He once again drew the attention to the Bench to the various documents in the paper books to demonstrate that the AO had in fact asked for the details and had verified the same.
42. The learned DR, in his rejoinder, relied on the decision of K.C.P. Ltd. v/s CIT, 245 ITR 421. He again rebutted the arguments raised by Mr. Dastur.
3243. Later, after the case was heard and orders were reserved, the learned DR, vide his letter dated 27-01-2011, submitted that on similar facts and issues that arise in this appeal, questions are pending before the Special Bench of the Tribunal at Cuttack in the case of M/s T.K. International Ltd., Bhuvaneshwar in ITA No. 76/CTK/2007 and that the orders in the present matter should be kept reserved or the order deferred till the Special Bench in the case of M/s T.K. International Ltd. (supra) pronounces the order. The Bench directed the registry to post this application of the learned DR for hearing on 18th Feb., 2011. On that date, Shri S.E. Dastur, senior Advocate, filed an order of the Tribunal in the case of T.K. International (supra) order dated 27-07-2010 in ITA No. 76/CKT/2007 and ITA No. 154/CKT/2008 and submitted that the issue has already been disposed of by the Division Bench of the Tribunal, by following the decision of the Special Bench in the case of Mahindra Holidays & Resorts Ltd. (supra). He pointed out that M/s. T.K. International Ltd., was an intervener in the case of Mahindra Holidays & Resorts Ltd. (supra). He further submitted that the learned DR should have made the application after proper verification of the facts and further submitted that though this being a stay granted matter and the learned DR has taken numerous adjournments on various grounds and that this has caused grave prejudice to the assessee and that there should be no further delay in resolving the issue. The learned DR sought a short adjournment on personal grounds. In view of the request for adjournment, we adjourned the case to 25th Feb., 2011. On this date, the learned Departmental Representative submitted a letter stating that his information about a Special Bench being pending is wrong and expressed his regret and indicated that the order may be pronounced.
44. After hearing both the parties on this issue, as the Cuttack Bench of the Tribunal has already disposed of the case of T.K. International (supra) and as there 33 is no other Special Bench decision which is awaited on date on this very issue, we proceed to dispose of the issue on hand.
45. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below as well as the case laws cited, we have to hold as follows.
46. The arguments of the parties can be categorised into three aspects. The first is, whether the assessment order was passed without proper application of mind and without verification of the details submitted and without considering the vital aspects required to be considered in an assessment; (ii) whether the direction of the CIT that the advance received on sale of room nights, is to be treated as income is correct or not; (iii) whether the direction of the CIT to the A.O. to disallow the provisions made for holiday membership surrendered value is correct or not. The entire arguments are centered on these three issues and each party made their pointes from different angles on the same issue. We first consider the argument of the learned Sr. Counsel, Shri S.E. Dastur. The arguments that the CIT was wrong in holding that the Assessing Officer passed the order prior to the date of final hearing appears to be correct. The details called for, vide letter dated 30th April 2007, by the Assessing Officer from the assessee were furnished much prior to the completion of assessment and except for asking the Assessing Officer to verify the marketing expenses, there is no point raised by the CIT in his 263 order on the other three issues i.e., disallowance under section 40A(2B), production of bank account and addition to block of assets. While saying so, we also observe that while the Assessing Officer called for information on account of marketing expenses, etc., the same were filed only on 26th April 2007, and in our considered opinion, such voluminous details cannot be examined in one day and order passed on 27th April 2007. We would be dealing with the other arguments of the learned 34 Sr. Counsel, in subsequent paragraphs. The arguments that in the fresh assessment order passed by the Assessing Officer under section 143(3) r/w 263, no addition has been made except in the case of advance rent received on sale of room nights and provisions for holiday membership surrendered value and thus, the revision on account of other issues is bad-in-law, cannot be accepted. The revision has to be examined only on the facts existing during the revision and not governed by subsequent events. Coming to the direction on treatment of advance received on sale of room nights as income, we would deal with the issue in subsequent paragraphs. But as to the issue whether the Assessing Officer has examined these vital aspects during the course of assessment proceedings or not, we find that the Assessing Officer has not specifically examined this issue and this is conceded by the learned Sr. Counsel, Shri Dastur, when he submitted that the Assessing Officer has not asked any specific question as to why the amount was not taxable in this year. He tried to defend the assessee by submitting that, in the earlier assessment year, the opinion of a leading Chartered Accountants firm was filed on the issue of taxability of advance sale of room nights. Filing of an opinion in the previous assessment years, in our opinion, does not lead to our conclusion that the Assessing Officer has applied his mind and examined the issue of taxability on accrual of the amounts received on advance sale of room nights during the impugned assessment years. We do not agree with the argument that the Assessing Officer has, after due verification, and after application of mind, has come to a considered view that these advances are not taxable as income. We are inclined to uphold the order passed under section 263 on this particular aspect of non-application of mind on the issue whether the advance amount received on account of sale of room nights is to be considered as income or not. On the other issues of marketing expenditure, addition on account of NUCA and disallowance under section 40a(ia), we are of the considered opinion that it would be academic to adjudicate this issue, as 35 ultimately no addition has been made by the Assessing Officer in the assessment order passed in pursuance to 263 order and as we have already held that on the issue of taxability of advance received on sale of room nights, the Assessing Officer has not applied his mind and, hence, on this account, the re-opening should be upheld.
46(a) Coming to the arguments of learned Departmental Representative, the issue whether there are discrepancies in the paper book filed has been resolved by the clarification given by the learned Sr. Counsel, in any event, these issues are not crucial to the decision to be given in this case. Coming to the opinion given by the A.F. Fergusons, we have already held that they are not part of the record of the current year. The entire effort made by the learned Departmental Representative is to convince the Bench that the Assessing Officer has not properly examined many issues and that the order was passed in a summary manner with undue haste and without conducting the relevant, necessary and proper and requisite enquiries. We are partially convinced on these submissions. If not in all the issues raised by the learned Sr. Counsel, at least on some issues, like taxability of advance sale of room nights and allowability of provisions of holiday membership surrendered scheme, we are of the considered opinion that the Assessing Officer accepted the submissions of the assessee on face value, without conducting relevant, necessary, proper, and requisite enquiries though they were vital issues.
46(b) On the issue of taxability of amount received as advance sale of room nights and allowability of provisions of holiday membership surrendered scheme, we would deal with the same in subsequent paragraphs. On the issue whether the assessment order is ante dated is also dealt separately. Learned Departmental Representative has raised so many issues which, in our considered opinion, were 36 not at all the basis on which the CIT has made revision under section 263. Though, we have mentioned the arguments, we do not deem it necessary to answer each and every argument, when it is clear that the argument was not on the basis of which the CIT has passed his order of revision under section 263.
46(c). The issue that we have to consider is whether the order of the CIT passed u/s 263 has to be examined based on the reasons and findings recorded therein and not based on reasons and submissions which are given by the Revenue at the time of hearing, to substantiate the order passed u/s 263. The law on this subject is clear. The Hon'ble Punjab & Haryana High Court in the case of CIT vs. Jagadhri Electric Supply and Industrial Co. 140 ITR 490, held as follows :
"Held - The jurisdiction vested in the CIT under s. 263(1) is of a special and exclusive nature. At the time of hearing of the appeal against CIT's order under s. 263(1), if the assessee can satisfy the Tribunal that the grounds for decision given in the order by the CIT are wrong on facts or are not tenable in law, the Tribunal has no option, but to accept the appeal and to set aside the order of the CIT. The Tribunal cannot uphold the order of the CIT on any other ground which, in its opinion, was available to the CIT as well but was not relied upon by the CIT in his s. 263(1) order. If the Tribunal is allowed to find out the grounds available to the CIT to pass an order under s. 263(1) then it will amount to sharing of the exclusive jurisdiction vested in the CIT, which is not warranted under the Act. It is all the more so, because the Revenue has not been given any right of appeal under the Act against an order of the CIT under s. 263(1). Further, in view of the matter in appeal, the Tribunal cannot uphold the order appealed against on the grounds other than those taken by the CIT in his order. It is CIT's satisfaction according to which he may pass necessary orders thereunder in accordance with law. If the grounds which were available to him at the time of the passing of the order do not find mention in his order appealed against, then it will be deemed that he rejected those grounds for the purpose of any action under s. 263(1). In this situation, the Tribunal while hearing an appeal filed by the assessee cannot substitute the grounds which the CIT himself did not think proper to form the basis of his order. Accordingly on the facts of the present case, the Tribunal was not competent to take into consideration the fact of increase in the number of adult partners from 10 to 11 when the Addl. CIT had not, in fact, relied upon the said change in holding the ITO's order to be erroneous."37
47. In the case of CIT vs. Chandrika Educational Trust 207 ITR 108, the Kerala High Court held as follows :
" In entertaining an appeal from the Commissioner's order what the Tribunal does is to examine whether the said order is sustainable in law and whether it is within the powers conferred by section 263. Therefore, when the Commissioner has chosen to set aside the order of the Income-tax Officer only on a particular ground, the Tribunal is not entitled to go beyond and sustain the order of the Commissioner on grounds different from that relied on by the Commissioner himself.
CIT v. Jagadhri Electrical Supply And Industrial Co. [1983] 140 ITR 490 (P&H) followed."
48. The Hon'ble Court held that;
" The Commissioner of Income-tax had set aside the order of assessment on the sole ground of delayed withdrawal of the share of profits and it was not open to the Tribunal to sustain it on other grounds."
49. The Hon'ble Karnataka High Court in the case of CIT vs. L.F.D'SILVA 192 ITR 547 observed as follows :
" The jurisdiction vested in the Commissioner under section 263(1) of the Income-tax Act, 1961, is of a special nature or, in other words, the Commissioner has the exclusive jurisdiction under the Act to revise the order passed by the Income-tax Officer if he considers that any order passed by him was erroneous in so far as it was prejudicial to the interests of the Revenue. In the memorandum of appeal, the assessee is supposed to attack the order of the Commissioner and to challenge the grounds for decision given by him in his order. At the time of the hearing, if the assessee can satisfy the Tribunal that the grounds for decision given in the order by the Commissioner are wrong on facts or are not tenable in law, the Tribunal has no option but to accept the appeal and to set aside the order of the Commissioner. The Tribunal cannot uphold the order of the Commissioner 38 on any other ground which, in its opinion, was available to the Commissioner as well.
Held, that, in the instant case, the sole basis of the notice issued under section 263 was that the contribution to the share in the immovable property, as contribution to the share capital of the partnership firm resulted in "transfer" of an asset and, in the said process, whatever gain was earned was liable to capital gains tax under section 45. The Commissioner of Income- tax proceeded as if there was a valid transfer under a genuine situation. It was not his case that the contribution towards the share capital made by the assessee was only a device for converting the asset into money. The basis of the initiation of proceedings by the Commissioner could not be altered by the Tribunal. Seondly, the Tribunal had given a definite finding that the transaction was genuine. Hence, the assessee was not liable to tax on capital gains.
CIT v. Harikishan Jethalal Patel [1987] 168 ITR 472 (Guj).
50. From the above it is clear that it is not open for us to uphold the order of the Commissioner of Income Tax exercising his power u/s 263, on grounds different from that relied upon by the Commissioner itself. With this background, we now consider each issue, based on which the CIT has revised the order u/s 263 of the Income-tax Act, 1961.
51. The first issue is that the assessment order is passed prior to the date of final hearing on 15th May, 2007. We, at the first instance, consider the case laws relied upon the counsels on the nature and scope of revision u/s 263. The case that has been relied upon strongly by both the parties is a case of Malabar Industrial Co. Ltd. vs. CIT 243 ITR 83. In this judgment the Hon'ble Supreme Court has held that :
a) The pre-requisite to exercise of jurisdiction by the CIT suo motu u/s 263 is that the order of the ITO satisfies the twin conditions, namely,
i) the order of the AO sought to be revised is erroneous, and 39
ii) it is prejudicial to the interest of the Revenue.
b) the provision cannot be invoked to correct each and every type of mistake or error committed by the AO.
c) an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous.
d) in the same category, are ante orders passed without applying the principles of natural justice or without application of mind.
e) the phrase "prejudicial to the interests of the revenue', is of wide import and is not confined to loss of tax.
f) if due to an erroneous order of the ITO, the Revenue is losing the tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase "prejudicial to the interest of the Revenue" is to be read in conjunction with an erroneous order passed by the AO.
g) every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interest of the revenue. For example, if the AO adopted one of the view permissible in law, or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order which is prejudicial to the interests of the Revenue, unless the view taken by the ITO is unsustainable in law.
h) if the AO passed an order without application of mind or failed to apply his mind to the case in all perspective, the order passed by him was erroneous.
i) mere acceptance of a statement filed by the assessee, in the absence of any supporting material and without making any enquiry, would make the order of the AO erroneous.
4052. The case of Green World Corporation vs. ITO 285 ITR 118 (Himachal Pradesh) was a case where the AO passed an order on the dictates of his superior officer without calling for more information and in such a situation, the Hon'ble Court has held that the order was passed by the AO on account of unwarranted interference by superior authority.
53. In the case of Gabrial India 203 ITR 108, the Hon'ble Court held that twin conditions of the order being erroneous and such error resulting in prejudice to the revenue have to be satisfied. It held that an order cannot be termed as erroneous unless it is not in accordance with law. Just because an order, in the opinion of the Commissioner, should have been written more elaborately, cannot be a reason for branding the order as erroneous simply because the Commissioner does not feel satisfied with the conclusion. In this case the ITO had made enquiries in regard to the nature of expenditure incurred by the assessee and on receiving the explanation, allowed the claim. In such a situation, the Hon'ble Court held that the order cannot be termed as erroneous simply because, in the assessment order, the AO did not make elaborate discussion in this regard.
54. The Commissioner after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the Income Tax Officer to reexamine the matter and that this was not permissible.
55. In the case of CIT vs, Max India Ltd. reported in 295 ITR 282 (SC), the Hon'ble Supreme Court reiterated the principles laid down in the case of Malabar Industrial Co. Ltd. (supra). It held that the law prevailing as on the date of passing of an assessment order should be applied, not withstanding retrospective 41 amendment, while examining whether view taken by the AO at the relevant time was unsustainable in law.
56. The Chennai Bench of the Tribunal in the case of Rajya Laxmi Mills Ltd. vs. ITO, held that if an Assessing Officer failed to make any enquiry as regards allowability of a claim, the same was erroneous and prejudicial to the interest of the revenue and is amenable to revisional jurisdiction of CIT. It further held that the CIT can hold the order as erroneous on the ground that, in the facts and circumstances of the case, the AO should have made further enquiries, before accepting the statement made by the assessee in his return. It pointed out that the AO is not only an adjudicator but is also an investigator and hence he cannot remain passive in the face of a return which is apparently in order but calls for further enquiry.
57. In the case of Jagdish Kumar Gulati vs. CIT 269 ITR 71, the Hon'ble Allahabad High Court has held that the assessment order can be held to be erroneous and prejudicial when it is passed without proper enquiries.
58. In the case of Saipen S.P.A. vs. CIT, the Delhi C-Bench of the Tribunal 123 ITD 153, was considering the case where the AO had taken a view which is neither as per the DTAA nor as per section 44BB and in such a situation it cannot be held that it was a possible view, though the Department had in earlier years accepted such claims of the assessee. The Tribunal held that due to lack of proper enquiry and for want of proper application of mind, by the Assessing Officer, the CIT was justified in exercising his jurisdiction u/s 263.
59. In the case of CIT vs. Kelvinator of India Ltd. (Del) (FB) 256 ITR 1, the Hon'ble Court was considering the validity of reopening. The Hon'ble Court held that the AO does not have any jurisdiction to review his own order and what cannot be done directly, cannot be done indirectly. It held that reopening cannot be 42 made on a change of opinion. The learned counsel relies on para 23 of this judgment where it is held that when a regular order of assessment is passed in terms of sub-section (3) of section 143, a presumption can be raised that such an order has been passed on application of mind.
60. The learned DR, on the other hand, relied on para 15 of this judgment wherein it is held that the AO does not possesses the power of review so as to initiate reassessment proceedings or to rectify a mistake and that in such a situation, it cannot be said that the Revenue is without remedy, as section 263 of the Act empowers the CIT, to review an order which is prejudicial to the Revenue.
61. In ITA No. 774/Mum/2009, the Mumbai E-Bench of the Tribunal in the case of SohaM Datta Processing and Finance Pvt, Ltd., order dated 26th Feb., 200, held that the decision and the proposition in the case of Kelvinator of India Ltd. (supra) is relevant only in the context of judging the validity of initiation of reassessment proceedings u/s 148 of the Act and not to 263 proceedings. The 263 order passed by the Commissioner was upheld as there is not even a reference to certain agreements and hence it cannot be held that it is a possible view.
62. In the case of Tata B Solan India Ltd. ITA No. 3381/Mum/2009, the E- Bench of the Tribunal in its order dated 30th Sept., 2010 was considering a situation where the AO did not raise any special query regarding the claim of depreciation at 80% on certain items of machinery, which were claimed as renewable energy devises. As necessary enquiries were not made, the order u/s 263 was upheld.
63. In the case of Arvee International vs. Addl. CIT, 101 ITD 495, the Mumbai Bench of the Tribunal held that when an assessment is made without application of mind, the order will be erroneous.
4364. On these parameters, we examine the facts of the present case.
65. The first ground on which the CIT passed his revision, is that the assessment order was passed prior to the date of final hearing which, in his opinion, was 15th May 2007. We find that this finding has three components - (i) whether the assessment order was passed prior to the date of final hearing; (ii) whether any fresh information was sought by the Assessing Officer after the completion of assessment, or has the Assessing Officer in post assessment proceedings, sought the very same information, which he had asked prior to the completion of assessment; and (iii) whether in view of the voluminous details filed by the assessee, it could be said that the Assessing Officer did not have enough time to examine the same and has passed the assessment order without verifying the detailed submitted and without proper application of mine.
65(i) The CIT, in this case has revised an order of assessment dated 27th April, 2007. The case of the learned Departmental Representative is that, the Assessing Officer's order is anti-dated. In our considered opinion, it should not lie in the mouth of Revenue, to argue that the assessment order in question was not passed on 27th April, 2007 but was passed possibly somewhere between 18th May, 2007 and before 24th May, 2007. Such an argument is self destructive, as, in our opinion, if it is accepted, then there is no valid assessment order passed on 27th April, 2007, which could have been revised by the CIT. This is not the case of CIT. The learned Departmental Representative is wrong and factually incorrect in arguing that the assessment order is anti-dated. A perusal of the assessment record and the order sheet entries disclose that the assessment order was passed on 27-4-2007. After that date there are no order sheet entries in the assessment diary. The learned DR bases these arguments on certain internal registers maintained by the Department and the manual of office procedure. A perusal of the entries in the "Current 44 Demand" and "Collection Register" disclose that the entries are not made date- wise and in fact an entry in the case of the Precision clause (2) limited is made after the entry in the case of PSL & Co. The assessment order in the case Precision clause (2) Limited was passed on 9th May, 2007 and whereas the assessment order in the case of PSL & Co. was passed on 24th May, 2007. In any event, an entry passed in Current Demand and Collection Register, cannot be the basis of determination of the date of passing the assessment order. Even the learned CIT- DR is unable to pinpoint a particular date on which the assessment order is, in his view, was passed. He just gives a period of a range of 4 to 5 days. This argument is dismissed as bereft on merit. The case laws relied upon by the learned Departmental Representative in support of his argument, that even an anti-dated order is valid, does not help, These case laws are not on this point.
66. Coming to the finding of the CIT that the AO issued a letter on 30th April, 2007 asking for some details and fixing the date of hearing on 15-05-2007 and that the order of assessment was passed prior to that on 27th April, 2007, we hold that the AO is functuous officio after 27th April, 2007 i.e. on passing of the assessment order. The letter issued on 30th April, 2007 asking for some details is without authority. Thus, in our humble opinion, this cannot be a basis for invoking powers of revision u/s 263 of the Act.
67. Coming to the issue whether the Assessing Officer had asked for such details, which are already filed by the assessee during the course of assessment proceedings and which are part of the assessment record, vide the Assessing Officer's letter dated 30th April 2007, we find that the assessee has shown evidence that all the details sought for, vide letter dated 30th April 2007, were in fact filed before the Assessing Officer, before completion of assessment on 27.4.2007. In any event, as we have held that the letter dated 30th April 2007, was issued by the 45 Assessing Officer without jurisdiction and as we have held that the Assessing Officer was functus officio after 27th April 2007, the letter dated 30th April 2007, has no legal sanction. Thus, looking at the issue from any angle, in our opinion, the CIT was wrong in revising the order on the ground that the assessment order was passed prior to the date of final hearing. This is factually incorrect as the date of final hearing, as per assessment record, was on 26th April 2007. In fact, the CIT himself, at Page-5 of his order, recorded that the last hearing took place on 26th April 2007.
68. Coming to the issue, as to whether the Assessing Officer has not applied his mind and has completed the assessment without verifying the details submitted and over looking vital aspects, we find that the CIT has specifically considered the letter dated 06-04-2007 filed by the assessee, wherein the assessee has furnished details of payment u/s 40A(2b). These details were similar to Annexure-B of the Tax Audit Report. The Commissioner observed that the assessee has not explained with evidence as to how the payments amounting to Rs.19,52,988/- were reasonable. No evidence was given. Similarly, though the assessee claimed to have produced bills in respect of addition of fixed assets vide letter dated 26-04-2007, the Commissioner found that the claims are not corroborated by order sheet entries or the evidence on record. At page 5 para 3 and 4 the CIT observed as follows :
"The last hearing took place on 26.4.2007, and the A.O. had passed the order on 27.4.2007. Even if the assessee's claim were to be accepted, the details furnished were voluminous which required enough time to examine before passing of the order. The haste in which the order was passed amply displays that there was no real application of mind by the A.O. before passing the assessment order. This is further obvious from the fact that whereas the assessee had suo motu disallowed an amount of ` 7,08,706, being loss on demolition of Thane Club house as is evident from the statement of computation attached with the return, the A.O. has devoted one paragraph (para 5.1 of the assessment order), in disallowing this 46 amount. In his reply dated 19.7.2008, the assessee's A.R. has stated that this is an example of application of mind by the A.O. which in fact is otherwise. When an expenditure is not claimed as deduction, there is no need for any discussion in the assessment order to disallow the same.
69. In our considered opinion, the reasons given by the CIT as recorded above, justify the invoking of jurisdiction u/s 263, as obviously the assessment order has been passed without application of mind and without doing necessary enquiries. The principles laid down by the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. are squarely applicable as the order passed was without applying the principles of natural justice and without application of mind.
70. It is a fact that the details furnished by the assessee are voluminous and require sufficient time for examination. It is also true that certain details collected, contained vital aspect of assessments. The issue whether advance sale of room nights is income or not and also the allowability of expenditure debited under the head "Holiday Membership Surrendered Value", etc., have not been considered and examined in the assessment order. Thus, on this particular point, we agree with the findings of the CIT that he has rightly exercised the power of revision under section 263.
71. Now, we consider the second major ground that the revision i.e., accounting of advance sale of room nights, the facts have already been brought out both in the assessment order as well as in the order of CIT and the arguments of the parties. The Departmental Representative, in his arguments, stressed on the point that the predominant purpose is to sell the room nights. The undisputed fact is that the assessee has collected an advance, under promise to make available to its customers, rooms in at any of its hotels / Clubs owned by it or by its subsidiary as well as owned by the other affiliated destinations. It is also undisputed that a customer is entitled to surrender the room nights in case they do not utilize them 47 and opt for surrender value. When a customer opts for surrender value, he shall be paid in cash by the assessee or in the alternative, the customer may opt to buy or utilise the products and services of its company and its group companies.
The CIT has brought out the scheme which is the basis on which we have to adjudicate the issue for ready reference, we extract the same from Pages-8 and 9 of the CIT's order.
"I have gone through the advertisement brochure in respect of all the nine schemes in operation during the relevant accounting year. The advertisement brochures are specific so far as the objective of the schemes is concerned. The primary objective in co-opting a person as a member is to provide accommodation and other facilities to avail of the facilities during the holiday period. Basic features of the scheme are similar. As on illustration, the features of Comfort Membership Scheme having a tenure of three years are detailed. This scheme provides for five room nights package at an officer price of ` 3,000. This scheme was effective from 1st April 2004. The terms and conditions for the membership are as follows:-
i) The tenure is three years.
ii) The membership is accepted for minimum of 5 nights and
thereafter in multiple of two room nights.
iii) Room is defined to mean a standard non air-conditioned accommodation provided for a couple, and child below 5 years of age.
iv) The entitlement of room nights is defined to mean accommodation only that shall be provided to the members.
v) In case the room nights are not availed of during the 3 years tenure period, the member would be entitled to surrender value of ` 4,250 @ ` 850 per room night).
vi) Member shall commence utilization of the room nights entitlement after 60 days from the date of membership.
vii) The room nights can be availed in the existing or the affiliated facilities, for availing of the affiliated facilities, exchange fee of ` 150 per room night will be charged.48
viii) The member may surrender their unused entitlement of room nights to the company and opt for surrender value.
ix) Payment against unused room nights will be made after the expiration of the membership period.
x) In lieu of surrender value, members may opt by or utilize the products and services of the company and its group companies.
The product and services, inter-alia, includes herbal products, food and food coupons, I.T. training software development, auditorium / hall at Thane Club, etc.
xi) The member shall be entitled to free insurance cover as per the eligibility under the scheme.
xii) In case of natural / accidental death of the members, the membership shall be transferred in the name of the nominee as mentioned in the membership application form who shall be entitled for unused room nights, settlement of claim amount but insurance benefits shall be transferred in favour of the nominee. The aforesaid features exist in all the schemes of membership floated by the assessee company." [Emphasis added] A perusal of the scheme shows that a member pays ` 3,000 for a five night package and that if he does not avail of any of the room or facilities, he is entitled to ` 4,250, as surrender value. The right to claim of surrender value accrues to the customer / member on payment of ` 3,000. The assessee has no right to appropriate or take as income, the amount of ` 3,000 before the customer / member, exercise any of the options given in the scheme i.e., (i) avail the room in the assessee's hotel or resort; (ii) avail room in affiliated facilities (in such case, the receipt has to be transferred to affiliated facility); (iii) opt for surrender value; (iv) opt to utilise the surrender value, in availing of the services or purchasing the product of the company. Unless the customer / member utilises the services, or exercises his option of purchase, etc., in our opinion, income does not accrue to the assessee.
49Another vital point is that, if the receipt of ` 3,000 from member as a floating advance for room nights is income, then the ld. CIT was bound to hold that the payment of surrender value of ` 4,250 is expenditure to be allowed. This was not done by the ld. CIT.
The assessee has furnished following statistics, which we extract for analysis.
F. Year Scheme Name Op. Bal Amount Refunded Utilisation Closing Bal.
Collected
2002-03
Comfort -- 117,151,200 -- 600 117,150,600
Luxury -- 191,979,300 -- 425 191,978,875
Premium -- 12,410,000 -- -- 12,410,000
Regular -- 15,963,000 102,000 -- 15,861,000
Royal -- 105,058,800 -- 5,600 105,053,200
Standard -- 38,219,160 -- 1,960 38,217,200
Supreme -- 10,854,480 -- -- 10,854,480
Total 491,635,940 -- 8,585 491,525,355
% 0.001%
2003-04 Comfort 117,150,600 173,715,200 -- 40,800 290,825,000
Luxury 191,978,875 353,233,990 -- 12,750 545,200,115
Premium 12,410,000 20,673,120 1,871,120 1,120 31,210,880
Regular 15,861,000 33,218,000 1,989,000 -- 47,090,000
Royal 105,053,200 79,150,120 -- 17,640 184,185,680
Standard 38,217,200 46,724,120 -- 7,560 84,933,760
50
Supreme 10,854,480 12,754,000 -- 840 23,607,610
Golden -- 1,846,800 -- -- 1,846,800
Platinum -- 15,748,700 -- -- 15,748,700
Total 737,064,650 3,860,120 80,710 1,224,648,575
0.006%
2004-05 Comfort 290,825,000 268,122,400 -- 732,600 558,214,800
Luxury 545,200,115 350,791,935 -- 1,021,700 894,970,350
Premium 31,210,880 25,500,000 5,236,000 -- 51,474,880
Regular 47,090,000 58,266,000 13,056,000 -- 92,300,000
Royal 184,185,680 98,562,520 -- 1,479,240 281,268,960
Standard 84,933,760 42,609,320 -- 136,640 127,406,440
Supreme 23,607,640 15,951,275 -- 46,760 39,515,135
Golden 1,846,800 2,462,400 615,600 3,693,600
Platinum 15,748,700 40,065,300 -- 55,814,000
Total 1,224,648,575 902,334,150 18,907,600 3,416,940 2,104,658,185
0.16%
2005-06
Comfort 558,214,800 196,698,671 58,102,450 75,900 996,735,121
Luxury 894,970,350 609,871,969 2,867,675 191,675 1,501,785,969
Premium 51,47,880 26,358,075 340,000 77,492,955
Regular 92,300,000 71,381,500 1,734,000 161,947,500
Royal 281,268,960 125,668,118 772,765 172,655 405,991,658
Standard 127,406,410 57,008,754 136,045 271,040 184,008,109
Supreme 39,515,155 28,070,873 167,040 4,120 67,417,868
Golden 3,693,600 4,164,000 -- 7,797,600
Regal -- 6,569,400 25,000 6,544,400
Platinum 55,814,000 75,966,010 232,950 131,547,060
Total 2,104,658,185 1,501,700,370 64,377,925 712,390 3,541,268,240
0.02%
51
2006-07
Comfort 996,735,121 989,856,575 120,313,395 1,866,278,301
Luxury 1,501,785,969 1,739,395,861 2,935,365 3,238,246,465
Premium 77,492,955 34,503,045 170,000 111,826,000
Regular 161,947,500 121,889,050 1,622,000 282,214,550
Royal 405,991,658 365,051,952 652,170 770,391,440
Standard 184,008,109 114,124,366 66,325 298,066,150
Supreme 67,417,868 82,809,432 98,525 150,128,775
Golden 7,797,600 3,129,300 4,668,300
Regal 6,544,400 12,810,375 900 19,353,875
Platinum 131,547,060 82,433,630 168,730,085 45,250,605
Total 3,541,268,240 3,542,874,286 297,718,065 6,786,424,461
000%
2007-08
Comfort 1,866278,301 201,670,929 302,138,530 78,700 1,765,732,000
Luxury 3,238,246,465 315,780,435 2,147,060 136,850 3,551,742,990
Premium 111,826,000 26,283,700 1,700 138,108,000
Regular 282,214,550 134,640,000 416,854,550
Royal 770,391,440 59,561,205 996,445 38,080 828,918,120
Standard 298,066,150 28,425,080 11,200 21,880 326,458,150
Supreme 150,128,775 137,329,055 462,725 1,680 286,993,425
Golden 4,668,300 410,400 564,300 4,514,400
Regal 19,353,875 41,783,465 61,137,340
Platinum 45,250,605 280,947,395 326,198,000
New Comfort 1,189,351,500 1,800 1,189,349,700
New Luxury 1,572,129,900 3,600 1,572,126,300
New Royal 279,784,750 279,784,750
Total 6,786,424,461 4,268,097,814 306,320,260 284,290 10,747,917,725 0.002% 52
72. A perusal of the above discloses that a very negligible percentage of the customer / member only utilise the room nights. More than 99% of the customers surrender the room nights which is not only the amount paid but which is inclusive of a premium over and above the collected value. The learned Departmental Representative also filed a chart to prove his point that the refunds are not done in its entirety and that only about 30% of the amount is returned. We do not extract this chart, as it will not serve the purpose, for the reason that the fact remains that the assessee is obliged to refund the amount when claimed and just because a smaller portion is returned, it does not mean that the receipt becomes income. Even otherwise, as we have upheld the review u/s 263, it would be open to the AO to examine the correctness of the quantification of income accounted. In principle the method adopted by the assessee is correct and is upheld. On these facts, we examine the case laws relied upon by both the parties.
(i) In the case of Taparia Tools Ltd. v/s JCIT, (2003), 260 ITR 102 (Bom.), the Hon'ble Jurisdictional High Court was considering the matching concept. It held that under the mercantile system of accounting, in order to determine the net income of accounting year, the revenue and other incomes are matched with the cost of resources consumed (expenses) and the sale is required to be done on accrual basis. It held that the revenues and income earned during an accounting period, irrespective of the actual cash flow is required to be compared with the expenses incurred for the same period irrespective of the cash out flow. It held that if the matching cost is not applied, then the profits get distorted. The learned Departmental Representative relied heavily on this aspect of matching concept. When there is no income, the question of recognizing a particular 53 portion as income under the matching concept does not arise. It has to be first seen if there is an income. Just because expenditure is claimed, the receipt which is not income does not become income. Matching concept talks about apportioning income, when there is corresponding expenditure which is spread over a period of time. A capital receipt does not become a revenue receipt, just because some expenditure is incurred on the capital receipt and claimed by the assessee. Thus, we do not agree on this issue with the learned CIT as well as the learned Departmental Representative.
(ii) In Siddheshwar Sahakari Sakhar Karkhana Ltd. v/s CIT & Ors., (2004) 270 ITR 001 (SC), the Hon'ble Supreme Court has held as follows:-
Held - (i) reversing the decision of the High Court, that the line of enquiry, in order to determine the true nature and character of the receipts, did not stop at ascertaining the mere fact whether the realization was in the course of trading. Although the use of the expression "deposit" did not conclude the issue, the expression was used in the bye-laws to mean just what it said. The repayment of loans taken for capital expenditure and the share capital of the govt. were two specified events which were by no means uncertain, though the time of repayment was indefinite. On the occurrence of the two events the right to demand refund would accrue to the member-depositor. Such a right, though contingent in nature initially, inhered in the depositor from the beginning. The word "may" in the bye-laws had to be construed as "shall" and the board was bound to allot shares to the members in relation to the deposits, after full repayment to the govt. and the financial institutions. The existence of the other features such as transferability of the deposit to another member and the provision for refund of the deposited amount to the member in case of cessation of membership or to his legal heirs in case of death indicated that the deposited amount could not be treated as money belonging to the assessee society. The payment of interest at a specified rate from year to year was consistent only with the fact that the deposited amount still belonged to the members. And the fact that the deposited amounts were credited to the individual accounts of the members corroborated the circumstances that the deposits belonged 54 to the members. The amounts deducted from the cane price towards the non refundable deposits were not trading receipts of the assessee.
CIT v/s Bazpur Co-operative Sugar Factory Ltd., (1988) 172 ITR 321 (SC); (1988) 3 SCC 553 and Shree Nirmal Commercial Ltd. v/s CIT, (1992) 192 ITR 694 (Bom.) distinguished.
(ii) Reversing the decision of the High Court, that the amount of refundable deposits could not in any sense be treated as income of the assessee society." [emphasis added]
73. In our opinion, the ratio laid down in this judgment which is relied upon by the ld. Sr. Counsel, squarely applies to the facts of the case, in view of the obligation fastened upon the assessee to refund the amount, of advance received on sale of room nights. The scheme gives a right to the customer to take back his money with premium and in such a situation, we do not see how it could be treated as a trading receipt.
(iii) In ACIT v/s Mahindra Holidays & Resorts (I) Ltd., (2010) 131 TTJ 1 (SB) (Chennai), the Special Bench of the Tribunal was considering the case where the facts were that the company had no obligation to refund the amount. It was a case where the assessee had not made any provisions for any liability which the company could claim that it would incur in future. In the case on hand, unlike in the case of Mahindra Holidays & Resorts (I) Ltd. (supra), there is a clear obligation on the part of the assessee to not only refund the amount of advance room nights collected but also pay a premium along with it. In the case of Mahindra Holidays & Resorts (I) Ltd. (supra), an annual maintenance charge was compulsorily collected, or only administrative charge was collected from customer / member irrespective of the fact as to whether the customer / member makes uses of resort or not. In the case on hand, there is no such annual 55 maintenance charge collected. These are the fundamental difference between these two cases. The Special Bench did consider all the points including the accounting standard AS/29 and AS/9, relied upon by the learned Departmental Representative and has come to conclusion that the entire receipt cannot be in the first year. In fact, the Special Bench decision clearly covers the case on hand to the extent that, the direction of the CIT that the entire advance have to be taxed, is bad-in-law. The Tribunal held as follows:-
Income--Accrual--Time-share membership fee receivable at the time of enrolment of members--Though a debt is created in favour of the assessee immediately on execution of the agreement, it cannot be said that the assessee has fully contributed to accrual of income by rendering services--Assessee is bound to provide accommodation to the members for one week every year till the currency of the membership--Till the assessee fulfils its promise, the parenthood cannot be traced to it--Further, if the assessee confirms the reservation of a member but is not able to provide the allotted or an alternate accommodation, it is liable to pay liquidated damages to the member--These types of contingencies will always entail outflow of resources for the assessee in future-- Therefore, there is every possibility of an obligating event arising which will result in an outflow of resources--There is a continuing liability on the part of the assessee not only to provide accommodation but also to provide other incidental services attached with the accommodation--It is not only difficult to quantify the future liability but also to reasonably estimate it--No scientific basis is shown to quantify the same even reasonably--Therefore, even if the assessee had chosen to provide for the liability in every year to comply with the matching concept, it would have been wholly unscientific and arbitrary--Averment in the affidavit filed by the assessee before the service-tax authorities to the effect that once the agreement is signed no service is left to be rendered by the assessee is not relevant in this regard--By saying so, the assessee meant that there is no taxable event under the service-tax laws once a person becomes a member--Since a definite liability is 56 cast on the assessee to fulfil its promise, it cannot be said that the entire fee received by it has accrued as income, and recognizing the entire receipt as income in the year of receipt would lead to distortion--Only way to minimise the distortion is to spread over a part of the income over the ensuing years-- Therefore, the entire amount of time-share membership fee receivable by the assessee upfront at the time of enrolment of a member is not income chargeable to tax in the initial year
(iv) In Treasure Island Resorts Pvt. Ltd. v/s DCIT, (2004) 90 ITD 814 (Hyd.), the Tribunal held as follows:-
"Income--Accrual--Spread over of club membership fees--Assessee-club treating the fees collected from members as revenue receipts but as per AS- 9 prescribed by the ICAI, spreading over the same for five years in the case of permanent members and two years in the case of temporary members-- Justified--Services are rendered by assessee to various categories of members on a continuing basis--Ceiling on number of members and refundability or otherwise of the fees are immaterial for purposes of applicability of AS- 9--AS-9 has been made mandatory by the ICAI w.e.f. 1st April, 1991, and no auditor certifying accounts can afford to ignore it-- Fact that membership fee was utilised in creation/acquisition of fixed assets on which depreciation was claimed is no ground to reject the claim for spread over--Whenever there is a receipt giving rise to a liability, a provision can be created against the receipt for the liability--There being no conflict between the provisions of IT Act and AS-9, there is no question of precedence of former over the latter--When duly mandated accounting standard is followed, it cannot be said that income cannot be deduced properly in terms of proviso to s. 145 but the things are other way round-- Further, if the entire receipt is shown in the current year, there would be substantial deficit in future years giving a completely distorted picture of working results". [Emphasis added]
(v) The Tribunal held that when membership fee is collected giving the right to the member over the period of five years, the allocation of income or the recognition of revenue, over a period of five years, is quite rational and in conformity with the AS/9. It held that if the entire membership fee is taxed in the first year, it would give a totally 57 distorted picture of the working results of the assessee as substantial profits would be taxed in the year under appeal and whereas substantial loss would be taxed in the subsequent years. The facts of the case show that the assessee was not under the obligation to refund the advance collected by it. Thus, this case does not support the findings of the CIT that the entire advance received on sale of room nights should be taxed in the year of receipts itself irrespective of the fact that, as to whether, the assessee has actually availed the facilities of room nights in any one of the properties of the assessee or in its subsidiaries or associate concerns.
(vi) The next decision, relied upon by the learned Departmental Representative, is in the case of CIT v/s Mangal Tirth Estates Ltd., (2008) 303 ITR 366 (Mad.). This is a case where the assessee is in the business of construction of sale of multistoried office-cum-shopping complex and has followed the project completion method. The assessee was receiving service charges separately for providing air-
condition facility for the period of five years. Hon'ble'ble Madras High Court held that the sale consideration of shops and premises was inclusive of air-condition facilities and, therefore, the entire consideration was liable to tax in the year on receipt as per project completion method. In our opinion, this case law has no relevance to the facts of the case.
(vii) The next decision is the order of Tribunal, Chandigarh Bench, rendered in ACIT v/s Asia Resorts Ltd., (2005) 96 TTJ 909 (Chand.). This is a case where the assessee received advance subscription in its 58 hotel business under a time sharing agreement, whereby the customer was entitled to certain facilities over a number of years. The Tribunal held that the income is assessable on proportionate basis. This decision also does not help the Revenue, as, in the case on hand, what was received was advance with embedded obligation for refund as and when the customer / member availed of the room nights, the proportion was taken as income. In any event, the Special Bench in Mahindra Holidays & Resorts (I) Ltd. (supra), has considered this case.
(viii) In JCIT v/s Tirumalai Chemicals Ltd., (2006) 9 SOT 744 (Mum.), the Mumbai Bench of the Tribunal considered the matching concept and it held that the assessee had adopted a scientific and had written off and allocated the expenditure proportionately for the entire period of life of the equipment and that in differing the remaining expenditure to the years corresponding to their income years the assessee had sought to match the expenditure to the corresponding revenue earning years. The Tribunal held that the expenditure in question should be allocated to over the period of five years.
(ix) In CIT v/s Punjab Tractors Co-operative Multipurpose Society Ltd., (1998) 234 ITR 105 (Punj.), the assessee was engaged in the business of purchase and sale of tractor and motorcycle and their parts, besides undertaking repairs of the same. The assessee had received advance from buyers of tractor to cover service charges of tractor for the period of one year after the expiry of warranty period of one year. The assessee's contention was that there is an obligation on 59 the part of assessee to prove very services to the tractor for one year, as required by the manufacturers and after the expiry of warranty period, a further period of one year was also covered by the assessee for servicing the tractor and that those services of the post warranty period, the assessee received money from the buyers. The Assessing Officer brought the same on tax to proportionate basis. The CIT invoked his power under section 263 and held that the amount received by the assessee from the customers towards post warranty service charges was taxable. The CIT held that these were trading receipts. The Tribunal reversed the order. On appeal, the Hon'ble Punjab & Haryana High Court held that the assessee did not become the owner of the amount and could not appropriate it till services were rendered in lieu of which it was received an advance. The Hon'ble Court has observed as under:-
"Held - Money was paid by the buyers of tractors to the assessee towards PWS charges. Services were required to be rendered by the assessee for one year after the expiry of the warranty period, that is to say, one year after the date of receipt of money. The assessee was also bound to refund the deposit to a member of the scheme if that member so desired. The assessee had refunded a sum of Rs. 19,320 to those persons who did not want to continue as members of the scheme. Every receipt was thus not necessarily income. The assessee had made adjustment of the amount received from the PWS advances account to the Workshop Income Account during the quarter in which the work of repairs and servicing was done. The amount, received one year earlier, was thus not relevant to the assessee ' s income and was dependent upon the services rendered by the assessee. The assessee did not become the owner of the amount and could not appropriate it till service was rendered in lieu of which it was received in advance. The assessee could legally claim the amount after rendering the services. Part of the amount could be treated as income in the year under assessment on the basis of the accrual of the right to appropriate the money. The deposited amount was transferred as income as soon as service was rendered. The assessee treated the amount received as income by 60 transferring it to the workshop income account. Thus, adjustment of the advance money towards income was made, keeping in view the period in which actual services were rendered. The question is as to when the money is to be treated as income. Since the receipt was relatable to a particular period in future, it would fructify and mature into income during that period and not earlier. The assessee was regularly following the system of adjustment. The money received from the buyers could not be treated to be income unless right to appropriate it towards the services had accrued or arisen. So long as the right did not exist, the money received from the buyers remained advance money. It is the appropriation of the money towards the object and purpose for which it was received, which is relevant. Deposits or advances received by the assessee became trading receipts when the assessee became entitled to appropriate the same to its income at the time of rendering the service." [Emphasis added] This case applies on all forums to the facts of this case. The assessee did not become an owner of the amount, unless the services are rendered. This case covers the case on hand and applying this judgment, we have to decide the case in favour of the assessee.
(x) In CIT v/s Bazpur Co Operative Sugar Factory Ltd., (1988) 172 ITA 321 (SC), the Hon'ble Supreme Court has held as follows:-
"If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as a trading receipt. The same principle can be derived from the decision of this Court in Punjab Distilling Industries Ltd. vs. CIT (1959) 35 ITR 519 (SC) : TC13R.487 In that case, the assessee carried on business as a distiller of country liquor and sold the produce of its distillery to licensed wholesalers. Under a scheme devised by the Government, the distiller (assessee) was entitled to charge the wholesaler a price for the bottles in which the liquor was supplied, at rates fixed by the Government, which he was bound to repay when the bottles were returned. In addition to the price fixed under the Government scheme, the assessee took from the wholesalers certain further amounts, described as security deposits without the Government's sanction and entirely as a condition imposed by the assessee itself for the sale of its liquor. The moneys described as security deposits were also returned as and when the bottles were returned but in 61 this case the entire sum taken in one transaction was refunded when 90 per cent. of the bottles covered by it were returned. The price of the bottles received by the assessee was entered by it in its general trading account while the additional sum was entered in the general ledger under the heading "Empty bottles return security deposit account". The question was whether the assessee could be assessed to tax on the balance of the amounts of these additional sums left after the refunds made out of the same. It was held that the additional amount described as security deposit by the assessee was really an extra price for the bottles and was a part of the consideration for the sale of liquor; it did not make any difference that the additional amount was entered in a separate ledger termed "Empty Bottles Return Deposit Account". It was held that these additional amounts, which remained after the refunds were made, were trading receipts of the assessee and liable to tax. Applying these principles to the present case, in our opinion, it makes no difference that, in the bye-law, these amounts have been referred to as deposits and the account in which these receipts were entered has been called "Loss Equalization and Capital Redemption Reserve Fund". The essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfillment of certain conditions."
In this case, the Hon'ble Supreme Court, on facts, rejected the contention of the assessee that what was received were deposits. It held that what is to be seen is the true nature and quality of the receipt and not the head under which it is entered in the account book that would prove decisive. They relied on the judgment of the Hon'ble Supreme Court in Chowringhee Sales Bureau Pvt. Ltd. v/s CIT, (1973) 87 ITR 542 (SC). Applying this proposition to the facts of the case, the advance receipt on sale of room nights cannot be treated as a trading receipt in view of the obligation fastened on the assessee to refund the advance and also in view of the historical data which demonstrate that the assessee has refunded the amount in more than 99% of the cases. We do not agree with the argument of the learned Departmental Representative that the receipt in a trading receipt, on the facts of this case .
6274. After discussing the case laws cited by both the parties and after applying to the proposition laid down therein to the facts of the case, we are of the considered opinion that the entire advance received on sale of room nights cannot be treated as income of the assessee for the reason that - (a) the assessee has an obligation to refund the money along with certain compensation, if the customer / member exercise such an option; (b) the amount received is an advance and it is not against any specific item, in the sense that the customer / member has a right for an option to choose to stay in the room for a night in any of the property of the assessee or in the property of its subsidiary or in the property of its associate concern. It is not a case where a customer has booked a particular room in a particular property for a particular date, It is a general amount given wherein in customer / member have option of staying in many alternate properties as well as an option for refund of money with certain compensation called "surrendered value" as well as an option the members / customers to utilize / purchase products and services of the companies and its group companies. Thus, when customer / member has so many options, it cannot be said that the assessee has the right to appropriate the amount of advance on receipt, irrespective of rendering of service. Just on receipt, it cannot be said that the income has accrued to the assessee. Thus, in our considered opinion, the direction of the CIT to tax the entire advance received by the assessee on account of sale of room nights as income during the year, is bad-in-law and has to be vacated. In our opinion, the system adopted by the assessee i.e., advance on sale of room nights is shown as an advance and thereafter apportionment to income is based on the happening of the event of the customer availing the room nights, is a correct method. The alternative proposition of the learned Departmental Representative that, a portion of the advance should be held as taxable cannot be accepted in view of the obligation on the assessee to refund the money. The issue is covered in favour of the assessee by the principles laid down in the judgment of 63 the Hon'ble Supreme Court in the case of Siddheshwar Sahakari Sakhar Karkhana Ltd. (supra).
75. Looking at the issue from another angle, as already pointed out, if an advance receipt is to be treated as an income, the natural corollary would be that the amount when refunded to the customer / member, on this case exercising an option of availing the surrender value, the repayment should be considered as an expenditure. The CIT's direction that the receipt should be treated as income and keeping silent about repayment being treated as expenditure, gives a distorted picture and such a direction cannot be upheld. Thus, we vacate the direction of the CIT to include the amount received on account of advance sale of room nights as income of the assessee for the relevant period.
76. The third issue is the allowability of an amount of ` 22,09,84,169, debited under the head "Holiday Membership Surrendered Value". As already explained, the customer / member has the option to collect surrender value. The surrender value is nothing but the amount paid by the customer / member plus a certain amount which is in the form of a premium or compensation. A perusal of the scheme clearly demonstrate that the surrendered value payable in refund of the advance room nights collected with a premium / compensation and that this compensation is a time based or a period based cost. It is not connected to the performance or other criteria. If the customer / member chooses not to avail of the facility of room night in a particular year, the particular amount accrues to him as surrendered value in that year. An important fact to be noticed in the scheme is that there is a "cap" on the number of room nights a member can use in a year. When a member does not utilise room nights in any year, including the first year, he looses his right to certain quantity of room night and gets entitled to a certain amount of 64 surrender value. If, for the entire duration of the scheme, the customer / member does not avail the room nights, this surrendered value accrues to him for the entire period. The facts clearly demonstrate that the liability is a time based liability and that it occurs from year to year. On these facts, we now examine the case laws relied upon by both the parties.
77. In Bharat Earth Movers v/s CIT, (2000) 245 ITR 428 (SC), the Hon'ble Supreme Court held that if a business liability has definitely arisen in a particular accounting year, the deduction should be allowed, although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty, though the actual quantification may not be possible. Under these circumstances, the Court held that the liability is not a contingent one. It is a liability in praesenti. though it has to be discharged at a future date. In our opinion, this case law applies on all four to the facts of this case. Learned Departmental Representative tried to distinguish this case law by submitted that the liability in this case cannot be estimated with reasonable certainty. In our considered opinion, the argument is devoide of merit. The facts point out that this is the period cost and on lapse of a particular time period, the customer / member gets entitled to the receipt of the compensation is surrender value and the assessee has certainly incurred the liability. In our opinion, the liability is not only estimated with reasonable certainty as the quantification is based of facts. The liability has definitely arising in the accounting year as the customer / member has chosen not to avail in this accounting year the services of room nights offered by the assessee but has chosen to encash the surrender value. As the provision is made on the happening of an event, i.e., a member not availing a room night, the question of 65 estimation does not arise. The provision is an actual provision. In our opinion, this case law supports the case of the assessee.
78. In Metal Box Company of India Ltd. v/s Their Workmen, (1969) 73 ITR 53 (SC), the assessee company established its liability under two gratuity schemes framed by the company and the amount of liability was deducted from the gross receipt in the Profit & Loss a/c. The provision was made on the basis of actuarial valuation every year, the exercise was repeated and the company worked out the additional liability incurred by it. The Hon'ble Supreme Court has laid down the following principles - (i) for an assessee maintaining the accounting system as mercantile, the liability already accrued, though to be discharged at a future date, would be a proper deduction for working out profits and gains of its business, regard being to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actual expended or paid; (ii) just as receipts, though not actual receipts but accrued and due are brought in, for income tax assessment, so also the liabilities accrued and due would be taken into account while working out the profits and gains of business; (iii) a condition, subsequent to the fulfillment of which may result in the rejection or even expansion of liability, would not have the effect of converting that liability into the contingent liability; (iv) a trader computing its taxable profits for a particular year may properly deduct, not only the payments actually made to his employees, but also the present value of any payments in respect of the services in that year to be made in subsequent year, if it can be satisfactorily estimated.
78(i) Similar view has also been taken in Calcutta Co. Ltd. v/s CIT, (1959) 27 ITR 1 (SC). Applying these principles to the facts of the present case, we have to hold that the liability in question is not a contingent liability as held by the CIT and as argued by the Learned Departmental Representative. The liability accrues to the 66 assessee on the passage of time, if the customer / member does not opt for using room nights or other services. In fact, it is a liability in persenti, as a member has chosen not to avail of a room night in this year and a provision of compensation of this year is made, though payable at a latter date.
79. In CIT v/s Swarup Vegetable Products, (1991) 210 ITR 716 (All.), the Hon'ble Allahabad High Court was considering the case of an assessee who followed mercantile system of accounting and had claimed deduction in respect of a business liability before it is quantified and even when the liability is being disputed. The assessee was engaged in the business of manufacture and sale of sugar and claimed deduction of the liability that has arisen on account of difference in cane price actually paid by the assessee and one fixed by the Central Govt. in the notification, the Hon'ble Court held that the assessee is entitled for deduction.
79(i) In Rotork Controls India Pvt. Ltd. v/s CIT, (2009) 314 ITR 62 (SC), the Hon'ble Supreme Court held as under:-
"Held : A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts) the probability that an 67 outflow will be required in settlement, is determined by considering the said obligations as a whole."
80. Learned Departmental Representative sought to distinguish this judgment by holding that the assessee had no past experience or historical data to determine the liability by substantial degree of reliability. In our opinion, this line of argument cannot be accepted on the facts of the case. At the end of the accounting year, the assessee knows that customer / member who has not availed the room nights and based on this factual information, the period cost in the form of surrendered value has been estimated and a proper provision made. This is what the assessee did. When the provision is made on facts, the question of scientific estimation etc., doe not arise. The data of this very year is relevant and the provision is on actual. This provision cannot be called a contingent liability. The CIT was wrong in directing the Assessing Officer to disallow the entire amount of surrendered value provided by the assessee. It is not a case where the CIT held that the estimation of liability is incorrect. It is a case where the CIT held that the liability in question is a contingent liability. Thus, this case, in our opinion, this case law goes in favour of the assessee.
81. In CIT v/s Motor Industries Co. Ltd., (1998) 229 ITR 137, the Hon'ble Karnataka High Court was considering allowability of provisions for salary / wages for unutilised leave. On facts of the case, the Hon'ble Court held that there is no certainty that the provision made for unutilised leave, will be used at all, since the liability itself is either contingent or non-existent. The leave earned during particular accounting year cannot be treated as money earned during the year. In our opinion, this case law is not of much avail.
82. Learned Counsel for the assessee relied on the judgment of Hon'ble Supreme Court rendered in Madras Industrial Investment Corp. Ltd. v/s CIT, (1997) 225 ITR 802 (SC). In this case, a company has issued debentures at a 68 discount. There was a liability to pay the discounted amount over an above the amount received for debentures. Hon'ble Supreme Court held that the liability incurred by the company was for the purpose of its business in order to generate funds for its business activities. It approved the claim of deduction on proportionate basis over the relevant accounting period on the ground that this was in conformity with the accounting practice. It approved the write-off of discount over a period of the debentures. In our considered opinion, this decision applies to the facts of the present case, as in the case on hand also the cost to the assessee is a period cost in the case of debentures. The assessee claimed a proportionate deduction of the liability based on the fact that in this year the member / customer did not avail the room night and the liability has actually accrued to him during the year. Thus we are of the opinion that the direction given to disallow the entire claim is erroneous and has to be vacated. But as we have already held that review is correct as this aspect is not examined by AO, we modify the order by making it clear that it would be open to the AO to examine the adequacy of the provision.
At this stage, we would refer to other case laws relied upon by the learned Counsel for the assessee as well as the learned Departmental Representative.
83. In K.C.P. Limited v/s CIT, (2000) 245 ITR 421 (SC), the Hon'ble Supreme Court was considering the case whether the assessee had excess realisation of price over and above the levy price of sugar and such a receipt was held as a trading receipt liable to tax. Though the Learned Departmental Representative tried to take assistance of this case law, we are of the considered opinion that this does not help the case of the revenue.
6984. Learned Departmental Representative placed reliance on the judgment of the Hon'ble Jurisdictional High Court in Rajendra Trading Co. v/s CIT, (1976) 104 ITR 39 (Bom.), for the proposition that the dominant object of the scheme has to be seen. For the same purpose, he relied on an another judgment of the Hon'ble Bombay High Court rendered in Nutan Warehousing Company Pvt. Ltd. v/s DCIT, (2010) 326 ITR 94 (Bom.), wherein it has been held that the dominant intention of the assessee has to be ascertained. Both these case laws were relied upon, with an object to derive home to point, that what the assessee collected was advance for sale of room nights and not anything else. This is also the case of the assessee. When both, the Department as well as the assessee, are on facts agreeing that what is collected is an advance for sale of room nights, nothing turn our on these case laws.
85. Learned Counsel for the assessee relied on the decision in National Engineering Industries Ltd. v/s CIT, (1999) 236 ITR 577 (Cal.), where the Hon'ble Supreme Court has made observation as under:-
"So far as the questions referred at the instance of the assessee are concerned, the assessee has explained that the assessee has already got the benefit in regard to gratuity in other concerned years and as such it would be difficult for the assessee to press for obtaining the tax benefit once again by pressing for a favourable answer to its question in that regard. The assessee has also conceded that insofar as the proper method of deduction of a debenture premium payable at the end period of the debenture is concerned, it is a pro rata method, whereby the extra premium is to be spread over all the years which are occupied between the date of issue and the date of ultimate redemption. On the basis of this concession the assessee does not and cannot ask for a favourable answer to the questions referred at its instance in regard to deduction for the liability to pay debenture premium. Naturally when the assessee itself could not press for favourable answers in regard to its questions, the Department had not 70 much to say in that regard. But as regards the questions framed at the instance of the Department, some submissions were made. These submissions were made even in regard to the spread over of debenture premium which were also referred at the instance of the Department."
86. Coming to the decision of Hon'ble Calcutta High Court in CIT v/s Tungabhadra Industries Ltd., (1994) 207 ITR 553 (Cal.), the learned Counsel for the assessee submitted that this judgment was reversed by the Hon'ble Supreme Court in Madras Industrial Investment Corp. Ltd. (supra) and this fact is noted in the case of National Engineering Industries Ltd. (supra).
87. Though both the parties have made numerous arguments on different angles, we find that all the arguments are repetitive and trying to support or oppose the same point from various angles. Factually, in our considered opinion, the schemes are very clear that the assessee is under the obligation to refund, not only the advance but also the surrendered value. The liability is incurred on account of surrendered value on the passage of time and it is an actual liability and making a provision for the same, in our considered opinion, is correct and also that no income accrues to the assessee on receipt of this advance.
88. Even otherwise, it is not within our powers to disturb the quantification of the amount, the CIT has directed the Assessing Officer to disallow. We have already discussed the judgment of Hon'ble Supreme Court and other Courts which have held that revisionary order under section 263 would stand or fall on the reason given by the CIT in his order and not otherwise. In this case, a specific direction has been given by the CIT to the Assessing Officer to disallow a particular amount on the ground that this is a contingent liability. Such a direction is held as erroneous by us. The learned DR pointed out, with the help of a chart, 71 that there might be some inaccuracies in quantification of provisions. Based on the facts brought out, though we have no hesitation in vacating this direction of the CIT, on disallowing the provision made for "Holiday Scheme Surrender Value", we also hold, that as the validity of the order u/s 263 is upheld, it would be open for the AO to examine the adequacy or other wise of the provisions. In principle we uphold the method adopted by the assessee and only on issue of quantification, we hold that the AO can verify the claim.
89. On the issues i.e., Accounting of income, Accounting of holiday membership surrendered value, provision and adequacy thereof, marketing expenses and assessability of NUCA payable, as already stated, we agree with the arguments of the learned Departmental Representative that the Assessing Officer has not examined these vital issues and that the Assessing Officer has not applied his mind and, hence, the CIT has correctly invoked the power under section 263 on this account. These aspects can be examined by the AO in the assessment order passed u/s 143(3) read with section 263 of the Act after giving adequate opportunity to the assessee.
90. Perusal of papers on record clearly disclose the non-application of mind by the Assessing Officer on any of these items. Just collecting voluminous details and not perusing the same and completing the assessment in hurry by accepting the submission of the assessee at face value and without application of mind, is valid reason for invoking the powers under section 263. Though we did not approve the CIT's finding that the assessment was completed before the final date of hearing or before raising of the queries by the Assessing Officer, we agree with him on the fact that the Assessing Officer has not examined vital aspecst on all the major issues and this is a clear case of non-application of mind by the Assessing Officer 72 while passing the assessment order. It is a case where vital issues which have a phenomenal effect of determination of correct total income were not examined at all. Thus, on this account, the order passed under section 263 for both years under assessment have to be upheld.
91. In view of the above discussion, we summarize our findings as follows:-
i) The order passed under section 263 for the assessment years 2005-06 and 2004-05 are upheld for the reasons stated above;
ii) The specific direction of CIT given to the Assessing Officer in his order under section 263, to bring to tax the advance sale of room nights as income is hereby vacated. It is held that the amount received on account of advance sale of room nights cannot be assessed as income of the assessee on the facts and circumstances of the case. The correctness of booking or recognizing income, can nevertheless be examined in fresh assessment proceeding by the AO.
iii) The direction of the CIT to disallow the provisions made by the assessee on surrendered value of holiday membership is hereby vacated. We hold that the assessee is entitled to a deduction of the provision made on account of holiday membership surrendered value.
It would be open to the AO to examine the adequacy of the provision, by examining the calculation.
7392. In the result, both the appeals of the assessee are allowed in part.
Order pronounced in the open Court on 16-3-2011.
Sd/- Sd/-
(R.S. Padvekar) (J. Sudhakar Reddy)
Judicial Member. Accountant Member
Mumbai,
Dated: 16th March, 2011.
Copy to :
1. Appellant
2. Respondent
3. C.I.T.
4. CIT(A)
5. DR, E-Bench
(True copy)
By Order
S.T.Wakode / Pradeep J. Chowdhury
Sr. Private Secretaries
Asstt. Registrar,
ITAT, Mumbai Benches,
Mumbai.