Income Tax Appellate Tribunal - Chennai
Sterling Holiday Resorts (India) Ltd. vs The Asst. Commissioner Of Income Tax on 19 January, 2007
Equivalent citations: [2008]111ITD116(CHENNAI), (2008)113TTJ(CHENNAI)268
ORDER
M.K. Chaturvedi, Vice President
1. This appeal by the assessee is directed against the order of CIT(A) and relates to the assessment year 2001-02.
2. At the outset we find that the grounds raised by the assessee are not in accordance with the Income-tax Appellate Tribunal Rules. 1963. Rule 8 of the Tribunal Rules is reproduced here as under:
Contents of memorandum of appeal.
8. liven memorandum of appeal shall be written in English and shall set forth concisely and under distinct heads, the grounds of appeal without any argument or narrative; and such grounds shall be numbered consecutively.
However, at the time of hearing learned Counsel for the assessee submitted that the final prayer made be taken as the ground. This reads as under:
The appellant therefore submits that Rs. 14,59,87,443/- which has been set apart and being offered as income over the period of the contract cannot be held as the income of the year of the receipt.
3. We have heard the rival submissions. Assessee is engaged in the business of sale of time share units promoted by it at different locations. During the relevant assessment year assessee received a sum of Rs. 26.54,31,714/- from the customers to whom the assessee extended usership right in terms of specific agreement entered into with each customers.
4. Assessee treated 45% of the said receipt as revenue during the year under consideration. Balance of 55% being Rs. 14,59,87,443/- was treated as advance subscription towards customer facilities and kept in the liability side. The said amount was offered as income in equal instalments over the number of years for which the user-ship right was extended to the customers. AO held that 55% , i.e. Rs. 14,59,87.443/- is the income in the year under consideration. CIT(A) confirmed the order of the AO. Being aggrieved assessee is in appeal before the Tribunal.
5. Shri R. Subramanian, learned Counsel for the assessee, submitted that the 55% of the amount was received from the customers to meet the on-going commitments during the period. Assessee was required to provide benefit of user-ship to the customers. Our attention was invited on Unit Certificate included at page 21 of the paper book. It is mentioned in the following words under the caption "Terms & Conditions" at 1.15:
ADVANCE SUBSCRIPTION TOWARDS CUSTOMER FACILITIES (ASCF) means the amount appropriated by the Company being 55% of the Unit price towards meeting the expenditure for providing Facilities. The balance 45% of the Unit price constitutes the cost of Time share. As per the Notes on Accounts, it is treated as deferred income with the following observations:
i) In respect of Time Shares cost portion of the Time Share consideration viz., 45% is treated as income in the year of receipt of 10% of the total amount specified in the Time Share Agreement.
ii) In respect of Holiday Units sold, the cost portion of the Time Share Consideration viz., 45% is treated as income in the year of receipt.
iii) Advance Subscription towards Customer Facilities in respect of Property Time Shares sold is spread over equally over a period of 100 years and included under sales.
iv) Advance subscription received from customers in respect of Time Share Units and Heritage Units is reckoned as income in equal amount spread over the period of 99 years and 33 years respectively and included under sales.
v) Advance subscription received from customers for facilities in respect of Holiday Units is reckoned as income in equal proportion over the years upto 2050 and is included under sales.
6. The time share period is prescribed in the agreement as a period of 99 years commencing from the agreed date. The agreement also defines 'time share" as a right to stay in the apartments in the Holiday Resorts and enjoy the amenities during the holiday week, subject to the terms, conditions and covenants mentioned in the agreement.
7. It transpires from the perusal of the agreement that the assessee made available the resort to the customers to provide the various amenities and facilities in the resort for a specified period each year during the period of 99 years Towards the cost of providing these amenities and facilities, the company has collected a specific sum as advance subscription towards customer facilities mentioned in the agreement.
8. The profit and loss account of each year is credited with the amount received towards the cost of time share which is sold to the customer. The amount collected towards advance subscription on account of customer facilities is credited to a separate account. As the time share period is 99 years, 1/99 of this amount is credited to the P&L account and the P&L account is debited with the actual expenses incurred during each year on the provision of amenities and facilities.
9. The general conspectus of the main plank of the learned Counsel's argument was that the amount received was deferred income as certain obligations were attached with such receipts. The treatment given to such receipt was in accordance with the fundamental accounting concept for matching the revenue of each year with the expenses incurred to earn such revenue. The entire amount received towards advance subscription cannot be debited to the P&L account as it tantamount to provision of agreed amenities and facilities towards which customer made the payment in the previous year. Reliance was placed on the decision of the apex court rendered in the case of Calcutta Co. Ltd. v. CIT (37 ITR 1) (SC). In this case assessee bought lands and sold them in plots fit for building purposes undertaking to develop them by laying out roads, providing a drainage. system and installing lights, etc. When the plots were sold the purchaser paid only a portion of the purchase price and undertook to pay the balance in instalment. The assessee in its turn undertook to carry out the developments within six months but time was not of the essence of the contract. During the relevant accounting period assessee actually received in cash only a sum of Rs. 29.392/- towards sale price of lands, but in accordance with the mercantile system of accounts adopted by it. it credited in its accounts the sum of Rs. 43,692/- representing the full sale price of lands. At the same time it also debited an estimated sum of Rs. 24,809/- as expenditure for the developments it had undertaken to carry out. even though no part of that amount was actually spent. The department disallowed the expenditure. On appeal it was held that the undertaking to carry out the developments within six months from the dates of the deeds of sale was unconditional, the assessee binding itself absolutely to carry out the same. The undertaking imported a liability on the assessee which accrued on the dates of the deeds of sale, though that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of the business, and the amount to be expended could be debited in accounts maintained in the mercantile system of accounting before it was actually disbursed. The difficulty in the estimation thereof did not convert the accrued liability into a conditional one: because it was always open to the Income-tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case.
10. We find that the facts of the present case are entirely different. In this case assessee spread the liability over 99 years. There is no basis for estimating the expenditure. It was further submitted that earlier the CIT, Central-I, Chennai had proposed to treat the entire receipt during the two years, 1991-92 and 1992-93 as part of the income of the relevant assessment year and to be taxed in full, and that after due consideration of the issues the proceedings Under Section 263 initiated in this regard were dropped. In our opinion, this cannot be a reason for not examining the issue in the year under consideration. It was further submitted that 55% of the sale value was collected towards advance subscription from the customers. Necessary consent from the customers was taken at the time of purchase. It is not clear on what basis 55% of the total consideration was determined towards customer facilities. Learned Counsel for the assessee further submitted that assessee has executed legal documents with the customers wherein it is specified that the assessee will receive advance towards future maintenance expenses. From this it is obvious that the assessee had a definite obligation to perform under the contract. It will be imprudent to account the entire receipt as income of the year.
11. As per the time share agreement, the customer facilities and amenities are as under:
Facilities:
1. Exchange Facility.
2. Floating Facility.
3. Split-Week Facility
4. Accumulation Facility.
Amenities:
1. Restaurant Service
2. Housekeeping service
3. Resort Security service
4. Common facilities for recreation and entertainment
5. Resort property up-keep and maintenance
12. As per clause 139(c) of the Time Share Agreement, the time share holder shall pay the requisite charges/fees/prices decided by the company from time to time for use and enjoyment of the amenities. The time share holder shall also pay such charges as may be fixed from time to time by the company in respect of electricity, gas. water, airconditioning/heater etc. that may be utilized by the time share holder while enjoying his time share. The time share holder is also required to pay "utility charges" as applicable to the concerned resort. Assessee could not demonstrate that what actual expenditure it incurred towards facilities for which it deducted 55% out of the total income. The first facility is known as "exchange facility'". By this the time share holder is given an option to exchange his holiday week to a different week in the same resort or in any other resorts, subject to availability. The second facility is known as "floating facility". When time share holder is not using his holiday week and is not sure as to when he will utilize, he can surrender his week and may enjoy a "floated week' any time in the same calendar year. The third facility is "split week facility'". By this the time-, share holder may utilize only a few days out of his holiday week in any year and may utilize the remaining days later. The last facility is "accumulation facility" where the time share holder has opted for a floating facility or a split week facility, but does not get confirmation of reservation due to non-availability, such floated or split week will be accumulated and can be enjoyed later. It is not clear as to what special expenses are involved in providing the aforesaid facilities. No details were furnished by the assessee as to the expenditure actually incurred during the relevant period towards providing the customer facilities. Assessee is separately collecting amenity charges which were reflected as miscellaneous income. The resorts operational expenses are separately claimed by the assessee. Learned Counsel for the assessee strongly relied on the decision of the Hon'ble Karnataka High Court rendered in the case of CIT v. Shankaranarayan Construction Co. 197 ITR 688 (Kar). In this case assessee was engaged in executing projects of a Power Corporation. Assessee received excess amounts over and above amounts due to it as per actual work done by it. Final adjustments were made at the end of the contract. Excess amount was to be adjusted in future years. The practice of Power Corporation was to make excess payments to the assessee. It also obtained large security deposits from assessee which were non-returnable until final bill was passed. On this factual backdrop Hon'ble High Court has held that the exeess amounts received were deposits or advances and not income liable to tax.
13. In the present case 55% amount allotted for the future expenditure can by no stretch of imagination be construed as deposit. It is not an advance inasmuch as it is not refundable.
14. Adverting to the precedents relied upon by the ld. D.R., we find that in the case of E.I.D. Parry (I) Ltd. v. CIT 258 ITR 404 (Mad), assessee purchased IDBI Bonds. It exercised option to receive discounted interest for entire period in the relevant accounting year. Hon'ble High Court has held that entire interest is chargeable to tax in the year under consideration. Similar view was taken in the case of CIT v. Varghese Mani 252 ITR 735 (Ker).
15. The concept of deferred income is alien to Income-tax Act. Income on its coming into existence attracts tax. The obligation to use the income in a particular manner does not remove it from the category of income: this is even if the obligation is part of the original contract giving rise to the income. This view was taken by the Hon'ble Supreme Court in the case of L.D. Sassoon & Company Ltd. v. CIT 26 ITR 27 (SC). It is amply clear that income that is received or deemed to be received in the previous year is exigible to tax. The computation of such income is to be made in accordance with the method of accounting regularly employed by the assessee. There is absolutely nothing in the Act to permit the assessee to treat part of the income as deferred income and to offer it for taxation as per its own sweet will. We find absolutely no rationale for excluding 55% income. Even on facts assessee failed to satisfy that 55% receipt was to meet certain obligations and it is to be spread over in 100 years' time. This in our opinion is a subterfuge devised to hoodwink the Revenue. We have perused the reasonings adduced in the impugned order. In our opinion, CWT(A) took a correct view in the matter and his order calls for no interference on this count. Accordingly, we uphold the same.
16. In the result, appeal of the assessee stands dismissed.