Income Tax Appellate Tribunal - Chennai
Mahindira Holidays & Resorts India ... vs Assessee on 16 May, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH, CHENNAI
BEFORE SHRI N.S.SAINI, ACCOUNTANT MEMBER AND
SHRI VIKAS AWASTHY, JUDICIAL MEMBER
ITA No.1613/Mds/2011
(Assessment Year: 2005-06)
M/s. Mahindra Holidays & Resorts The Deputy Commissioner of Income
India Ltd., Tax-(LTU),
M/s.Subbaraya Aiyar Vs. Chennai-600 101.
Padmanabhan & Ramamani Advocates
75A, Dr.Radhakrishnan Salai,
Mylapore, Chennai-600 004.
PAN:AAACM 6469L
(Appellant) (Respondent)
&
ITA No.1761/Mds/2011
(Assessment Year: 2005-06)
The Deputy Commissioner of M/s. Mahindra Holidays & Resorts
Income Tax-(LTU), India Ltd.,
Chennai-600 101. Vs. M/s.Subbaraya Aiyar
Padmanabhan & Ramamani Advocates
75A, Dr.Radhakrishnan Salai,
Mylapore, Chennai-600 004.
PAN:AAACM 6469L
(Appellant) (Respondent)
Assessee by : Mr. H.P.Mahajani, C.A.,
Revenue by : Mr. Shaji P.Jacob, Addl. CIT
Date of Hearing : 16th May, 2012
Date of Pronouncement : 25th May, 2012
ORDER
PER N.S.SAINI, ACCOUNTANT MEMBER:
These are cross appeals filed by assessee and revenue against the order of the CIT(A), LTU, Chennai dated 25.08.2011 in assessment year 2005-06.
2 ITA No.1613 & 1761/Mds/20112. The first ground of appeal of the assessee is general in nature and hence requires no adjudication. The second ground of appeal taken by the assessee in its appeal is that the learned CIT(A) erred in confirming the addition to income of the assessee of ` 39,20,35,431/-.
3. The brief facts of the case are that the assessee is in the business of selling time share units. It provides holiday facilities to its members for a specified period each year, over a number of years, for which membership fees is collected either in full or in instalments. The assessee offers 60% of the fees received from the members as income in the year in which the members are admitted and the balance 40% is equally spread over the tenure of membership. The Assessing Officer taxed the entire membership fee received as income after examining various clauses of the membership agreement and other relevant issues. He concluded that no extra expenses would be incurred in the subsequent years for providing facilities to customers. The Assessing Officer further observed that assessee also collected charges for upkeep and maintenance of the resorts and equipments 3 ITA No.1613 & 1761/Mds/2011 separately as annual charges each year. He also observed that the assessee has claimed entire expenses incurred during the year but had deferred a portion of the income received which is against the concept of matching principle.
According to Assessing Officer, loss which is neither suffered nor incurred in the accounting year is deductible against the actual receipts of the year. He relied on the decision of the Chennai Bench of the Tribunal in the case of Sterling Holiday Resorts (India) Ltd. Vs. ACIT., (2007) 295 ITR (AT) 162 (Chennai).
4. Being aggrieved by the said order of the Assessing Officer, the assessee filed an appeal before the CIT(A). The assessee contended by filing written submission that deferment of income to subsequent years was supported by the decision of Special Bench of the Tribunal in assessee's own case reported at 131 TTJ 1.
5. The CIT(A) after considering the submissions of the assessee deleted the addition by observing as under:-
"I have carefully considered the facts of the case and the submission made by the ld. AR. I have also gone through the decisions relied on by the 4 ITA No.1613 & 1761/Mds/2011 Assessing Officer and the AR. I find that the issue under dispute is of recurring nature starting from assessment year 1998-99 onwards. Similar issue came up for consideration before me in appellant's own case for A.Y. 2006-07 in ITA No.458-ITA Tr.07/10-11LTU(A) . After considering the facts of the case, submission of the appellant, decisions relied on by rival parties and other relevant materials, the ground was dismissed in ITA No.458- ITA Tr.7/10-11/LTU(A) dated 25.08.2011 for A.Y.2006-07. For the reasons stated in the above order, the ground is dismissed."
6. The learned A.R. submitted that since the issue was covered in favour of the assessee in assessee's own case by the decision of the Chennai Special Bench of the Tribunal reported at 131 TTJ 1, therefore following the same, the ground of appeal of the assessee should be allowed. He also submitted that the appeal of the revenue against the said decision of the Special Bench of the Tribunal filed by the revenue has still not been admitted by the Hon'ble High Court as submitted by the learned D.R. during the course of hearing. Therefore, the order of the Special Bench which is binding on the Division Bench should be followed and the ground of appeal of the assessee should be allowed.
5 ITA No.1613 & 1761/Mds/20117. On the other hand, the learned D.R. has filed written submissions, wherein it is submitted that the Assessing Officer took cognizance of the following judicial decisions while rejecting the claim of the assessee that the receipts were 'deferred income':-
1. Gopal Saran Narain Singh Vs. CIT., 31 ITR 237,
2. Ashoka Viniyoga Ltd.Vs. CIT., 84 ITR 264 (SC)
3. Chowrangee Sales Bureau Pvt. Ltd., 87 ITR 542 (SC)
8. It was further argued that before the CIT(A) the assessee has placed reliance on the decision of the Special Bench of the Tribunal in the assessee's own case for assessment year 1998-99 to 2002-03, wherein the issue was adjudicated in favour of the assessee. He submitted that CIT(A) has observed that judicial decisions in the case of CIT Vs. Calcutta Stock Exchange Association Ltd., (1959) 36 ITR 222 and the decision in the case of Delhi Stock Exchange Association Vs. CIT, (1961) 41 ITR 495 were not brought to the notice of the Special Bench of the Tribunal which resulted in the verdict in favour of the assessee. He submitted that the 6 ITA No.1613 & 1761/Mds/2011 CIT(A) has taken cognizance of the Assessing Officer's action in following the decision of the Tribunal in the case of M/s.
Chennai Corporate Club in ITA No.2076 to 2080/Mds/2010 dated 8.8.2011 wherein it was held that life membership fee received by the assessee was a revenue receipt liable to tax.
He further submitted that CIT(A) also endorsed the view of the Assessing Officer in following the decision of the Chennai Bench of the Tribunal in an identical issue in the case of Sterling Holidays Resorts (India) Ltd., Vs. ACIT., 295 ITR (AT) 162 where it was held as under:-
"The concept of deferred income is alien to the 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 even if the obligation is part of the original contract giving rise to the income. The 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 nothing in the Act to permit the assessee to treat part of the income as deferred income and to offer it for taxation at will.
The assessee was engaged in the business of sale of time share units promoted by it at different locations. The time share period prescribed in the agreement was for a period of ninety-nine years 7 ITA No.1613 & 1761/Mds/2011 commencing from the agreed date. Under the agreement, the assessee made available the resort to the customers to provide the various amenities and facilities in the resort for a speci-fied period each year during the period of ninety-nine years. Towards the cost of providing these amenities and facilities, the assessee collected a specific sum as an advance subscription towards customer facilities such as (i) exchange facility,
(ii) floating facility, (iii) split-week facility ; and (iv) accommodation facility. During the assessment year 2001-02, the assessee received sums from the customers to whom the assessee extended usership right in terms of the agreement entered into with each customer. The assessee treated the forty-five per cent.
of the receipt as revenue and the remaining fifty-five per cent. as advance subscription towards customer facilities. This was offered as income in equal instalments over the number of years for which the usership right was extended to the customers. The Assessing Officer treated the fifty-five per cent. as the income of the assessee. This was confirmed by the Commissioner (Appeals). On appeal :
Held, dismissing the appeal, it was not clear as to what special expenses were involved in providing the customer facilities. The assessee had not furnished the details as to the expenditure actually incurred during the relevant period towards providing customer facilities. The assessee was collecting separately amenity charges. The amount of fifty-five per cent. allotted for future expenditure could not be construed as deposit. It was not an advance inasmuch as it was not refundable. Thus, there was no rationale for excluding the fifty-five per cent. receipt to meet certain obligations and it was to be spread over a period of hundred years."8 ITA No.1613 & 1761/Mds/2011
It was therefore the plea of the learned D.R. that since the Chennai Bench of the Tribunal itself in Sterling Holidays Resorts (India) Ltd. (supra) has comprehensively and unambiguously decided the issue in favour of the Revenue, the ground raised by the assessee must be dismissed.
9. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. In the instant case, the assessee is in the business of selling time share units. It provides holiday facilities to its members for a specified period each year, over a number of years, for which membership fees of ` 39,20,35,431/-. The assessee has offered 60% of the fees received from the members as income in the year in which the members were admitted and the balance 40% is equally spread over the tenure of membership. According to the Assessing Officer as the assessee is not required to incur any extra expenses in the subsequent years for providing facilities to customers, therefore the entire receipts were liable to tax in the year 9 ITA No.1613 & 1761/Mds/2011 itself. The contention of the Assessing Officer is also that the assessee has claimed entire expenses incurred during the year but has deferred a portion of the income received which was against the matching principle of accountancy. He treated the entire amount of fees received as income of the assessee. On appeal, the learned CIT(A), following his order for the assessment year 2006-07, wherein on similar facts and issue he had confirmed the order of the Assessing Officer dismissed the appeal of the assessee.
10. The learned A.R. of the assessee has relied on the decision of the Special Bench of the Tribunal in the case of assessee's itself reported in 131 TTJ 1, wherein the Tribunal while deciding an identical issue has held as under:-
"23. We have duly considered the rival contentions and the material on record. Thousands of litres of ink have been consumed lavishly over the past more than hundred years in discussing the concept of accrual and yet there is no end to it, and rightly so as it indicates the ever changing dynamics of business and commerce. Hospitality business, though in existence since more than hundred years, it has 10 ITA No.1613 & 1761/Mds/2011 come into limelight recently with several variants and sale of timeshare unit is one such variant with which are concerned in the present group of appeals.
24. The dynamics of how timeshare industry works is not difficult to grasp. The company will set up several resorts at tourist places, either on its own or take such resorts on lease or may enter into arrangements with other resort owners. The company will grant membership on payment of certain amount. On payment of the amount, the member acquires membership for a specified number of years. During the currency of the membership, the member gets a right to have a holiday for one week in a year at the place of his choice from amongst the places offered by the company. The types of membership may differ depending on the type of accommodation opted by the person. The company receives the membership fee either in lumpsum or it may grant instalments to the prospective member. In addition to the membership fee, the company also charges annual maintenance charges (AMC) or annual subscription fees (ASF) or administrative charges. These charges generally are collected irrespective of the fact whether the member makes use of the resort or not. Further, if the member utilises the resort, he makes an additional payment towards utilities like electricity, 11 ITA No.1613 & 1761/Mds/2011 water, air-conditioning, heater etc. There are other incidental facilities also like exchange facilities, one- up exchange, RCI exchange etc. There are certain rules pertaining to cancellation of membership also along with the rules pertaining to quantification of refund. The assessee before us initially granted membership for 33 years which was later reduced to 25 years. The entire membership fee received by the assessee is treated as revenue receipt, but the entire amount collected is not recognised as revenue and offered for taxation in the year of its receipt. During the first three years of its operation, the assessee recognised 40 per cent of the revenue as income in the year of receipt and from 4th year onwards, it started recognising 60 per cent of the receipt as income in the year of receipt. The balance amount was equally spread over the period of membership i.e., 25 or 33 years, as the case may be. The case of the assessee is that though it has received the entire amount in, one year only, its obligation to the members remain spread over the period of membership and, therefore, part of the fees are recognised as income in the subsequent years. There is no basis for recognising the income in the ratio of 40:60 and it is stated to be as per industry norms. The basis for the ratio of 60:40 is stated to be 12 ITA No.1613 & 1761/Mds/2011 that with experience, the assessee has become wiser. The case of the revenue is that having received the income in the first year itself, the same should be recognised as income in that year only. So far as maintenance of resorts and other utilities are concerned, they, according to the ld. D.R., are being taken care of by the AMC/ASF etc. We proceed to resolve this dispute.
25. It is not in dispute that the assessee follows mercantile-system of accounting. Section 5(1) of the Act defines the scope of total income in case of a resident and includes all income which--
(a)Is received or is deemed to be received in India in such year by or on behalf of such person; or
(b)Accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c)Accrues or arises to him outside India during such year.
As per section 29 of the Act, the profits and gains of business or profession have to be computed in accordance with the provisions contained in sections 30 to 43D of the Act which in nutshell means that it is the net income which is taxable and not the gross income. Net income has to be arrived at after allowing all deductions permissible under the Act. In the backdrop of these facts and statutory provisions, 13 ITA No.1613 & 1761/Mds/2011 we have to examine whether the income received by the assessee has really accrued to it or not. The most enlightening judgment in this regard and which has also been the bedrock of subsequent decisions, is that of the Supreme Court in the case of E.D. Sassoon & Co. Ltd. (supra).
26. The assessee in that case (the Sassoons for short) were the managing agents for three companies. They were entitled to receive as their remu-neration, a commission of certain per cent per annum on the annual net profits of the three companies. The Sassoons decided to transfer the managing agencies to three other companies along with all their rights and benefits under the managing agency agreement. The transfer took place on different dates during the accounting year. The accounts of the managed companies were made up at the end of the year and the commission payable was computed. The commission was paid over to the three new managing agents. The Sassoons did not include any part of the commission in their income but the commission was assessed in the hands of the three transferees. The transferees objected to the said assessment stating that the agency commission received by them should be apportioned on a proportionate basis and the transferees should be 14 ITA No.1613 & 1761/Mds/2011 made liable to pay tax only on the commission earned by them during the period that they had worked as managing agents of the respective companies. It was argued on behalf of the Sassoons that it was a condition precedent to the earning of the remuneration that they fulfilled the terms of their employment and completed the period for which the remuneration was payable to them and the service for the particular period was a condition precedent to their earning the remuneration for that period. Since the stated period of one year was not over, no remuneration was payable to the Sassoons till the end of the year and it did not become a debt due by the companies to the Sassoons. Therefore, according to the Sassoons, no income accrued to them. On the other hand, it was urged on behalf of the transferees that though under the deed of assignment, they were paid the whole of the commission, they had merely earned the commission for the period of actual services rendered by them to the company. Even though the ascertainment and the payment came later it made no difference to the accrual of income which could be referred back to the period during which the income was earned and, accordingly, whatever amount was earned by the Sassoons during the respective periods that they had acted as 15 ITA No.1613 & 1761/Mds/2011 agents, had accrued to them during those periods. The court by majority decision held that no income accrued to the Sassoons.
27. Now let us examine the principles laid down in the case of Sassoons and try to apply them to the facts of the present case. One of the important observations the court made is at page 52 of ITR 26. It observed that the Sassoons had no doubt rendered services as managing agents of the companies for the broken periods. But unless and until they completed their performance, viz., the completion of the definite period of service of a year which was a condition precedent to their being entitled to receive the remuneration or commission stipulated thereunder no debt payable by the companies was created in their favour and they had no right to receive any payment from the companies. No remuneration or commission could, therefore, be said to have accrued to them at the dates of the respective transfers. In the present case, of course, the fees are payable on the execution of the contract between the company and the prospective member. Once a person agrees to become member the fees are immediately payable to the company. It becomes a debt payable by the person to the company. In that sense income has arisen to the company. However, the question is 16 ITA No.1613 & 1761/Mds/2011 whether it has accrued to the company or not. In this connection, the Supreme Court has explained the meaning of the word 'earned' and we reproduce the relevant observation below (pages 51 & 52 of 26 ITR) :--
"The word "earned" even though it does not appear in section 4 of the Act has been very often used in the course of the judgments by learned Judges both in the High Courts as well as the Supreme Court, (Vide CIT Bombay v. Ahmedbhai Umarbhai & Co., Bombay [1950] 18 ITR 472 , and CIT Madras v. K.R.M.T.T. Thiagaraja Chetty & Co. [1953] 24 ITR 525 at 533). It has also been used by the Judicial Committee of the Privy Council in Commissioners of Taxation v. Kirk[1900] A.C. 588 at 592. The concept, however, cannot be divorced from that of income accruing to the assessee. If income has accrued to the assessee it is certainly earned by him in the sense that he has contributed to its production or the parenthood of the income can be traced to him. But in order that the income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into 17 ITA No.1613 & 1761/Mds/2011 existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words a debitum in praesenti, solvendum in futuro it cannot be said that any income has accrued to him. The mere expression "earned" in the sense of rendering the services etc. by itself is of no avail."
From the above observations, it is evident that two conditions are necessary to say that income has accrued to or earned by the assessee. They are: (i) it is necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise, and (ii) a debt must have come into existence and he must have acquired a right to receive the payment. In the present case, a debt is created in favour of the assessee immediately on execution of the agreement. However, it cannot be said that the assessee has fully contributed to its accruing by rendering services. The assessee is bound to provide accommodation to the members for one week every year till the currency of the membership. Till the assessee fulfills its promise, the parenthood cannot be traced to it. In this connection, certain clauses in the membership rules need to be examined. The reservation for holiday can be done 18 ITA No.1613 & 1761/Mds/2011 90 days to 1 day before the commencement of holiday but the same is subject to availability. In other words, if the resort requested for is not available, the member would be deprived of the holiday. If the assessee confirms the reservation but is not able to provide the allotted or the alternate accommodation, assessee is liable to pay liquidated damages to the member. It is worth noting that the assessee is liable to pay liquidated damages only if it is not in a position to provide accommodation as per confirmed reservation. But it is not liable to pay any damages if it is not able to provide an accommodation on account of non-availability. Under such circumstances, the only recourse for the member is to approach the Consumer Forum which will term it as deficiency in services and direct the assessee to pay damages. The point we are trying to drive home is that the matter does not end on signing of the agreement and on a person becoming a member. 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. This is an important aspect of the matter.
28. It has been argued on behalf of the assessee that the main reason to spread the balance amount of 19 ITA No.1613 & 1761/Mds/2011 membership fees over the tenure of membership is that it has to incur heavy expenditure for the upkeep and maintenance of its various resorts. However, we are not impressed with this argument. Separate charges are collected for maintenance and for use of utilities and therefore, the matching concept cannot be pressed into service so far as membership fee is concerned. No doubt, it will be the constant endeavour of the assessee to go on adding new resources which will be available to the existing members also. To that extent one can say that some portion of the membership fees will go to finance new properties. But membership fee is essentially a consideration for the right to occupy a resort for one week in a year for 33/25 years. But the contingency of non-availability of accommodation will always be there. Sometimes, if the assessee is not able to provide accommodation in any of its notified resorts, it will try to procure alternate accommodation. This also will entail additional expenditure on the part of the assessee over and above paying liquidated damages to the assessee. Unlike the case in Calcutta Co. Ltd.'s case (supra), the liability in this case is difficult not only to quantify but also to reasonably estimate it. The liability is undoubtedly there. However, no scientific basis has been brought to our 20 ITA No.1613 & 1761/Mds/2011 notice to quantify the same even reasonably. Just as life insurance premium or provision for encashment of leave can be quantified reasonably on actuarial basis, there is no such method brought to our notice to quantify the liability of the assessee in the present case. In the case of life insurance, the premium is computed on actuarial basis only for the life assured whose longevity can be reasonably estimated. In the case of encashment of leave, despite the change in the number of employees, reasonable number of retirements every year can be estimated and, hence, the provision thereof is not rendered that difficult. However, in the case before us, the membership is ever increasing and in which year how many contingencies of non-availability of accommodation can arise, can be anybody's guess. At this juncture we may clarify the use of the word "contingencies". It is not used in the sense that the event of non- availability of accommodation is wholly uncertain. The event is certain, only how many such events can occur is uncertain. As a matter of fact, the Supreme Court has also used the words "contingent liability"
for warranty expense and allowed deduction in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62 1. Therefore, coming back to the point of making provision, even if the 21 ITA No.1613 & 1761/Mds/2011 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. At this juncture, when we are making the observation that the assessee has incurred a liability to provide accommodation, it would be appropriate to deal with the argument of the department in connection with be affidavit filed by the assessee before the service tax authorities. The department is banking on the averment in the affidavit to the effect that once the agreement is signed, there is no service left to be rendered by the assessee. This argument has to be rejected. The department itself admits, that the assessee is bound to provide accommodation for one week in a year during the tenure of the membership.
Secondly, by saying that no service is left to be rendered, what the assessee means to say is that there is no taxable event under the Service Tax laws once a person becomes member. Therefore, the reliance of the department on the affidavit has no substance at all.
29.We again revert to the aspect of liability. In this connection, the judgment of the Supreme Court in the case of Rotork Controls India (P.) Ltd. (supra) is quite useful. Of course, we are conscious of the fact that that case pertained to provision for warranties, 22 ITA No.1613 & 1761/Mds/2011 nonetheless, certain principles enunciated therein are quite apt for the case on hand as well. In the said case, the assessee had made provision for warranties. The Madras High Court in their judgment in CIT v. Rotork Controls India Ltd. [2007] 293 ITR 311 denied deduction of the provision for warranties on the ground that the liability was not certain. In fact at page 315 the High Court expressed this view by stating that considering the nature of the liability, which is yet to crystallise but loaded ,with uncertainty of the event, to cause a liability, there is no justification to accept the plea of the assessee. On the other hand, the Supreme Court observed that 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. It was further observed that 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 also observed that 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 (underline by us). If we consider the facts in the present case, the past event is admitting a 23 ITA No.1613 & 1761/Mds/2011 person as a member with a promise to fulfil the obligation of providing him accommodation for one week every year for the next 33/25 years. It is not an ordinary obligation. In fact, in our view, the obligation is heavier than that in the case of sale of goods. In the .case of sale of goods, the goods are already in possession of the buyer and are being used by the buyer. On the other hand, the sale of timeshare unit:
is not as tangible as sale of goods but becomes tangible when the assessee fulfils its promise. Let us consider certain factors which may prevent the assessee from keeping its promise. Most of the members would opt for a holiday during the peak season, i.e. during vacation in schools and this can put a lot of pressure on the assessee to satisfy each and every member. It will have to disappoint certain members for non-availability of accommodation and this may invite outflow of resources. There may be a demand for a particular resort but the assessee may not be able to provide it if the same is under some major repairs or renovation. These types of contingencies will always entail outflow of resources for the assessee in future. Therefore, we are of the view that there is every possibility of an obligating event arising which will result in an outflow of resources.24 ITA No.1613 & 1761/Mds/2011
30. A question may be raised that if the obligating event is sure to arise, the assessee could have made reasonable provision every year which would meet the matching concept also. Let us see how it is not possible. In the case of Rotork Controls (supra), the Supreme Court has observed that a provision is recognised 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 recognised. In the present case, we have already observed in the preceding paragraphs that the assessee has a present obligation as a result of a past event. Thus, the first condition is satisfied. We have also observed that outflow of resources is probable to settle the obligation. The second condition is also satisfied. However, considering the nature of activity, it is the third condition which is difficult to satisfy. The demand for accommodation by the members is essentially tourism oriented. Tourism, in turn, depends on several factors. They may be social, political, climatic and so on. If wedding season is in full swing, tourism can get affected. If there is some commotion around a particular resort or if the 25 ITA No.1613 & 1761/Mds/2011 law and order situation is not conducive, tourism can be affected. Sudden change in weather can also affect tourism. Further, availability of rail or air reservation can also affect tourism. The possibility of leave travel concession (LTC) getting lapsed can see sudden spurt in tourism. These are only a few illustrations which can affect the demand for accommodation either way. There may be many possibilities which may not come to mind but may put the assessee into tremendous pressure. All these factors are such which are twined with the normal human life and, hence, are not only certain to occur but also makes it difficult to reasonably estimate the probable outflow of resources. Moreover, as mentioned earlier, most of the grievances are settled by Consumer Forum and it can be anybody's guess as to what damages the Forum will award. Some orders of the Consumer Forum awarding damages to the complainants have been placed on record.
Considering the difficulty in estimating reasonably the obligation in monetary terms, no provision can be made.
31. We have held that there is a definite liability cast on the assessee to fulfil its promise and, therefore, it cannot be said that the entire fee received by it has accrued as income. We have also considered the 26 ITA No.1613 & 1761/Mds/2011 peculiar nature of the activity along with the complexity attached to it as a result of which no reasonable provision for the liability can be made. Therefore, recognizing the entire receipt as income in the year of receipt can lead to distortion. Somewhat similar, though not exactly identical, situation was faced by the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. (supra). In that case, the assessee had issued debentures of Rs. 1.5 crores at a discount of 2 per cent redeemable after 12 years. At page 813 of the report, the court observed that ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. It is this distortion we have talked about in the earlier part of this paragraph. The only difference is that in the case of Madras Industrial Investment Corpn. (supra), the distortion was supposed to be on account of expenditure, in the 27 ITA No.1613 & 1761/Mds/2011 present case the distortion is on account of the entire income being accounted in the year of receipt. Earlier, we have also discussed as to how difficult it is to estimate the liability which is likely to be incurred in future, more so in the absence of any scientific basis or historical data. Therefore, the only way to minimise the distortion is to spread over a part of the income over the ensuing years. At this juncture, we may deal with one of the arguments made on behalf of the assessee and the intervener. It was argued that accounting for the whole of the income in one year would give a distorted view of the profits of the company which will be against the true and fair principle required for the annual accounts. Well, the distortion the ld. counsel talked about was vis-a- vis the presentation of published accounts whereas the distortion the Supreme Court talked about and which we are inclined to follow, is vis-a-vis the real taxable income for a particular year. Therefore, in view of the foregoing discussion, we accept the proposition of the assessee that it is not justifiable to tax the entire income in a single year as is the case of the department.
32. Accordingly, to answer the question posed to the Special Bench, the entire amount of timeshare membership fee receivable by the assessee up front 28 ITA No.1613 & 1761/Mds/2011 at the time of enrolment of a member is not the income chargeable to tax in the initial year on account of contractual obligation that is fastened to the receipt to provide services in future over the term of contract."
11. The learned D.R. has argued that the decisions of Hon'ble Supreme Court and Chennai Bench of the Tribunal, as quoted above in this order, were not considered by the Special Bench of the Tribunal while adjudicating the issue in the case of the assessee in the earlier assessment years 1998-99 to 2002-03. Therefore, the decision rendered by the Tribunal was per incuriam. The learned D.R. could not point out any distinguishable features in the present appeal from the facts which were before the Special Bench in the case of the assessee for the assessment years 1998-99 to 2002-03. It is an admitted fact that the facts involved and the issue involved in the years which were before the Special Bench and which are in the year under appeal are identical. The only argument of the learned D.R. was certain decisions were not considered by the Special Bench and therefore the decision 29 ITA No.1613 & 1761/Mds/2011 of the Special Bench was per incuriam. He contended that the decision of the Chennai Bench of the Tribunal in the case of Sterling Holiday Resorts (India) Ltd. has to be followed. We find that the decision of the Special Bench being a decision of Larger Bench, the same has to be followed by us and therefore we do not find any merit in the argument of the learned D.R. In support of his contentions, the learned D.R. relied on the following case laws:-
1. Gopal Saran Narain Singh Vs. CIT., 31 ITR 237,
2. Ashoka Viniyoga Ltd.Vs. CIT., 84 ITR 264 (SC)
3. Chowrangee Sales Bureau Pvt. Ltd., 87 ITR 542 (SC)
12. The issue in the present appeal is that whether the amount received on account of time sharing units is to be taxed in the year of receipt when it is a fact that services are to be rendered by the assessee in subsequent years also.
It was submitted that in the case of Gopal Saran Narain Singh Vs. CIT., 31 ITR 237, it is held that "anything which can be properly described as 'income' is taxable under the Income Tax Act unless expressly exempted". It was also submitted 30 ITA No.1613 & 1761/Mds/2011 that in the case of Ashoka Viniyoga Ltd.Vs. CIT., 84 ITR 264 (SC), it is held that "the mode or system of book keeping cannot override the substantial character of a transaction." It was further submitted that in the case of Chowrangee Sales Bureau Pvt. Ltd., 87 ITR 542 (SC), it was held that "a trading receipt will remain a trading receipt even if it is not shown as trading receipt." He further submitted that in the case of Sterling Holiday Resorts (India) Ltd. Vs. ACIT., (2007) 295 ITR (AT) 162 (Chennai), it has been held that "there is nothing in the Act to permit the assessee to treat part of the income as deferred income and to offer it for taxation at will." The above decisions relied on by the D.R. have not considered or decided this issue. Therefore, these decisions are not applicable to decide the issue under consideration and on the basis of those decisions it cannot be held that the decision of Special Bench was per incuriam. We therefore respectfully following the decision of the Special Bench, set aside the orders of lower authorities and delete the addition made by the Assessing Officer and allow the ground of appeal.
31 ITA No.1613 & 1761/Mds/201113. Ground no.3 in assessee's appeal and ground no.2 in revenue's appeal relate to the order of the CIT(A) directing the Assessing Officer to verify the expenditure of ` 1,60,16,762/- and allow the same if it was incurred on salary, rent, interest, repairs and furniture.
14. The brief facts of the case are that the Assessing Officer observed that the assessee has claimed deduction of ` 1,50,12,214/- as expenditure during construction. In the Schedule 5 to the balance sheet, the assessee has capitalized ` 1,60,16,172/- accumulated expenditure during construction and the balance amount ` 31,68,717/- has been taken to the balance sheet as asset i.e. expenditure during construction pending allotment. In reply to the show-cause-
notice by the Assessing Officer as to why ` 1,60,16,762/-
claimed as deductible expense should not be disallowed being capital in nature, the assessee submitted that during the course of business, the company constructs, acquires, takes on lease resort properties for offering to its members for stay as per the terms of contract. These relate to expansion of the same business and not starting a separate line of 32 ITA No.1613 & 1761/Mds/2011 business. The common expenses towards central warehousing, electricity, loading & unloading and unloading charges, freight which cannot be identified or linked to a particular site, which can pertain both to work under progress and completed during the year. The expenditure of ` 1.6 crores incurred during the construction of the above resort is in continuation of the existing business and hence treated as revenue expenditure. Common resources are deployed for carrying on the project/construction/acquisition at all the existing and proposed locations and the expenses of these resources like salary, travel & rent constitute the expenses.
Since these resources are common it will be difficult to monitor the expenses incurred in the books project-wise and hence providing break-up of these expenses at project level is not feasible. Similar items claimed by the company for the assessment year 1998-99 has been disallowed by the department during the course of assessment on the ground that the same has to be capitalized. The CIT(A) has upheld the company's treatment on the ground that there is unity of control as far as the projects that have come up for which 33 ITA No.1613 & 1761/Mds/2011 expenditure under consideration has been made and expenses incurred are for expansion of the existing business and not for a separate line of business. The Tribunal has upheld the order of the CIT(A) when the department has gone on appeal against the order of CIT(A). The Assessing Officer after considering the submissions observed that on the direction of the Tribunal to examine the issue afresh for the assessment year 2005-06, the assessee was asked to produce details of the expenses. The assessee explained that organizational set up and how the expenses claimed during the construction of ` 1.6 crores was towards common expenses for all projects and that project-wise allocation was not possible. The assessee produced sample contracts in respect of consultants is also included in the sum of `1.6 crores under question. The sale contracts show that location for such project consultant is fixed. Even all the expenditures are fixed/assigned for the specific project . On 31.03.2005, the assessee company had incurred expenses for Jaipure Venue Visit, which can easily be capitalized on 31.3.2005.
The Assessing Officer also observed that the assessee 34 ITA No.1613 & 1761/Mds/2011 company had incurred expenses on account of car hire charges from Munar to Ernakulam and back for advocates for land purchase, which is a capital expenditure and hence there is no merit in the argument of the assessee that such costs cannot be allocated to specific projects. Further the expansion of the assessee's business consists of construction of new resorts as well as explanation of existing resorts. There is no doubt that the assessee is enjoying enduring benefits from such expansion. The benefit enjoyed from new facilities is not enjoyed by the assessee only in the year of construction. The new facilities are used in the assessee's business from which the assessee earns revenue year after year. A clear indication of the assessee's intention is in the assessee's own treatment of such expenses year on year, the assessee capitalizes a certain part of these expenses while carrying forward pending allocation. The assessee's treatment can at the most be determent of capitalization. He therefore added back the amount of ` 1,60,16,762/- to the income of the assessee as capital expenditure. On appeal, the CIT(A) following the order of the Tribunal in assessee's own case for 35 ITA No.1613 & 1761/Mds/2011 the assessment year 1998-99 in ITA no. 337/Mds/2002 dated 19.10.2005, wherein the Assessing Officer was directed to verify the expenditure and allow the same if the same was incurred on salaries, rent, interest, repairs and furnitures, directed the Assessing Officer to verify the expenditure of ` 1,60,16,762/- and allow the appeal of the assessee for statistical purposes.
15. The learned D.R. submitted that when the CIT(A) has allowed the claim for expenditure of the assessee following the order of the Tribunal for the assessment year 2006-07 and restored the issue back to the file of the Assessing Officer for verification, there was no grievance to the assessee against the order of the CIT(A). Therefore, appeal of the assessee is liable to be dismissed. He submitted that the revenue is against the direction of the CIT(A) to allow the deduction of expenditure like furniture which is a capital expenditure.
16. On the other hand, learned A.R. of the assessee submitted that CIT(A) was not justified in restoring the matter 36 ITA No.1613 & 1761/Mds/2011 back to the file of Assessing Officer but should have allowed the appeal of the assessee.
17. After hearing the submissions of both the parties, we find that the CIT(A) in deciding the issue under consideration has followed the order of the Tribunal passed in the case of the assessee itself in the assessment year 1998-99. The learned D.R could not point out that the order of the Tribunal was varied by any higher authority on appeal or there was no distinguishable facts in the present case than the facts involved in the assessment year 1998-99. Therefore, we do not find any merit in the ground of appeal of the Revenue.
18. With regard to the ground no.3 raised by the assessee, the only contention of the A.R. of the assessee is that the CIT(A) was not justified in directing the Assessing Officer to verify the nature of expenses before allowing the same as because in the assessment year 1998-99, the Tribunal allowed the appeal of the assessee. We do not find any force in this argument of the A.R. because there is no material on record to show the entire amount of ` 1.6 crores are on account of revenue expenditure like salaries, interest, rent 37 ITA No.1613 & 1761/Mds/2011 etc. and no part of the expenditure under the head 'construction expenses pending allocation' includes any expenditure incurred for acquiring new capital asset. In the above circumstances, in our considered view, the CIT(A) was justified in directing the Assessing Officer to allow revenue expenditure after verifying if the amounts were for salaries, rent, interest etc. Therefore, this ground of appeal of the assessee is dismissed.
19. In the result, both the appeals filed by the assessee as well as Revenue are dismissed.
Order pronounced in the open court on Friday, the 25th of May, 2012 at Chennai.
Sd/- Sd/-
(Vikas Awasthy) ( N.S. Saini )
Judicial Member Accountant Member
Chennai,
Dated the 25th May, 2012.
somu
Copy to: (1) Appellant (2) Respondent (3) CIT
(4) CIT(A) (5) D.R. (6) G.F.