Income Tax Appellate Tribunal - Chandigarh
Assistant Commissioner Of Income Tax vs Asia Resorts Ltd. on 18 July, 2005
Equivalent citations: (2005)96TTJ(CHD)909
ORDER
S.K. Pransukhka, A.M.
1. This appeal by the Revenue is directed against the order dt. 8th May, 2002 of the CIT(A)-I, Ludhiana, for asst. yr. 1998-99.
2. Following effective ground of appeal has been raised :
"(i) Whether, in law and on facts, the CIT(A) was justified in entertaining the ground of appeal relating to the adjustment of 45 per cent of the non-refundable 'time sharing membership fee' towards the written down value of the block of assets, when this issue was not in dispute, during the course of assessment proceedings, as the assessee in the preceding assessment year i.e., asst. yr. 1997-98, after detailed discussion had accepted the AO's view that the assessee's method of working out the taxable receipt of a year out of total 'membership fee', was not in accordance with the law and accepted the AO's method which was based on the treatment ostensibly given in the case of M/s Sterling Resorts Ltd. Madras, and on which issue, the assessee had not filed any appeal in that very year ?
(ii) Whether, on merit, the CIT(A) was justified in holding that only a part of the 'time sharing membership fee' which is equivalent to the total fee divided by the number of years for which a member is eligible to enjoy the 'facilities' is only taxable and thereby overlooking the fact that the whole of the fees being non-refundable had in fact got accrued in the year of receipt, as held in the order passed under Section 263 for the asst. yr. 1997-98 and also in view of the decision of Kerala High Court in the case of Varghese Mani v. CIT ?
(iii) The learned CIT(A) has erred both in law and on facts of the case in allowing 1/5th of pre-operative expenses of Rs. 12,14,672 and deferred revenue expenditure of Rs. 19,64,489 ignoring the facts that the assessee has claimed these expenses only after the expiry of time-limit of Section 139(5) of the IT Act i.e., during the course of assessment proceedings, as the assessee has not claimed pre-operative expenses as well as deferred revenue expenditure at the time of filing of the return. Even depreciation on pre-operative expenses incurred on the construction of hotel at Manali has not been claimed.
(iv) The learned CIT(A) has erred both in law and on facts of the case in deleting the addition made on account of interest not charged on advances given to its sister concern 'M/s Asia Greens Ltd. disregarding the fact (that) the assessee has been paying interest to banks and to others on the amount borrowed on short-term basis whereas the assessee advanced interest free amount to its sister concern on long-term basis besides overlooking decision of Hon'ble Allahabad High Court in CIT v. H.R. Sugar Factory (P) Ltd. ."
3. We take up ground No. (iv) first on the reasoning that for asst. yr. 1997-98 in assessee's own case in ITA No. 584/Chd/2002, vide order dt. 30th May, 2005, which was heard together with appeal of this year, the Tribunal disposed of similar ground. In that year, the appeal of the Revenue was rejected. That decision will squarely apply to this year also. We accordingly reject this ground of appeal raised for 1998-99.
4. Ground Nos. (i) and (ii), only one issue being that out of total time-sharing membership fees received by the assessee, 45 per cent thereof was sought to be deducted from the written down value of the block assets by the AO which was challenged by the assessee before the CIT(A). The relevant facts briefly stated are that assessee-company is running a hotel and a restaurant in the name and style of Timber Trail Resorts. In order to promote its business, assessee launched a scheme known as time-sharing scheme wherein a scheme was offered to the members of general public and by virtue of this scheme, advance subscription towards providing various customer facilities as stipulated in the agreement were to be given and for which company agreed to collect certain discounted sum of money in advance and the salient feature of the scheme is known as time-share agreement i.e., by paying a fixed sum of money a person could stay at the hotel of the company and the period was one week per year. The other salient feature of the company was that time shareholders could transfer his rights to some other person and the agreement also stipulated number of persons who could use the number of premises of the company. During the relevant year, assessee was in receipt of Rs. 82,97,146. The AO reduced the amount of Rs. 37,33,716 being 45 per cent of the total receipts from the written down value of the building. This issue was discussed by the AO at pp. 1 and 2 of his order. While making the addition, the AO has stated that the company had agreed to such an addition in asst. yr. 1997-98. While doing so, the AO rejected the plea of the assessee that no separate books of account had been maintained for the facilities provided to the time share holders and composite facilities were being given by the assessee to them. He thus reduced the WDV of the building as mentioned above. Assessee being aggrieved, (preferred) appeal to the CIT(A) wherein the assessee submitted written submissions. Relying upon the submissions of the assessee, the learned CIT(A) held that the AO was not justified in reducing the written down value by 45 per cent which works out to Rs. 37,33,716. The CIT(A) further held that there was no justification to enhance income as proposed by the AO and, therefore, this ground of appeal was decided in favour of the assessee.
5. The learned Departmental Representative relied on the order of the AO and did not offer any plausible explanation for the reduction of 45 per cent amounting to Rs. 37,3,716 from the WDV.
6. The learned counsel for the assessee, on the other hand, reiterated the same submissions as were made before the learned CIT(A).
7. We have given our careful consideration to the rival contentions. We find that the AO has passed the assessment order in most casual manner by taking arbitrarily 45 per cent figure out of his imagination and reducing the amount from the cost of the building which neither follow the correct accounting principles nor the law regarding taxation of income. There is no occasion to upset the agreement between the time shareholders and the assessee-company. The agreement is a valid agreement and has been acted upon. As per the scheme of the agreement, time shareholders are to take benefit of the scheme spread over to a number of years and assessee's practice of treating the advance subscription as liability and only proportionate amount of subscription as income in the relevant years was upheld by the tax authorities in asst. yr. 1996-97.
8. As regards asst. yr. 1997-98, as discussed above in the submissions, the said order of assessment by the AO was sought to be revised by invoking provisions of Section 263 by the CIT against which assessee preferred an appeal before the Tribunal and in that year also by order dt. 11th March, 2003 in ITA No. 219/Chd/2002 [reported as Asia Resort Ltd. v. Asstt. CIT (2004) 85 TTJ (Chd) 466--Ed.], the Tribunal decided the issue in favour of the assessee. In the said order of the Tribunal, the Tribunal has denounced the action of the AO and directed to consider only appropriate part of the total receipt keeping in view the period of lease in relevant assessment year and similarly in subsequent assessment years. We, therefore, find no reason in not accepting the well-reasoned order of the CIT(A) on the issue for the relevant year. Accordingly, we reject the appeal of the Revenue.
9. Ground No. 3 regarding deletion of allowance of Rs. 12,14,672 being 1/5th of pre-operative expenses and deferred revenue expenditure of Rs. 19,64,489. The AO did not allow these expenditures on the ground that these were not claimed by the assessee in the return of income and later on these were claimed during the course of assessment proceedings vide letter dt. 26th Feb., 2001.
10. The assessee appealed before the CIT(A). In regard to pre-operative expenses of Rs. 12,14,672, it was submitted before the CIT(A) that the hotel in Manali is also under the same management and there are common sources of financing, marketing, administrative activities, etc. It was further argued that both the units have interconnection, interrelation and interdependence on each other and, therefore, they constitute one business.
In regard to the deferred revenue expenditure of Rs. 19,64,489, it was stated that these were incurred by the assessee and used for the promotion of the business mainly for the booking of the time shareholders. The details of such expenses had been filed before the AO. It was submitted that this expenditure was necessitated to promote business of the company. Therefore, such expenses which were wrongly shown in the balance sheet under the head deferred revenue expenditure, actually should have been allowed as expenditure during the year under consideration. The learned CIT(A) considered these issues in para 4.4 of his appellate order by observing as under:
"4.4 I have considered the rival submissions and I am of the view that the AO has not doubted the genuineness of the expenses or the details furnished during the course of the assessment proceedings but has only stated that it is a claim time-barred. The appellant had made a bona fide claim during the course of assessment proceeding. There was unity of management and control, it being one and single and the expenditure having been made for promoting the business of the company. However, in respect of the pre-operative expenses amounting to Rs. 12,14,672, I do hold that these expenses were incurred for the construction of the new hotel building and therefore, this would go to increase the cost of the capital assets of the company and accordingly, the claim of Rs. 12,14,672 is held to be capital expenditure. The same should be treated as such, and depreciation allowed thereon by the AO during the year under consideration by capitalising this amount towards the building account. As regards deferred revenue expenditure, the claim appears a bona fide one. Also, by virtue of such expenditure, the appellant could collect a lot of revenue as time share receipts and, therefore, such expenses are held to be revenue in nature, allowable in toto during the year under consideration, even though such a claim was not made specifically in the return of income but it was made during the course of assessment proceedings. Therefore, the AO is directed to allow a sum of Rs. 19,64,489 from the total income of the appellant as determined."
11. We have given our careful consideration to the rival contentions. As regards pre-operative expenses of Rs. 12,14,672, the CIT(A) confirmed the action of the AO and directed to treat the expenditure of Rs. 12,14,672 as capital expenditure and increased the cost of assets of the company and accordingly depreciation was also directed to be allowed. As regards deferred revenue expenditure of Rs. 19,64,489, we find that the said expenditure was incurred by the assessee for the purposes of promotion of its business mainly for booking of time shareholders. As regards pre-operative expenses of Rs. 12,14,672, we agree with the CIT(A) on the reason that these expenditures being capital in nature and as such be treated as part of the fixed assets and depreciation be allowed. However, as regards the deferred revenue expenditures of Rs. 19,64,489, in our foregoing conclusion regarding treatment of income on proportionate basis from the advance subscription, we have decided the issue in favour of the assessee holding that entire income should be assessed over total period of lease as per the agreement between time shareholders. Whereas regarding expenditure incurred in connection with this scheme claimed by the assessee in this year itself, which finds no force since income is spread over a period, then on matching principle, expenditure should also be spread over a period of lease. When advance subscription received by the assessee is spread over a number of years, there is no reason why expenditure incurred in respect of the same venture should be allowed in the first year itself. Hence, we differ with the CIT(A) regarding allowance of this expenditure and direct the AO to give allowance only on proportionate amount of expenditure according to the period of lease with the subscribers.
12. In the result, the appeal of the Revenue is partly allowed.