Income Tax Appellate Tribunal - Mumbai
Pancard Clubs Ltd, Mumbai vs Department Of Income Tax on 7 January, 2014
आयकर अपील य अ धकरण,
धकरण, मुंबई
ई,, "सी" यायपीठ मुंबई म।
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH, MUMBAI
ी वजय पाल राव, या यक सद य एवं ी डी. क णाकर राव,, लेखा सद य के सम ।
BEFORE SRI VIJAY PAL RAO, JM AND SHRI D. KARUNAKARA RAO, AM
आयकर अपील सं./I . T. A. N o. 6724 /Mum/2012
( नधारण वष / Assessment Years: 2006-07)
DCIT-7(1), बनाम/
बनाम M/s. Pancard Clubs Ltd., 110,
Room No.622, Vs. Kalyandas Udyog Bhavan,
Aayakar Bhavan, Near Century Bazar,
M.K.Road, Churchgate, Prabhadevi,
Mumbai-400020 Mumbai-400 0025.
थायी ले खा सं . /जीआइआर सं . / P A N / G I R No. : AAACP9093R
(अपीलाथ /Assessee) .. ( यथ / Respondent)
आयकर अपील सं./I . T. A. N o. 6725 /Mum/2012
( नधारण वष / Assessment Years: 2008-09)
DCIT-7(1), बनाम/
बनाम M/s. Pancard Clubs Ltd., 110,
Room No.622, Vs. Kalyandas Udyog Bhavan,
Aayakar Bhavan, Near Century Bazar,
M.K.Road, Churchgate, Prabhadevi,
Mumbai-400020 Mumbai-400 0025.
थायी ले खा सं . /जीआइआर सं . / P A N / G I R N o . : AAACP9093R
(अपीलाथ /Assessee) .. ( यथ / Respondent)
अपीलाथ क ओर से / Assessee by : Shri A.C. Tejpal
यथ क ओर से/ Respondent by : Shri D.V.Lakhani
सन
ु वाई क तार ख /Date of Hearing : 07/01/2014
घोषणा क तार ख /Date of Pronouncemen t : 21 /02/2014
आदे श / O RDER
PER VIJAY PAL RAO, JM:
These two appeals by the Revenue which directed against the composite order dated 27/08/2012 of CIT(A) for the Assessment Years 2006-07 and 2008-09. The Revenue has raised common grounds in these appeals as under.
a. "The Learned CIT(A) has erred in law and on facts in holding that the receipt of advance of room night is not a revenue receipt."
2ITA NO.6724 & 6625/Mum/2012 M/s Pancard Clubs Ltd.
b. "The Learned CIT(A) has erred in law and on facts in holding that the provision for 'Holiday Scheme Surrender Value's is allowable expenditure."
2. The assessee is a public limited company and engaged in the business of providing facilities of room nights in hotels/clubs. The assessee has floated several holidays schemes on account of advance against sale of room nights. Under the scheme an individual can become a member and will make the advance payment for utilisation of room nights in future. The member has an option to exercise his right and if the option is exercised then he will be entitled to avail the room nights as per the scheme. The member is also entitle to refund, at the end of the respective shceme, the surrender value of the room nights. The assessee has treated the advance received against the sale of room nights as a liability and the same is disclosed in the balance sheet under the head Liability. The assessee has treated difference between amount paid by the member and the surrender value as an expense and the same is spread over the tenure of the scheme and prorate amount is claimed as deduction. The Ld. AO has treated the advance received from the members as taxable income and has also disallowed the claim of or prorate amount of holiday membership surrender value. The Assessing Officer relied upon the order passed by the Commissioner u/s 263 for the A.Y. 2004-05 and 2005-06. On appeal, the ld. CIT(A) has allowed the claim of the assessee by following the decision of this Tribunal in the appeal filed by the assessee against the order of Commissioner passed u/s 263 for A.Y.2004-05 and 2005-06.
3. Before us, the ld. DR has heavily relied upon the order of the Assessing Officer. On the other hand, the ld. AR has submitted that 3 ITA NO.6724 & 6625/Mum/2012 M/s Pancard Clubs Ltd.
the issue in these appeals is now covered in favour of the assessee by the decision of this Tribunal in assessee's own case arising from the revision order passed by the Commissioner u/s 263 of the Income-tax Act for A.Y. 2004-05 and 2005-06.
4. We have considered the rival submissions, facts and circumstances of the case as well as relevant material on record. At the outset, we note that for the A.Y.2004-05 and 2005-06 the original assessment was completed on 16/03/2009 and 17/02/2009 respectively. Subsequently,the Commissioer found that the order of the Assessing Officer for these two assessment years were eroneous so far as prejudicial to the interest of revenue to the extent the claim of the assessee is not recognising advance received from the members against the sale of room nights as revenue. Further, allowing the prorate surrneder value computing over the period of schemes as expenditure. The assesse challenged the order of the Commissioner passed u/s 263 before the Tribunal. The Tribunal though found that there was a lack of enquiry on the part of the AO and therefore the invoking of the provision u/s 263 was justified. However, the Tribunal has decided these two issues on merit vide order dated 16/03/2011 in ITA No.2389/Mum/2009 and 2918/Mum/2009. We note that the Tribunal has given a detailed finding on merits of these two issues from para 71 to para 87 as under.
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 4 ITA NO.6724 & 6625/Mum/2012 M/s Pancard Clubs Ltd.
not utilize them 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 ofthe 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 Rs. 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 Rs. 4,250 @ Rs.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 Rs.150 per room night will be charged.
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] 5 ITA NO.6724 & 6625/Mum/2012 M/s Pancard Clubs Ltd.
A perusal of the scheme shows that a member pays Rs. 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 Rs.4,250, as surrender value. The right to claim of surrender value accrues to the customer / member on payment of Rs.3,000. The assessee has no right to appropriate or take as income, the amount of Rs.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.
Another vital point is that, if the receipt of Rs. 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 Rs. 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
6
ITA NO.6724 & 6625/Mum/2012
M/s Pancard Clubs Ltd.
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%
2006-07
7
ITA NO.6724 & 6625/Mum/2012
M/s Pancard Clubs Ltd.
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%
8
ITA NO.6724 & 6625/Mum/2012
M/s Pancard Clubs Ltd.
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 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. 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 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 9 ITA NO.6724 & 6625/Mum/2012 M/s Pancard Clubs Ltd.
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 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 one 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 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 10 ITA NO.6724 & 6625/Mum/2012 M/s Pancard Clubs Ltd.
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 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 11 ITA NO.6724 & 6625/Mum/2012 M/s Pancard Clubs Ltd.
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 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 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.
12ITA NO.6724 & 6625/Mum/2012 M/s Pancard Clubs Ltd.
(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 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 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 13 ITA NO.6724 & 6625/Mum/2012 M/s Pancard Clubs Ltd.
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 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."14
ITA NO.6724 & 6625/Mum/2012 M/s Pancard Clubs Ltd.
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 .
74. 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 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.
15ITA NO.6724 & 6625/Mum/2012 M/s Pancard Clubs Ltd.
76. The third issue is the allowability of an amount of Rs. 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 an entertainment of 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 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 16 ITA NO.6724 & 6625/Mum/2012 M/s Pancard Clubs Ltd.
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 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 outflow will be required in settlement, is determined by considering the said obligations as a whole."17
ITA NO.6724 & 6625/Mum/2012 M/s Pancard Clubs Ltd.
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 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.
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.
18ITA NO.6724 & 6625/Mum/2012 M/s Pancard Clubs Ltd.
84. 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 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 19 ITA NO.6724 & 6625/Mum/2012 M/s Pancard Clubs Ltd.
opinion, is correct and also that no income accrues to the assessee on receipt of this advance.
5. The ld. CIT(A) has allowed the claim of the assessee by following the above decision of this Tribunal in assessee's own case. Accordingly we do not find any error or irregularity in impugned order of the CIT(A).
6. In the result, appeals of the Revenue are dismissed.
Order pronounced in the open court on 21/02/2014.
आदे श क घोषणा खल
ु े यायालय म दनांक 21 /02/2014 , को क गई ।
Sd/- Sd/-
(D.KARUNAKARA RAO) (VIJAY PAL RAO)
लेखा सद य / ACCOUNTANT MEMBER या यक सद य / JUDICIAL MEMBER
मंब
ु ई Mumbai; दनांक /Dated : 21 /02/ 2014
f{x~{tÜ? P.S.
आदे श क त ल प अ े षत / Copy of the order forwarded to:
(1) नधा रती / The Assessee;
(2) राज व / The Revenue;
(3) आयकर आयु (अपील) / The CIT(A);
(4) आयकर आयु / The CIT, Mumbai City concerned;
(5) वभागीय त न ध, आयकर अपील य अ धकरण, मब
ंु ई / The DR, ITAT, Mumbai;
(6) गाड फाईल / Guard file.
स या पत त / True Copy
आदे शानस
ु ार / By Order
उप / सहायक पंजीकार / (Dy./Asstt. Registrar)
आयकर अपील य अ धकरण, मब
ुं ई / ITAT, Mumbai