TaxTMI 
TaxTMI 
2003 (8) TMI 188
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....t assessment was completed vide order of the Assessing Officer dated 31-3-1999, which is the last date of the limitation period. The assessee questioned the validity of this assessment before the CIT(A) on the ground that it was time-barred. This appeal was disposed off, by the order of the CIT(A) dated 10th December, 1999, whereby he set aside the assessment, with directions to reframe the same after giving due opportunity of being heard to the assessee and after considering a certain note regarding membership fees filed before him. The first of these appeals, viz., ITA No. 136/Hyd/2000 is directed against the above order of the Commissioner (Appeals). 4. Subsequently, the Assessing Officer completed the assessment de novo in pursuance of the above order of the Commissioner (Appeals), vide his assessment order dated 27-3-2002, and the Commissioner (Appeals) disposed off the appeal arising out of the said order of assessment, vide his order dated 9th December, 2002. The latter of these appeals, viz., ITA No. 244/Hyd/03, is directed against the said order of the Commissioner (Appeals) dated 9th December, 2002. 5. That is how, there are two appeals filed by the assessee for one ass....
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....essee came to know about such change vide a notice issued to the assessee on 8-4-1999 dated 22-2-1999. The assessment files were transferred and the department has not bothered to inform the assessee. Under section 127 of the Income-tax Act, the assessee need not be informed as far as the files are transferred from one assessing authority to the other within the same city. However, natural justice and the assessment procedures demand that the assessee be informed about the change and be given an opportunity of being heard afresh even the matters that were already heard by the earlier Assessing Officer under section 129 of the Income-tax Act. When a case is transferred under section 127 there is a change in the income-tax officer and though fresh notices need not be issued by the new Assessing Officer the assessee can claim the right to reopen the case under section 129. The officer need not issue a fresh notice but he should inform the assessee of the change so that if the latter so desires, he can ask for a rehearing - Anantha Naganna Chetty v. CIT [1970] 78 ITR 743 (AP). The Assessing Officer has issued a notice under section 143(2) dated 22-2-1999 which was served on the assesse....
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....ng Officer is the notice under section 143(2) dated 12-2-1999. As per learned A.R. of the appellant, the aforesaid notice was served on the appellant on 8-4-1999 and the notice showed date of hearing as 12-4-1999. But the copy of the 143(2) notice as available in the record of the Assessing Officer shows that the case was initially fixed on 23-2-1999. Another date was shown in the same notice as 'DH 15-3-1999'. It appears that the notice was actually despatched for service on 10-3-1999. The date of 12-4-1999 does not appear anywhere in the copy of the notice available in the record of the Assessing Officer. The charge from the side of the appellant that it was given a date of hearing on 12-4-1999 is therefore not correct. There is also nothing in the order sheet of the Assessing Officer that he had telephonically contacted the learned A.R. of the appellant twice before 31-3-1999. However, the Assessing Officer has also not been able to produce any evidence about the actual date of service of the notice dated 12-2-1999 on the appellant. The question that arises in this regard is whether the non-service of the notice will make any difference to the validity of the assessment. The lea....
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....convinced that the assessment order in this case was passed within the statutory limitation period allowed under the Income-tax Act, 1961. Coming to the merits of the addition, I find that the addition in respect of depreciation claim and expenses have been made by the Assessing Officer on the ground of non-compliance which allegation is not correct as the relevant books of account and documents were in the custody of the Department. Regarding addition on account of membership subscription, the learned A.R. had submitted a note on the accountancy principle followed by appellant in this regard and the same requires consideration by the Assessing Officer. Therefore, considering the totality of the facts and circumstances of the case, I feel it will be just and fair to set aside the assessment and restore the same to the file of the Assessing Officer to reframe the same de novo after giving opportunity to the appellant." 9. Before us, the learned counsel for the assessee stressed that after the vesting of the jurisdiction in the DCIT 4(1) Inv. consequent to the above-mentioned order of the Chief Commissioner dated 30-12-1998, the Assessing Officer apparently issued only one notice un....
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....ereof, a copy of the letter dated 17-8-1998 addressed by the authorized representative of the assessee, Shri Raghavachari & Co., Chartered Accountants, which reads as under: - To The Asstt. Commissioner of Income-tax, Comp. 4(6), Hyderabad. Sub-Treasure Island Resorts (P.) Ltd.- A.Y. 96-97 Madam, I came here to attend on behalf of our clients M/s. Treasure Island Resorts (P.) Ltd. I am leaving for Bhimavaram. I wanted a short adjournment. Kindly adjourn the matter for two days. I shall come and attend on 19th. Kindly do the needful and oblige. Thanking you, Yours sincerely Sd/- (Srinivasachary) There is another letter dated 22nd October, 1998 of the authorised representative for the assessee, copy of which may be seen at pages 6-7 of the Department's paper-book. In that letter, some information called for by the Assessing Officer was furnished, and this letter ends with a request for grant of further time to furnish the rest of the information. Similarly, there is another letter-dated 16th November, 1998, in which M/s. Raghavachari and Co. made a request for further time. There is a further letter dated 23-11-1998 addressed by the Assessing Officer to the assessee, whi....
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....f the above provision, it is contended that the DC 4(1) Inv., who succeeded AC 4(6) with effect from 1-1-1999, could legitimately continue the proceedings from the stage at which it was left by his predecessor, and so, it is not a case where the assessment had been made without the issuance of any notice under section 143(2) or section 142(1). In this context, he also relied on the decision of the A.P. High Court in the case of K. Venkataramana and Budha Appa Rao v. CIT [1987] 168 ITR 747, in which it was held, that when there is a change of incumbency of office during pendency of the assessment proceedings, rehearing is not necessary. He has also pointed out that, as per the clear findings of the CIT(A), which are not controverted, the assessment was completed on 31st March, 1999, and as per section 153(1) of the Act, the limitation is saved if the assessment is made before the date of limitation, and it is not necessary for the order to be communicated to the assessee before the said date. For this proposition, he relied upon the decision of the Hon'ble A.P. High Court in the case of K.U. Srinivasa Rao v. CWT [1985] 152 ITR 128. In that case, it was held that an order is deemed t....
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....Departmental Representative supports the case of the Revenue. The relevant portion of the head-note of the said decision reads as under: - "......In revenue matters the violation of natural justice in the completion of an assessment will not lead to nullity of the entire proceeding. Such violation merely results in illegality or irregularity supervening the course of proceeding under the law but does not destroy the jurisdiction of the authority, if he had seisin at the initial stage when the proceedings arose and if the authority while acting had lawfully assumed jurisdiction to proceed to Act. Misdirection of the proceeding would merely vitiate the course of the proceeding but that supervening irregularity or illegality has to be set right by putting the proceeding back on its rails. When such error is curable, it is the duty of the court to cure it. Where the Income-tax Officer commits an error in the course of completing the assessment proceeding after having duly assumed jurisdiction, it is the duty of the appellate authority to remove the particular defect or irregularity occurring in the course of the proceeding." 14. The predecessor Assessing Officer had legitimate juris....
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....d and the DCIT 4(1)(Inv.) could continue the proceeding from the stage at which it was left by his predecessor. So this is a case where, at the most, an irregularity supervened after the jurisdiction vested in the DCIT 4(1) Inv. inasmuch as he did not give a notice of hearing to the assessee. We are of the view that such supervening irregularity can be removed by the appellate authority by remitting the matter to the Assessing Officer for fresh consideration as done in the present case. It has to be remembered that, as already mentioned, this is not a case where the Assessing Officer did not have legitimate jurisdiction at any stage. Both the predecessor and the concerned Assessing Officer did have legitimate jurisdiction and so any supervening irregularity can be rectified. Further, the distinction sought to be made by the learned counsel for the assessee between an assessment under section 143(3) and the assessment under section 144 does not seem to have any relevance. It makes no difference so far as the powers of the Commissioner of Income-tax (Appeals) are concerned, whether the assessment is made under one section or the other. In either case, if the Commissioner (Appeals) fi....
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.... thereby ignoring the accounting standards adopted in the treatment of the money collected from the members. The CIT(A) has failed to understand the accounting standards and hence his order is ought to be rejected. For the above grounds among the other that may be permitted to be urged at the time of hearing, it is prayed that this Honourable authority may be pleased to quash the order passed by the assessing authority and pass such order or other orders in the interest of justice." 17. We have already extracted the directions given by the CIT(A) in his order dated 10-12-1999, while setting aside the original assessment made under section 144 of the Act dated 31-3-1999. It may be noticed that the CIT(A) mentioned that the assessee has submitted a note on the accounting principle followed by the assessee. In the impugned order, the Assessing Officer has given a full extract of the said note filed before the CIT(A) in the earlier proceedings. The said note reads as under: - "Note on membership fees collections M/s. Treasure Island Resorts (P.) Ltd. has commenced its business as a club to provide service to its members. It charges rates from members and non-members on account of va....
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....membership, but it is for a period of two years only. The company has segregated the membership fee collection into two for Revenue recognition, longer duration membership is taken to revenue spread over a period of five years that is, 20 per cent is taken to profit and loss account every year. The shorter duration membership fee collection is taken to income spread over the life of the membership. The company has only one shorter duration membership, that is, Temporary membership. The decision to recognise revenue in the above fashion is taken in consonance with Accounting Standards (AS) 9 - Revenue Recognition, as issued by the Institute of Chartered Accountants of India. The annexure to AS-9 relates to 'Special circumstances of revenue recognition from rendering of services'. The relevant portion to Membership Fees reads as follows: 'In the case of Revenue Recognition for membership fees, it must be noted that if membership fee permits only membership, the fee should be recognised when received. However, if the membership feel entitles the member to receive publications or services to be provided during the year, it should be recognized on a systematic and rational basis havin....
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....n, held that the provisions of Income-tax Act take precedence over the accounting standards and so, invoking the first proviso to section 145, he brought to tax as already mentioned above, the entire amount of Rs. 87,86,450. 19. The CIT(A) upheld the order of the Assessing Officer, observing that the entire membership fee, which is shown in the Balance Sheet under the head 'advance subscription' has been utilised for the acquisition of fixed assets, on which depreciation was also claimed and so, entire membership fee is correctly taxed in the year under appeal. He accordingly, upheld the order of the Assessing Officer, with the following remarks: - "A perusal of the balance sheet indicates that the entire subscription collected by the appellant along with the borrowed funds is utilized for creation of the fixed assets in the resort. The entire capital including the borrowed funds and, the subscriptions totals to Rs. 96,65,764. It is clear that the entire subscription is utilized or creation for fixed assets for the use of the members. Further the appellant has claimed depreciation on the fixed assets which has been allowed by the Assessing Officer to the extent of Rs. 23,25,217. ....
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....bsp; ------------ 62,83,753 --------------------------------------------------- The appellant company is running the resort and making the revenue collection of Rs. 62,83,753 as detailed above. This indicates that the assets are fully operational and the members are deriving a benefit from the use of the assets. Hence the deferment of income based upon accounting standard AS-9 is not relevant for the facts and circumstances of the appellant's case. Further, the accounting standard relied upon by the appellant has no mandatory status. It is recommendatory for being adopted in relevant case. In the appellant's case, the subscription is utilized for creation of the fixed assets which are used by the members by payment of relevant charges as evidenced by the details mentioned above. The deferment of income is not relevant for the facts and circumstances of the appellant's cas....
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....bsp; - One frame free Tale Tennis - Half-an-hour free Tennis - Three sets free. Over and above this, usage charges are applicable (iv) Certain facilities like Go-Karts, Dirt Bike wherein usage of petrol is involved, charges are payable per round. Life Membership: Membership fee ranging between Rs. 10,000 to Rs. 15,000 is collected. This membership is for life. All the facilities of the privileged members are enjoyed and applicable to the Life Members excepting that no cottages are provided free of cost. Such members, are charged for the cottages depending on the availability at a discounted rate. Barring this difference, all the facilities of the privileged members are applicable to the Life Members. Permanent Members: Membership fee ranges between Rs. 5,000 to Rs. 10,000. This is also for life. These members are eligible for the facilities of the category of Life Members excepting that this category of membe....
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....--------------------------------------- Details of Membership Paid Honorary Total ---------------------------------------------------------- 1. Privileged 355 358 713 2. Life 1013 666 1679 3. Permanent 147 35 182 4. Temporary 24 15 39 Total 1539 1074 ....
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....acts (c) A.S. 8 - Accounting for Research and Development (d) A.S. 9 - Revenue Recognition (e) A.S. 10 - Accounting for Fixed Assets 2. The Companies Act, 1956, as well as many other statutes require that the financial statements of an enterprise should give a true and fair view of its financial position and working results. This requirement is implicit even in the absence of a specific statutory provision to this effect. However, what constitutes 'true and fair' view has not been defined either in the Companies Act, 1956 or in any other statute. The pronouncements of the Institute see to describe the accounting principles and the methods of applying these principles in the preparation and presentation of financial statements so that they give a true and fair view......" 26. Learned counsel for the assessee has filed before us a copy of the Accounting Standard No. 9, which may be seen at pages 26-30 of the assessee's paper-book. The relevant portion of the said Standard reads as under:- "10. Revenue from sales or service transactions should be recognised when the requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided that at the time of perform....
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....s (b) the incidence of the costs relating to the service. (c) when the payment for the service will be received. In general commissions charged for arranging or granting loan or other facilities should be recognised when a binding obligation has been entered into. Commitment, facility or loan management fees which relate to continuing obligations or services should normally be recognized over the life of the loan or facility having regard to the amount of the obligation outstanding, the nature of the services provided and the timing of the costs relating thereto. 4. Admission fees Revenue from artistic performances, banquets and other special events should be recognized when the event takes place. When a subscription to a number of events is sold, the fee should be allocated to each event on a systematic and rational basis. 5. Tuition fees Revenue should be recognised over the period of instruction. 6. Entrance and membership fees Revenue recognition from these sources will depend on the nature of the services being provided. Entrance fee received is generally capitalized. If the membership fee permits only membership and all other services or products are paid for separate....
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....---- He has also invited our attention to Item D of the Notes forming part of accounts in Schedule 12, and the relevant portion reads as under: 1. Accounting Policies: D. Revenue Recognition: 1. All revenue is recognized on accrual system of accounting. 2. The subscriptions collected by the Company shall be taken to revenues based on the term of the subscription. 3. The income on account of the &n....
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.... in each year over a period of five years. In the case of temporary members, the period is reduced to two years, and their membership fee is recognised at 50 per cent in each year. 29. In the light of the above, he pleaded that the Accounting Standards are to depict a fair and correct picture of the working results and the financial position of the assessee, and so, there was no reason for the Assessing Officer to have ignored the results shown by the assessee on the basis of the Accounting Standard No. 9. 30. He also invited our attention to sub-sections 3A, 3B and 3C of section 211 of the Companies Act and pointed out that with effect from 31-10-1998, it has been made statutorily mandatory that the Profit & Loss Account and the Balance Sheet of a company shall comply with the Accounting Standards. Even though this requirement came into effect from 31-10-1998, and is not applicable for the earlier years, it is pointed out that the Accounting Standards were made mandatory by the Institute of Chartered Accountants, as already mentioned, with effect from 1-4-1991. It is further claimed that the only objection of the Assessing Officer was that the Accounting Standard 9 is only recom....
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....ssee has relied on the following decisions of the Tribunal- (a) Kevin Enterprise v. Joint CIT [2001] 79 ITD 196 (Ahd.) (b) H.M. Constructions v. Joint CIT[2003] 84 ITD 429 (Bang.) He also filed before us a copy and relied on decision of the Hyderabad Bench of the Tribunal in the case of Comp-U-Learn Tech (I) Ltd. [IT Appeal No. 672 (Hyd.) of 2001 dated 4-4-2002] for the assessment year 1998-99. 32. In the light of the above decisions, it is pleaded that the assessee has fairly disclosed the working results, and as there is a continuing liability on the part of the assessee to provide services either free of charge or at reduced rates to its members, it is unfair to regard the entire amount of Rs. 87,86,450 as the income of the year. It is further pleaded that if the entire amount is treated as income of the year, there would be big loss in subsequent years when there would be substantial expenditure in the from of repairs and maintenance, without matching income. It is claimed that such a situation would depict distorted results of the assessee, with huge income in the year under appeal, and huge losses in the subsequent years, and it would be totally unfair to the assessee and....
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....However, they are charged for the use of different facilities as per the decided rates at resorts. No. 3 Permanent Membership : The membership fee collected is Rs. 8,000 to Rs. 10,000. This is a one time fee collected in order to allow the members and is not refundable. Monthly subscription of Rs. 125 is collected over and above the charges for use of other facilities. This membership is also for life. No. 4 Temporary Membership : Is generally given few officers of Army temporarily for one year as on now we have 120 membership. No membership fee is collected from these members except for monthly subscription of Rs. 50 per member. No. 5 Honorary Membership : There are honorary members among the four card holders i.e., these are members from whom no fee is collected and monthly subscription is collected. Q. Have you returned any amounts to any members out of the 'Membership fees' collected. A. So far, we have not returned any fee collected. As per the bye-laws there is nothing written as refundable. However, if some members are not happy we have an intention to return the membership fee. Q. Does the income offered in the P&L Accounts filed with the I.T. Returns include membersh....
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....not have to pay entrance fee on each visit. It is also pleaded that there is no limit on the number of members, who may be admitted and the membership fee collected from all the categories of members is not refundable. In the circumstances, it is pleaded that the membership fee collected from all categories of members is liable to tax. In this context, he also relied on the decision of the Hon'ble Patna High Court in the case of CIT v. United Club [1986] 161 ITR 853, in which entrance fee was held to be a revenue receipt. He submitted that as, at any rate, it is not proved that any services are provided free to life, permanent and temporary members, Accounting Standard No. 9 does not apply, so, the Assessing Officer was justified in bringing to tax the membership fee of Rs. 87,86,450. It is also pleaded that there is no concept of deferred revenue expenditure in income-tax, and analogously revenue recognition in respect of receipts, also should not be deferred. 35. We are of the view that the assessee deserves to succeed. It requires to be remembered that the impugned assessment is made consequent to the directions of the Commissioner of Income-tax (Appeals) while setting aside th....
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....nature of the fees, and they do not say the fee is non-refundable. The applicability of Accounting Standard 9 does not depend on whether membership fee collected is refundable or not. It applies even when the amounts collected are non-refundable provided the other specified conditions are satisfied. As already mentioned, there is no basis for the remark of the Assessing Officer that there is no guarantee that the members will get services beyond one year. We understand that the club is still in existence and the members continue to avail of the facilities. The claim of the assessee has to be examined on the assumption that the club will continue in business and not on the assumption that it will be wound up. Similarly, the remark of the Assessing Officer that Accounting Standard is only recommendatory in nature has no basis. It is pointed out by the learned counsel for the assessee that accounting standard has been made mandatory by the Institute of Chartered Accountants of India with effect from 1-4-1991 and no auditor certifying accounts of a company can afford to ignore it. 38. Further, the remark of the Assessing Officer that the AS-9 is only recommendatory implies admission o....
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....on altogether different considerations like that the accounting standard is only recommendatory and that the amounts are not refundable. The contention that the assessee is not under an obligation to render services free or at reduced rates to its various categories of members except the privileged members is raised for the first time before us by the learned Departmental Representative. He made an exception in the case of privileged members only because bye-laws relating to this class of members was available before the Assessing Officer. As already mentioned, the Assessing Officer did not give any specific treatment even to the membership fee collected from the privileged members nor did he examine any of the privileged members to throw doubt on the genuineness of the bye-laws relating to them. In these circumstances, we do not find any reason to accept the plea of the learned Departmental Representative that the assessee is not under an obligation to render services to various categories of its members on a continuing basis. 40. Even the Commissioner of Income-tax (Appeals) did not mention that the assessee was not under an obligation to render services either free or at reduce....
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....y the assessee in summary fashion in the note filed before the Commissioner of Income-tax (Appeals). There is no material adduced by the Assessing Officer or the Commissioner of Income-tax (Appeals) to dispute the contents of the said note. So, we have to conclude that the assessee is under an obligation to render the various services either free or at reduced rate on a continuing basis to its various categories of members. Except in the case of temporary members, such liability is permanent. 42. It has been explained before us that the assessee has to maintain livestocks like horses and camels, swimming pool, tennis lawns, cottages, etc. for the use of the members. The cottages are provided with thatched roofs to create an eco-friendly atmosphere. These facilities entail substantial expenditure for years together. 43. Whenever there is a receipt giving rise to a liability, a provision can be created against the receipt for the liability. This proposition is now well established in view of the decision of the Apex Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 the relevant portion of the head-note of which reads as under:- "The expression 'profits or gains' in sec....
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....a observed as under :- "Under section 5 profits are chargeable when they accrue or arise or are received. The effect of this section is that the assessee's choice of the system of accounting determines whether profits are to be actually charged when they accrue or when they are received or at some other point of time." (Kanga & Palkhiwala's the Law and Practice of Income-tax, Eighth Edition P. 1163) After considering the above remarks of the learned authors, the Hyderabad Bench of the Tribunal in the case of Meera & Ceiko Pumps (P.) Ltd. [IT Appeal No. 652 (Hyd.) of 2001] for the assessment year 1994-95, in its order dated 21-6-2002, observed in para 5.7 thereof that even when the method of accounting adopted is mercantile system, taxability of a receipt may be postponed when the receipt entails a liability to be met in future years. In this view of the matter, it has to be held that all the amounts received by the assessee as the membership fee do not accrue as income in the same year. In view of the continuing liability, allocation of income over different years is permissible. 45. We have also to reject the contention of the learned Departmental Representative that the provis....
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....services to the members without matching receipts. This would give a totally distorted picture of the working results of the assessee. While substantial profits will be taxed in the year under appeal, there will be substantial losses in subsequent years. The revenue may seek such result, but we see no reason to allow it. 49. In the view that we have taken of the matter, it is not necessary to consider the ground of the assessee that the amount of Rs. 32,94,000 pertaining to the financial year 1994-95 should be excluded from the present assessment year. This is only an alternative plea of the assessee. We may however, mention that we find no merit in this plea. Admittedly, the business of the assessee commenced only on 1 -4-995 and the amounts received before commencement of business should be regarded as relating to the first financial year, i.e., 1995-96. As we are accepting the main claim of the assessee, the rejection of the alternative plea has no bearing on the result of this appeal. 50. Before we conclude, we may mention that there appears to be some incongruity in item 6 of the appendix to the accounting standard 9, which we have extracted hereinabove. While it states that....