TaxTMI 
TaxTMI 
2011 (3) TMI 890
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....d the decision taken on the validity of the order under section 263 for the assessment year 2004-05, can be followed for the assessment year 2005-06. Thus we take ITA No. 2418/Mum./2009 first. Facts in brief: 3. The facts are brought out at para 3 to para 3.3 of the assessment order for the assessment year 2004-05. They are extracted below for ready reference : "3. Pancard Club is a company of Panoramic Group of companies having business interests and activities in the fields of Hotel Industries, Resorts, Clubs, etc. Assessee company offers card facilities which includes savings and discounts on purchases made by Card Members plus club facilities which includes Health Facilities, Gymnasium, Sports, Restaurant, Swmming pool, Sauna, Jacuzzi, Water Park, Children game, video parlour etc., to its members. 3.1 The company offers Holiday Scheme to card members at a discounted/special price on account of advance Room Nights marketed through its agents. The agents are entitled to a commission on the offer price collected by them. The assessee had deducted tax on commission payments and paid it on 2-9-2005. The company charged Membership Entrance Fee which is non-refundable to i....
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....d hence the same is not allowable as there was contravention in law. Thus the Assessing Officer assessed the total loss at Rs. 48,09,14,236. 5. The CIT-7, Mumbai vide order dated 17-2-2006, passed under section 263 of the Act, set aside the assessment order dated 27-4-2007, with a direction to the Assessing Officer to pass a fresh assessment order in conformity with the directions contained in section 263 order. 6. The CIT held that the order is erroneous and prejudicial to the interests of the Revenue for the reason that : (a) the assessment order was passed prior to the date of final hearing, hence the same is erroneous and prejudicial to the interests of the revenue. (b) that proceeds from "Advance sale room nights" is a taxable receipt under section 5 of the Act and that the assessee has not offered advance sale of room nights as income, but is deducting all the expenses such as, marketing expenses, Holiday membership surrender value, administrative expenses and personal expenses which give a distorted picture and is not in consonance with the matching principles. The CIT directed the Assessing Officer to include the entire amount of Rs. 88,0....
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....d as revenue receipts and whether the provisions of NUCA was an allowable expenditure. He directed the Assessing Officer to examine the assessability of Rs. 20,52,34,763 which is the difference between the total membership fund and the amount payable to NUCA as on 31-3-2005, as per law and in accordance with the available facts in this regard. (f) that the Assessing Officer has not examined, as to whether the assessee has complied with the TDS provisions. He observed that the Assessing Officer has not examined whether the TDS has been deposited within the stipulated time. He directed the Assessing Officer to examine whether any expenditure is disallowable under section 40A(ia). 6.1 The learned CIT at paras 3 and 4 pages 17 and 18 held as follows : "I have considered the aforesaid submissions of the assessee. As has already been discussed in the preceding paragraphs, the dominant purpose of the Holiday Membership Scheme was to provide accommodation to the members on the concessional price referred to as "offer price". The surrender value on expiry of the scheme in the event of a member not availing of the option to use the room nights already sold is inclusive ....
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.... on this account. The Assessing Officer is directed not to allow the said amount as expenditure while determining the income from business for the assessment year 2005-06." Aggrieved, the assessee filed this appeal on the following grounds : 1. The Commissioner of Income-tax has erred in assuming the jurisdiction under section 263 of Income-tax Act, 1961 in respect of six items mentioned in his order. The basic conditions of issue of notice are not satisfied. The appellant submits that the order passed by the Assessing Officer is not erroneous and prejudicial to the interest of the revenue. 2. The Commissioner of Income-tax has overlooked that even after the issue of the notice under section 263 the Assessing Officer has completed the assessment for the assessment year 2006-07 and did not felt it necessary to take a different view. 3. The Commissioner of Income-tax has erred in concluding that the sum of Rs. 73,31,23,220 received by the appellant as advances towards sale of room nights is its income assessable for assessment year 2004-05. 4. The Commissioner of Income-tax has erred in directi....
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....d while working out the assessed loss. The conclusion reached by the Commissioner of Income-tax that the Assessing Officer has not given proper treatment to this disallowance is not justified. The appellant submits that the direction given by the Commissioner of Income-tax is not justified. 13. The appellant craves the permission to add, alter or amend the grounds of appeal which are without prejudice to each other. 7. The learned Senior Advocate, Shri S.E. Dastur, appeared on behalf of the assessee along with Mr. Nitesh Joshi and Mr. D.V. Lakhani. Mr. Dastur explained the various schemes operated by the assessee. He submitted that the Member makes a upfront payment, a certain amount and is allowed to stay for a certain period, in a resort, subject to certain terms and conditions. He pointed out that if the person, does not avail the facility of stay in the resort, the amount will be paid back to him along with certain compensation, which is worked out as per the scheme. After explaining the scheme, Mr. Dastur challenged the validity of the order passed under section 263 by the CIT on 17-2-2009. The submissions are as follows : (i) That the Assessi....
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....ade any disallowance on account of marketing expenditure. Thus he submits that the information called for by the Assessing Officer on 30-4-2007, subsequent to the completion of the assessment, has not resulted ultimately, any disallowance or addition, and hence, this ground for re-opening is devoid of any merit. (iv) that in the fresh assessment order passed by the Assessing Officer, consequent to the original order under section 143(3) being set aside by the CIT in section 263 proceedings, only two additions were made i.e., on account of - (a) advance rent received on account of sale of room nights and (b) disallowance of expenditure in the form of surrender value. On all other issues, on which the CIT revised section 263 order, the Assessing Officer, ultimately did not make any additions/disallowance. Thus he submitted that he would advance arguments only on these two issues only. 8. The learned Counsel for the assessee submitted that the receipt of advance on sale of room nights, amounting to Rs. 88 crores is not income, as the assessee has a contractual liability/obligation to return the amount, with certain compensation. He emphasized the fact that the assessee has an ob....
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.... submitted that all the decisions on the issue of taxability of advance sale of room nights and the provision for expenditure, have been referred to in the decision of the Special Bench of the Tribunal in the case of Mahindra Holidays & Resorts (India) Ltd. (supra). 12. The learned counsel submitted that the order passed under section 263 is bad in law as the Assessing Officer has called for all the details as per his letter which is at page 78 of the paper book and only on receipt of the entire details he had passed the assessment order. While submitting that the Assessing Officer has not asked any specific question as to why Rs. 88 crores was not taxable in this year, he submitted that this the aspect was considered by the Assessing Officer in the earlier assessment years and an opinion from a leading Chartered Accountant Firm, A.F. Ferguson & Co. was filed and that this is at pages 358 and 367 of the assessee's paper book. He submitted that the Assessing Officer discussed the scheme fully and applied his mind and thereafter came to a considered possible view and hence the CIT was wrong in invoking the provisions of section 263. He relied on the following case laws, for the pr....
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....06, total to 258 pages and whereas at page 290, the written submissions of the assessee to CIT during section 263 proceedings are included, the number of pages were 201 pages. Thus there is a discrepancy of 57 pages in the paper book filed before the ITAT, (ii) referring to item No. 17, which is a copy of the opinion regarding, policies of holiday membership fees, M/s A.F. Fergusons, C.A, Mumbai page Nos. 358-379 and page 213 of the paper book, it was submitted that the copies of the opinion was filed with the Assessing Officer in the assessment proceedings for the assessment year 2003-04 and not during the current assessment year 2005-06. He pointed out that purported report of M/s. A.F. Fergusons, was not filed even during the previous assessment year 2004-05, wherein the CIT allowed the Authorized Representative to inspect all the records of the earlier year; (iii) that the AS-29 was not considered by M/s. A.F Fergusons & Co. in its report and the report was marked by inadequacy, deficiency and incompleteness and is unreliable and hence is invalid, (iv) that pages 20, 78, 89, 109 and 206 which are copies of the letters dated 6-3-2007, 29-3-2007, 10-4-2007, 24-4-2007 and 26-4-200....
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....rs is not as per the scheme of membership. A table has been given to demonstrate that on a comparison of factual refunds of subscription on maturity, its surrender value, it reveals that the amount refunded is much lesser than what is refundable as per the scheme. He submitted that the provision made on estimate basis do not match actual and the variation is large. A calculation was submitted to demonstrate that the actual refunds given by the assessee is only of about 1/3rd of the subscription that has matured. (vi) Calculations are submitted to prove that there is some discrepancy in arriving at the provision of surrender value. It was pointed out that when the schemes started in July, 2002 and has a grace period of 60 days, the assessee chose to make a provision right from July, 2002, when the customer is not entitled to utilize the total nights purchased. That for the assessment year 2002-03, no scheme had completed one year by March, 2003, for the reason that all the schemes were launched in July, 2002 and the question of subscriber not using hotel nights is entitled to within one year of subscription does not arise. Thus the liability to refund subscription of surren....
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....t the Assessing Officer has not examined the taxability of receipt, allowability of deduction and also taxability of surplus in NUCA account and thus the order is prejudicial and erroneous. (x) That the submission of the assessee that the year in which the expenditure is incurred, need not necessarily be the year in which there is corresponding income, is against the matching concept. 18. On the first ground of a revision i.e., passing of assessment order prior to the date of final hearing on 15-5-2007, the learned DR submitted that : (a) Notice has been issued on 30-4-2007 seeking details and posting the case on 15-5-2007 and whereas the assessment was completed on 27-4-2007, which shows that the assessment order was passed prior to date of hearing. (b) At page 13 of the written submissions the learned DR in block letters states as follows : "Irregular, arbitrary manner in which assessment has been completed and assessment order being ante-dated." The learned DR's case is that the assessment order, demand notice were dated prior to issual of notice under section 142(1) on 30-4-2007 and this can be ascertained from the fact that in t....
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....g of advance sale of room nights of Rs. 88,00,09,610 the learned DR submitted that, the CIT has examined the features of the scheme and the contract entered by selling the room nights. He submitted that the predominant purpose of sale of room nights is not, to refund the sale proceeds at surrender value but is for actual utilization of the room nights by the subscriber. The refund can be claimed only after the expiry of the tenure of the scheme. That the period of the scheme vary from 3 to 10 years and the question of refund, if any, arises only after a long period of 9 to 10 years in most of the cases. That the assessee has not followed the matching concept as he has booked expenditure but not recognized corresponding income. That if the sale is recognized only on actual utilization of the room nights, then expenses should also be debited accordingly. That the claim of the assessee that the Assessing Officer has examined all these aspects during the scrutiny proceedings for the assessment year 2003-04, is not borne out of record. That the CIT considered the arguments of the assessee that : (a) money collected does not have the character of income; (b) ....
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.... corresponding income and hence the assessment order is erroneous and prejudicial to the interest of the revenue. 22.1 On the issue of marketing expenses, the learned DR submitted : (i) that the CIT has noted that the assessee has not disputed the fact that all these expenses were not properly examined by the Assessing Officer with respect to their genuineness and allowability. (ii) that the assessee has debited all expenses in contradiction of its theory that direct expenses should be amortized over the period of the scheme and hence the order is erroneous and prejudicial to the interest of the revenue. 23. On the difference of membership funds collected and NUCA payable, the learned DR submitted that the Assessing Officer has not examined the assessability of the different amount under this head, and hence the order is erroneous and prejudicial to the interest of the revenue. He further points out that the Assessing Officer has never examined whether the provision for NUCA is an allowable deduction and as to the taxability of the amounts received from the members under the scheme. 24. On the payment of TDS liabilities as on 31-3-2005 and ap....
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.... the interest of the revenue. (vi) that the judgment in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC) is in his favour as the Hon'ble Court held that incorrect assumption of facts or incorrect application of law or non-application of mind to something which was obvious and required application of mind or based on no, or insufficient material so as to affect the merits of the case and thereby caused prejudice to the interest of the revenue. (vii) that the submissions of the assessee have been accepted at face value without enquiry or application of mind and hence it cannot be said that a conscious view is taken by the Assessing Officer. Thus the question of forming a possible judicial view does not arise. Reliance is placed on the judgment of Green World Corpn. v. ITO [2006] 285 ITR 118/[2007] 159 Taxman 35 (HP) for the proposition that office record and office note can be relied for the purpose of upholding section 263 order and in this case entries in the DCR should be considered and section 263 order should be upheld. (viia) that assessment order does not become invalid, just because it is ante-dated or passed in an irregular m....
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....n the case of Tparia Tools Ltd. v. Jt. CIT [2003] 260 ITR 102/126 Taxman 544 and the order of the Hyderabad Bench of the Tribunal in the case of Treasure Island Resorts (P.) Ltd. (supra). In this order, emphasis was placed on the finding that the issue whether the amount is refundable or not, is not relevant. Reliance is also placed on the decision in the case of Dy. CIT (IT) v. Speco Electric Power Construction Corpn. Ltd. [2009] 126 TTJ 539 (Bilaspur). Reliance is placed on the decision of Chennai Bench of the Tribunal in the case of Mahindra Holidays & Resorts (India) Ltd. (supra) and submitted that even in the case of Mahindra Holidays & Resorts (India) Ltd. (supra) there was a refund clause and to demonstrate, attention was drawn to paras 13 and 22 of the order. In this case, law was also relied upon for the proposition that there is no basis for recognizing of income in the ratio of 40s to 60s. Reliance was also placed on paras 30 and 31 of that order. (xii) that marketing expenses including business development expenses etc., have to be amortized for the period of the scheme to avoid distortion of profits and reliance placed was on the judgment of Hon'ble Madras High Cour....
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....ransaction of running of services can be estimated reliably, revenue associated with the transaction should be recognized by reference to the stage of completion of the transaction as at the balance sheet date and submitted that the assessee could not demonstrate as to how this standard applies to it. On the statement of refund filed by the assessee, the learned DR submitted that, it is not clear whether the refunds and surrender value is on maturity or it is on cancellation of subscription. He pointed out that the assessee has created provisions for the same but reversal of provision in case of cancellation of subscription was not indicated and the Assessing Officer has not examined the same. 32. That the refunds are only about 1/3rd of amount payable as per the scheme. While submitting that the argument of the counsel that the rate of utilization of accommodation is low, is good for accounting, the learned DR submits that it is not enough to claim deduction as per law. 33. Referring to the reliance placed by the assessee on the judgment of the Supreme Court in the case of Metal Box Co. of India Ltd. (supra), in support of their claim that liability on account of refund at s....
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....r the DR to give an entirely different version and entirely different reasons for justifying the revision under section 263. He submitted that if the argument of the learned DR, that the assessment order is not passed on 27-4-2007, and that the order would have been passed on any of the dates between 18-5-2007 and 25-5-2007, then it should be held that there is no order passed on 27-4-2007 and hence the illegal order of that date has to be discarded and that the consequential revision order under section 263, should also be nullified. He referred to the charts filed by him and submitted that the assessee has refunded all the money that has been collected by way of advance sale of room night and factually the learned DR is wrong in submitting that only 30 per cent of the amount has been refunded. He submitted that less than 1 per cent of the subscriber who paid advance for room night, actually availed stay in the room and that more than 99 per cent of the subscriber had actually collected back not only the contribution but also surrender value. He submitted that the assessee had data to demonstrate that in almost of the cases, where the subscriber has paid advance for room night, ha....
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.... 38. On advance room nights received, Mr. Dastur submitted that the directions of the CIT to the Assessing Officer is very clear that the entire amount of Rs. 88 crores is to be taken as income and submitted that the Tribunal does not have the right to modify the order of the CIT under section 263. For the submissions that the order of the CIT passed under section 263, has to be examined on the strength of the reasons given in that particular order and for the proposition that the Tribunal cannot modify the orders of the CIT, the learned counsel relied upon certain case laws which we will be dealing with in due course. 39. Mr. Dastur emphasized that in the case on hand, a refund obligation is fastened on the assessee and no such obligation is there in the case of Mahindra Holidays and Resorts (India) Ltd. (supra). Referring to the decision in the case of Taparia Tools (supra) relied upon by the learned DR, the learned counsel submitted that this case law deals with spreading over of expenditure and has nothing to do with the issue whether income has accrued. He submitted that the case law deals with period cost. Similarly he submitted that the Tribunal decision in the case of....
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....amount was collected prior to the launch of the scheme, the learned counsel produced further pamphlets and submitted that many schemes are pre-launched year after year and the DR was factually incorrect and that he had a wrong impression. 41. Mr. Dastur vehemently contended that the CIT has not referred to any of the reasons mentioned by the learned DR and alleged that the learned DR wanted to pass afresh order under section 263, by giving his own set of reasons and submitted that this is not permissible. He submitted that the judgment of the Supreme Court in the case of Bharat Earth Movers (supra) very much applies to the case of the assessee. On the other issues, he submitted that the CIT has simply restored these matters to the file of the Assessing Officer for fresh verification and that such a direction is not permissible. He once again drew the attention to the Bench to the various documents in the paper books to demonstrate that the Assessing Officer had in fact asked for the details and had verified the same. 42. The learned DR, in his rejoinder, relied on the decision of K.C.P. Ltd. v. CIT [2000] 245 ITR 421/112 Taxman 66 (SC). He again rebutted the arguments raised ....
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....n be categorised into three aspects. The first is, whether the assessment order was passed without proper application of mind and without verification of the details submitted and without considering the vital aspects required to be considered in an assessment; (ii) whether the direction of the CIT that the advance received on sale of room nights, is to be treated as income is correct or not; (iii) whether the direction of the CIT to the Assessing Officer to disallow the provisions made for holiday membership surrendered value is correct or not. The entire arguments are centered on these three issues and each party made their points from different angles on the same issue. We first consider the argument of the learned Sr. Counsel, Shri S.E. Dastur. The arguments that the CIT was wrong in holding that the Assessing Officer passed the order prior to the date of final hearing appears to be correct. The details called for, vide letter dated 30-4-2007, by the Assessing Officer from the assessee were furnished much prior to the completion of assessment and except for asking the Assessing Officer to verify the marketing expenses, there is no point raised by the CIT in his 263 order on the....
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....t of sale of room nights is to be considered as income or not. On the other issues of marketing expenditure, addition on account of NUCA and disallowance under section 40a(ia), we are of the considered opinion that it would be academic to adjudicate this issue, as ultimately no addition has been made by the Assessing Officer in the assessment order passed in pursuance to section 263 order and as we have already held that on the issue of taxability of advance received on sale of room nights, the Assessing Officer has not applied his mind and, hence, on this account, the re-opening should be upheld. 46(a) Coming to the arguments of learned Departmental Representative, the issue whether there are discrepancies in the paper book filed has been resolved by the clarification given by the learned Sr. Counsel, in any event, these issues are not crucial to the decision to be given in this case. Coming to the opinion given by the A.F. Fergusons, we have already held that they are not part of the record of the current year. The entire effort made by the learned Departmental Representative is to convince the Bench that the Assessing Officer has not properly examined many issues and that the....
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....he CIT in his section 263(1) order. If the Tribunal is allowed to find out the grounds available to the CIT to pass an order under section 263(1) then it will amount to sharing of the exclusive jurisdiction vested in the CIT, which is not warranted under the Act. It is all the more so, because the Revenue has not been given any right of appeal under the Act against an order of the CIT under section 263(1). Further, in view of the matter in appeal, the Tribunal cannot uphold the order appealed against on the grounds other than those taken by the CIT in his order. It is CIT's satisfaction according to which he may pass necessary orders thereunder in accordance with law. If the grounds which were available to him at the time of the passing of the order do not find mention in his order appealed against, then it will be deemed that he rejected those grounds for the purpose of any action under section 263(1). In this situation, the Tribunal while hearing an appeal filed by the assessee cannot substitute the grounds which the CIT himself did not think proper to form the basis of his order. Accordingly on the facts of the present case, the Tribunal was not competent to take into considerat....
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....re capital of the partnership firm resulted in "transfer" of an asset and, in the said process, whatever gain was earned was liable to capital gains tax under section 45. The Commissioner of Income-tax proceeded as if there was a valid transfer under a genuine situation. It was not his case that the contribution towards the share capital made by the assessee was only a device for converting the asset into money. The basis of the initiation of proceedings by the Commissioner could not be altered by the Tribunal. Seondly, the Tribunal had given a definite finding that the transaction was genuine. Hence, the assessee was not liable to tax on capital gains. CIT v. Harikishan Jethalal Patel [1987] 168 ITR 472 (Guj)." 50. From the above it is clear that it is not open for us to uphold the order of the Commissioner of Income-tax exercising his power under section 263, on grounds different from that relied upon by the Commissioner itself. With this background, we now consider each issue, based on which the CIT has revised the order under section 263 of the Income-tax Act, 1961. 51. The first issue is that the assessment order is passed prior to the date of final hearing on 15-5-20....
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.... the Assessing Officer erroneous. 52. The case of Green World Corporation (supra) was a case where the Assessing Officer passed an order on the dictates of his superior officer without calling for more information and in such a situation, the Hon'ble Court has held that the order was passed by the Assessing Officer on account of unwarranted interference by superior authority. 53. In the case of CIT v. Gabrial India Ltd. [1993] 203 ITR 108/71 Taxman 585 (Bom.) the Hon'ble Court held that twin conditions of the order being erroneous and such error resulting in prejudice to the revenue have to be satisfied. It held that an order cannot be termed as erroneous unless it is not in accordance with law. Just because an order, in the opinion of the Commissioner, should have been written more elaborately, cannot be a reason for branding the order as erroneous simply because the Commissioner does not feel satisfied with the conclusion. In this case the ITO had made enquiries in regard to the nature of expenditure incurred by the assessee and on receiving the explanation, allowed the claim. In such a situation, the Hon'ble Court held that the order cannot be termed as erroneous simply be....
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.... India Ltd. (supra) the Hon'ble Court was considering the validity of reopening. The Hon'ble Court held that the Assessing Officer does not have any jurisdiction to review his own order and what cannot be done directly, cannot be done indirectly. It held that reopening cannot be made on a change of opinion. The learned counsel relies on para 23 of this judgment where it is held that when a regular order of assessment is passed in terms of sub-section (3) of section 143, a presumption can be raised that such an order has been passed on application of mind. 60. The learned DR, on the other hand, relied on para 15 of this judgment wherein it is held that the Assessing Officer does not possess the power of review so as to initiate reassessment proceedings or to rectify a mistake and that in such a situation, it cannot be said that the revenue is without remedy, as section 263 of the Act empowers the CIT, to review an order which is prejudicial to the revenue. 61. In the case of Sohamn Datta Processing & Finance (P.) Ltd. (supra) held that the decision and the proposition in the case of Kelvinator of India Ltd. (supra) is relevant only in the context of judging the validity of ini....
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....rect in arguing that the assessment order is anti-dated. A perusal of the assessment record and the order sheet entries disclose that the assessment order was passed on 27-4-2007. After that date there are no order sheet entries in the assessment diary. The learned DR bases these arguments on certain internal registers maintained by the Department and the manual of office procedure. A perusal of the entries in the "Current Demand" and "Collection Register" disclose that the entries are not made date-wise and in fact an entry in the case of the Precision clause (2) limited is made after the entry in the case of PSL & Co. The assessment order in the case Precision clause (2) Limited was passed on 9-5-2007 and whereas the assessment order in the case of PSL & Co. was passed on 24-5-2007. In any event, an entry passed in Current Demand and Collection Register, cannot be the basis of determination of the date of passing the assessment order. Even the learned CIT-DR is unable to pinpoint a particular date on which the assessment order is, in his view, was passed. He just gives a period of a range of 4 to 5 days. This argument is dismissed as bereft on merit. The case laws relied upon by ....
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.... evidence was given. Similarly, though the assessee claimed to have produced bills in respect of addition of fixed assets vide letter dated 26-04-2007, the Commissioner found that the claims are not corroborated by order sheet entries or the evidence on record. At page 5 paras 3 and 4 the CIT observed as follows : "The last hearing took place on 26-4-2007, and the Assessing Officer had passed the order on 27-4-2007. Even if the assessee's claim were to be accepted, the details furnished were voluminous which required enough time to examine before passing of the order. The haste in which the order was passed amply displays that there was no real application of mind by the Assessing Officer before passing the assessment order. This is further obvious from the fact that whereas the assessee had suo motu disallowed an amount of Rs. 7,08,706, being loss on demolition of Thane Club house as is evident from the statement of computation attached with the return, the Assessing Officer has devoted one paragraph (para 5.1 of the assessment order), in disallowing this amount. In his reply dated 19-7-2008, the assessee's A.R. has stated that this is an example of application of mind by the A....
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....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....
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....c., 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 Collected Refunded Utilisation Closing Bal. 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 ....
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....; 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 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 &nb....
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....tion is returned, it does not mean that the receipt becomes income. Even otherwise, as we have upheld the review under section 263, it would be open to the Assessing Officer to examine the correctness of the quantification of income accounted. In principle the method adopted by the assessee is correct and is upheld. On these facts, we examine the case laws relied upon by both the parties. (i) In the case of Taparia Tools Ltd. (supra), 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 inco....
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....rs. The amounts deducted from the cane price towards the non refundable deposits were not trading receipts of the assessee. CIT v. Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 (SC); [1988] 3 SCC 553 and Shree Nirmal Commercial Ltd. v. 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 upon 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 Mahindra Holidays & Resorts (I) Ltd., (supra) 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 c....
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....ity 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 (P.) Ltd. v. Dy. CIT 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 ....
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....tates Ltd. (supra). 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 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 Asia Resorts Ltd. (supra). 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, t....
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....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....
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.... 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 ess....
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....respective 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 exerci....
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....e. 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 be 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 prov....
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....bad 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. (i) In Rotork Controls India (P.) Ltd. (supra), 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 i....
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..... 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 Corpn. Ltd. (supra). 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 ....
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....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 Tungabhadra Industries Ltd. (supra), the learned Counsel for the assessee submitted that this judgment was reversed by the Hon'ble Supreme Court in Madras Industrial Investment Corpn. Ltd. (supra) and thi....
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.... These aspects can be examined by the Assessing Officer in the assessment order passed under section 143(3) read with section 263 of the Act after giving adequate opportunity to the assessee. 90. Perusal of papers on record clearly disclose the non-application of mind by the Assessing Officer on any of these items. Just collecting voluminous details and not perusing the same and completing the assessment in hurry by accepting the submission of the assessee at face value and without application of mind, is valid reason for invoking the powers under section 263. Though we did not approve the CIT's finding that the assessment was completed before the final date of hearing or before raising of the queries by the Assessing Officer, we agree with him on the fact that the Assessing Officer has not examined vital aspect on all the major issues and this is a clear case of non-application of mind by the Assessing Officer while passing the assessment order. It is a case where vital issues which have a phenomenal effect of determination of correct total income were not examined at all. Thus, on this account, the order passed under section 263 for both years under assessment have to be uphel....