AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (3) TMI 480
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.... in holding the above expenditure as capital in nature and reasons given by him is unsustainable and untenable in law. 5. The ld CIT(A)- Appeals erred in rejecting the relevant evidences while relying on irrelevant factors. 6. The ld authorities below erred in disallowing the claim for deduction u/s 8-IB of the Act of Rs. 7,54,533/- relating to the project G.R Grand Residency without giving any cogent reasons for doing so. 7. The appellant denies the liabilities for interest u/s. 234B and 234D of the I.T. Act. No opportunity has been given before the levy of interest uls 234B & D of the Act. 8. Without prejudice to the appellant's right of seeking waiver before appropriate authority the appellant begs for consequential relief in the levy of interest u/s.234B and 234D. 9. For the above and other grounds and reasons which may be submitted during the course of hearing of this appeal, the assessee requests that the appeal be allowed as prayed and justice be rendered." 3. The brief facts of the case are that the assessee is a firm engaged in the business activity of builder and property developer and filed its return of income on 19/10....
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....uman Motels Ltd.,'herein after referred to as the service provider'. 'In short S.P. The S.P. have to construct the club house and provide other facilities at, their cost and run and maintain the same after admitting as members. The individual plot owners and others from the general public, can use the facility after paying the respective fees and charges to the Club as per applicable Rules. The S.P. has to share the profit after claiming the expenses for running it with the Developer In the ratio of 60:40. 6. The SP had constructed the Club House after availing loan form Punjab National bank and run the club house up to 2003. Subsequently the S.P. had become bankrupt and could not pay back the dues to the bank and, therefore, the bank took over the club house building for recovering its dues from the S.P. 7. As the ( SP) Summon Motels Ltd., became bankrupt and bank or work the charge of the club and nor services would render with the members / plot owners, therefore assessee negotiated with the bank to settle the dues of M/s Summon Motels Ltd for a consideration of Rs. 1 crore, so as to provide the club facility to the members and outsiders. AO was not convinced with ....
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....is not allowable this year." 9. Aggrieved, by the order of CIT, the assessee is before us. 10. We have heard the rival submissions and perused the material on record. The assessee submitted that the expenditure incurred by him were in discharge of legal obligation arising from the terms and conditions of the joint development agreement entered between him and Shri Rajani Kanth and Shri Krishan Prasad. The learned AR has pointed out the obligation under the joint development agreement was to extend the club facilities for the utilization of the buyer of the plot. The attention of the Bench was drawn to paragraph 5.4 and 5.5 of the joint development agreement to the following extent: "5.4 That under the scheme of development the property measuring six acres in survey NO.61/3, Byanahalli Village, Jala Hobli, Bangalore North Taluk is agreed to be developed for locating club house with three star hotel facilities and also with necessary infrastructure including restaurant and bar, Indoor games, health club, business centre, meeting hall, departmental store, swimming pool, shuttle court, tennis court, children play ground and other facilities which shall be for the use and....
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....s Murukutla Venkata Subba Rao and more particularly clause 9(e) of the sale agreement to the following effect. 9eMembership of the club to be located in schedule C herein subject to payment of monthly subscription and fees and compliance of rules and regulations. 12. It was also submitted by the learned AR that the members who have purchased the plots formed an association and they have served legal notice, as SP failed to provide club facility to the members for that our attention was drawn to page nos. 90 and 91 of the paper book. 13. Therefore , on the basis of this document, it was submitted that as the assessee was developer of the property and it was the duty of the assessee to maintain and provide the club facility to plot owners and since M/s S.P failed to run the club and the property of the club was taken over/attached by the Punjab National Bank, therefore, with a view to provide uninterrupted club facility to the plot owners, the assessee has paid a sum of Rs. 1,00,00,000/- to Punjab National Bank. 14. Secondly it was submitted that the assessee has incurred an amount of Rs. 1,00,00,000/- as prudent business man and this has been done considering the c....
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....ances, having regard to business principles. Another distinction that shall be borne in mind is that between the real and the statutory profits, i.e., between the commercial profits and statutory profits. The latter are statutorily fixed for a specified purpose. If we bear in mind these two principles there will be no difficulty in answering the question raised." 7. The Apex Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 / 24 Taxman 337, after considering various decisions of the Apex Court, held as under: "An acceptable formula of co-relating the notion of real income in conjunction with the method of accounting for the purpose of the computation of income for the purpose of taxation is difficult to evolve. Besides, any strait-jacket formula is bound to create problems in its application to every situation, it must depend upon the facts and circumstances of each case. When and how does an income accrue and what are the consequences that follow from accrual of income are well-settled. The accrual must be real taking into account the actuality of the situation. Whether an accrual has taken place or not must, in appropriate cases, be judged ....
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....5 explaining the meaning of the word 'accrued', held as under: "Section 145 of the Act deals with the method of accounting and states that in case of business income, inter alia, the same is to be computed in accordance with the cash or mercantile system of accounting. Sub-section (2) thereof authorizes the Central Government to notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. Section 211 of the Companies Act, on the other hand, prescribes the form and contents of balance-sheet and profit and loss account, which are to be maintained by the companies under the said Act. Sub-section (2) casts a duty on a company to give a true and fair view of the profit and loss of a company for the financial year in its profit and loss accounts. Sub-section (3A) adheres to the accounting standards for preparing profit and loss and balance-sheet. Sub-section (3C) defines "accounting standards" as under: "(3C) For the purposes of this section, the expression 'accounting standards' means the standards of accounting recommended by the Institute of Chartered Accountants o....
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....77 of 297 ITR): "82. Matching concept is based on the accounting period concept. The paramount object of running a business is to earn profit. In order to ascertain the profit made by the business during a period, it is necessary that 'revenues' of the period should be matched with the costs (expenses) of that period. In other words, income made by the business during a period can be measured only with the revenue earned during a period is compared with the expenditure incurred for earning that revenue. However, in cases of mergers and acquisitions, companies sometimes undertake to defer revenue expenditure over future years which brings in the concept of deferred tax accounting. Therefore, today it cannot be said that the concept of accrual is limited to one year. 83. It is a principle of recognizing costs (expenses) against revenues or against the relevant time period in order to determine the periodic income. This principle is an important component of accrual basis of accounting. As stated above, the object of AS 22 is to reconcile the matching principle with the fair valuation principles. It may be noted that recognition, .measurement and disclosure o....
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....ill ensure to the owners of the said property. The expenditure for acquiring the said advantage is an expenditure incurred purely for the individual partners. Had this expenditure been incurred by the individual owner, it would have been a capital and not a revenue expense. There is no justification and reason, why the petitioner firm made the said payment and on what terms/basis payment was made. The said expenditure cannot be treated as running business expenditure and cannot be claimed as a deduction under Section 37 of the Act by the petitioner/assessee. At best it would be payment on behalf of and at the behest of the owners, who were also partners of the petitioner. 19. Individual owners and the partnership firm are two distinct tax entities for the purpose of the Act and are liable to pay income tax on their income after reducing revenue expenditure. But in the facts of the present case while deciding the question of enduring benefit, we cannot be oblivious and ignore the practical reality that unless the partners of the petitioner want the partnership firm i.e. the petitioner cannot continue to operate and run the guest house. Therefore, while determining and decid....
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....club facility and running of club is a doing of business in the present case because the assets of the club is property of the assessee and any accretion in the value of asset will be a gain to the assessee. Similarly, the club can charge admission fees and other fees without any cap and it will result in to income which was initially shared between the assessee and SP and after 20207. it was fully accruing to the assessee. The impugned payment of Rs. I Crore in the present year to PNB in settlement of the liability of SP had resulted into ownership of assets of the club to the assessee and therefore, it is as cost of purchase of assets of club and it cannot be allowed as revenue expenditure. Had the ownership of the assets of the club was required to be vested in the purchasers of plots or their association, there might have some merit in the claim of the assessee but when as per the JDA, the ownership is vested in the assessee and the plot owners have no right in the assets of the club, it cannot be said that creating the asset of the club is a revenue expenditure. Commercial expediency 20. Regarding commercial expediency aspect, we are of the considered opinion that this m....