TaxTMI 
TaxTMI 
2025 (12) TMI 1331
X X X X Extracts X X X X
X X X X Extracts X X X X
....sment year (AY) 2015-16 is treated as lead case. The revenue in its appeal for AY 2015-16 has raised following grounds of appeal: (1) Whether on facts and circumstances of the case, the CIT(A) erred is not considering routine commercial transaction of purchase of time share weeks, entered into with its subsidiaries Regal Vacation Concepts Private Limited and Royal International Holiday Club (India) Private Limited as deemed dividend under section 2(22)(e) of the Act. (2) Whether on facts and circumstances of the case, the CIT(A) erred in allowing commission expenses amounting to Rs.3.43,69,243/- as the necessary documents to prove that the transaction was not genuine and undertaken in normal course of business were not submitted by assessee during assessment proceedings. (3) The appellant craves the leave to add, amend, alter and/ or delete any of the grounds of appeal as above" (4) Whether on facts and circumstances of the case, CIT(A) right in allowing depreciation amounting to Rs. 94,57,623/-on the time share weeks capitalized during the year, by holding, inter alia, that the rights in time share weeks qualify as tangible asset and can be cons....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncome for impugned assessment year declaring income at Rs.5.05 crores. Case was selected for scrutiny. During assessment, the Assessing Officer (AO), on perusal of schedules of fixed assets in the financial account of assessee noted that assessee made addition under the head, "Land & premises". The assessee made detailed reporting in Note 10 of audited financials. The assessee made addition to the extent of Rs.3.37 crores and addition on account of office premises of Rs.19.72 crores. The Assessing Officer issued show cause notice to justify such addition. The assessee filed its reply dated 21/12/2018. The summary of reply of assessee is recorded at para 8.2 of assessment order. The assessee, in its reply stated that they are in the business of development of resorts / apartments and selling membership for the use of their members on the basis of time share vacation in the resorts. They are the legal owner of all the resort properties. Over the years, the time share weeks, assessee sold to various customers / members, permitting them to visit in the resorts / apartments during their membership period. The members were required to pay annual maintenance and management to maintain and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....); Royal International Holiday Club (India) Pvt Ltd (RIHCPL); Royal GoanBeach Resorts Pvt Ltd (RGBRPL); and International Vacation Ownership Pte Ltd. All such details are recorded at para 9.3 of assessment order. The AO issued notice under section 133(6) to all four subsidiary companies for seeking details with copy of ledger and financials of such companies. The AO recorded the details of such enquiries carried out by him. With regard to transaction with Regal Vacation Concepts Pvt Ltd, the AO recorded that purchase of time share weeks are on capital account transaction. With regard to Royal International Holiday Club (India) Pvt Ltd, the AO also recorded that the purchase of time share weeks are capital account transaction. It was further noted that assessee has shown consideration at Rs.1.87 crores to Royal International Holiday Club (India) Pvt Ltd, but as on 31/03/2015, a sum of Rs.1.98 crores is the total outstanding amount which was to be paid to them. The AO was of the view that it was not regular current account transaction as the purchase of time share weeks had not capitalised as 'Land & Office premises' for the first time in the books of assessee. The financial capabili....
X X X X Extracts X X X X
X X X X Extracts X X X X
....profits is Rs. 9,17,41,215/- With this financials an amount of Rs. 15,41,89,163/- has been advanced to the assessee in the form of time share weeks for which the consideration amount is not yet received. The Information in Balance Sheet of RIHC reveals that there is Share Capital of Rs. 100000/- and Reserves & Surplus in the form of accumulated profits is Rs. 7,55,99,155/ With this financials an amount of Rs. 1,98,95,613/ has been advanced to the assessee in the form of time share weeks for which the consideration amount is not yet received. 9.12 This is nothing but the loan or advance granted to the assessee company to take due benefits of the assets without making the payment. This facilitates the entire accumulated reserves being used by the shareholder who is the assessee in this case, without taking any dividend, which is the modus to be prohibited by virtue of section 2(22)(e) of the act. Purchase of time share weeks has been capitalised as Fixed assets under land and Office premises by taking the same from RVCPL and RIHC and the same has been advanced in kind by RVCPL and RIHC by showing as Receivable in their books. 9.13 From the perusal of the reply of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....see has shown commission to 900 individuals ranging from Rs.75/- to Rs.1.23 crores. The AO issued notice under section 133(6) to 27 persons. Out of 27 persons, 18 parties have not responded. The aggregate commission's payment to such 18 parties was of Rs.3.62 crores. The details of such parties are mentioned at para 11.3 of assessment order. The AO by referring the name of such persons, issued show cause notice as to why such amount should not be treated as unexplained expenditure. The assessee filed its reply. In the reply, the assessee furnished copy of agreement with various agents and also furnished bank statement to substantiate the payment of commission. The AO not accepted the explanation and evidences furnished by the assessee by taking view that 16 parties have not responded to his notice under section 133(6). The AO in para 11.5 of his order treated payment of commission to 16 parties aggregating to Rs.3.34 crores as unexplained. Thus, the AO while passing assessment order made disallowance of depreciation, addition on account of deemed dividend and partial disallowance of commissions expenditure. 8. Aggrieved by the additions in the assessment order, the assessee file....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion of time share weeks is not an identifiable asset. Purchase of time share weeks is similar to occupational right which cannot be considered as 'building'. The cost of construction of resort was written off by assessee during earlier years. In spite of considering the subject asset as 'intangible asset' in nature, the AO not allowed consequential depreciation on the said intangible assets. 10. The Ld.CIT(A), on considering the submission of the assessee allowed relief to the assessee by taking view that assessee is in the business of marketing of luxury resorts. It has built four resorts in Goa. The assessee introduced a unique project called "fractional ownership". It is also known as time share vacation facilities. The assessee sold time share to its various members / clients. The members were eligible to use facilities of the resorts of the assessee. Time shares were sold directly to members through consultant and commission agents. To upkeep and maintenance of the resorts, the maintenance was entrusted to one associate group company, viz. Royal Goan Beach Resorts Pvt Ltd. The assessee, in earlier year credited the sale proceeds of time share in its accounts and charge of c....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on priority basis capitalisation of 292 forfeited units which were free from encumbrance was for a sum of Rs.22.28 crores. As per actual payment made to four group entities and capitalised the value at Rs.3.37 crores and the improvement towards land and Rs.18.91 crores as a cost of improvement towards building. Since the capitalisation was made at the end of the year, the assessee claimed depreciation on building @50% of 10% which is of Rs.94.57 lakhs. The AO objected on the ground that such time share cannot be treated as tangible asset and units are not identifiable. The Ld.CIT(A) noted that the claim of assessee is that of payment to the group companies; the assessee did not procure any new asset as the legal right of ownership over the resort was altogether with assessee company. By making payments to group companies, the designated 252 units in the properties were made free from encumbrance and capitalised the cost of improvement of the property, ownership of which was already with the assessee, though it was not reflected in the balance-sheet. 11. The Ld.CIT(A) held that the entire consideration paid by assessee company to its group companies for getting the identifiable ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t by RVCPL, which was purchased by the assessee company. The assessee had capitalised such purchases in its books of account. The treatment of such payment as deemed dividend was absolutely wrong. The assessee also relied CBDT Circular No. 19 of 2017 dated 12.06.2017, wherein it was stated that any advance which is in the nature of commercial transaction, would not fall within the ambit of word "advance" as per section 2(22)(e). The actual sale proceeds on purchase of time share week was not on account of in the nature of advance at all rather it is a commercial transaction. 15. The ld. CIT(A) on considering the submissions of assessee deleted the entire addition under section 2(22)(e) by taking view that in case of RVCPL, the assessee is regularly crediting the amount on account of sale of share points and making payment through tax. On 31st March the account of RVCPL was credited a sum of Rs. 16.17 crores for purchase of time share inventory from such company. Out of which Rs. 14.39 crores for actual purchase for revocation purchases and Rs. 1.77 crores for service tax for such revocation purchase. There was no logic in the finding of AO why such transaction should not be trea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....With it's another subsidiary i.e. Royal International Holiday Club (India) Pvt. Ltd. (RIHCPL), the assessee entered into transactions for collection of commission, receipt of subscription fees for database and purchases of timeshare weeks. The AO was of view that transaction with Regal Vacation Concept Pvt. Ltd. (RVCPL) was not on account of regular transaction. The assessee has closing outstanding balance payable at Rs. 15.41 crore as on 31.03.2015, out of said balance of Rs. 14.39 crore is payable for purchase of time share weeks. With regard to transaction with Royal International Holiday Club (India) Pvt. Ltd. (RIHCPL), the assessee had a closing outstanding balance payable at Rs. 1.98 crore as on 31.03.2015. Out of the said balance of Rs. 1.87 crore is payable towards purchase of timeshare weeks on the basis of such observation AO was of the view these are not regular current account transaction, as the purchase of timeshare weeks have been capitalized as land and building for the first time in the books of the account for the year under consideration. The AO also of the view that financial capability of these subsidiaries to advance amount is nothing but an arrangement by whi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly shows that all transaction which recorded under the same ledger which was grouped as part of the current liabilities in the books of the in the books of the assessee and as part of the current assets/trade receivables in the books of the subsidiaries. Such transaction partakes the character of current account transactions and was not liable to the rigor of section. 2(22)(e) of the Act. The ld AR of the assessee further submits that these timeshare weeks acquired by assessee are held as trading assets over the years and that these trading assets were capitalized only during the year as the assessee decided not to trade in these timeshare weeks and alternatively sell these weeks as units of real estate. Thus, by going the analogy adopted by the A.O. trading asset in the past in the respective years of acquisition, these timeshare weeks could not have been treated as transaction on capital account. Even the CBDT circular No. 19 of 2017 dated 12.06.2017 also clarified that trade advances in the nature of commercial transaction would not fall within the admit of provision of section 2(22)(e). To support his submission, the ld.AR of the assessee relied upon the following decision: ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce about such commission agents. Confirmation letters from the parties were also filed. The Ld. CIT(A) held that mere receipt of confirmation and replies from the parties against the notice issues after three years cannot be sole reason to disallow the expenditure. The Ld. CIT(A) followed the decision of Hon'ble Bombay High Court in the case of PCIT vs. Chawala Interbild Construction Co. Pvt. Ltd.(supra) and deleted the addition. The sole ground of disallowance was not response to the notice under section 133(6), which cannot be the basis of disallowances of genuine expenses. Majority of parties were responded to the notice issued by AO. Seven parties filed their replies subsequent to the completion of the assessment proceedings. It was also explained to Ld. CIT(A) that the rest of agents were not in contact of the assessee as the contract got terminated and/or it was not possible for the assessee to get fresh confirmation from such parties. The commission payable to the agents was subjected to TDS which was paid to government account. No deficiency or discrepancy was point out by AO in the evidence furnished by the assessee. Similar commission was paid in earlier years and has bee....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... CIT(A), accepted the submissions of the assessee and deleted the said disallowance. Th ld.AR of the assessee submits that the assessee had constructed four resort properties situated in and around Goa namely Karma Royal Palms, Karma Royal Benaulim, Karma Royal Monterio and Karma Haathi Mahal. 21. These properties were constructed by the Assessee between 1996 to 2001. After completion of the construction of the said properties, the cost of construction was written off against the income earned by the Assessee in the form of membership rights issued to the members. The AO was of the view that as per the arrangement with members, these membership rights issued to various members upon conclusion of 80 years of tenure, would grant each of such members, a right to the share in the sale proceeds of the resort properties. Hence, the cost of construction ought to be written off against these membership fees. However, during the tenure of the membership, due to non-payment of the annual maintenance /management charges to the management company (which was in addition to one-time charges), these membership rights were forfeited and terminated. As already explained in the foregoing paras, s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nding 31.03.2001 which reflects that the substantial cost of construction was written off by the year ending 31.03.2001 and has shown all such entries in books of accounts. It was argued that these timeshare weeks so acquired by the Assessee in the year under consideration as well as in the earlier years and capitalized as part of the cost of building in the year under appeal, were subsequently sold in the form of fractional ownership of the apartments. This fractional ownership of the apartments has been offered to tax by the assessee as and by way of sale of depreciable asset and the income therefrom has been offered to tax. During these years, the assessee has offered income from capital gains on account of transfer of this fractional ownership of the resort apartments and offered the aggregate income of Rs. 170 crores. Such facts can be verified from the financial statements and the computation of income of the Assessee for the years from A.Y. 2018-19 to A.Υ. 2023-24. These facts are also recorded and acknowledged by the Ld. CIT(A) at page 9 of his Order. The assessment proceedings in case of the assessee was also carried out for some of the years and the income from su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....zing their advance in the form of purchase of share week. Both the companies were 100% subsidiaries of assessee and thus, covered by the rigor of section 2(22)(e). Thus, the assessing officer rightly invoked the provision of section 2(22)(e). 28. In support of ground No. 2 which relates to deleting the commission expenses disallowance, the ld. CIT-DR submits that assessee claimed payment of commission to their sales agent. The total commission payments were about 33% of total sales. The AO issued notice only in respect of 27 parties. The AO reasonably disallowed the commission payment only in respect of agent who has not replied. The ld. CIT(A) deleted the addition by simply accepting the contention of assessee that non-receipt of confirmation cannot be received for disallowance of commission expenses. The CIT-DR prayed for restoring the order of assessing officer. 29. In support of ground no. 3 which relates to deleting the disallowance of depreciation. The ld. CIT-DR for the revenue submits that rights pertaining to time share weeks are not in the nature of building or tangible assets. The resorts ownership which is claimed by assessee not reflected in the books of account.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2017, according to such circular any advance which are in the nature of commercial transaction will not form for invoking provisions of section 2(22)(e). On independent consideration of fact, we find that assessee was having commercial transaction with its both the group companies on account of sale of timeshare weeks. Thus, we affirmed the order of ld. CIT(A) with our additional observation. In the result, this ground of appeal is dismissed. 32. Ground No. 2 relates to deleting the commission expenses. The basis of making addition/partial disallowance of commission is recorded in para 7 of this order. We find that before ld. CIT(A), the assessee submitted that commission was paid to various commission agent for procuring business. The assessee furnished ledger of entire payment of commission. The assessee also claimed that commission was paid after deducting tax at source @ 10% wherein PAN was provided by the agents and @F 20% when the agents failed to provide their PAN. We find that assessing officer sent notice to 27 persons under section 133(6). Out of 27 persons, 16 parties have not responded. The ld. AO disallowed commission payment of such 16 parties. Before ld. CIT(A), ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ess of four luxury resort in Goa. The assessee introduced unique project for fractional ownership. Such unique concept was also known as time share vacation facilities which were sold to various members. To keep the maintenance of resort, the maintenance was interested to associated group companies. The assessee in earlier years credited sale proceeds of timeshare in accounts and charge of construction against such sale proceeds. Many of members not utilized whole week to said resort but only spent a part of week. Such timeshare weeks were converted into sometime share point. The assessee also engaged 3 group companies and allotted certain timeshare points to such group entities for marketing on identical term and condition. Contract with such companies who are also having forfeiture clause. In case purchaser failed to make the payment against membership and maintenance fees their membership were forfeited. The legal ownership of resort building was with assessee. The assessee retained the building at zero cost. In the balance sheet of assessee company, the building or the land were not reflected in earlier years despite retaining legal ownership of resort building. On coming to kn....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ere made before that the fractional ownership gains have been offered to tax in subsequent years. We also find that similar claims have been allowed in subsequent assessment years. Thus, on independent appreciation of facts, we do not find any reason to interfere with the finding of ld. CIT(A) which we affirmed with our additional observation. In the result, corresponding ground of appeal raised by revenue is dismissed. 35. In the result, the appeal of the revenue for AY 2015-16 is dismissed. ITA No. 4162/Mum/2025 (2016-17) 36. Ground no. 1 relates to allowing depreciation on timeshare weeks capitalized during the year. We find that this ground of appeal is similar to the ground no. 4 in appeal for A.Y. 2015-16, which we have already dismissed. Thus, following the principal of consistency, this ground of appeal is also dismissed with similar observation. 37. Ground no. 2 relates to deleting the addition of commission expenses. WE find that this ground of appeal is similar to the ground no. 2 in appeal for A.Y. 2015-16 wherein we have affirmed the order of ld. CIT(A) and thereby rejected the similar ground of appeal. Thus, following the principle of consistency, this gro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....disallowance. The ld. AR of the assessee submits that he supports the order of ld. CIT(A). In support of his submission, the ld. AR also relied upon the decision in Johnson & Johnson Pvt. Ltd. In ITA No. 2441 of 2013 dated 04.07.2016 passed by Bombay High Court wherein it was held that when expenditure is held for the purpose of business, no adhoc disallowance can be made for treating the same is non-business purpose. 39. On the other hand, ld. Sr. DR for the revenue submits that during assessment, the assessee failed to substantiate the fact that expenditure on foreign travel incurred on various persons was directly related to business of the assessee. The AO officer clearly held that certain persons were neither on the rolls of assessee rather was relative to the directors. The assessing officer reasonably disallowed only 25%. 40. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We find that assessing officer made disallowance of foreign travel expenses of Rs. 37,26,384/-. Such disallowances consist of 25% of expenses incurred in the foreign travel of Managing Director, John Spence Esparanca Patric....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rts Pvt. Ltd., a non-existing entity. Prestige Holiday Resort Pvt. Ltd. was converted into Prestige Holiday Resorts LLP with effect from 02.02.2017 that is during the course of assessment proceeding. The return of income was filed by Prestige Holiday Resort Pvt. Ltd. (PHRPL) on 30.11.2015. The case was selected for scrutiny. During pendency, the assessee company converted into LLP. The assessee/cross-objector vide their letter dated 14.06.2018 filed on 19.06.2018, copy of which is filed at page no. 40 to 49 of paper book brought such fact in the notice of assessing officer. Despite bringing such fact in the notice of assessing officer, the assessing officer passed assessment order on 30.12.2018 for A.Y. 2015-16 as well as for A.Y. 2016-17 in the name of non-existing entity. The assessment order passed in the name of non-existing entity is invalid and void ab initio. The assessment order has been passed under PAN of erstwhile Private Limited Company without recognizing the fact that said company was converted into LLP and was offered / allotted different PAN, copy of such PAN is already placed on record. The issue of order passed in non-existing entity is now settled by Hon'ble Supr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. The statement of managing director was also recorded wherein certain declaration was made in respect of certain income belonging to Mahagun Realtors. Subsequently, the said company was also filed return of income in the name of said non-existing company and not disclosed the fact of amalgamation and that Supreme Court noted that cross objection was filed for the first time before Tribunal and additional ground of appeal about nullity of assessment order that Mahagun Realtors (P) Ltd. was not in existence. Thus, the said decision is not applicable. Moreover, on identical set of fact, Mumbai Tribunal in ACIT vs Candor Renewable Energy Pvt. Ltd. and vice versa in ITA No. 2560-2561/Mum/2021 discuss the distinguishable fact of Mahagun Realtors Pvt. Ltd. (supra) and the principle laid down in Maruti Suzuki Ltd. was followed. 47. We have considered the rival submissions of the parties and have gone through the orders of ld CIT(A) carefully. We have also deliberated on various case laws relied by the parties. 48. We find that before assessing officer, the assessee filed an application vide letter dated 14.06.2018, copy of which is filed at page no. 38 of the paper book that assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gorically held that there is no doubt that MRPL amalgamated with MIPL and ceased to exist thereafter which is an established fact and not in contention. Further the Court held that the respondent has relied upon Spice and Maruti Suzuki (supra) whereas the facts of present case can be distinguished from the facts in Spice and Maruti Suzuki. ⮚ Secondly, the judgment by the Hon'ble Apex Court in¬ Mahagun Realtors is rendered in peculiar facts and merely holds that the law declared in the case of Maruti Suzuki cannot be applied without looking into the overall facts, in particular the conduct of the assessee and the manner of framing of assessment. ⮚ Thirdly, the judgment raises a pertinent point that the¬ business of the amalgamating entity survives even after merger, though the corporate entity may have come to an end. This point is merely to emphasize that the liability of the successor and therefore, it cannot be held that merely on account of non-existence of the predecessor, successor is not liable. ⮚ Fourthly, in para 43, the Court categorically held that the¬ aforesaid discussion is "having regard to the facts of t....