TaxTMI 
TaxTMI 
2014 (2) TMI 1451
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....nder the scheme an individual can become a member and will make the advance payment for utilisation of room nights in future. The member has an option to exercise his right and if the option is exercised then he will be entitled to avail the room nights as per the scheme. The member is also entitle to refund, at the end of the respective scheme, the surrender value of the room nights. The assessee has treated the advance received against the sale of room nights as a liability and the same is disclosed in the balance sheet under the head Liability. The assessee has treated difference between amount paid by the member and the surrender value as an expense and the same is spread over the tenure of the scheme and prorate amount is claimed as deduction. The Ld. AO has treated the advance received from the members as taxable income and has also disallowed the claim of or prorate amount of holiday membership surrender value. The Assessing Officer relied upon the order passed by the Commissioner u/s 263 for the A.Y. 2004- 05 and 2005-06. On appeal, the ld. CIT (A) has allowed the claim of the assessee by following the decision of this Tribunal in the appeal filed by the assessee against th....
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....r opts for surrender value, he shall be paid in cash by the assessee or in the alternative, the customer may opt to buy or utilise the products and services of its company and its group companies. The CIT has brought out the scheme which is the basis on which we have to adjudicate the issue for ready reference, we extract the same from Pages-8 and 9 of the CIT's order. "I have gone through the advertisement brochure in respect of all the nine schemes in operation during the relevant accounting year. The advertisement brochures are specific so far as the objective of the schemes is concerned. The primary objective in co-opting a person as a member is to provide accommodation and other facilities to avail of the facilities during the holiday period. Basic features of the scheme are similar. As on illustration, the features of Comfort Membership Scheme having a tenure of three years are detailed. This scheme provides for five room nights package at an officer price of Rs. 3,000. This scheme was effective from 1st April 2004. The terms and conditions for the membership are as follows:- i) The tenure is three years. ii) The membership is accepted....
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....oom in the assessee's hotel or resort; (ii) avail room in affiliated facilities (in such case, the receipt has to be transferred to affiliated facility); (iii) opt for surrender value; (iv) opt to utilise the surrender value, in availing of the services or purchasing the product of the company. Unless the customer / member utilises the services, or exercises his option of purchase, etc., in our opinion, income does not accrue to the assessee. Another vital point is that, if the receipt of Rs. 3,000 from member as a floating advance for room nights is income, then the ld. CIT was bound to hold that the payment of surrender value of Rs. 4,250 is expenditure to be allowed. This was not done by the ld. CIT. The assessee has furnished following statistics, which we extract for analysis. F. Year Scheme Name Op. Bal Amount 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 &....
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....71,969 2,867,675 191,675 1,501,785,969 Premium 51,47,880 26,358,075 340,000 77,492,955 Regular 92,300,000 71,381,500 1,734,000 161,947,500 Royal 281,268,960 125,668,118 772,765 172,655 405,991,658 Standard 127,406,410 57,008,754 136,045 271,040 184,008,109 Supreme 39,515,155 28,070,873 167,040 4,120 67,417,868 Golden 3,693,600 4,164,000 - - 7,797,600 Regal - - 6,569,400 25,000 6,544,400 Platinum 55,814,000 75,966,010 232,950 131,547,060 Total 2,104,658,185 1,501,700,370 64,377,925 712,390 3,541,268,240 0.02% 2006-07 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 ....
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.... the collected value. The learned Departmental Representative also filed a chart to prove his point that the refunds are not done in its entirety and that only about 30% of the amount is returned. We do not extract chart, as it will not serve the purpose for the reason that the fact remains that the assessee is obliged to refund the amount when claimed and just because a smaller portion is returned, it does not mean that the receipt becomes income. On these facts, we examine the case laws relied upon by both the parties. (i) In the case of Taparia Tools Ltd. v/s JCIT, (2003), 260 ITR 102 (Bom.), the Hon'ble Jurisdictional High Court was considering the matching concept. It held that under the mercantile system of accounting, in order to determine the net income of accounting year, the revenue and other incomes are matched with the cost of resources consumed (expenses) and the sale is required to be done on accrual basis. It held that the revenues and income earned during an accounting period, irrespective of the actual cash flow is required to be compared with the expenses incurred for the same period irrespective of the cash out flow. It held that if the matching cost is ....
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....l belonged to the members. And the fact that the deposited amounts were credited to the individual accounts of the members corroborated the circumstances that the deposits belonged to the members. The amounts deducted from the cane price towards the non refundable deposits were not trading receipts of the assessee. CIT v/s Bazpur Co-operative Sugar Factory Ltd., (1988) 172 ITR 321 (SC); (1988) 3 SCC 553 and Shree Nirmal Commercial Ltd. v/s CIT, (1992) 192 ITR 694 (Bom.) distinguished. (ii) Reversing the decision of the High Court, that the amount of refundable deposits could not in any sense be treated as income of the assessee society." [emphasis added] 73. In our opinion, the ratio laid down in this judgment which is relied upon by the ld. Sr. Counsel, squarely applies to the facts of the case, in view of the obligation fastened one the assessee to refund the amount, of advance received on sale of room nights. The scheme gives a right to the customer to take back his money with premium and in such a situation, we do not see how it could be treated as a trading receipt. (iii) In ACIT v/s Mahindra Holidays & Resorts (I) Ltd., (2010) 131 ....
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....tal services attached with the accommodation-It is not only difficult to quantify the future liability but also to reasonably estimate it-No scientific basis is shown to quantify the same even reasonably-Therefore, even if the assessee had chosen to provide for the liability in every year to comply with the matching concept, it would have been wholly unscientific and arbitrary-Averment in the affidavit filed by the assessee before the service-tax authorities to the effect that once the agreement is signed no service is left to be rendered by the assessee is not relevant in this regard-By saying so, the assessee meant that there is no taxable event under the service-tax laws once a person becomes a member-Since a definite liability is cast on the assessee to fulfil its promise, it cannot be said that the entire fee received by it has accrued as income, and recognizing the entire receipt as income in the year of receipt would lead to distortion-Only way to minimise the distortion is to spread over a part of the income over the ensuing years- Therefore, the entire amount of time-share membership fee receivable by the assessee upfront at the time of enrolment of a member is not income ....
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....tself irrespective of the fact that, as to whether, the assessee has actually availed the facilities of room nights in any one of the properties of the assessee or in its subsidiaries or associate concerns. (vi) The next decision, relied upon by the learned Departmental Representative, is in the case of CIT v/s Mangal Tirth Estates Ltd., (2008) 303 ITR 366 (Mad.). This is a case where the assessee is in the business of construction of sale of multistoried office-cum-shopping complex and has followed the project completion method. The assessee was receiving service charges separately for providing air-condition facility for the period of five years. Hon'ble Madras High Court held that the sale consideration of shops and premises was inclusive of air-condition facilities and, therefore, the entire consideration was liable to tax in the year on receipt as per project completion method. In our opinion, this case law has no relevance to the facts of the case. (vii) The next decision is the order of Tribunal, Chandigarh Bench, rendered in ACIT v/s Asia Resorts Ltd., (2005) 96 TTJ 909 (Chand.). This is a case where the assessee received advance subscription in its hotel ....
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.... appropriate it till services were rendered in lieu of which it was received an advance. The Hon'ble Court has observed as under:- "Held - Money was paid by the buyers of tractors to the assessee towards PWS charges. Services were required to be rendered by the assessee for one year after the expiry of the warranty period, that is to say, one year after the date of receipt of money. The assessee was also bound to refund the deposit to a member of the scheme if that member so desired. The assessee had refunded a sum of Rs. 19,320 to those persons who did not want to continue as members of the scheme. Every receipt was thus not necessarily income. The assessee had made adjustment of the amount received from the PWS advances account to the Workshop Income Account during the quarter in which the work of repairs and servicing was done. The amount, received one year earlier, was thus not relevant to the assessee ' s income and was dependent upon the services rendered by the assessee. The assessee did not become the owner of the amount and could not appropriate it till service was rendered in lieu of which it was received in advance. The assessee could legally claim the amou....
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....Government, which he was bound to repay when the bottles were returned. In addition to the price fixed under the Government scheme, the assessee took from the wholesalers certain further amounts, described as security deposits without the Government's sanction and entirely as a condition imposed by the assessee itself for the sale of its liquor. The moneys described as security deposits were also returned as and when the bottles were returned but in this case the entire sum taken in one transaction was refunded when 90 per cent. of the bottles covered by it were returned. The price of the bottles received by the assessee was entered by it in its general trading account while the additional sum was entered in the general ledger under the heading "Empty bottles return security deposit account". The question was whether the assessee could be assessed to tax on the balance of the amounts of these additional sums left after the refunds made out of the same. It was held that the additional amount described as security deposit by the assessee was really an extra price for the bottles and was a part of the consideration for the sale of liquor; it did not make any difference that the ad....
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....as booked a particular room in a particular property for a particular date, It is a general amount given wherein in customer / member have option of staying in many alternate properties as well as an option for refund of money with certain compensation called "surrendered value" as well as an option the members / customers to utilize / purchase products and services of the companies and its group companies. Thus, when customer / member has so many options, it cannot be said that the assessee has the right to appropriate the amount of advance on receipt, irrespective of rendering of service. Just on receipt, it cannot be said that the income has accrued to the assessee. Thus, in our considered opinion, the direction of the CIT to tax the entire advance received by the assessee on account of sale of room nights as income during the year, is bad-in-law and has to be vacated. In our opinion, the system adopted by the assessee i.e., advance on sale of room nights is shown as an advance and thereafter apportionment to income is based on the happening of the event of the customer availing the room nights, is a correct method. The alternative proposition of the learned Departmental Represe....
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....ty is a time based liability and that it occurs from year to year. On these facts, we now examine the case laws relied upon by both the parties. 77. In Bharat Earth Movers v/s CIT, (2000) 245 ITR 428 (SC), the Hon'ble Supreme Court held that if a business liability has definitely arisen in a particular accounting year, the deduction should be allowed, although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty, though the actual quantification may not be possible. Under these circumstances, the Court held that the liability is not a contingent one. It is a liability in praesenti. though it has to be discharged at a future date. In our opinion, this case law applies on all four to the facts of this case. Learned Departmental Representative tried to distinguish this case law by submitted that the liability in this case cannot be estimated with reasonable certainty. In our considered opinion, the argument is devoide of merit. The facts point out that this is the period cost and on lapse of a particular time period, the cust....
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....s also been taken in Calcutta Co. Ltd. v/s CIT, (1959) 27 ITR 1 (SC). Applying these principles to the facts of the present case, we have to hold that the liability in question is not a contingent liability as held by the CIT and as argued by the Learned Departmental Representative. The liability accrues to the assessee on the passage of time, if the customer / member does not opt for using room nights or other services. In fact, it is a liability in persenti, as a member has chosen not to avail of a room night in this year and a provision of compensation of this year is made, though payable at a latter date. 79. In CIT v/s Swarup Vegetable Products, (1991) 210 ITR 716 (All.), the Hon'ble Allahabad High Court was considering the case of an assessee who followed mercantile system of accounting and had claimed deduction in respect of a business liability before it is quantified and even when the liability is being disputed. The assessee was engaged in the business of manufacture and sale of sugar and claimed deduction of the liability that has arisen on account of difference in cane price actually paid by the assessee and one fixed by the Central Govt. in the notification, t....
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....ing the Assessing Officer to disallow the entire amount of surrendered value provided by the assessee. It is not a case where the CIT held that the estimation of liability is incorrect. It is a case where the CIT held that the liability in question is a contingent liability. Thus, this case, in our opinion, this case law goes in favour of the assessee. 81. In CIT v/s Motor Industries Co. Ltd., (1998) 229 ITR 137, the Hon'ble Karnataka High Court was considering allowability of provisions for salary / wages for unutilised leave. On facts of the case, the Hon'ble Court held that there is no certainty that the provision made for unutilised leave, will be used at all, since the liability itself is either contingent or non-existent. The leave earned during particular accounting year cannot be treated as money earned during the year. In our opinion, this case law is not of much avail. 82. Learned Counsel for the assessee relied on the judgment of Hon'ble Supreme Court rendered in Madras Industrial Investment Corp. Ltd. v/s CIT, (1997) 225 ITR 802 (SC). In this case, a company has issued debentures at a discount. There was a liability to pay the discounted amount....
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....assessee relied on the decision in National Engineering Industries Ltd. v/s CIT, (1999) 236 ITR 577 (Cal.), where the Hon'ble Supreme Court has made observation as under:- "So far as the questions referred at the instance of the assessee are concerned, the assessee has explained that the assessee has already got the benefit in regard to gratuity in other concerned years and as such it would be difficult for the assessee to press for obtaining the tax benefit once again by pressing for a favourable answer to its question in that regard. The assessee has also conceded that insofar as the proper method of deduction of a debenture premium payable at the end period of the debenture is concerned, it is a pro rata method, whereby the extra premium is to be spread over all the years which are occupied between the date of issue and the date of ultimate redemption. On the basis of this concession the assessee does not and cannot ask for a favourable answer to the questions referred at its instance in regard to deduction for the liability to pay debenture premium. Naturally when the assessee itself could not press for favourable answers in regard to its questions, the Department ....