2010 (5) TMI 524 - AT - Income Tax

Income escaping assessment - Reopening of assessments with regard to assessment years 1999-2000 to 2001-02 - The view taken in a particular assessment year cannot bind the Assessing Officer for subsequent assessment years - Supreme Court in the case of CIT vs. Kelvinator of India Ltd. (2010 -TMI - 35201 - SUPREME COURT OF INDIA ) - Held that the tangible material available with the Assessing Officer is that the assessee has received certain subscription from customers only a portion of which has been declared as income - Therefore, it can be said that the Assessing Officer had reason to believe about the escapement of income - It is valid ground for reopening of assessment reopening for assessment year 1998-99 - On the merits of the re-opening of the assessment, here also as in other assessment years, the main contention is that all the relevant material was on the record of the department furnished at the time of the assessment of the previous year - Each issue has to be weighed on its own merits and legal principles cannot be sacrificed on the altar of consistency - the assessment for 1998-99, though re-opened after four years, is validly re-opened - In the result, the cross objections of the assessee for all the years are dismissed Accrual of income - Thousands of litres of ink have been consumed lavishly over the past more than hundred years in discussing the concept of accrual and yet there is no end to it, and rightly so as it indicates the ever changing dynamics of business and commerce. Hospitality business, though in existence since more than hundred years, it has come into limelight recently with several variants and sale of timeshare unit is one such variant with which are concerned in the present group of appeals. Membership Fees - Addition - The entire membership fee received by the assessee is treated as revenue receipt, but the entire amount collected is not recognised as revenue and offered for taxation in the year of its receipt -Regarding ratio of revenue receipt - Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT (1997 -TMI - 5591 - SUPREME Court) - Accordingly, to answer the question posed to the Special Bench, the entire amount of timeshare membership fee receivable by the assessee up front at the time of enrolment of a member is not the income chargeable to tax in the initial year on account of contractual obligation that is fastened to the receipt to provide services in future over the term of contract - Appeals are dismissed

Issues Involved:
1. Whether the entire amount of the time-share membership fee receivable by the assessee upfront at the time of enrolment of a member is the income chargeable to tax in the initial year.
2. Whether the initiation of proceedings under sec.147/148 is legal or valid.

Issue-wise Detailed Analysis:

1. Whether the entire amount of the time-share membership fee receivable by the assessee upfront at the time of enrolment of a member is the income chargeable to tax in the initial year:

The main issue was whether the entire amount of the time-share membership fee received upfront should be considered as taxable income in the initial year. The assessee argued that the fee should be spread over the term of the contract due to the obligation to provide services over the membership period. The department contended that the entire fee should be taxed in the initial year, as the concept of deferred income is not recognized under the Income Tax Act.

The Tribunal noted that the assessee is bound to provide accommodation and other services to its members over the membership period, which creates a continuing liability. The Tribunal found that recognizing the entire fee as income in the initial year would distort the true income of the assessee, as the obligation to provide services extends over several years. The Tribunal cited the Supreme Court's judgment in the case of E.D. Sassoon & Co. Ltd. v. CIT, which held that income accrues when a debt is created in favor of the assessee and the assessee has contributed to its accruing by rendering services.

The Tribunal also referred to the Supreme Court's judgment in the case of Madras Industrial Investment Corporation Ltd. v. CIT, which allowed the spreading of expenditure over multiple years to avoid distortion of profits. Applying these principles, the Tribunal concluded that the entire amount of the time-share membership fee receivable upfront is not chargeable to tax in the initial year due to the contractual obligation to provide services over the term of the contract.

2. Whether the initiation of proceedings under sec.147/148 is legal or valid:

The assessee challenged the validity of the reopening of assessments under sec.147/148 for the assessment years 1998-99 to 2001-02. The Tribunal noted that the assessment for the year 2002-03 was a normal assessment under sec.143(3) and not reopened under sec.147, making the cross objection for that year misconceived and dismissed.

For the assessment years 1999-2000 to 2001-02, the Tribunal observed that the assessments were reopened within four years. The Tribunal held that the Assessing Officer had the power to reopen the assessments if there was tangible material indicating escapement of income, as held by the Supreme Court in the case of CIT vs. Kelvinator of India Ltd. The Tribunal found that the Assessing Officer had recorded due reasons to believe that income had escaped assessment, making the reopening valid.

For the assessment year 1998-99, the Tribunal noted that the reopening was done after four years, and the first proviso to sec.147 would apply. The Tribunal found that the assessee had not fully and truly disclosed all material facts necessary for the assessment, as there was no explanation for the basis of bifurcation of the membership fee. The Tribunal held that the reopening of the assessment for 1998-99 was valid, even though it was done after four years.

Conclusion:

The Tribunal concluded that the entire amount of the time-share membership fee receivable upfront is not chargeable to tax in the initial year due to the contractual obligation to provide services over the term of the contract. The Tribunal also upheld the validity of the reopening of assessments under sec.147/148 for the assessment years 1998-99 to 2001-02. Consequently, all the appeals of the department and the cross objections of the assessee were dismissed.

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