2010 (10) TMI 717 - AT - Income Tax

Revenue Recognition - AS 9 - capital contribution of this year as well as the next four years as income of the appellant -Regarding membership fees - Held that - a clear right is given by the assessee-company to the members to utilise its capital facilities for a period of 99 years for discharge of agreed quantities of effluent. - Thus the one-time membership fee is not in fact in return for any obligation or services rendered by the assessee in one year. It is a receipt in advance for an obligation to be rendered in future. Thus it cannot be said that income has actually accrued to the assessee in one year even though it might have received it in one year. Mere receipt does not ensure accrual unless an equivalent part of the agreed services by the receiver is rendered. - Following the above decision of the Special Bench in the case of Asst. CIT v. Mahindra Holidays and Resorts (India) Ltd. (2010 -TMI - 203965 - ITAT CHENNAI) we hold that the assessee was justified in deferring the revenue for taxation for four years. Accordingly this ground of the assessee is allowed.

Issues Involved:

1. Taxation of capital contributions received by the assessee.
2. Addition under section 43B of the Income-tax Act for employer's and employees' contributions.
3. Levy of penalty under section 271(1)(c) of the Income-tax Act.
4. Disallowance of consultancy fees under section 37 of the Income-tax Act.

Detailed Analysis:

Issue 1: Taxation of Capital Contributions Received by the Assessee

The primary issue in these appeals is whether the capital contributions received by the assessee from new members should be treated as revenue income in the year of receipt or deferred over several years. The assessee, a co-operative venture, argued that these contributions should be spread over five years, as they provide long-term benefits and are linked to the use of the effluent disposal system over an extended period. The Assessing Officer and the Commissioner of Income-tax (Appeals) (CIT(A)) treated the entire amount as revenue income in the year of receipt, citing sections 4, 5, and 9 of the Income-tax Act.

The Tribunal referred to the Special Bench decision in the case of Asst. CIT v. Mahindra Holidays and Resorts (India) Ltd., which held that when fees are received for services to be rendered in future, the entire amount should not be taxed in the year of receipt. The Tribunal concluded that the assessee was justified in deferring the revenue for taxation over five years, as the capital contributions were linked to future services and obligations.

Issue 2: Addition Under Section 43B of the Income-tax Act

The assessee challenged the addition of employer's and employees' contributions towards provident fund under section 43B of the Act. The Tribunal noted that the issue was covered in favor of the assessee by the Supreme Court decision in CIT v. Alom Extrusions Ltd., which held that such contributions are allowable deductions if paid before the due date of filing the return. Consequently, the addition was deleted.

Issue 3: Levy of Penalty Under Section 271(1)(c) of the Income-tax Act

The Revenue appealed against the cancellation of penalty levied under section 271(1)(c) for furnishing inaccurate particulars of income. Since the Tribunal had already deleted the addition of the entire capital contribution in the quantum proceedings, the basis for the penalty did not survive. The Tribunal cited several judgments, including CIT v. Parkash Industries Ltd. and CIT v. Reliance Petroproducts P. Ltd., which held that penalty cannot be imposed if the addition is deleted. Therefore, the Tribunal upheld the CIT(A)'s order canceling the penalty.

Issue 4: Disallowance of Consultancy Fees Under Section 37 of the Income-tax Act

The assessee claimed consultancy fees paid to Kadam Environmental Consultant and M/s. Bankim Bhatt and Co. as business expenditure under section 37. The Assessing Officer disallowed the claim, considering it not incurred wholly and exclusively for business purposes. The CIT(A) upheld the disallowance, treating the expenditure as capital in nature.

The Tribunal disagreed, stating that the consultancy fees were incurred for exploring the feasibility of treating effluents and upgrading the disposal system, which are directly related to the assessee's business. The Tribunal emphasized that no new asset came into existence, and the expenditure was for the expansion of the existing business. Therefore, the consultancy fees were allowable as business expenditure, and the disallowance was deleted.

Conclusion:

The Tribunal allowed the assessee's appeals regarding the deferral of capital contributions and the consultancy fees, and deleted the addition under section 43B. The Revenue's appeal regarding the penalty was dismissed. The Tribunal's order was pronounced in open court on October 15, 2010.

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