2011 (3) TMI 890 - AT - Income Tax

Revision u/s 263 - company offers Holiday Scheme to card members at a discounted/special price on account of advance Room Nights marketed through its agents - assessment order is passed prior to the date of final hearing on 15-5-2007 - Similarly, though the assessee claimed to have produced bills in respect of addition of fixed assets vide letter dated 26-04-2007, the Commissioner found that the claims are not corroborated by order sheet entries or the evidence on record - It is a fact that the details furnished by the assessee are voluminous and require sufficient time for examination. It is also true that certain details collected, contained vital aspect of assessments Regarding accounting of advance sale of room nights - The undisputed fact is that the assessee has collected an advance, under promise to make available to its customers, rooms in at any of its hotels/Clubs owned by it or by its subsidiary as well as owned by the other affiliated destinations - More than 99 per cent of the customers surrender the room nights which is not only the amount paid but which is inclusive of a premium over and above the collected value - The CIT s direction that the receipt should be treated as income and keeping silent about repayment being treated as expenditure, gives a distorted picture and such a direction cannot be upheld - Decided in favor of the assessee Regarding Holiday Membership Surrendered Value - The surrender value is nothing but the amount paid by the customer/member plus a certain amount which is in the form of a premium or compensation - When a member does not utilise room nights in any year, including the first year, he looses his right to certain quantity of room night and gets entitled to a certain amount of surrender value - Just collecting voluminous details and not perusing the same and completing the assessment in hurry by accepting the submission of the assessee at face value and without application of mind, is valid reason for invoking the powers under section 263 - Appeals are allowed in part

Summary

Issues Involved:
1. Whether the assessment order was passed without proper application of mind and without verification of details.
2. Whether the advance received on sale of room nights should be treated as income.
3. Whether the provision for holiday membership surrender value is deductible.
4. Whether the marketing expenses and other deductions were properly examined.
5. Whether the assessment order was passed before the final hearing date.
6. Whether the Assessing Officer complied with TDS provisions.

Detailed Analysis:

1. Assessment Order Passed Without Proper Application of Mind:
The CIT observed that the assessment order dated 27-4-2007 was passed without proper verification of details and without considering vital aspects required for assessment. The CIT noted that the last hearing took place on 26-4-2007, and the order was passed the next day, indicating a lack of real application of mind by the Assessing Officer. The CIT pointed out that the voluminous details filed by the assessee required sufficient time for examination, which was not done. This justified the invocation of jurisdiction under section 263.

2. Advance Received on Sale of Room Nights as Income:
The CIT directed that the entire amount received as advance on sale of room nights should be treated as taxable income. The Tribunal, however, disagreed, noting that the assessee had an obligation to refund the money along with certain compensation if the customer/member opted for surrender value. The Tribunal held that the receipt of Rs. 3,000 for a five-night package could not be treated as income until the customer/member exercised any of the options provided in the scheme. The Tribunal emphasized that the amount received was an advance, not income, and the CIT's direction to tax the entire advance was vacated.

3. Provision for Holiday Membership Surrender Value:
The CIT directed the disallowance of the provision made by the assessee for holiday membership surrender value, terming it a contingent liability. The Tribunal, however, found that the liability was a time-based cost that accrued from year to year as the customer/member did not utilize the room nights. The Tribunal held that the provision was not a contingent liability but an actual liability that should be allowed as a deduction. The Tribunal vacated the CIT's direction but allowed the Assessing Officer to examine the adequacy of the provision.

4. Marketing Expenses and Other Deductions:
The CIT noted that the Assessing Officer did not properly examine the marketing expenses and other deductions claimed by the assessee. The Tribunal upheld the CIT's order for a fresh examination of these expenses, noting that the Assessing Officer had not applied his mind to these vital aspects during the original assessment.

5. Assessment Order Passed Before Final Hearing Date:
The CIT found that the assessment order was passed before the final hearing date (15-5-2007), indicating undue haste. The Tribunal, however, found that the assessment order was indeed passed on 27-4-2007, and any subsequent letter issued by the Assessing Officer on 30-4-2007 was without jurisdiction as the officer was functus officio after passing the order. Thus, this ground for revision was dismissed.

6. Compliance with TDS Provisions:
The CIT observed that the Assessing Officer had not examined whether the assessee complied with TDS provisions and whether any expenditure was disallowable under section 40A(ia). The Tribunal upheld the CIT's direction to examine this aspect in the fresh assessment proceedings.

Conclusion:
The Tribunal upheld the CIT's order under section 263 for both assessment years but vacated the specific directions to treat the advance sale of room nights as income and to disallow the provision for holiday membership surrender value. The Tribunal allowed the Assessing Officer to examine the adequacy of the provision and the correctness of income recognition in the fresh assessment proceedings. The appeals were allowed in part.