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2012 (7) TMI 651 - AT - Income TaxBusiness of selling time share units - accrual of income - mercantile-system of accounting. - holiday facilities to its members for a specified period each year, over a number of years, for which membership fees is collected either in full or in installments. - held that - there is a definite liability cast on the assessee to fulfil its promise and, therefore, it cannot be said that the entire fee received by it has accrued as income. - the peculiar nature of the activity along with the complexity attached to it as a result of which no reasonable provision for the liability can be made. Therefore, recognizing the entire receipt as income in the year of receipt can lead to distortion. 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. - Decision of Special Bench of the Tribunal in assessee s own case ACIT Versus Mahindra Holidays & Resorts (India) Ltd. (2010 (5) TMI 524 - ITAT, CHENNAI) followed. Expenditure on salary, rent, interest, repairs and furniture. - there is no material on record to show the entire amount of Rs. 1.6 crores are on account of revenue expenditure like salaries, interest, rent etc. and no part of the expenditure under the head construction expenses pending allocation includes any expenditure incurred for acquiring new capital asset. In the above circumstances, in our considered view, the CIT(A) was justified in directing the Assessing Officer to allow revenue expenditure after verifying if the amounts were for salaries, rent, interest etc. Therefore, this ground of appeal of the assessee is dismissed.
Issues Involved:
1. Addition to income of Rs. 39,20,35,431/-. 2. Verification and allowance of expenditure of Rs. 1,60,16,762/-. Detailed Analysis: 1. Addition to Income of Rs. 39,20,35,431/-: The primary issue revolves around the treatment of membership fees received by the assessee, who is in the business of selling time share units. The assessee offers 60% of the fees received as income in the year of admission and spreads the remaining 40% over the tenure of membership. The Assessing Officer (AO) taxed the entire membership fee received as income in the year of receipt, arguing that no extra expenses would be incurred in subsequent years for providing facilities to customers. The AO relied on the decision of the Chennai Bench of the Tribunal in the case of Sterling Holiday Resorts (India) Ltd. Vs. ACIT., (2007) 295 ITR (AT) 162 (Chennai), stating that the concept of deferred income is alien to the Income-tax Act. The CIT(A) deleted the addition, following the decision of the Special Bench of the Tribunal in the assessee's own case for assessment years 1998-99 to 2002-03, which was in favor of the assessee. The Special Bench held that the entire amount of timeshare membership fee receivable upfront at the time of enrollment is not chargeable to tax in the initial year due to the contractual obligation to provide services in future over the term of the contract. The Revenue argued that the decision of the Special Bench was per incuriam as it did not consider certain judicial decisions. However, the Tribunal found no merit in this argument, stating that the decision of the Special Bench, being a decision of a Larger Bench, must be followed. Consequently, the Tribunal set aside the orders of the lower authorities and deleted the addition made by the AO, allowing the ground of appeal of the assessee. 2. Verification and Allowance of Expenditure of Rs. 1,60,16,762/-: The second issue pertains to the deduction of Rs. 1,60,16,762/- claimed by the assessee as expenditure during construction. The AO disallowed the expenditure, treating it as capital in nature. The CIT(A) directed the AO to verify the expenditure and allow it if it was incurred on salaries, rent, interest, repairs, and furniture, following the Tribunal's order in the assessee's own case for the assessment year 1998-99. The Revenue contended that the CIT(A) erred in directing the AO to allow the deduction of expenditure like furniture, which is capital expenditure. The assessee argued that the CIT(A) should have allowed the appeal without remanding the matter back to the AO. The Tribunal found that the CIT(A) was justified in directing the AO to verify the nature of the expenses before allowing the same, as there was no material on record to show that the entire amount was on account of revenue expenditure. Hence, the Tribunal dismissed the ground of appeal of the assessee and upheld the order of the CIT(A). Conclusion: Both the appeals filed by the assessee and the Revenue were dismissed. The Tribunal upheld the decision of the Special Bench regarding the treatment of membership fees and directed the AO to verify and allow the expenditure incurred on salaries, rent, interest, and repairs. The order was pronounced in the open court on May 25, 2012, in Chennai.
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