2004 (7) TMI 296 - AT - Income Tax

Accrual of income - Validity of the order passed u/s 263 by the CIT - erroneous and prejudicial to the interest of the revenue -Treatment of time share sales income and the method of accounting adopted by the assessee - HELD THAT - As per our considered view every receipt is not an income. Only those receipts which partake the character of the income of the current year will only be taxable during the current year, whereas the portion of receipt which is though in the nature of income but not the income of the current year, cannot be brought to tax during the current year. In construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the law and not merely to the spirit of the statute or the substance of the law. In the instant case there is no dispute to the fact that the assessee company had to render services to the holder of time share unit in the next 99 years, therefore, there is no reason for taxing the receipt relatable to further 99 years, in the year of receipt itself. No material has been brought on record by the department to the effect that the assessee company is not required to render any services to the holder of the time share unit in further 99 years. On the contrary the contractual agreement is entered by the assessee company according to which the assessee company has to provide room accommodation to the time share unit holder for 99 years. Such accommodation is to be provided for 7 days in each year. It is also not the case of the department that the assessee company has debited the expenditure required to be incurred in future 99 years in providing services to the members, in the year under consideration so as to make the assessee company liable to treat the receipt pertaining to the future 99 years, as the income of the year under consideration. As per our considered view section 263 does not visualize a case of substitution of judgment of the Commissioner for that of the ITO who passed the order unless the decision is held to be erroneous. It is because the ITO has exercised the quasi judicial powers vested in him in accordance with the law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion the Commissioner, the order in question is prejudicial to the interest of the revenue, but that by itself will not be the enough to vest the Commissioner with the power to suo motu revision because the first requirement namely the order is prejudicial is absent. Any and every erroneous order cannot be subject-matter of revision because a second requirement must also be fulfilled. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of powers in this context, the Hon'ble Bombay High Court in the case of CIT v. Gabrial India Ltd. 1993 (4) TMI 55 - BOMBAY HIGH COURT observed that the exercise of powers of suo motu revision under such circumstances will amount to arbitrary exercise of power. Any other view in the matter will amount to giving unbridled arbitrary power to revising authority to initiate proceedings for revision in every case and start re-examination and fresh inquiries in the matter which have already been concluded under the law. It is quasi judicial power hedged with the limitation and has to be exercised subject to the same and within its scope and ambit. Conclusion The Tribunal held that the CIT's order u/s 263 was not justified and allowed the appeals filed by the assessee. The Tribunal emphasized that the Assessing Officer had adopted one of the permissible courses in law and that the provisions of section 263 could not be invoked merely because the CIT disagreed with the view taken by the Assessing Officer.

Summary

Issues Involved:
1. Validity of the order passed by the CIT u/s 263 for the assessment years 1995-96 and 1998-99.
2. Treatment of time share sales income and the corresponding expenses.
3. Applicability of the accounting method and industry norms.

Summary:

1. Validity of the Order Passed by the CIT u/s 263:
The appeals were filed by the assessee against the order of the CIT u/s 263 for the assessment years 1995-96 and 1998-99. The CIT observed that the accounting method employed by the assessee was mercantile and did not change from the previous year. The CIT contended that all revenue receipts should be taxed on the basis of accrual and thus, the entire time share sale proceeds should be taxed in the year of receipt. The CIT further noted that the assessee's revised return reduced the income from time share sales but did not correspondingly reduce the expenses, which was seen as prejudicial to the interest of the revenue.

2. Treatment of Time Share Sales Income and Corresponding Expenses:
The assessee derived income from hotel and lodging business and offered a portion of receipts from time share sales as income. Initially, 100% of the receipt was offered as income, but a revised return offered only 45%, with the remaining 55% kept as a reserve to be amortized over 99 years. The Assessing Officer accepted the revised return and brought 50% of such receipts to tax. The CIT argued that the entire receipt should be taxed in the year of accrual and that the expenses should be adjusted accordingly. However, the assessee contended that the 55% portion was advance income for future services over 99 years and should not be taxed in the year of receipt.

3. Applicability of the Accounting Method and Industry Norms:
The assessee justified the bifurcation of time share sales into 45% and 55% based on industry norms, citing similar practices by other companies like Sterling Resorts India Ltd. The CIT(A) had previously accepted this bifurcation for the assessment year 1996-97, recognizing it as an industry norm. The Tribunal noted that the assessee's method was in line with the contractual obligation to provide services for 99 years and that taxing the entire receipt in the year of receipt would distort the income for that year.

Conclusion:
The Tribunal concluded that the Assessing Officer's view was legally tenable and that the CIT was not justified in treating the order as erroneous and prejudicial to the interest of the revenue. The Tribunal emphasized that every receipt is not income and that only those receipts which partake the character of income for the current year should be taxed. The Tribunal allowed the appeals, setting aside the CIT's order u/s 263.