2013 (9) TMI 672 - AT - Income Tax

Undisclosed income - Deferred income - Club membership - taxability of 60% or 100% of receipt - Held that - membership fee alone is not the obligation collected by the assesseecompany from its members. The assessee-company levies annual charges for the upkeep and maintenance of the resorts and their equipment. Whenever a member occupies his holiday home portion, he is charged for utilities like power, water, etc. The funds necessary for the annual services rendered by the assessee-company to its members are thus annually collected from the members themselves. Therefore, such expenses need not be reserved from the membership fee collected from the members at the time of admission - liability of the assessee is to maintain the assets and properties as a whole for carrying on its business and not for a particular member. The assessee is apportioning the membership fees between 60 per cent. and 40 per cent. on the principle of individual liability existing between the assessee and its members. The concept of individual liability is hypertechnical - Therefore, it is very difficult to agree with the contention of the assessee company that the revenue model of apportioning the membership collection between 60 per cent. and 40 per cent. is justified. We find that the revenue model adopted by the assessee is based on hypothesis and not on facts. On the other hand, the revenue model of treating the entire membership fee collection as income of the year of collection proposed by the Assessing Officer is more justified - But in view of the decision of special bench in ACIT Versus Mahindra Holidays & Resorts (India) Ltd. 2010 (5) TMI 524 - ITAT, CHENNAI - Decided in favour of assessee. Expenditure on procurement of furniture - whether revenue expenditure in nature - Held that - Furniture is a capital asset. Rules have provided separate rate of depreciation in the case of furniture and fixtures. They are distinct block of assets. Therefore, the expenses incurred for procuring furniture cannot be allowed as a deduction in the nature of revenue expenditure. As the furniture was not used for the purpose of the business, depreciation also cannot be granted. Therefore, the direction of the Commissioner of Income-tax (Appeals), as far as it related to furniture is concerned, we vacate the same and hold that the expenditure incurred for procuring furniture needs to be disallowed - Decided against assessee. Disallowance of software expenses - Held that - assessee had acquired licence to use the software for a period of three years. Every year the assessee is making payment as licence fees. As rightly pointed out by the Commissioner of Income-tax (Appeals), it is only a payment of licence fees and the assessee has not acquired any rights. The assessee was having only a permissive right to use the software. The assessee is not enjoying any copyright. In other words, it has not become the asset of the assessee-company. Therefore, the Commissioner of Income-tax (Appeals) is justified in treating the amount of ₹ 66,97,954 as revenue expenditure deductible in computing the income of the assessee-company - Decided against Revenue.

Issues Involved:
1. Addition of membership fees to income.
2. Verification and allowance of specific expenditures.
3. Set-off of losses from an amalgamating company.
4. Classification of market research expenditure.
5. Classification of software expenses.
6. Classification of furniture expenses.

Detailed Analysis:

1. Addition of Membership Fees to Income:
The primary issue raised by the assessee was the addition of Rs. 61,78,71,246 to its income. The assessee's business involved running holiday homes on a time-share basis, where 60% of membership fees were recognized as income in the year of collection, and 40% were deferred over 24 years. The Assessing Officer (AO) and Commissioner of Income-tax (Appeals) (CIT(A)) disagreed, treating the entire fee as income for the year of collection, citing the matching principle of accountancy and precedent from Sterling Holiday Resorts (India) Ltd. v. Asst. CIT [2007] 295 ITR (AT) 162 (Chennai). However, the Tribunal followed the Special Bench decision in the assessee's own case (Asst. CIT v. Mahindra Holidays and Resorts (India) Ltd. [2010] 3 ITR (Trib) 600 (Chennai)), which justified the 60-40 split. Thus, the addition was deleted, and the issue was decided in favor of the assessee.

2. Verification and Allowance of Specific Expenditures:
The assessee contested the CIT(A)'s direction to the AO to verify and allow expenditures of Rs. 3,12,77,264 if incurred on salaries, rent, interest, repairs, and furniture. The Tribunal upheld the CIT(A)'s direction, as it followed the Tribunal's order for the earlier assessment year 1998-99. However, for furniture expenses, the Tribunal agreed with the Revenue that such expenses are capital in nature and should not be allowed as revenue expenditure.

3. Set-off of Losses from an Amalgamating Company:
The assessee's claim for set-off of losses amounting to Rs. 2,35,60,140 from M/s. Mahindra Entertainment Ltd. was dismissed as not pressed.

4. Classification of Market Research Expenditure:
For the assessment year 2007-08, the assessee's claim that market research expenses of Rs. 85,28,395 were revenue in nature was rejected. The Tribunal agreed with the lower authorities that these expenses were capital in nature, as they were incurred for a new project, which was ultimately abandoned.

5. Classification of Software Expenses:
The Revenue's appeal contested the deletion of software expenses of Rs. 66,97,954 (2006-07) and Rs. 39,59,287 (2007-08). The Tribunal upheld the CIT(A)'s decision that these were annual license fees, not capital expenditures, and thus deductible.

6. Classification of Furniture Expenses:
For both assessment years, the Tribunal agreed with the Revenue that furniture expenses are capital expenditures and should not be treated as revenue expenditures. The CIT(A)'s direction to allow such expenses was vacated.

Conclusion:
The appeals by both the assessee and the Revenue were partly allowed. The Tribunal's decisions reflected adherence to precedents and a detailed examination of the nature of the expenditures and income recognition principles. The orders were pronounced on October 17, 2012, at Chennai.

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