9911796707
TMI Blog2003 (8) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... y distorted picture of the working results of the assessee. While substantial profits will be taxed in the year under appeal, there will be substantial losses in subsequent years. The revenue may seek such result, but we see no reason to allow it. Thus, it is not necessary to consider the ground of the assessee that the amount of Rs. 32,94,000 pertaining to the financial year 1994-95 should be excluded from the present assessment year. This is only an alternative plea of the assessee. We may however, mention that we find no merit in this plea. Admittedly, the business of the assessee commenced only on 1 -4-995 and the amounts received before commencement of business should be regarded as relating to the first financial year, i.e., 1995-96. As we are accepting the main claim of the assessee, the rejection of the alternative plea has no bearing on the result of this appeal. If the membership fee permits only membership it should be on par with entrance fee and so there seems to be some contradiction between the two statements. But the general import of item 6 of the appendix and more particularly of the accounting standard 9 itself is clear. The import of item 6 has to be seen in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment, with directions to reframe the same after giving due opportunity of being heard to the assessee and after considering a certain note regarding membership fees filed before him. The first of these appeals, viz., ITA No. 136/Hyd/2000 is directed against the above order of the Commissioner (Appeals). 4. Subsequently, the Assessing Officer completed the assessment de novo in pursuance of the above order of the Commissioner (Appeals), vide his assessment order dated 27-3-2002, and the Commissioner (Appeals) disposed off the appeal arising out of the said order of assessment, vide his order dated 9th December, 2002. The latter of these appeals, viz., ITA No. 244/Hyd/03, is directed against the said order of the Commissioner (Appeals) dated 9th December, 2002. 5. That is how, there are two appeals filed by the assessee for one assessment year before us. ITA No. 136/Hyd/2000 6. Let us first consider the appeal ITA No. 136/Hyd/2000, in which effective grounds of the assessee read as under- "1...... 2. The learned Commissioner of Appeals failed to note the difference between section 143(3) and the provisions of section 144, therefore, the order is unsound and untenable and ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same city. However, natural justice and the assessment procedures demand that the assessee be informed about the change and be given an opportunity of being heard afresh even the matters that were already heard by the earlier Assessing Officer under section 129 of the Income-tax Act. When a case is transferred under section 127 there is a change in the income-tax officer and though fresh notices need not be issued by the new Assessing Officer the assessee can claim the right to reopen the case under section 129. The officer need not issue a fresh notice but he should inform the assessee of the change so that if the latter so desires, he can ask for a rehearing - Anantha Naganna Chetty v. CIT [1970] 78 ITR 743 (AP). The Assessing Officer has issued a notice under section 143(2) dated 22-2-1999 which was served on the assessee on 8-4-1999 fixing a date of hearing on 12-4-1999. It is quite surprising that the date of hearing is 12-4-1999 and the assessment order is dated 31-3-1999. It is pertinent to note that the assessment order has preceded the date of hearing fixed. The learned Assessing Officer is quite confused as to under which section of the Income-tax Act the assessment i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate was shown in the same notice as 'DH 15-3-1999'. It appears that the notice was actually despatched for service on 10-3-1999. The date of 12-4-1999 does not appear anywhere in the copy of the notice available in the record of the Assessing Officer. The charge from the side of the appellant that it was given a date of hearing on 12-4-1999 is therefore not correct. There is also nothing in the order sheet of the Assessing Officer that he had telephonically contacted the learned A.R. of the appellant twice before 31-3-1999. However, the Assessing Officer has also not been able to produce any evidence about the actual date of service of the notice dated 12-2-1999 on the appellant. The question that arises in this regard is whether the non-service of the notice will make any difference to the validity of the assessment. The learned A.R., had submitted that after search seizure operation, the appellant heard from the Assessing Officer for the first time through the notice under section 143(2) dated 12-2-1999. In my considered view, the non-service will not invalidate the assessment order. First of all, the assessment order shows that the year under consideration is not materially affe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of account and documents were in the custody of the Department. Regarding addition on account of membership subscription, the learned A.R. had submitted a note on the accountancy principle followed by appellant in this regard and the same requires consideration by the Assessing Officer. Therefore, considering the totality of the facts and circumstances of the case, I feel it will be just and fair to set aside the assessment and restore the same to the file of the Assessing Officer to reframe the same de novo after giving opportunity to the appellant." 9. Before us, the learned counsel for the assessee stressed that after the vesting of the jurisdiction in the DCIT 4(1) Inv. consequent to the above-mentioned order of the Chief Commissioner dated 30-12-1998, the Assessing Officer apparently issued only one notice under section 143(2) and as per this notice dated 12-2-1999, the case was posted for hearing on 12-4-1999, and the same was actually served on the assessee only on 8-4-1999. A copy of this notice filed by the assessee originally before the CIT(A) may be seen at page 5 of the Department's paper-book. In this notice, the date of hearing was originally mentioned as 15-3-1999, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. I am leaving for Bhimavaram. I wanted a short adjournment. Kindly adjourn the matter for two days. I shall come and attend on 19th. Kindly do the needful and oblige. Thanking you, Yours sincerely Sd/- (Srinivasachary) There is another letter dated 22nd October, 1998 of the authorised representative for the assessee, copy of which may be seen at pages 6-7 of the Department's paper-book. In that letter, some information called for by the Assessing Officer was furnished, and this letter ends with a request for grant of further time to furnish the rest of the information. Similarly, there is another letter-dated 16th November, 1998, in which M/s. Raghavachari and Co. made a request for further time. There is a further letter dated 23-11-1998 addressed by the Assessing Officer to the assessee, which may be seen at page 3 of the second paper-book of the Department. The said letter reads as under- To The Managing Director, M/s. Treasure Island Resorts Pvt. Ltd., 8-2-592, Road No. 12, Lapaloma Caves Apartments, Banjara Hills, Hyderabad. Sub: I.T. Asstt. - Asstt. Year 1996-97-Your own - Calling for information Sir, Despite granting several opportunities the details called for have not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of K. Venkataramana and Budha Appa Rao v. CIT [1987] 168 ITR 747, in which it was held, that when there is a change of incumbency of office during pendency of the assessment proceedings, rehearing is not necessary. He has also pointed out that, as per the clear findings of the CIT(A), which are not controverted, the assessment was completed on 31st March, 1999, and as per section 153(1) of the Act, the limitation is saved if the assessment is made before the date of limitation, and it is not necessary for the order to be communicated to the assessee before the said date. For this proposition, he relied upon the decision of the Hon'ble A.P. High Court in the case of K.U. Srinivasa Rao v. CWT [1985] 152 ITR 128. In that case, it was held that an order is deemed to have been made on the date on which it purports to have been made, even though it is served later. He further contended that the date of hearing on the notice dated 12-2-1999 must have been changed unauthorisedly and without the knowledge of the Assessing Officer from 15-3-1999 to 12-4-1999. He pointed out that on the office copy of this notice, dated 12-2-1999 which is with the Assessing Officer, the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he jurisdiction of the authority, if he had seisin at the initial stage when the proceedings arose and if the authority while acting had lawfully assumed jurisdiction to proceed to Act. Misdirection of the proceeding would merely vitiate the course of the proceeding but that supervening irregularity or illegality has to be set right by putting the proceeding back on its rails. When such error is curable, it is the duty of the court to cure it. Where the Income-tax Officer commits an error in the course of completing the assessment proceeding after having duly assumed jurisdiction, it is the duty of the appellate authority to remove the particular defect or irregularity occurring in the course of the proceeding." 14. The predecessor Assessing Officer had legitimate jurisdiction over the case. This aspect of the matter was not questioned by the learned counsel for the assessee before us. The Chief Commissioner had passed the notification dated 30-12-1999 vesting jurisdiction in DCIT 4(1)(Inv.). Such notification was also endorsed to the Assessing Officer for being communicated to the assessee. There is no reason to assume that the said notification was not duly sent by the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer for fresh consideration as done in the present case. It has to be remembered that, as already mentioned, this is not a case where the Assessing Officer did not have legitimate jurisdiction at any stage. Both the predecessor and the concerned Assessing Officer did have legitimate jurisdiction and so any supervening irregularity can be rectified. Further, the distinction sought to be made by the learned counsel for the assessee between an assessment under section 143(3) and the assessment under section 144 does not seem to have any relevance. It makes no difference so far as the powers of the Commissioner of Income-tax (Appeals) are concerned, whether the assessment is made under one section or the other. In either case, if the Commissioner (Appeals) finds that sufficient opportunity was not given to the assessee and that it is the only defect in the assessment order, he can save the assessment by remitting the matter to the file of the Assessing Officer with a direction to frame the assessment de novo after giving due opportunity of being heard to the assessee. That is exactly what the CIT(A) has done in the present case. This is a case where, at the most, princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such order or other orders in the interest of justice." 17. We have already extracted the directions given by the CIT(A) in his order dated 10-12-1999, while setting aside the original assessment made under section 144 of the Act dated 31-3-1999. It may be noticed that the CIT(A) mentioned that the assessee has submitted a note on the accounting principle followed by the assessee. In the impugned order, the Assessing Officer has given a full extract of the said note filed before the CIT(A) in the earlier proceedings. The said note reads as under: - "Note on membership fees collections M/s. Treasure Island Resorts (P.) Ltd. has commenced its business as a club to provide service to its members. It charges rates from members and non-members on account of various kinds of services it provides to both members and non-members. It provides the following facilities at its Gandipet Club: 1. Cottages 2. Swimming Pool 3. Disco 4. Indoor Games like billiard, table tennis etc. 5. Go-Kart-Prototy race vehicles. 6. Dirt Bikes 7. Horse ride 8. Camel Ridding etc. Besides this it does excellent catering of both Chinese and continental foods. Apart from this it has two conference halls. The fee for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows: 'In the case of Revenue Recognition for membership fees, it must be noted that if membership fee permits only membership, the fee should be recognised when received. However, if the membership feel entitles the member to receive publications or services to be provided during the year, it should be recognized on a systematic and rational basis having regard to the timing and nature of all services provided.' Based on the above accounting standard the company has taken to revenue 20 per cent of the collection. This is on account of the reason that the membership entails the members to services provided during the year on preferential basis and free/concessional rates. The Accounting Standard stipulates that the revenue should be recognized on a systematic and rational basis having regard to the timing and nature of all services provided. The company is charging payment from the permanent members and such total collection works out to Rs. 7,500 per member on an average. The average membership fee from the discounts and the company has given discounts and several memberships as complimentary for almost all types of memberships offered by the company. Further the one time free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The entire capital including the borrowed funds and, the subscriptions totals to Rs. 96,65,764. It is clear that the entire subscription is utilized or creation for fixed assets for the use of the members. Further the appellant has claimed depreciation on the fixed assets which has been allowed by the Assessing Officer to the extent of Rs. 23,25,217. The assets created by the appellant at the resort utilizing the subscription of the members are available for the use of the members. The depreciation on the assets is also claimed by the appellant. The subscription fee received from the members utilised for investment in the assets is clearly the income assessable for the last year. Without considering the subscription as income, it is against the principles of accountancy to allow depreciation expenditure on the assets created by utilising the subscription. Since depreciation is allowed as an expenditure on the assets, the subscription received by the appellant utilized for the purpose of investment in the fixed assets is to be treated as income for this assessment year. Since the depreciation expenditure is allowed, the subscription is to be treated as an income for this assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for the assessee to file before us, the bye-laws for all categories of members. In pursuance of our requirement in terms of Rule 29 of the Income-tax Appellate Tribunal Rules, 1963, the assessee has filed the general bye-laws for all categories of members bye-laws for life members, bye-laws for permanent members bye-laws or temporary members. 21. The Assessing Officer himself reproduced in his order bye-laws for the privileged members. We required the assessee to file before us the bye-laws for all the remaining categories of members, because we wanted to verify the contents of the above note filed before the CIT(A) in the earlier proceedings. Copies of the bye-laws for the other categories of members filed at our instance may be seen at pages 31 to 36 of the assessee's paper-book. 22. The assessee has also filed before us a note on the services rendered to various categories of members. The said note reads as under:- Privileged Membership: The amount collected for this membership is around Rs. 15,000 to Rs. 20,000 and the member will have access to the club all round the year. This membership is for lifetime. The following facilities are provided to this category of members free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of cottages in a calendar year for the privileged members, which is not given to life members. The permanent members get all the facilities of a life member and they are also excluded horn the free enjoyment of cottages. Permanent members, however pay a monthly subscription of Rs. 125 per member, and this monthly subscription is not required of be paid by the Life Members and this is the only difference between the Life Members and Permanent Members. The temporary members enjoy all the facilities of the life member and permanent members. They are also excluded from the free enjoyment of cottages. Unlike the permanent members they do not pay the monthly subscription. The membership fee received from the privileged members life members and permanent members is spread over by the assessee over a period of five years for revenue recognition, whereas the membership fee collected from the temporary members is spread over only two years, as their membership is only for two years. 23. At our instance the learned counsel for the assessee has filed before us, details of the number of members under each category. Those details are as under :- -------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies Act, 1956 or in any other statute. The pronouncements of the Institute see to describe the accounting principles and the methods of applying these principles in the preparation and presentation of financial statements so that they give a true and fair view......" 26. Learned counsel for the assessee has filed before us a copy of the Accounting Standard No. 9, which may be seen at pages 26-30 of the assessee's paper-book. The relevant portion of the said Standard reads as under:- "10. Revenue from sales or service transactions should be recognised when the requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, recognition should be postponed. 11. In a transaction involving the sale of goods...... 12. In a transaction involving the rendering of service, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. Such performance should be regarded as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he timing of the costs relating thereto. 4. Admission fees Revenue from artistic performances, banquets and other special events should be recognized when the event takes place. When a subscription to a number of events is sold, the fee should be allocated to each event on a systematic and rational basis. 5. Tuition fees Revenue should be recognised over the period of instruction. 6. Entrance and membership fees Revenue recognition from these sources will depend on the nature of the services being provided. Entrance fee received is generally capitalized. If the membership fee permits only membership and all other services or products are paid for separately, or if there is a separate annual subscription, the fee should be recognized when received. If the membership fee entitles the member to services or publications to be provided during the year, it should be recognized on a systematic and rational basis having regard to the timing and nature of all services provided. 27. It may be seen that item 6 of the above Appendix is relevant in the context of a Club. As we shall see presently, there seems to be some confusion about item-6 of the Appendix, but the general import of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s reduced to two years, and their membership fee is recognised at 50 per cent in each year. 29. In the light of the above, he pleaded that the Accounting Standards are to depict a fair and correct picture of the working results and the financial position of the assessee, and so, there was no reason for the Assessing Officer to have ignored the results shown by the assessee on the basis of the Accounting Standard No. 9. 30. He also invited our attention to sub-sections 3A, 3B and 3C of section 211 of the Companies Act and pointed out that with effect from 31-10-1998, it has been made statutorily mandatory that the Profit Loss Account and the Balance Sheet of a company shall comply with the Accounting Standards. Even though this requirement came into effect from 31-10-1998, and is not applicable for the earlier years, it is pointed out that the Accounting Standards were made mandatory by the Institute of Chartered Accountants, as already mentioned, with effect from 1-4-1991. It is further claimed that the only objection of the Assessing Officer was that the Accounting Standard 9 is only recommendatory. He has not disputed that the assessee has followed the said Standard. It is also p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2001] 79 ITD 196 (Ahd.) (b) H.M. Constructions v. Joint CIT[2003] 84 ITD 429 (Bang.) He also filed before us a copy and relied on decision of the Hyderabad Bench of the Tribunal in the case of Comp-U-Learn Tech (I) Ltd. [IT Appeal No. 672 (Hyd.) of 2001 dated 4-4-2002] for the assessment year 1998-99. 32. In the light of the above decisions, it is pleaded that the assessee has fairly disclosed the working results, and as there is a continuing liability on the part of the assessee to provide services either free of charge or at reduced rates to its members, it is unfair to regard the entire amount of Rs. 87,86,450 as the income of the year. It is further pleaded that if the entire amount is treated as income of the year, there would be big loss in subsequent years when there would be substantial expenditure in the from of repairs and maintenance, without matching income. It is claimed that such a situation would depict distorted results of the assessee, with huge income in the year under appeal, and huge losses in the subsequent years, and it would be totally unfair to the assessee and would render serious injustice from revenue angle. 33. The learned Departmental Representative on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Permanent Membership : The membership fee collected is Rs. 8,000 to Rs. 10,000. This is a one time fee collected in order to allow the members and is not refundable. Monthly subscription of Rs. 125 is collected over and above the charges for use of other facilities. This membership is also for life. No. 4 Temporary Membership : Is generally given few officers of Army temporarily for one year as on now we have 120 membership. No membership fee is collected from these members except for monthly subscription of Rs. 50 per member. No. 5 Honorary Membership : There are honorary members among the four card holders i.e., these are members from whom no fee is collected and monthly subscription is collected. Q. Have you returned any amounts to any members out of the 'Membership fees' collected. A. So far, we have not returned any fee collected. As per the bye-laws there is nothing written as refundable. However, if some members are not happy we have an intention to return the membership fee. Q. Does the income offered in the P L Accounts filed with the I.T. Returns include membership fee. A. The amount collected on account of any membership of different types in a year i.e., the membership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admitted and the membership fee collected from all the categories of members is not refundable. In the circumstances, it is pleaded that the membership fee collected from all categories of members is liable to tax. In this context, he also relied on the decision of the Hon'ble Patna High Court in the case of CIT v. United Club [1986] 161 ITR 853, in which entrance fee was held to be a revenue receipt. He submitted that as, at any rate, it is not proved that any services are provided free to life, permanent and temporary members, Accounting Standard No. 9 does not apply, so, the Assessing Officer was justified in bringing to tax the membership fee of Rs. 87,86,450. It is also pleaded that there is no concept of deferred revenue expenditure in income-tax, and analogously revenue recognition in respect of receipts, also should not be deferred. 35. We are of the view that the assessee deserves to succeed. It requires to be remembered that the impugned assessment is made consequent to the directions of the Commissioner of Income-tax (Appeals) while setting aside the original assessment. Before the Commissioner (Appeals) in the first round, the assessee had filed detailed note indicatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on whether membership fee collected is refundable or not. It applies even when the amounts collected are non-refundable provided the other specified conditions are satisfied. As already mentioned, there is no basis for the remark of the Assessing Officer that there is no guarantee that the members will get services beyond one year. We understand that the club is still in existence and the members continue to avail of the facilities. The claim of the assessee has to be examined on the assumption that the club will continue in business and not on the assumption that it will be wound up. Similarly, the remark of the Assessing Officer that Accounting Standard is only recommendatory in nature has no basis. It is pointed out by the learned counsel for the assessee that accounting standard has been made mandatory by the Institute of Chartered Accountants of India with effect from 1-4-1991 and no auditor certifying accounts of a company can afford to ignore it. 38. Further, the remark of the Assessing Officer that the AS-9 is only recommendatory implies admission on his part that the assessee is under an obligation to render services to its members on a continuing basis, and as such, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fundable. The contention that the assessee is not under an obligation to render services free or at reduced rates to its various categories of members except the privileged members is raised for the first time before us by the learned Departmental Representative. He made an exception in the case of privileged members only because bye-laws relating to this class of members was available before the Assessing Officer. As already mentioned, the Assessing Officer did not give any specific treatment even to the membership fee collected from the privileged members nor did he examine any of the privileged members to throw doubt on the genuineness of the bye-laws relating to them. In these circumstances, we do not find any reason to accept the plea of the learned Departmental Representative that the assessee is not under an obligation to render services to various categories of its members on a continuing basis. 40. Even the Commissioner of Income-tax (Appeals) did not mention that the assessee was not under an obligation to render services either free or at reduced rate as claimed by it. He disallowed the claim of the assessee for spread over of its income for altogether a different reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer or the Commissioner of Income-tax (Appeals) to dispute the contents of the said note. So, we have to conclude that the assessee is under an obligation to render the various services either free or at reduced rate on a continuing basis to its various categories of members. Except in the case of temporary members, such liability is permanent. 42. It has been explained before us that the assessee has to maintain livestocks like horses and camels, swimming pool, tennis lawns, cottages, etc. for the use of the members. The cottages are provided with thatched roofs to create an eco-friendly atmosphere. These facilities entail substantial expenditure for years together. 43. Whenever there is a receipt giving rise to a liability, a provision can be created against the receipt for the liability. This proposition is now well established in view of the decision of the Apex Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 the relevant portion of the head-note of which reads as under:- "The expression 'profits or gains' in section 10(1) of the Income-tax Act has to be understood in its commercial sense and there can be no computation of such profits and ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee's choice of the system of accounting determines whether profits are to be actually charged when they accrue or when they are received or at some other point of time." (Kanga Palkhiwala's the Law and Practice of Income-tax, Eighth Edition P. 1163) After considering the above remarks of the learned authors, the Hyderabad Bench of the Tribunal in the case of Meera Ceiko Pumps (P.) Ltd. [IT Appeal No. 652 (Hyd.) of 2001] for the assessment year 1994-95, in its order dated 21-6-2002, observed in para 5.7 thereof that even when the method of accounting adopted is mercantile system, taxability of a receipt may be postponed when the receipt entails a liability to be met in future years. In this view of the matter, it has to be held that all the amounts received by the assessee as the membership fee do not accrue as income in the same year. In view of the continuing liability, allocation of income over different years is permissible. 45. We have also to reject the contention of the learned Departmental Representative that the provisions of section 145 are attracted in this case. This is not a case where the accounts are incomplete or incorrect. When the duly mandated account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial profits will be taxed in the year under appeal, there will be substantial losses in subsequent years. The revenue may seek such result, but we see no reason to allow it. 49. In the view that we have taken of the matter, it is not necessary to consider the ground of the assessee that the amount of Rs. 32,94,000 pertaining to the financial year 1994-95 should be excluded from the present assessment year. This is only an alternative plea of the assessee. We may however, mention that we find no merit in this plea. Admittedly, the business of the assessee commenced only on 1 -4-995 and the amounts received before commencement of business should be regarded as relating to the first financial year, i.e., 1995-96. As we are accepting the main claim of the assessee, the rejection of the alternative plea has no bearing on the result of this appeal. 50. Before we conclude, we may mention that there appears to be some incongruity in item 6 of the appendix to the accounting standard 9, which we have extracted hereinabove. While it states that entrance fee is generally capitalised, it proceeds to state that when membership fee permits only membership and all other services are paid for sepa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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