9911796707
TMI Blog2010 (5) TMI 524X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the Hon'ble President referred the following question also to the Special Bench by his order dated 16.1.2009: "Whether on the facts and in the circumstances of the case the initiation of proceedings under sec.147/148 in the above cases is legal or valid?" It has also been directed by the Hon'ble President to dispose of the entire appeals while considering the above two questions. As a matter of fact, the first question mentioned above constitutes the only ground raised by the department in its appeals. Similarly, the second question referred to above constitutes the only ground raised by the assessee in its cross objections. All the appeals of the department and the cross objections of the assessee arise from a combined order of the ld. CIT (A) dated 15.7.2005 for assessment years 1998-99 to 2002-03. Since the ground raised by the assessee in its cross objections goes to the root of the matter and has a bearing on the validity of the assessments, we deem it proper to deal with that question first in this order. 2. At the outset, it may be pointed out that the assessment for assessment year 2002-03 is a normal assessment under sec.143 (3) of the Act and is not an assessment re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself. It is well established that each assessment year is a separate unit of assessment and the law relating to reopening of assessment has to be applied keeping the facts and circumstances of that year only in mind. Of course, the basic requirement that there has to be a reason to believe that income has escaped assessment has to be fulfilled. There is no allegation by the assessee that the Assessing Officer has not recorded due reasons to reopen the assessments. At the same time, since the assessments are completed under sec.143 (1) of the Act, it cannot be said that a definite opinion has been expressed by the Assessing Officer. As a matter of fact, considering the wide scope given in Explanation 2 to sec.147, the Assessing Officer can be said to be of the view that income chargeable to tax has been under-assessed. It has been held by the Supreme Court in the case of CIT vs. Kelvinator of India Ltd. (320 ITR 561) that the Assessing Officer has power to reopen provided there is tangible material to come to the conclusion that there is escapement of income from assessment. The tangible material available with the Assessing Officer is that the assessee has received certain subsc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... close the ratio of 40:60 in which the income was shown. According to him, the Assessing Officer should have exercised due diligence by referring to the earlier records. It was contended that Explanation 2 will not hit the assessee because it had filed everything that was mandatorily required. It was submitted that all the relevant material including the agreements were on the record of the Department and were examined in the proceedings for assessment year 1997-98. The method of accounting was spelt out in the earlier assessment year and the Assessing Officer was required to make a mention about the same in the subsequent years only if there was a change. Similarly, in the tax audit report also only the change was to be indicated if there was any. There being no such change in the year under consideration, the Assessing Officer was not required to re-examine it and record his finding once again. Our attention was drawn to section 143(2) to point out that the notice under the said sub-section was to be issued, interalia, to ensure that the assessee has not understated the income. Therefore, having passed the order under section 143(3), it cannot be said that there was escapement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned in paragraph 6 above, each assessment year is to be considered a separate unit of assessment and the view taken in an earlier assessment year cannot bind the Assessing Officer for the subsequent assessment years. By stating this, we are not in any way suggesting that consistency should not be maintained. Consistency is undoubtedly necessary but it may not be relevant for all the issues. Each issue has to be weighed on its own merits and legal principles cannot be sacrificed on the altar of consistency. We are in agreement with the contention of the ld. DR that there is no explanation about the basis for offering part of the receipts as income for taxation. It is also true that the assessee has given three contradictory arguments to justify the offer of part receipts as income. One argument is that the assessee is required to incur maintenance expenses during the entire period of timeshare. Second argument is that the assessee has to incur reasonable direct expenses to sell the timeshare and thirdly, before the Service Tax Authorities, an affidavit has been filed to the effect that once the timeshare is sold, the transaction is over. These inherently contradictory arguments go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a)". This figure represented the amount collected from timeshare members but not recognised as revenue for the current year. The explanation of the assessee was that it had considered only 40% of the membership fees collected as income and the balance 60% was treated as deferred income. It was stated that the balance amount was to be spread over the next 33 years during which the assessee is expected to provide timeshare facilities to the members. It was also stated that in order to provide various facilities during the next 33 years, it has to incur many costs. Further explanation of the assessee was that the AMC was exclusively meant to cover the maintenance of various facilities which are an integral part of the timeshare property. These charges were for the maintenance of various electronic gadgets made available in the accommodation, furniture, kitchen equipments, central air-conditioning etc. On the other hand, the consideration for future obligations received in the initial stages is towards transfer facility from one resort to another, split, accumulation and advancing facility, domestic and international exchange, transmission, up-gradation etc. The assessee mainly relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... units. Taking us through the membership rules, it was pointed out that a person can become a member either by paying the full amount at a time or by paying instalments. The members are entitled to enjoy the holidays only after 12 or 18 months from the date of membership depending on the number of instalments that have been opted for by the member. Our attention was then drawn to the rules relating to the consequences following default in payment of instalments and the rules relating to cancellation of membership. Barring these few circumstances, the money collected by the assessee becomes its exclusive asset. From the rules it was also pointed out as to what constitutes the cost of membership. The cost of accommodation constitutes 40% of the total cost of membership and advance payment towards facilities (APF) constitutes 60% of the total cost of membership. The member was also liable to pay annual maintenance charges (AMC) for the maintenance and upkeep of the various resorts. AMC was payable irrespective of the fact whether the facilities were used or not. In essence, it was submitted, a person becoming member was actually purchasing occupancy right for a specific floor area for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 to 2416/05 & CO 7 to 11/06 10. E.I.D. Parry (I) Ltd. vs. CIT - 258 ITR 404 (Mad.) 11. CIT v. G.S.R.Krishnamurthy - 262 ITR 392 (Mad.) 12. P.L.Ganapathi Rao vs. CIT - 285 ITR 501 (AP) 13. CIT v. Mangal Tirth Estates Ltd. - 303 ITR 366 (Mad.) 14. CIT v. K.Thangamani - 309 ITR 15 (Mad.) 15. Sterling Holiday Resorts (India) Ltd. vs. ACIT -111 ITD 116 (Chenn.) Thus, the ld. D.R. strongly supported the order of the Assessing Officer. 16. Shri B.K. Khare, learned counsel for the assessee, first took us through the Directors' Report for the financial year 1997-98. This financial period comprised of 15 months and pointed out that the assessee has taken resorts under leave and licence arrangements at Goa, Mussourie and Shimla. The Members have already started availing the holidays at these resorts. From the auditor's report it was pointed out that the company has maintained proper records relating to fixed assets, stores, supplies, etc. and had adequate internal control procedures commensurate with the size and the nature of its business. Coming to the accounts proper and the notes thereon, it was pointed out that Members who paid the entire amount in lump sum, 60% of that sum was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer had no right to tinker with the accounts of the assessee if the method of accounting was systematically followed and also had been accepted by the Department. The method followed was not irrational but was sanctified by usage. Our attention was drawn to the commentary by Kanga, Palkiwala and Vyas in the Ninth Edition of the Law and Practice of Income Tax. He referred to pages 321 to 323 in Vol. I of the said treatise. Distinction was sought to be drawn between the words "accrue" and "arise". It is stated that income, profits and gains accrue when they first come into existence or the right to receive them comes into existence; but they may be said to arise when the method of accounting shows them in the shape of profits or gains. It was submitted that depending on the system of accounting, a case may very well arise where income accrues in one year, arises (according to the method of accounting) in a different year and is received at some third point of time. When the statute requires that income, profits or gains should accrue, arise or be received in the previous year, it contemplates three different points of time at which they can possibly be brought to charge, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the Supreme Court in the case of Calcutta Co. Ltd. in 37 ITR 1. In that case, the assessee had claimed expenses on development of land though no money was actually spent. The court held that the undertaking of the assessee to carry out the development was unconditional and it imported a liability on the assessee which accrued on the date of sale of the plots. It was thus an accrued liability and the expenditure which would be incurred was held to be deductible. Drawing analogy from this it was contended by the ld. counsel that the judgment was applicable not only to expenditure but also to income and it was also contended that in the present case, the assessee was bound to incur expenses on the upkeep of the resorts. Thus, the undertaking to spend the money was expenditure. His next reliance was on the judgment of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd.(225 ITR 802). On the basis of this judgment it was contended that 'expenditure' includes a liability which has accrued or which has been incurred although to be discharged at a future date. It was also argued that where the liability is a continuing one, the amount of expenditure if allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated by the assessee. Despite these facts, 60% of the collection (earlier 40%) is already taxed. If taxing the entire receipt in a single year would have given a distorted picture, taxing 1/33rd of the receipts in each year would have made the picture more distorting. It was submitted that there was no continuing obligation in most of the cases relied upon by the ld. D.R. 21. Shri T.Banusekar appeared as intervener on behalf of T.K.International. He explained the relevancy of incurring marketing expenses which was stated to be to make timesharing saleable. By and large, he supported the arguments advanced on behalf of the assessee before us with the only difference that in the case of the intervener, it did not collect any maintenance charge. Only management fee was collected which was sufficient to recover certain administrative expenses like taking care of bookings etc. He also ventured to state that what was meant by mentioning in the affidavit before the service tax authorities that no services were rendered after selling the membership was that there was no taxable event once the membership was sold. Shri Banusekar referred to the observation of the Tribunal at paragraph 15 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. D.R. stated that the basic fact remained that what the assessee sold was the occupancy right of a specified area for specified days for specified years. The AMC was collected compulsorily. Depreciation and marketing expenses were allowed and when a person became a member, he got a television as gift which was allowed as revenue expenditure. Therefore, there is no logic to incur any marketing expenditure in future and how can it be matched with the revenue which is collected today. As an illustration, he referred to the AMC/ASF chart showing the amount charged to members per room night for each category of apartment. It was submitted that the charges collected on annual basis was sufficient to carry out the normal maintenance. Referring to paragraph 5 of the Membership Rules, it was submitted that the mere statement by the assessee to treat certain portion as Advance Payment towards Facilities (APF) does not make the receipt nontaxable. Referring to paragraph 5.1 in the revised Membership Rules, it was submitted that unlike the previous Rules, there was no bifurcation about the cost of membership. It was submitted that in fact, the commentary of the ld. authors Kanga & Palkhival ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itially granted membership for 33 years which was later reduced to 25 years. The entire membership fee received by the assessee is treated as revenue receipt, but the entire amount collected is not recognised as revenue and offered for taxation in the year of its receipt. During the first three years of its operation, the assessee recognised 40% of the revenue as income in the year of receipt and from 4th year onwards, it started recognising 60% of the receipt as income in the year of receipt. The balance amount was equally spread over the period of membership i.e. 25 or 33 years, as the case may be. The case of the assessee is that though it has received the entire amount in one year only, its obligation to the members remain spread over the period of membership and therefore, part of the fees are recognised as income in the subsequent years. There is no basis for recognising the income in the ratio of 40:60 and it is stated to be as per industry norms. The basis for the ratio of 60:40 is stated to be that with experience, the assessee has become wiser. The case of the revenue is that having received the income in the first year itself, the same should be recognised as income in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period that they had worked as managing agents of the respective companies. It was argued on behalf of the Sassoons that it was a condition precedent to the earning of the remuneration that they fulfilled the terms of their employment and completed the period for which the remuneration was payable to them and the service for the particular period was a condition precedent to their earning the remuneration for that period. Since the stated period of one year was not over, no remuneration was payable to the Sassoons till the end of the year and it did not become a debt due by the companies to the Sassoons. Therefore, according to the Sassoons, no income accrued to them. On the other hand, it was urged on behalf of the transferees that though under the deed of assignment, they were paid the whole of the commission, they had merely earned the commission for the period of actual services rendered by them to the company. Even though the ascertainment and the payment came later it made no difference to the accrual of income which could be referred back to the period during which the income was earned and accordingly whatever amount was earned by the Sassoons during the respective periods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words a debitum in praesenti, solvendum in futuro it cannot be said that any income has accrued to him. The mere expression "earned" in the sense of rendering the services etc. by itself is of no avail." From the above observations, it is evident that two conditions are necessary to say that income has accrued to or earned by the assessee. They are, (i) it is necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise, and (ii) a debt must have come into existence and he must have acquired a right to receive the payment. In the present case, a debt is created in favour of the assessee immediately on execution of the agreement. However, it cannot be said that the assessee has fully contributed to its accruing by rendering services. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there. Sometimes, if the assessee is not able to provide accommodation in any of its notified resorts, it will try to procure alternate accommodation. This also will entail additional expenditure on the part of the assessee over and above paying liquidated damages to the assessee. Unlike the case in Calcutta Co. Ltd. v. CIT (37 ITR 1), the liability in this case is difficult not only to quantify but also to reasonably estimate it. The liability is undoubtedly there. However, no scientific basis has been brought to our notice to quantify the same even reasonably. Just as life insurance premium or provision for encashment of leave can be quantified reasonably on actuarial basis, there is no such method brought to our notice to quantify the liability of the assessee in the present case. In the case of life insurance, the premium is computed on actuarial basis only for the life assured whose longevity can be reasonably estimated. In the case of encashment of leave, despite the change in the number of employees, reasonable number of retirements every year can be estimated and hence the provision thereof is not rendered that difficult. However, in the case before us, the membership is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yet to crystallise but loaded with uncertainty of the event to cause a liability, there is no justification to accept the plea of the assessee. On the other hand, the Supreme Court observed that liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. It was further observed that a past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It also observed that for a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation (underline by us). If we consider the facts in the present case, the past event is admitting a person as a member with a promise to fulfil the obligation of providing him accommodation for one week every year for the next 33/25 years. It is not an ordinary obligation. In fact, in our view, the obligation is heavier than that in the case of sale of goods. In the case of sale of goods, the goods are already in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n weather can also affect tourism. Further, availability of rail or air reservation can also affect tourism. The possibility of leave travel concession (LTC) getting lapsed can see sudden spurt in tourism. These are only a few illustrations which can affect the demand for accommodation either way. There may be many possibilities which may not come to mind but may put the assessee into tremendous pressure. All these factors are such which are twined with the normal human life and hence are not only certain to occur but also makes it difficult to reasonably estimate the probable outflow of resources. Moreover, as mentioned earlier, most of the grievances are settled by Consumer Forum and it can be anybody's guess as to what damages the Forum will award. Some orders of the Consumer Forum awarding damages to the complainants have been placed on record. Considering the difficulty in estimating reasonably the obligation in monetary terms, no provision can be made. 31. We have 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. We have also considered the peculiar nat ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
