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TMI Blog2010 (5) TMI 524X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the altar of consistency - the assessment for 1998-99, though re-opened after four years, is validly re-opened - In the result, the cross objections of the assessee for all the years are dismissed Accrual of income - Thousands of litres of ink have been consumed lavishly over the past more than hundred years in discussing the concept of accrual and yet there is no end to it, and rightly so as it indicates the ever changing dynamics of business and commerce. Hospitality business, though in existence since more than hundred years, it has come into limelight recently with several variants and sale of timeshare unit is one such variant with which are concerned in the present group of appeals. Membership Fees - Addition - 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 -Regarding ratio of revenue receipt - Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT (1997 -TMI - 5591 - SUPREME Court) - Accordingly, to answer the question posed to the Special Bench, the entire amount of timeshare membership fee rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment for assessment year 2002-03 is a normal assessment under sec.143 (3) of the Act and is not an assessment reopened under sec.147 of the Act. Therefore, so far as the cross objection of the assessee for assessment year 2002-03 is concerned, it is misconceived and hence dismissed. 3. Out of the remaining four years, the assessment for assessment year 1998-99 is reopened four years after the end of the relevant assessment year whereas for assessment years 1999-2000 to 2001-02, they are reopened within four years. Accordingly, we first deal with the issue of reopening of assessments with regard to assessment years 1999-2000 to 2001-02. 4. At the outset, it was pointed out by the ld. D.R. that in ground No.2 taken by the assessee in its cross objections for these years, it has been mentioned that the assessments are reopened after four years. This is factually incorrect and the same is confirmed by the learned counsel for the assessee also. On merits, the ld. D.R. relied on the judgment of the Madras High Court in the case of ITO vs. K.M.Pachiappan (311 ITR 31) and also on the judgment of the Supreme Court in the case of ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment. The tangible material available with the Assessing Officer is that the assessee has received certain subscription from customers only a portion of which has been declared as income. Therefore, it can be said that the Assessing Officer had reason to believe about the escapement of income. The fact that the material was available in earlier assessment year on the basis of which a view was taken, cannot be relevant for the years under consideration. Therefore, in our view, the reopening of the assessments for assessment years 1999-2000 to 2001-02 is valid. 7. Now we take up the issue of reopening for assessment year 1998-99. Admittedly, the assessment has been reopened after the expiry of four years from the end of relevant assessment year and the assessment has been completed under sec.143 (3) of the Act. Therefore, the first proviso to sec.147 would come into play. In this connection, the ld. D.R. drew our attention to page 3 of the assessee s paper book I which is the profit and loss account of the assessee for the accounting year 1997-98. It was pointed out that the assessee has shown timeshare income to the extent of Rs.9.45 crores against the actual collection of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated the income. Therefore, having passed the order under section 143(3), it cannot be said that there was escapement of income and more so, four years after the end of the assessment year. Therefore, the contention was that the first proviso to section 147 was clearly applicable as the assessee had disclosed fully and truly all the material facts necessary for the assessment. Reliance was placed on the judgment of the Supreme Court in the case of ITO vs Lakhmani Mewal Das (103 ITR 437). The judgment of the Punjab Haryana High Court in the case of Winsome Textiles Industries Ltd vs Union of India (278 ITR 470) was also relied upon. Another contention of the learned counsel was that under sec.151 of the Act, the Assessing Officer was required to obtain necessary approval of the competent authority before issuing notice under sec.148 of the Act. In this connection, attention was drawn to the notice of reopening dated 27.10.2003 in which the relevant portion signifying the approval was scored off. Further, in the assessment order also there is no mention of the fact that there was any failure on the part of the assessee to disclose relevant material. Therefore, it was pleaded that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed to the effect that once the timeshare is sold, the transaction is over. These inherently contradictory arguments go to prove that the assessee has not fully and truly disclosed all the material facts during the year for the purpose of assessment. If the argument of the ld. Counsel with regard to the issue of notice under sec.143 (2) is to be accepted, then the entire section 147 will be rendered otiose. Similar would be the fate of sec. 147 if it is held that an assessment cannot be re-opened as there is no change in the accounting method over the previous year. Therefore, considering all the facts and circumstances of the case, we are of the view that the assessment for 1998-99, though re-opened after four years, is validly re-opened. 11. In the result, the cross objections of the assessee for all the years are dismissed. 12. We now go to the merits of the addition made. The main grievance of the department is against the deletion of the addition made by the Assessing Officer towards subscription received from customers. In support of this ground, the department has relied on the judgment of the Madras High Court in the case of CIT v. A.R. Santhanakrishnan (256 ITR 187) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation and advancing facility, domestic and international exchange, transmission, up-gradation etc. The assessee mainly relied on the judgment of the Supreme Court in the case of Calcutta Co. Ltd. (supra). The Assessing Officer observed that the assessee is following mercantile system of accounting and hence, income has to be accounted for on accrual basis. He was of the view that the receipt was undisputedly income as the assessee itself had shown it as deferred income. However, the Act does not recognise the concept of deferred income and hence the assessee s explanation cannot be accepted. The Assessing Officer referred to the various clauses of the agreement and also a confirmation obtained from each customer. The confirmation stated that the customer agrees to pay the AMC as the company needs to maintain the resort. Thus, the Assessing Officer was not convinced about the future costs to be incurred by the assessee. He also pointed out from the agreement that the assessee was not under any contractual or other obligation to provide the facilities as all the requests for holiday were subject to availability. Considering all these aspects, the Assessing Officer added a sum of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot. In essence, it was submitted, a person becoming member was actually purchasing occupancy right for a specific floor area for specified days. It was further submitted that the member had a right to transfer, bequeath or gift his membership/timeshare unit to any person. One of the arguments of the assessee before the CIT(A) was that it had to incur substantial expenses either to construct new properties, or for renovation and replacement of various assets and hence the income was spread over 33/25 years depending on the scheme. To counteract this argument, the ld. D.R. drew our attention to the affidavit filed by the Managing Director of the assessee company before the Madras High Court in a litigation relating to service tax matter. In this affidavit it was averred that the company had no further service to be rendered once the contract and enrolment making a person member were executed. Therefore, the argument was that the claim of the assessee that it had to incur expenses in future was not correct. The ld. D.R. supported the contention of the Assessing Officer that there was no concept of deferred income in the Income tax Act and that all the expenses incurred during the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 treated as deferred income and 40% was offered for taxation. The reason for not offering the entire amount as income was stated to be that the assessee had to incur huge marketing expenses and that it was under an obligation to provide service to the Members for 33 years during which the membership subsisted. Later, this period was reduced to 25 years. Further, the immediate reason to bifurcate the sum received in the ratio of 40:60 was stated to be to follow what Sterling Holiday Resorts, a company engaged in similar business, had done. Three years later, when the industry gained more maturity and when the assessee almost reached the break-even point, 60% of the amount received was offered as income and balance 40% was treated as deferred income. The prime argument of the learned counsel was that though the assessee received the amount in full, in reality it had not become richer as there was a corresponding liability to service the Members for 33/25 years. It was submitted that the assessee can be said to be the owner of the entire sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise or be received in the previous year, it contemplates three different points of time at which they can possibly be brought to charge, the actual charge being at such one of the three points of time as the assessee s method of accounting warrants. Emphasis was placed on this part of the commentary by the learned counsel. The learned counsel referred to the definition of previous year and referring to section 4, it was contended that the only occasion for the Assessing Officer to change the year of taxability was as provided in the proviso to section 4. Otherwise, he could not do it. At this juncture, the learned counsel relied on the judgment of the Supreme Court in the case of Sir Kikabhai Premchand Vs. CIT (24 ITR 506). 18. From the synopsis of facts placed on record, the ld. counsel pointed out that its Resorts at Munnar, Goa and Coorg have been consistently rated as Five Star category and the services provided at all the Resorts have been consistently rated by RCI (Resort Condominium International Inc.) as Gold Crown (highest rating) for excellence of service. It was further pointed out as to how the company has been increasing the number of resorts from time to time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lthough to be discharged at a future date. It was also argued that where the liability is a continuing one, the amount of expenditure if allowed in one year would give a distorted picture of the profits of a particular year and that where there is a continuing benefit to the business over a period of time, the liability should be spread over the period of such benefit. Similarly, many other decisions were relied upon mainly to press in service the principles of matching concept, distortion of profits, true accounting principles in the light of the method of accounting followed, ascertainment of profits as per normal book keeping practice, emphasis on business aspect rather than a theoretical or doctrinaire aspect and so on. Shri Khare referred to the affidavit filed in the Service Tax matter to contend that the reliance of the department on the same is out of context. 20. Shri Mahajani also referred to the affidavit and submitted that collection of instalments from those who opted to become members by paying in instalments, was merely realisation of debts and therefore, in that context it was stated in the affidavit that no service is rendered once the person acquired the members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip was that there was no taxable event once the membership was sold. Shri Banusekar referred to the observation of the Tribunal at paragraph 15 in the case of Sterling Holiday Resorts (supra). It is observed that the computation of income is to be made in accordance with the method of accounting regularly employed by the assessee. It was argued that the assessee adopted the proportionate completion method as mentioned in AS9. It is also stated in the said Standard that 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 recognised when received. If the membership fee entitles the member to services or publications to be provided during the year, it should be recognised on systematic and rational basis having regard to the timing and nature of all services provided. Thus, the contention was that the assessee is following a consistent method to recognise the revenue which is in accordance with AS9 and hence the same should not be disturbed by the Assessing Officer. Reference was then made to the Guidance Note on Accrual Basis of Accounting issued by ICAI. As per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Rules, there was no bifurcation about the cost of membership. It was submitted that in fact, the commentary of the ld. authors Kanga Palkhivala supported the case of the revenue and further as per the judgment of the Supreme Court in the case of CIT v. British Paints India Ltd. (188 ITR 44), the Assessing Officer was justified in bringing to tax the entire membership fee collected by the assessee, particularly when no provision in the Act has been pointed out to show as to how 60%/40% of the fee collected is left out. 23. We have duly considered the rival contentions and the material on record. Thousands of litres of ink have been consumed lavishly over the past more than hundred years in discussing the concept of accrual and yet there is no end to it, and rightly so as it indicates the ever changing dynamics of business and commerce. Hospitality business, though in existence since more than hundred years, it has come into limelight recently with several variants and sale of timeshare unit is one such variant with which are concerned in the present group of appeals. 24. The dynamics of how timeshare industry works is not difficult to grasp. The company will set up several r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that year only. So far as maintenance of resorts and other utilities are concerned, they, according to the ld. D.R., are being taken care of by the AMC/ASF etc. We proceed to resolve this dispute. 25. It is not in dispute that the assessee follows mercantile system of accounting. Sec.5 (1) of the Act defines the scope of total income in case of a resident and includes all income which (a) Is received or is deemed to be receive in India in such year by or on behalf of such person; or (b) Accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) Accrues or arises to him outside India during such year. As per sec.29 of the Act, the profits and gains of business or profession have to be computed in accordance with the provisions contained in sections 30 to 43D of the Act which in nutshell means that it is the net income which is taxable and not the gross income. Net income has to be arrived at after allowing all deductions permissible under the Act. In the backdrop of these facts and statutory provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred back to the period during which the income was earned and accordingly whatever amount was earned by the Sassoons during the respective periods that they had acted as agents, had accrued to them during those periods. The court by majority decision held that no income accrued to the Sassoons. 27. Now let us examine the principles laid down in the case of Sassoons and try to apply them to the facts of the present case. One of the important observations the court made is at page 52 of ITR 26. It observed that the Sassoons had no doubt rendered services as managing agents of the companies for the broken periods. But unless and until they completed their performance, viz., the completion of the definite period of service of a year which was a condition precedent to their being entitled to receive the remuneration or commission stipulated there under no debt payable by the companies was created in their favour and they had no right to receive any payment from the companies. No remuneration or commission could therefore be said to have accrued to them at the dates of the respective transfers. In the present case, of course, the fees are payable on the execution of the contract betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on execution of the agreement. However, it cannot be said that the assessee has fully contributed to its accruing by rendering services. The assessee is bound to provide accommodation to the members for one week every year till the currency of the membership. Till the assessee fulfils its promise, the parenthood cannot be traced to it. In this connection, certain clauses in the membership rules need to be examined. The reservation for holiday can be done 90 days to 1 day before the commencement of holiday but the same is subject to availability. In other words, if the resort requested for is not available, the member would be deprived of the holiday. If the assessee confirms the reservation but is not able to provide the allotted or the alternate accommodation, assessee is liable to pay liquidated damages to the member. It is worth noting that the assessee is liable to pay liquidated damages only if it is not in a position to provide accommodation as per confirmed reservation. But it is not liable to pay any damages if it is not able to provide an accommodation on account of nonavailability. Under such circumstances, the only recourse for the member is to approach the Consumer For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irements every year can be estimated and hence the provision thereof is not rendered that difficult. However, in the case before us, the membership is ever increasing and in which year how many contingencies of non-availability of accommodation can arise, can be anybody s guess. At this juncture we may clarify the use of the word contingencies . It is not used in the sense that the event of non-availability of accommodation is wholly uncertain. The event is certain, only how many such events can occur is uncertain. As a matter of fact, the Supreme Court has also used the words contingent liability for warranty expense and allowed deduction in the case of Rotork Controls India P. Ltd. v. CIT(314 ITR 62 at 75). Therefore, coming back to the point of making provision, even if the assessee had chosen to provide for the liability in every year to comply with the matching concept, it would have been wholly unscientific and arbitrary. At this juncture, when we are making the observation that the assessee has incurred a liability to provide accommodation, it would be appropriate to deal with the argument of the department in connection with the affidavit filed by the assessee before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igation. 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 possession of the buyer and are being used by the buyer. On the other hand, the sale of timeshare unit is not as tangible as sale of goods but becomes tangible when the assessee fulfils its promise. Let us consider certain factors which may prevent the assessee from keeping its promise. Most of the members would opt for a holiday during the peak season i.e. during vacation in schools and this can put a lot of pressure on the assessee to satisfy each and every member. It will have to disappoint certain members for non-availability of accommodation and this may invite outflow of resources. There may be a demand for a particular resort but the assessee may not be able to provide it if the same is under some major repairs or renovation. These types of contingencies will always entail outflow of resources for the assessee in future. Therefore, we are of the view that there is every possibility of an obligating event arising which will result in an outflow of resources. 30. A question may be raised that if the obligating event is sure t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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, recognising the entire receipt as income in the year of receipt can lead to distortion. Somewhat similar, though not exactly identical, situation was faced by the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT (225 ITR 802). In that case, the assessee had issued debentures of Rs.1.5 crores at a discount of 2% redeemable after 12 years. At page 813 of the report, the court observed that ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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