9911796707
TMI Blog2011 (3) TMI 890X X X X Extracts X X X X X X X X Extracts X X X X ..... e order under section 263 for the assessment year 2004-05, can be followed for the assessment year 2005-06. Thus we take ITA No. 2418/Mum./2009 first. Facts in brief: 3. The facts are brought out at para 3 to para 3.3 of the assessment order for the assessment year 2004-05. They are extracted below for ready reference : "3. Pancard Club is a company of Panoramic Group of companies having business interests and activities in the fields of Hotel Industries, Resorts, Clubs, etc. Assessee company offers card facilities which includes savings and discounts on purchases made by Card Members plus club facilities which includes Health Facilities, Gymnasium, Sports, Restaurant, Swmming pool, Sauna, Jacuzzi, Water Park, Children game, video parlour etc., to its members. 3.1 The company offers Holiday Scheme to card members at a discounted/special price on account of advance Room Nights marketed through its agents. The agents are entitled to a commission on the offer price collected by them. The assessee had deducted tax on commission payments and paid it on 2-9-2005. The company charged Membership Entrance Fee which is non-refundable to its members to cover the initial administration cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in law. Thus the Assessing Officer assessed the total loss at Rs. 48,09,14,236. 5. The CIT-7, Mumbai vide order dated 17-2-2006, passed under section 263 of the Act, set aside the assessment order dated 27-4-2007, with a direction to the Assessing Officer to pass a fresh assessment order in conformity with the directions contained in section 263 order. 6. The CIT held that the order is erroneous and prejudicial to the interests of the Revenue for the reason that : (a) the assessment order was passed prior to the date of final hearing, hence the same is erroneous and prejudicial to the interests of the revenue. (b) that proceeds from "Advance sale room nights" is a taxable receipt under section 5 of the Act and that the assessee has not offered advance sale of room nights as income, but is deducting all the expenses such as, marketing expenses, Holiday membership surrender value, administrative expenses and personal expenses which give a distorted picture and is not in consonance with the matching principles. The CIT directed the Assessing Officer to include the entire amount of Rs. 88,00,09,610 received by the assessee as "Advance sale of room night ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble expenditure. He directed the Assessing Officer to examine the assessability of Rs. 20,52,34,763 which is the difference between the total membership fund and the amount payable to NUCA as on 31-3-2005, as per law and in accordance with the available facts in this regard. (f) that the Assessing Officer has not examined, as to whether the assessee has complied with the TDS provisions. He observed that the Assessing Officer has not examined whether the TDS has been deposited within the stipulated time. He directed the Assessing Officer to examine whether any expenditure is disallowable under section 40A(ia). 6.1 The learned CIT at paras 3 and 4 pages 17 and 18 held as follows : "I have considered the aforesaid submissions of the assessee. As has already been discussed in the preceding paragraphs, the dominant purpose of the Holiday Membership Scheme was to provide accommodation to the members on the concessional price referred to as "offer price". The surrender value on expiry of the scheme in the event of a member not availing of the option to use the room nights already sold is inclusive of the accretion in the offer price in the tenure of the scheme. The differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt as expenditure while determining the income from business for the assessment year 2005-06." Aggrieved, the assessee filed this appeal on the following grounds : 1. The Commissioner of Income-tax has erred in assuming the jurisdiction under section 263 of Income-tax Act, 1961 in respect of six items mentioned in his order. The basic conditions of issue of notice are not satisfied. The appellant submits that the order passed by the Assessing Officer is not erroneous and prejudicial to the interest of the revenue. 2. The Commissioner of Income-tax has overlooked that even after the issue of the notice under section 263 the Assessing Officer has completed the assessment for the assessment year 2006-07 and did not felt it necessary to take a different view. 3. The Commissioner of Income-tax has erred in concluding that the sum of Rs. 73,31,23,220 received by the appellant as advances towards sale of room nights is its income assessable for assessment year 2004-05. 4. The Commissioner of Income-tax has erred in directing the Assessing Officer to include the amount of Rs. 73,31,23,220 as income of the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer has not given proper treatment to this disallowance is not justified. The appellant submits that the direction given by the Commissioner of Income-tax is not justified. 13. The appellant craves the permission to add, alter or amend the grounds of appeal which are without prejudice to each other. 7. The learned Senior Advocate, Shri S.E. Dastur, appeared on behalf of the assessee along with Mr. Nitesh Joshi and Mr. D.V. Lakhani. Mr. Dastur explained the various schemes operated by the assessee. He submitted that the Member makes a upfront payment, a certain amount and is allowed to stay for a certain period, in a resort, subject to certain terms and conditions. He pointed out that if the person, does not avail the facility of stay in the resort, the amount will be paid back to him along with certain compensation, which is worked out as per the scheme. After explaining the scheme, Mr. Dastur challenged the validity of the order passed under section 263 by the CIT on 17-2-2009. The submissions are as follows : (i) That the Assessing Officer has examined the schemes run by the assessee in detail and has thereafter allowed the claims made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer on 30-4-2007, subsequent to the completion of the assessment, has not resulted ultimately, any disallowance or addition, and hence, this ground for re-opening is devoid of any merit. (iv) that in the fresh assessment order passed by the Assessing Officer, consequent to the original order under section 143(3) being set aside by the CIT in section 263 proceedings, only two additions were made i.e., on account of - (a) advance rent received on account of sale of room nights and (b) disallowance of expenditure in the form of surrender value. On all other issues, on which the CIT revised section 263 order, the Assessing Officer, ultimately did not make any additions/disallowance. Thus he submitted that he would advance arguments only on these two issues only. 8. The learned Counsel for the assessee submitted that the receipt of advance on sale of room nights, amounting to Rs. 88 crores is not income, as the assessee has a contractual liability/obligation to return the amount, with certain compensation. He emphasized the fact that the assessee has an obligation to refund this advance amount received on sale of room nights and hence argued that the same cannot be treated as incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en referred to in the decision of the Special Bench of the Tribunal in the case of Mahindra Holidays & Resorts (India) Ltd. (supra). 12. The learned counsel submitted that the order passed under section 263 is bad in law as the Assessing Officer has called for all the details as per his letter which is at page 78 of the paper book and only on receipt of the entire details he had passed the assessment order. While submitting that the Assessing Officer has not asked any specific question as to why Rs. 88 crores was not taxable in this year, he submitted that this the aspect was considered by the Assessing Officer in the earlier assessment years and an opinion from a leading Chartered Accountant Firm, A.F. Ferguson & Co. was filed and that this is at pages 358 and 367 of the assessee's paper book. He submitted that the Assessing Officer discussed the scheme fully and applied his mind and thereafter came to a considered possible view and hence the CIT was wrong in invoking the provisions of section 263. He relied on the following case laws, for the proposition as to what is income. (i) CIT v. Max India Ltd. [2007] 295 ITR 282/[2008] 166 Taxman 188 (SC). (ii) & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of pages were 201 pages. Thus there is a discrepancy of 57 pages in the paper book filed before the ITAT, (ii) referring to item No. 17, which is a copy of the opinion regarding, policies of holiday membership fees, M/s A.F. Fergusons, C.A, Mumbai page Nos. 358-379 and page 213 of the paper book, it was submitted that the copies of the opinion was filed with the Assessing Officer in the assessment proceedings for the assessment year 2003-04 and not during the current assessment year 2005-06. He pointed out that purported report of M/s. A.F. Fergusons, was not filed even during the previous assessment year 2004-05, wherein the CIT allowed the Authorized Representative to inspect all the records of the earlier year; (iii) that the AS-29 was not considered by M/s. A.F Fergusons & Co. in its report and the report was marked by inadequacy, deficiency and incompleteness and is unreliable and hence is invalid, (iv) that pages 20, 78, 89, 109 and 206 which are copies of the letters dated 6-3-2007, 29-3-2007, 10-4-2007, 24-4-2007 and 26-4-2007 filed by the assessee before the Assessing Officer during the assessment, are letters filed by the assessee during assessment and they contains li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der value, it reveals that the amount refunded is much lesser than what is refundable as per the scheme. He submitted that the provision made on estimate basis do not match actual and the variation is large. A calculation was submitted to demonstrate that the actual refunds given by the assessee is only of about 1/3rd of the subscription that has matured. (vi) Calculations are submitted to prove that there is some discrepancy in arriving at the provision of surrender value. It was pointed out that when the schemes started in July, 2002 and has a grace period of 60 days, the assessee chose to make a provision right from July, 2002, when the customer is not entitled to utilize the total nights purchased. That for the assessment year 2002-03, no scheme had completed one year by March, 2003, for the reason that all the schemes were launched in July, 2002 and the question of subscriber not using hotel nights is entitled to within one year of subscription does not arise. Thus the liability to refund subscription of surrender value did not arise. That the calculation and estimation of surrender value is not in line with the proposition laid down by the Hon'ble Supreme Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dicial and erroneous. (x) That the submission of the assessee that the year in which the expenditure is incurred, need not necessarily be the year in which there is corresponding income, is against the matching concept. 18. On the first ground of a revision i.e., passing of assessment order prior to the date of final hearing on 15-5-2007, the learned DR submitted that : (a) Notice has been issued on 30-4-2007 seeking details and posting the case on 15-5-2007 and whereas the assessment was completed on 27-4-2007, which shows that the assessment order was passed prior to date of hearing. (b) At page 13 of the written submissions the learned DR in block letters states as follows : "Irregular, arbitrary manner in which assessment has been completed and assessment order being ante-dated." The learned DR's case is that the assessment order, demand notice were dated prior to issual of notice under section 142(1) on 30-4-2007 and this can be ascertained from the fact that in the computation sheet ITNS 150A there is overwriting and the date has been changed from 26-4-2007 to 27-4-2007. For making this allegation, the learned DR also relies on "Current De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submitted that the predominant purpose of sale of room nights is not, to refund the sale proceeds at surrender value but is for actual utilization of the room nights by the subscriber. The refund can be claimed only after the expiry of the tenure of the scheme. That the period of the scheme vary from 3 to 10 years and the question of refund, if any, arises only after a long period of 9 to 10 years in most of the cases. That the assessee has not followed the matching concept as he has booked expenditure but not recognized corresponding income. That if the sale is recognized only on actual utilization of the room nights, then expenses should also be debited accordingly. That the claim of the assessee that the Assessing Officer has examined all these aspects during the scrutiny proceedings for the assessment year 2003-04, is not borne out of record. That the CIT considered the arguments of the assessee that : (a) money collected does not have the character of income; (b) is not assessable unless the room nights are actually utilized; (c) the receipt cannot be unconditionally appropriated; (d) the propositions laid down by the judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T has noted that the assessee has not disputed the fact that all these expenses were not properly examined by the Assessing Officer with respect to their genuineness and allowability. (ii) that the assessee has debited all expenses in contradiction of its theory that direct expenses should be amortized over the period of the scheme and hence the order is erroneous and prejudicial to the interest of the revenue. 23. On the difference of membership funds collected and NUCA payable, the learned DR submitted that the Assessing Officer has not examined the assessability of the different amount under this head, and hence the order is erroneous and prejudicial to the interest of the revenue. He further points out that the Assessing Officer has never examined whether the provision for NUCA is an allowable deduction and as to the taxability of the amounts received from the members under the scheme. 24. On the payment of TDS liabilities as on 31-3-2005 and applicability of section 40A(ia), the learned DR submitted that the assessee furnished the details during section 263 proceedings, regarding TDS, and that these details were not produced before the Assessing Officer and henc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t application of law or non-application of mind to something which was obvious and required application of mind or based on no, or insufficient material so as to affect the merits of the case and thereby caused prejudice to the interest of the revenue. (vii) that the submissions of the assessee have been accepted at face value without enquiry or application of mind and hence it cannot be said that a conscious view is taken by the Assessing Officer. Thus the question of forming a possible judicial view does not arise. Reliance is placed on the judgment of Green World Corpn. v. ITO [2006] 285 ITR 118/[2007] 159 Taxman 35 (HP) for the proposition that office record and office note can be relied for the purpose of upholding section 263 order and in this case entries in the DCR should be considered and section 263 order should be upheld. (viia) that assessment order does not become invalid, just because it is ante-dated or passed in an irregular manner. That antedating of an assessment order would merely vitiate the course of the proceedings but supervening irregularity or illegality has to be set right by putting the proceedings back on right. (viii)that when the order is curable, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue whether the amount is refundable or not, is not relevant. Reliance is also placed on the decision in the case of Dy. CIT (IT) v. Speco Electric Power Construction Corpn. Ltd. [2009] 126 TTJ 539 (Bilaspur). Reliance is placed on the decision of Chennai Bench of the Tribunal in the case of Mahindra Holidays & Resorts (India) Ltd. (supra) and submitted that even in the case of Mahindra Holidays & Resorts (India) Ltd. (supra) there was a refund clause and to demonstrate, attention was drawn to paras 13 and 22 of the order. In this case, law was also relied upon for the proposition that there is no basis for recognizing of income in the ratio of 40s to 60s. Reliance was also placed on paras 30 and 31 of that order. (xii) that marketing expenses including business development expenses etc., have to be amortized for the period of the scheme to avoid distortion of profits and reliance placed was on the judgment of Hon'ble Madras High Court in the case of CIT v. Mangal Tirth Estates Ltd. [2008] 303 ITR 366/171 Taxman 435 and Asstt. CIT v. Asia Resorts Ltd. [2005] 96 TTJ 909/143 Taxman 8 (Mag.) (Chd.). (xiii)Reliance was placed on AS9 and it was argued that the advance sale of room nigh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to how this standard applies to it. On the statement of refund filed by the assessee, the learned DR submitted that, it is not clear whether the refunds and surrender value is on maturity or it is on cancellation of subscription. He pointed out that the assessee has created provisions for the same but reversal of provision in case of cancellation of subscription was not indicated and the Assessing Officer has not examined the same. 32. That the refunds are only about 1/3rd of amount payable as per the scheme. While submitting that the argument of the counsel that the rate of utilization of accommodation is low, is good for accounting, the learned DR submits that it is not enough to claim deduction as per law. 33. Referring to the reliance placed by the assessee on the judgment of the Supreme Court in the case of Metal Box Co. of India Ltd. (supra), in support of their claim that liability on account of refund at surrender value has to be allowed as a deduction, the learned DR submitted that it is possible only if the corresponding benefits are credited to the account. He gave a table to demonstrate that the assessee has created the provision immediately after the sale of room ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on any of the dates between 18-5-2007 and 25-5-2007, then it should be held that there is no order passed on 27-4-2007 and hence the illegal order of that date has to be discarded and that the consequential revision order under section 263, should also be nullified. He referred to the charts filed by him and submitted that the assessee has refunded all the money that has been collected by way of advance sale of room night and factually the learned DR is wrong in submitting that only 30 per cent of the amount has been refunded. He submitted that less than 1 per cent of the subscriber who paid advance for room night, actually availed stay in the room and that more than 99 per cent of the subscriber had actually collected back not only the contribution but also surrender value. He submitted that the assessee had data to demonstrate that in almost of the cases, where the subscriber has paid advance for room night, have preferred to take back the advance along with surrender value and that based on such historical data, the assessee has estimated the refunds. Thus he emphasized that this is nothing but advance and the question of treating the advance as income does not arise. He emphasi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT under section 263. For the submissions that the order of the CIT passed under section 263, has to be examined on the strength of the reasons given in that particular order and for the proposition that the Tribunal cannot modify the orders of the CIT, the learned counsel relied upon certain case laws which we will be dealing with in due course. 39. Mr. Dastur emphasized that in the case on hand, a refund obligation is fastened on the assessee and no such obligation is there in the case of Mahindra Holidays and Resorts (India) Ltd. (supra). Referring to the decision in the case of Taparia Tools (supra) relied upon by the learned DR, the learned counsel submitted that this case law deals with spreading over of expenditure and has nothing to do with the issue whether income has accrued. He submitted that the case law deals with period cost. Similarly he submitted that the Tribunal decision in the case of Jt. CIT v. Tirumalai Chemicals Ltd. [2006] 9 SOT 744 (Mum.) is not applicable. Referring to AS9, he submitted that the accounting standard proceeds on the footing that there is income and accrual of income is assumed. He pointed out that in the case on hand the issue is whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT has not referred to any of the reasons mentioned by the learned DR and alleged that the learned DR wanted to pass afresh order under section 263, by giving his own set of reasons and submitted that this is not permissible. He submitted that the judgment of the Supreme Court in the case of Bharat Earth Movers (supra) very much applies to the case of the assessee. On the other issues, he submitted that the CIT has simply restored these matters to the file of the Assessing Officer for fresh verification and that such a direction is not permissible. He once again drew the attention to the Bench to the various documents in the paper books to demonstrate that the Assessing Officer had in fact asked for the details and had verified the same. 42. The learned DR, in his rejoinder, relied on the decision of K.C.P. Ltd. v. CIT [2000] 245 ITR 421/112 Taxman 66 (SC). He again rebutted the arguments raised by Mr. Dastur. 43. Later, after the case was heard and orders were reserved, the learned DR, vide his letter dated 27-1-2011, submitted that on similar facts and issues that arise in this appeal, questions are pending before the Special Bench of the Tribunal at Cuttack in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT that the advance received on sale of room nights, is to be treated as income is correct or not; (iii) whether the direction of the CIT to the Assessing Officer to disallow the provisions made for holiday membership surrendered value is correct or not. The entire arguments are centered on these three issues and each party made their points from different angles on the same issue. We first consider the argument of the learned Sr. Counsel, Shri S.E. Dastur. The arguments that the CIT was wrong in holding that the Assessing Officer passed the order prior to the date of final hearing appears to be correct. The details called for, vide letter dated 30-4-2007, by the Assessing Officer from the assessee were furnished much prior to the completion of assessment and except for asking the Assessing Officer to verify the marketing expenses, there is no point raised by the CIT in his 263 order on the other three issues i.e., disallowance under section 40A(2B), production of bank account and addition to block of assets. While saying so, we also observe that while the Assessing Officer called for information on account of marketing expenses, etc., the same were filed only on 26-4-2007, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en made by the Assessing Officer in the assessment order passed in pursuance to section 263 order and as we have already held that on the issue of taxability of advance received on sale of room nights, the Assessing Officer has not applied his mind and, hence, on this account, the re-opening should be upheld. 46(a) Coming to the arguments of learned Departmental Representative, the issue whether there are discrepancies in the paper book filed has been resolved by the clarification given by the learned Sr. Counsel, in any event, these issues are not crucial to the decision to be given in this case. Coming to the opinion given by the A.F. Fergusons, we have already held that they are not part of the record of the current year. The entire effort made by the learned Departmental Representative is to convince the Bench that the Assessing Officer has not properly examined many issues and that the order was passed in a summary manner with undue haste and without conducting the relevant, necessary and proper and requisite enquiries. We are partially convinced on these submissions. If not in all the issues raised by the learned Sr. Counsel, at least on some issues, like taxability of advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue has not been given any right of appeal under the Act against an order of the CIT under section 263(1). Further, in view of the matter in appeal, the Tribunal cannot uphold the order appealed against on the grounds other than those taken by the CIT in his order. It is CIT's satisfaction according to which he may pass necessary orders thereunder in accordance with law. If the grounds which were available to him at the time of the passing of the order do not find mention in his order appealed against, then it will be deemed that he rejected those grounds for the purpose of any action under section 263(1). In this situation, the Tribunal while hearing an appeal filed by the assessee cannot substitute the grounds which the CIT himself did not think proper to form the basis of his order. Accordingly on the facts of the present case, the Tribunal was not competent to take into consideration the fact of increase in the number of adult partners from 10 to 11 when the Addl. CIT had not, in fact, relied upon the said change in holding the ITO's order to be erroneous." 47. In the case of CIT v. Chandrika Educational Trust [1994] 207 ITR 108, the Kerala High Court held as follows : "In e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds the share capital made by the assessee was only a device for converting the asset into money. The basis of the initiation of proceedings by the Commissioner could not be altered by the Tribunal. Seondly, the Tribunal had given a definite finding that the transaction was genuine. Hence, the assessee was not liable to tax on capital gains. CIT v. Harikishan Jethalal Patel [1987] 168 ITR 472 (Guj)." 50. From the above it is clear that it is not open for us to uphold the order of the Commissioner of Income-tax exercising his power under section 263, on grounds different from that relied upon by the Commissioner itself. With this background, we now consider each issue, based on which the CIT has revised the order under section 263 of the Income-tax Act, 1961. 51. The first issue is that the assessment order is passed prior to the date of final hearing on 15-5-2007. We, at the first instance, consider the case laws relied upon the counsels on the nature and scope of revision under section 263. The case that has been relied upon strongly by both the parties is a case of Malabar Industrial Co. Ltd. (supra). In this judgment the Hon'ble Supreme Court has held that : (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terference by superior authority. 53. In the case of CIT v. Gabrial India Ltd. [1993] 203 ITR 108/71 Taxman 585 (Bom.) the Hon'ble Court held that twin conditions of the order being erroneous and such error resulting in prejudice to the revenue have to be satisfied. It held that an order cannot be termed as erroneous unless it is not in accordance with law. Just because an order, in the opinion of the Commissioner, should have been written more elaborately, cannot be a reason for branding the order as erroneous simply because the Commissioner does not feel satisfied with the conclusion. In this case the ITO had made enquiries in regard to the nature of expenditure incurred by the assessee and on receiving the explanation, allowed the claim. In such a situation, the Hon'ble Court held that the order cannot be termed as erroneous simply because, in the assessment order, the Assessing Officer did not make elaborate discussion in this regard. 54. The Commissioner after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t where it is held that when a regular order of assessment is passed in terms of sub-section (3) of section 143, a presumption can be raised that such an order has been passed on application of mind. 60. The learned DR, on the other hand, relied on para 15 of this judgment wherein it is held that the Assessing Officer does not possess the power of review so as to initiate reassessment proceedings or to rectify a mistake and that in such a situation, it cannot be said that the revenue is without remedy, as section 263 of the Act empowers the CIT, to review an order which is prejudicial to the revenue. 61. In the case of Sohamn Datta Processing & Finance (P.) Ltd. (supra) held that the decision and the proposition in the case of Kelvinator of India Ltd. (supra) is relevant only in the context of judging the validity of initiation of reassessment proceedings under section 148 of the Act and not to section 263 proceedings. The section 263 order passed by the Commissioner was upheld as there is not even a reference to certain agreements and hence it cannot be held that it is a possible view. 62. In the case of Tata P Solar India Ltd. (supra) was considering a situation where the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocedure. A perusal of the entries in the "Current Demand" and "Collection Register" disclose that the entries are not made date-wise and in fact an entry in the case of the Precision clause (2) limited is made after the entry in the case of PSL & Co. The assessment order in the case Precision clause (2) Limited was passed on 9-5-2007 and whereas the assessment order in the case of PSL & Co. was passed on 24-5-2007. In any event, an entry passed in Current Demand and Collection Register, cannot be the basis of determination of the date of passing the assessment order. Even the learned CIT-DR is unable to pinpoint a particular date on which the assessment order is, in his view, was passed. He just gives a period of a range of 4 to 5 days. This argument is dismissed as bereft on merit. The case laws relied upon by the learned Departmental Representative in support of his argument, that even an anti-dated order is valid, does not help. These case laws are not on this point. 66. Coming to the finding of the CIT that the Assessing Officer issued a letter on 30-4-2007 asking for some details and fixing the date of hearing on 15-5-2007 and that the order of assessment was passed prior to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer had passed the order on 27-4-2007. Even if the assessee's claim were to be accepted, the details furnished were voluminous which required enough time to examine before passing of the order. The haste in which the order was passed amply displays that there was no real application of mind by the Assessing Officer before passing the assessment order. This is further obvious from the fact that whereas the assessee had suo motu disallowed an amount of Rs. 7,08,706, being loss on demolition of Thane Club house as is evident from the statement of computation attached with the return, the Assessing Officer has devoted one paragraph (para 5.1 of the assessment order), in disallowing this amount. In his reply dated 19-7-2008, the assessee's A.R. has stated that this is an example of application of mind by the Assessing Officer which in fact is otherwise. When an expenditure is not claimed as deduction, there is no need for any discussion in the assessment order to disallow the same." 69. In our considered opinion, the reasons given by the CIT as recorded above, justify the invoking of jurisdiction under section 263, as obviously the assessment order has been passed without application o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Basic features of the scheme are similar. As on illustration, the features of Comfort Membership Scheme having a tenure of three years are detailed. This scheme provides for five room nights package at an officer price of Rs. 3,000. This scheme was effective from 1st April, 2004. The terms and conditions for the membership are as follows :- (i) The tenure is three years. (ii) The membership is accepted for minimum of 5 nights and thereafter in multiple of two room nights. (iii) Room is defined to mean a standard non air-conditioned accommodation provided for a couple, and child below 5 years of age. (iv) The entitlement of room nights is defined to mean accommodation only that shall be provided to the members. (v) In case the room nights are not availed of during the 3 years tenure period, the member would be entitled to surrender value of Rs. 4,250 at the rate of Rs. 850 per room night). (vi) Member shall commence utilization of the room nights entitlement after 60 days from the date of membership. (vii) The room nights can be availed in the existing or the affiliated facilities, for availing of the affiliated facilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heme Name Op. Bal Amount Collected Refunded Utilisation Closing Bal. 2002-03 Comfort - - 117,151,200 - - 600 117,150,600 Luxury - - 191,979,300 - - 425 191,978,875 Premium - - 12,410,000 - - - - 12,410,000 Regular - - 15,963,000 102,000 - - 15,861,000 Royal - - 105,058,800 - - 5,600 105,053,200 Standard - - 38,219,160 - - 1,960 38,217,200 Supreme - - 10,854,480 - - - - 10,854,480 Total 491,635,940 - - 8,585 491,525,355 % 0.001% 2003-04 Comfort 117,150,600 173,715,200 - - 40,800 290,825,000 Luxury 191,978,875 353,233,990 - - 12,750 545,200,115 Premium 12,410,000 20,673,120 1,871,120 1,120 31,210,880 Regular 15,861,000 33,218,000 1,989,000 - - 47,090,000 Royal 105,053,200 79,150,120 - - 17,640 184,185,680 Standard 38,217,200 46,724,120 - - 7,560 84,933,760 Supreme 10,854,480 12,754,000 - - 840 23,607,610 Golden - - 1,846,800 - - - - 1,846,800 Platinum - - 15, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 797,600 3,129,300 4,668,300 Regal 6,544,400 12,810,375 900 19,353,875 Platinum 131,547,060 82,433,630 168,730,085 45,250,605 Total 3,541,268,240 3,542,874,286 297,718,065 6,786,424,461 000% 2007-08 Comfort 1,866,278,301 201,670,929 302,138,530 78,700 1,765,732,000 Luxury 3,238,246,465 315,780,435 2,147,060 136,850 3,551,742,990 Premium 111,826,000 26,283,700 1,700 138,108,000 Regular 282,214,550 134,640,000 416,854,550 Royal 770,391,440 59,561,205 996,445 38,080 828,918,120 Standard 298,066,150 28,425,080 11,200 21,880 326,458,150 Supreme 150,128,775 137,329,055 462,725 1,680 286,993,425 Golden 4,668,300 410,400 564,300 4,514,400 Regal 19,353,875 41,783,465 61,137,340 Platinum 45,250,605 280,947,395 326,198,000 New Comfort 1,189,351,500 1,800 1,189,349,700 New Luxury 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortioning income, when there is corresponding expenditure which is spread over a period of time. A capital receipt does not become a revenue receipt, just because some expenditure is incurred on the capital receipt and claimed by the assessee. Thus, we do not agree on this issue with the learned CIT as well as the learned Departmental Representative. (ii) In Siddheshwar Sahakari Sakhar Karkhana Ltd. (supra) the Hon'ble Supreme Court has held as follows :- "Held - (i) reversing the decision of the High Court, that the line of enquiry, in order to determine the true nature and character of the receipts, did not stop at ascertaining the mere fact whether the realization was in the course of trading. Although the use of the expression "deposit" did not conclude the issue, the expression was used in the bye-laws to mean just what it said. The repayment of loans taken for capital expenditure and the share capital of the govt. were two specified events which were by no means uncertain, though the time of repayment was indefinite. On the occurrence of the two events the right to demand refund would accrue to the member-depositor. Such a right, though contingent in nature init ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Mahindra Holidays & Resorts (I) Ltd. (supra), an annual maintenance charge was compulsorily collected, or only administrative charge was collected from customer/member irrespective of the fact as to whether the customer/member makes uses of resort or not. In the case on hand, there is no such annual maintenance charge collected. These are the fundamental difference between these two cases. The Special Bench did consider all the points including the accounting standard AS/29 and AS/9, relied upon by the learned Departmental Representative and has come to conclusion that the entire receipt cannot be in the first year. In fact, the Special Bench decision clearly covers the case on hand to the extent that, the direction of the CIT that the entire advance have to be taxed, is bad-in-law. The Tribunal held as follows :- "Income-Accrual-Time-share membership fee receivable at the time of enrolment of members-Though a debt is created in favour of the assessee immediately on execution of the agreement, it cannot be said that the assessee has fully contributed to accrual of income by rendering services-Assessee is bound to provide accommodation to the members for one week every year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rwise of the fees are immaterial for purposes of applicability of AS-9-AS-9 has been made mandatory by the ICAI w.e.f. April 1, 1991, and no auditor certifying accounts can afford to ignore it-Fact that membership fee was utilised in creation/acquisition of fixed assets on which depreciation was claimed is no ground to reject the claim for spread over-Whenever there is a receipt giving rise to a liability, a provision can be created against the receipt for the liability-There being no conflict between the provisions of IT Act and AS-9, there is no question of precedence of former over the latter-When duly mandated accounting standard is followed, it cannot be said that income cannot be deduced properly in terms of proviso to section 145 but the things are other way round-Further, if the entire receipt is shown in the current year, there would be substantial deficit in future years giving a completely distorted picture of working results". [Emphasis added] (v) The Tribunal held that when membership fee is collected giving the right to the member over the period of five years, the allocation of income or the recognition of revenue, over a period of five years, is quite rational and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ific and had written off and allocated the expenditure proportionately for the entire period of life of the equipment and that in differing the remaining expenditure to the years corresponding to their income years the assessee had sought to match the expenditure to the corresponding revenue earning years. The Tribunal held that the expenditure in question should be allocated to over the period of five years. (ix) In Punjab Tractors Co-operative Multipurpose Society Ltd. (supra), the assessee was engaged in the business of purchase and sale of tractor and motorcycle and their parts, besides undertaking repairs of the same. The assessee had received advance from buyers of tractor to cover service charges of tractor for the period of one year after the expiry of warranty period of one year. The assessee's contention was that there is an obligation on the part of assessee to prove very services to the tractor for one year, as required by the manufacturers and after the expiry of warranty period, a further period of one year was also covered by the assessee for servicing the tractor and that those services of the post warranty period, the assessee received money from the buyers. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the buyers could not be treated to be income unless right to appropriate it towards the services had accrued or arisen. So long as the right did not exist, the money received from the buyers remained advance money. It is the appropriation of the money towards the object and purpose for which it was received, which is relevant. Deposits or advances received by the assessee became trading receipts when the assessee became entitled to appropriate the same to its income at the time of rendering the service." (Emphasis added) This case applies on all forums to the facts of this case. The assessee did not become an owner of the amount, unless the services are rendered. This case covers the case on hand and applying this judgment, we have to decide the case in favour of the assessee. (x) In Bazpur Co-operative Sugar Factory Ltd. (supra), the Hon'ble Supreme Court has held as follows :- "If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as a trading receipt. The same principle can be derived from the decision of this Court in Punjab Distilling Industries Ltd. v. CIT [1959 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seen is the true nature and quality of the receipt and not the head under which it is entered in the account book that would prove decisive. They relied on the judgment of the Hon'ble Supreme Court in Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542. Applying this proposition to the facts of the case, the advance receipt on sale of room nights cannot be treated as a trading receipt in view of the obligation fastened on the assessee to refund the advance and also in view of the historical data which demonstrate that the assessee has refunded the amount in more than 99 per cent of the cases. We do not agree with the argument of the learned Departmental Representative that the receipt in a trading receipt, on the facts of this case. 74. After discussing the case laws cited by both the parties and after applying to the proposition laid down therein to the facts of the case, we are of the considered opinion that the entire advance received on sale of room nights cannot be treated as income of the assessee for the reason that - (a) the assessee has an obligation to refund the money along with certain compensation, if the customer/member exercise such an option; (b) the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection of the CIT to include the amount received on account of advance sale of room nights as income of the assessee for the relevant period. 76. The third issue is the allowability of an amount of Rs. 22,09,84,169, debited under the head "Holiday Membership Surrendered Value". As already explained, the customer/member has the option to collect surrender value. The surrender value is nothing but the amount paid by the customer/member plus a certain amount which is in the form of a premium or compensation. A perusal of the scheme clearly demonstrate that the surrendered value payable in refund of the advance room nights collected with a premium/compensation and that this compensation is a time based or a period based cost. It is not connected to the performance or other criteria. If the customer/member chooses not to avail of the facility of room night in a particular year, the particular amount accrues to him as surrendered value in that year. An important fact to be noticed in the scheme is that there is a "cap" on the number of room nights a member can use in a year. When a member does not utilise room nights in any year, including the first year, he looses his right to certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The provision was made on the basis of actuarial valuation every year, the exercise was repeated and the company worked out the additional liability incurred by it. The Hon'ble Supreme Court has laid down the following principles - (i) for an assessee maintaining the accounting system as mercantile, the liability already accrued, though to be discharged at a future date, would be a proper deduction for working out profits and gains of its business, regard being to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actual expended or paid; (ii) just as receipts, though not actual receipts but accrued and due are brought in, for Income-tax assessment, so also the liabilities accrued and due would be taken into account while working out the profits and gains of business; (iii) a condition, subsequent to the fulfilment of which may result in the rejection or even expansion of liability, would not have the effect of converting that liability into the contingent liability; (iv) a trader computing its taxable profits for a particular year may properly deduct, not only the payments actually made to his em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existing independently of the future conduct of the business of the enterprise that is recognized as provision. 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. Where there are a number of obligations (e.g., product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole." 80. Learned Departmental Representative sought to distinguish this judgment by holding that the assessee had no past experience or historical data to determine the liability by substantial degree of reliability. In our opinion, this line of argument cannot be accepted on the facts of the case. At the end of the accounting year, the assessee knows that customer/member who has not availed the room nights and based on this factual information, the period cost in the form of surrendered value has been estimated and a proper provision made. This is what the assessee did. When the provision is made on facts, the question of scientific estimation etc., does not arise. The data of this very year is relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Assessing Officer to examine the adequacy of the provision. At this stage, we would refer to other case laws relied upon by the learned Counsel for the assessee as well as the learned Departmental Representative. 83. In K.C.P. Ltd.'s case (supra), the Hon'ble Supreme Court was considering the case whether the assessee had excess realisation of price over and above the levy price of sugar and such a receipt was held as a trading receipt liable to tax. Though the Learned Departmental Representative tried to take assistance of this case law, we are of the considered opinion that this does not help the case of the revenue. 84. Learned Departmental Representative placed reliance on the judgment of the Hon'ble Jurisdictional High Court in Rajendra Trading Co. v. CIT [1976] 104 ITR 39 (Bom.), for the proposition that the dominant object of the scheme has to be seen. For the same purpose, he relied on an another judgment of the Hon'ble Bombay High Court rendered in Nutan Warehousing Co. (P.) Ltd. v. Dy. CIT [2010] 326 ITR 94, wherein it has been held that the dominant intention of the assessee has to be ascertained. Both these case laws were relied upon, with an object to derive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is under the obligation to refund, not only the advance but also the surrendered value. The liability is incurred on account of surrendered value on the passage of time and it is an actual liability and making a provision for the same, in our considered opinion, is correct and also that no income accrues to the assessee on receipt of this advance. 88. Even otherwise, it is not within our powers to disturb the quantification of the amount, the CIT has directed the Assessing Officer to disallow. We have already discussed the judgment of Hon'ble Supreme Court and other Courts which have held that revisionary order under section 263 would stand or fall on the reason given by the CIT in his order and not otherwise. In this case, a specific direction has been given by the CIT to the Assessing Officer to disallow a particular amount on the ground that this is a contingent liability. Such a direction is held as erroneous by us. The learned DR pointed out, with the help of a chart, that there might be some inaccuracies in quantification of provisions. Based on the facts brought out, though we have no hesitation in vacating this direction of the CIT, on disallowing the provision made for " ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
