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TMI Blog2012 (7) TMI 651X X X X Extracts X X X X X X X X Extracts X X X X ..... ived from the members as income in the year in which the members are admitted and the balance 40% is equally spread over the tenure of membership. The Assessing Officer taxed the entire membership fee received as income after examining various clauses of the membership agreement and other relevant issues. He concluded that no extra expenses would be incurred in the subsequent years for providing facilities to customers. The Assessing Officer further observed that assessee also collected charges for upkeep and maintenance of the resorts and equipments separately as annual charges each year. He also observed that the assessee has claimed entire expenses incurred during the year but had deferred a portion of the income received which is against the concept of matching principle. According to Assessing Officer, loss which is neither suffered nor incurred in the accounting year is deductible against the actual receipts of the year. He relied on the decision of the Chennai Bench of the Tribunal in the case of Sterling Holiday Resorts (India) Ltd. Vs. ACIT., (2007) 295 ITR (AT) 162 (Chennai). 4. Being aggrieved by the said order of the Assessing Officer, the assessee filed an appeal befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vour of the assessee. He submitted that CIT(A) has observed that judicial decisions in the case of CIT Vs. Calcutta Stock Exchange Association Ltd., (1959) 36 ITR 222 and the decision in the case of Delhi Stock Exchange Association Vs. CIT, (1961) 41 ITR 495 were not brought to the notice of the Special Bench of the Tribunal which resulted in the verdict in favour of the assessee. He submitted that the CIT(A) has taken cognizance of the Assessing Officer's action in following the decision of the Tribunal in the case of M/s. Chennai Corporate Club in ITA No.2076 to 2080/Mds/2010 dated 8.8.2011 wherein it was held that life membership fee received by the assessee was a revenue receipt liable to tax. He further submitted that CIT(A) also endorsed the view of the Assessing Officer in following the decision of the Chennai Bench of the Tribunal in an identical issue in the case of Sterling Holidays Resorts (India) Ltd., Vs. ACIT., 295 ITR (AT) 162 where it was held as under:- "The concept of deferred income is alien to the Incometax Act. Income on its coming into existence attracts tax. The obligation to use the income in a particular manner does not remove it from the category of incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad over a period of hundred years." It was therefore the plea of the learned D.R. that since the Chennai Bench of the Tribunal itself in Sterling Holidays Resorts (India) Ltd. (supra) has comprehensively and unambiguously decided the issue in favour of the Revenue, the ground raised by the assessee must be dismissed. 9. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. In the instant case, the assessee is in the business of selling time share units. It provides holiday facilities to its members for a specified period each year, over a number of years, for which membership fees of Rs. 39,20,35,431/-. The assessee has offered 60% of the fees received from the members as income in the year in which the members were admitted and the balance 40% is equally spread over the tenure of membership. According to the Assessing Officer as the assessee is not required to incur any extra expenses in the subsequent years for providing facilities to customers, therefore the entire receipts were liable to tax in the year itself. The contention of the Assessing Officer is also that the assessee has claimed entire expenses i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. There are other incidental facilities also like exchange facilities, oneup exchange, RCI exchange etc. There are certain rules pertaining to cancellation of membership also along with the rules pertaining to quantification of refund. The assessee before us initially 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 per cent of the revenue as income in the year of receipt and from 4th year onwards, it started recognising 60 per cent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he three transferees. The transferees objected to the said assessment stating that the agency commission received by them should be apportioned on a proportionate basis and the transferees should be made liable to pay tax only on the commission earned by them during the 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e it is certainly earned by him in the sense that he has contributed to its production or the parenthood of the income can be traced to him. But in order that the income can be said to have accrued to or earned by the assessee it is not only necessary 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 recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... membership fees will go to finance new properties. But membership fee is essentially a consideration for the right to occupy a resort for one week in a year for 33/25 years. But the contingency of non-availability of accommodation will always be 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.'s case (supra), 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. Rotork Controls India Ltd. [2007] 293 ITR 311 denied deduction of the provision for warranties on the ground that the liability was not certain. In fact at page 315 the High Court expressed this view by stating that considering the nature of the liability, which is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ends on several factors. They may be social, political, climatic and so on. If wedding season is in full swing, tourism can get affected. If there is some commotion around a particular resort or if the law and order situation is not conducive, tourism can be affected. Sudden change in 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. counsel talked about was vis-avis the presentation of published accounts whereas the distortion the Supreme Court talked about and which we are inclined to follow, is vis-a-vis the real taxable income for a particular year. Therefore, in view of the foregoing discussion, we accept the proposition of the assessee that it is not justifiable to tax the entire income in a single year as is the case of the department. 32. Accordingly, to answer the question posed to the Special Bench, the entire amount of timeshare membership fee receivable by the assessee up front at the time of enrolment of a member is not the income chargeable to tax in the initial year on account of contractual obligation that is fastened to the receipt to provide services in future over the term of contract." 11. The learned D.R. has argued that the decisions of Hon'ble Supreme Court and Chennai Bench of the Tribunal, as quoted above in this order, were not considered by the Special Bench of the Tribunal while adjudicating the issue in the case of the assessee in the earlier assessment years 1998-99 to 2002-03. Therefore, the decision rendered by the Tribunal was per incuriam. The learned D.R. could not po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration and on the basis of those decisions it cannot be held that the decision of Special Bench was per incuriam. We therefore respectfully following the decision of the Special Bench, set aside the orders of lower authorities and delete the addition made by the Assessing Officer and allow the ground of appeal. 13. Ground no.3 in assessee's appeal and ground no.2 in revenue's appeal relate to the order of the CIT(A) directing the Assessing Officer to verify the expenditure of Rs. 1,60,16,762/- and allow the same if it was incurred on salary, rent, interest, repairs and furniture. 14. The brief facts of the case are that the Assessing Officer observed that the assessee has claimed deduction of Rs. 1,50,12,214/- as expenditure during construction. In the Schedule 5 to the balance sheet, the assessee has capitalized Rs. 1,60,16,172/- accumulated expenditure during construction and the balance amount Rs. 31,68,717/- has been taken to the balance sheet as asset i.e. expenditure during construction pending allotment. In reply to the show-causenotice by the Assessing Officer as to why Rs. 1,60,16,762/- claimed as deductible expense should not be disallowed being capital i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed/assigned for the specific project . On 31.03.2005, the assessee company had incurred expenses for Jaipure Venue Visit, which can easily be capitalized on 31.3.2005. The Assessing Officer also observed that the assessee company had incurred expenses on account of car hire charges from Munar to Ernakulam and back for advocates for land purchase, which is a capital expenditure and hence there is no merit in the argument of the assessee that such costs cannot be allocated to specific projects. Further the expansion of the assessee's business consists of construction of new resorts as well as explanation of existing resorts. There is no doubt that the assessee is enjoying enduring benefits from such expansion. The benefit enjoyed from new facilities is not enjoyed by the assessee only in the year of construction. The new facilities are used in the assessee's business from which the assessee earns revenue year after year. A clear indication of the assessee's intention is in the assessee's own treatment of such expenses year on year, the assessee capitalizes a certain part of these expenses while carrying forward pending allocation. The assessee's treatment can at the most be determen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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