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TMI Blog2007 (11) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... ight in holding that the amenities charges paid for central air-conditioning of the shops sold should be treated only as an advance and not as a trading receipt ? 2. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the receipt for allotment of car park should be treated as a returnable deposit, when as per the sale deed, the ownership of the shop and the car park are inseparable ? 3. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the entire expenditure incurred during the year should be allowed as a deduction, although the asses-see is following a 'completed contract method' of accounting its income ?" (T. C. (A) No. 626 of 2004) : "1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the amenity charges amounting to Rs. 39,08,725 was assessable as returned income of the assessee for the assessment year 1993-94 ? 2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the amount of Rs. 5,16,336 charged towards car parking space was a trading re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts over a period of 10 years was considered as against the claim for deduction of the entire expenditure as per the income-tax adjustment statement. 4. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) dismissed the appeals on all counts, taking the view that the amenities charges paid for the air-conditioning was not an advance but part of the consideration for the shops and hence, to be treated as trading receipts. The Commissioner of Income-tax also held that the transfer deed clearly stated that the reserved car park space and the shop are inseparable and hence, the consideration received on the car park could not be treated as advance. On the question of the claim for deferred revenue expenditure, the Commissioner of Income-tax (Appeals) upheld the Assessing Officer's view that the assessee was not entitled to adopt one method of accounting of the company's account and modify it for income-tax purpose to suit the convenience of the assessee. He held that the assessee could have only a pro-portion of that expenditure allowed in the year under construction on the basis of the completed contract method. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be spread over. Since the receipts and costs are taken on the basis of the completed contract, the expenses incurred cannot, in entirety, be attributed to the completed con-tract method. 7. Per contra, Mr. Arvind Datar, learned senior counsel appearing for the assessee pointed out that befitting the nature of the asset, the amount received on the amenities provided for was spread over for a period of five years. In terms of the contract, the assessee had an obligation to maintain the air-conditioning system for a period of five years. He submitted that matching the character of the receipt with the obligation under the agreement, the Tribunal has rightly held that the receipts have to be spread over to a period of five years for the purpose of income-tax liability. Referring to the matching principles as held by the Bombay High Court in CIT v. Taparia Tools Ltd. [2003] 260 ITR 102, 107, he submitted that the same theory extended to the case of car park too. He emphasised that as far as the allotment of car park space is concerned, it is a refundable deposit and that whenever the owner sells his shop or the office space, the assessee has an obligation to refund the deposit a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintenance of accounts in a method whereby, revenue receipts and related costs were recognised with respect to the completed phase of construction and sold. He pointed out that the assessee recognised the revenue only on the completed contract basis and costs and receipts are accumulated till the completion of the first phase of the project. During the previous year relevant to the assessment year 1992-93, the assessee had completed the first phase of construction and prepared its profit and loss account. 10. The Income-tax Officer pointed out that the entire shopping complex is a centrally air-conditioned one. As such, all buyers, in general, have the facility without any exception. He pointed out that the buyers of the office space did not enter into a separate amenity agreement and the sale consideration was inclusive of any amenity charges. He held that only in the case of shops sale, the assessee artificially broke the sale consideration through a separate agreement. In the face of the totality of the circum-stances, the attempt of the assessee to separate this receipt from the agreement and spread over it over a number of years by taking recourse to clause 4 of the agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration. It also pointed out that the assessee had not provided the facility to the shops during the relevant assessment year and that the amount was received only from persons, who were willing to purchase the shops and this was specifically intended for the commercial space situated in the ground, first and second floors. Thus the Tribunal upheld the claim of the assessee. 14. On the question of providing car park, the assessing authority held that the car park space merged with the right over the undivided share of the land. The Revenue pointed out that, as a developer, the assessee acquired no right of ownership over the land or the superstructure. The assessee rendered his services as a developer and was transferring the use of the space to the buyer. There is no reference in the agreement as to the assignment of ownership of the basement to the assessee. The possibility of the assessee refunding the deposit on the allottee or transferring the same did not, in any way, stand in the way of the deposits treated as the receipts in the hands of the assessee. The Income-tax Officer held that the receipts were relatable only to the space constructed and sold during the year a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng receipt in the course of the appellant's business. He pointed out that the sale of car park space was linked to the sale of undivided sale of the land. Hence, he upheld the assessment as a trading receipt. On appeal by the assessee, the Tribunal, however, allowed the claim of the assessee treating it as a refundable amount and hence not taxable as income. 16. On the question of deferred revenue expenditure on advertisement, sales, promotion and legal charges, it is seen that as the accounts were maintained on the completed contract basis, the same was amortized over a period of ten years. However, in the income-tax adjustment statement account, the assessee claimed the entire expenditure as deduction. The Assessing Officer took the view that the benefit of the expenditure would cover even those areas still under construction and considering the method of accounting consistently employed, the Assessing Officer rejected this plea for deduction in full and held that the same was to be amortized. 17. On the question of deferred revenue expenses, the appellate authority pointed out that expenses incurred arose under the head "advertisement, sales promotion and legal charges". The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. for transfer of undivided share of the land and the second with the developer, the asses-see herein for construction as per the specification. Apart from this, there is an agreement for providing air-conditioning facility and an agreement for providing car park facility. 20. A perusal of the sample sale deed dated May 31, 2000, for the shop shows that Spencer and Co. sold undivided share of the land. Apart from conveying the undivided share in the land, the deed contained various clauses pertaining to the enjoyment of common amenities, the rights of the developer, allotment of the car park as well as the rights of the purchaser. Schedule C in the sale deed relates to the restrictions on the rights of the purchasers. Clause (e) of schedule C refers to the sale of undivided share in the land and the apartment referred to in schedule B together with reserved car park space shall always be considered as inseparable and one cannot be sold and disposed of without the other or the others. Schedule D deals with the rights included in the transfer to the purchaser. Clause 12 of the agreement shows that terraces/basement/atriums/unreserved car park space shall always remain under the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... space, the consideration received is inclusive of the provision of amenities and they are treated as part of the revenue from the property development. As regards the sale of shop space, the assessee entered into three such agreements. 23. A sample of the air-conditioning agreement between the builder and the purchaser shows that the builder shall install the necessary central air-conditioning plant and accessories at their cost to enable them to extend the air-condition facilities. 24. The agreement entered into between the purchaser and the assessee herein reveals that as per clause (1), the builder is to purchase and install necessary central air-conditioning plant and equipments and other accessories at their own cost in order to enable them to extend the central air-conditioning facility to the said apartment. The charges are fixed at Rs. 250 per sq. ft. of super built up area as deposit to the builder (clause 3). As per clause 4, the builder is authorised to adjust 20 per cent. of the deposit annually towards the central air-conditioning amenities to be provided from the date of installation of the plant for five years or appropriation of the entire deposit or such percent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly given to the shops alone. 26. As already seen, the assessee is in the business of construction and sale of built-up areas. Read in the context of the sale agreement and the one with the developer, the execution of a separate agreement on air-conditioning facility appears to be nothing but a device to suit the convenience of the assessee. Admittedly, the entire office-cum-shopping complex is a centrally air-conditioned one. The purchasers, without any exception, take this facility and there is no option to stay out of this common facility. Although the construction might have been split into more than one contract, as may be seen from the model agreement, what has been spoken to under the agreement is a part of the entire transaction of sale. Read in the background of clause 8 of the air-conditioning agreement that the transfer would be without any consideration and the terms of the sale agreement on the rights of the purchaser to common facilities, it stands to reason that what has been collected in the name of charges for the facility extended is, in reality, recouping of the charges for the installation of the plant. As rightly pointed out by the Assessing Officer and confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or disposed of without the other or others." 28. Clause 12 of the sale deed touches on what is given to the developer. This reads as follows : "The terraces/basement/atriums/unreserved car park space of the buildings in Spencer Plaza shall always remain under the control, ownership and use of the developer or their nominees. The developer or their nominees shall be exclusively entitled to any income that may be derived from the same. The purchaser shall have no right to object to such use of the terraces/basement/atriums/unreserved car park space on any grounds whatsoever. The use of the unreserved car park space shall be regulated by the developer or their nominees. The purchaser further agree not to object to the use of common areas, amenities and lifts by the developer or its nominee/s for use of terraces/ basement/atriums/unreserved car park." 29. A reading of the model car park agreement shows that the owners are to deposit a sum of Rs. 35,000 interest-free and that the owners are liable to pay municipal tax and other public charges in respect of the car park. Learned counsel appearing for the assessee pointed out that where the owner had surrendered the car park space s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessing Officer held that the method of accounting adopted by the assessee was such that the profits and gains of the assessee could be properly deduced by applying the completed contract method. It is not denied by the asses-see that the adjustment statement on the basis of which the claim is made by the assessee for the spread over, did not form part of the accounts. Hence, he ignored the statement to go by the regular method by which the assessee maintained the accounts, namely, the mercantile accounting, and worked out the income as referable to the completed phase of construction. The assessment order referred to the notes under the notes on accounts of the relevant period (1992-93) as follows : "Income from property development is recognised in the year in which the building space is completed and is ready for occupation by the buyers ; (i) In respect of building space for which sale deed has been executed, irrespective of the receipt of entire consideration. (ii) In respect of others, on receipt of full consideration." 32. It is seen from the order of the Assessing Officer that the assessee amortized the expenses on advertisement, sales promotion and legal charges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad over for a period of 12 years. Touching on the deduction to be given to business expenditure, the apex court held that (headnote) "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 is 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". 36. The said decision of the apex court was applied by the Bombay High Court in the decision reported in CIT v. Taparia Tools Ltd. [2003] 260 ITR 102. It is seen from the facts in the said decision that the assessee therein issued debentures redeemable after five years. As per the agreement, the upfront payment of interest immediately on allotment was shown in its financial statement as deferred expenditure. The assessee, however, had the benefit of the said sum to the business over the period of time. The Bombay High Court held that the liability, hence, was to be spread over a period of the debentures. In so holding, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to the issue on the assessment on the amortisation of the expenditure. In the decision of the apex court and that of the Bombay High Court, there was no doubt that the assessee derived a continued benefit over the period of years. The benefit is given by way of a contractual obligation. We do not find any such facts to accept the plea of matching concept as invoked by the assessee. However as already seen, considering the nature of business, the principle laid down by the apex court has relevance to the facts herein for the limited purpose of understanding that the revenue expenditure, normally, must be allowed in its entirety in the year in which it is incurred, and spreading over is an exception conditioned by the facts prevailing in a particular case. Looking at the facts herein, the expenditure on advertising can-not be dissected to point out any definite benefit referable to a specified part or the period of the business activity, in the sense of its having relevance to the completed phase or the phase which is still under construction. Only when the benefit can reasonably be attributed as having relevance to the later year, it is possible to go for amortization. Learned se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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