DCIT, CHENNAI V. M/s. Mahindra Holidays & Resorts India Limited, CHENNAI

ITA 1762/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64412 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 09-10-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 04-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHAJI P JACOB IRS
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE DR. O.K.NARAYANAN, VICE-PRESIDENT AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NOS.1614 & 1615(MDS)/2011 ASSESSMENT YEARS : 2006-07 & 2007-08 M/S.MAHINDRA HOLIDAYS & RESORTS INDIA LTD., MAHINDRA TOWERS, II FLOOR, 17-18, PATULLOS ROAD, CHENNAI-600 002. PAN AAACM6469L. VS. THE DEPUTY COMMISSIONER OF INCOME-TAX, LARGE TAX PAYER UNIT, CHENNAI. (APPELLANT) (RESPONDENT) AN D ITA NOS.1762 & 1763(MDS)/20 11 ASSESSMENT YEARS : 2006-07 & 2007-08 THE DEPUTY COMMISSIONER OF M/S.MAHINDRA HOLIDAYS & INCOME-TAX, LARGE TAX VS. RESORTS I NDIA LTD., PAYER UNIT, CHENNAI. CHENN AI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI R.VIJAYARAGHAVAN, A DVOCATE DEPARTMENT BY : SHRI SHAJI PJACOB, IRS, ADDL.CIT DATE OF HEARING : 9 TH OCTOBER, 2012 DATE OF PRONOUNCEMENT : 17 TH OCTOBER, 2012 - - ITA 1614, 1615, ETC. OF 2011 2 O R D E R PER DR.O.K.NARAYANAN, VICE PRESIDENT THIS IS A SET OF CROSS APPEALS FILED BY THE ASSES SEE AND THE REVENUE FOR THE TWO ASSESSMENT YEARS 2006-07 AN D 2007-08. THESE APPEALS ARE DIRECTED AGAINST THE OR DERS PASSED BY THE COMMISSIONER OF INCOME-TAX(APPEALS), LARGE T AX PAYER UNIT AT CHENNAI ON 25-8-2011. THE APPEALS ARISE OU T OF THE ASSESSMENTS COMPLETED UNDER SECTION 143(3) OF THE I NCOME-TAX ACT, 1961. 2. WE WILL FIRST CONSIDER THE CROSS APPEALS FILED FOR THE ASSESSMENT YEAR 2006-07. 3. THE APPEAL FILED BY THE ASSESSEE IS IN ITA NO.1614(MDS)/2011. 3.1. THE FIRST GROUND RAISED BY THE ASSESSEE IS TH AT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN CO NFIRMING THE ADDITION OF ` 61,78,71,246/- TO THE INCOME OF THE ASSESSEE. IT IS THE CASE OF THE ASSESSEE THAT THE SAID SUM WAS N OT CHARGEABLE TO TAX AS INCOME OF THE ASSESSEE FOR THE ASSESSMENT YEAR UNDER APPEAL. - - ITA 1614, 1615, ETC. OF 2011 3 3.2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF RU NNING HOLIDAY HOMES ON TIME SHARE BASIS. MEMBERS ARE ADM ITTED AS TIME SHAREHOLDERS AND THEY ARE PROVIDED STAY IN THE HOLIDAY HOMES MAINTAINED BY THE ASSESSEE FOR A SPECIFIED NU MBER OF DAYS IN A YEAR. WHENEVER NEW MEMBERS/CUSTOMERS SUB SCRIBE TO THE MEMBERSHIP OF THE ASSESSEES HOLIDAY HOME PLAN, THE ASSESSEE IS COLLECTING MEMBERSHIP FEES FROM THEM. THE ASSESSEE PROVIDES HOLIDAY HOME FACILITY FOR ITS MEM BERS FOR A PERIOD OF 25 YEARS. A MEMBER IS ENTITLED TO COME A ND STAY IN THE HOLIDAY HOME FOR A SPECIFIED NUMBER OF DAYS IN A PA RTICULAR YEAR. WHILE COLLECTING MEMBERSHIP FEES FROM TIME SHAREHOL DERS, THE ASSESSEE COMPANY OFFERS 60% OF SUCH MEMBERSHIP COLL ECTION AS INCOME OF THE YEAR OF COLLECTION. THE BALANCE 40% OF THE MEMBERSHIP FEES IS TREATED AS DEFERRED INCOME TO BE SPREAD OVER THE REMAINING PERIOD OF HOLIDAY SHARE OWNED BY A MEMBER. IN A 25 YEAR PLAN, THE 60% MEMBERSHIP FEES IS TREAT ED AS INCOME OF THE ASSESSEE FOR THE FIRST YEAR AND THE B ALANCE 40% IS TO BE TREATED AS INCOME OF THE REMAINING 24 YEARS O N A PRO RATA BASIS. - - ITA 1614, 1615, ETC. OF 2011 4 3.3. THIS METHOD OF RECOGNIZING THE INCOME WAS NOT ACCEPTED BY THE ASSESSING OFFICER. THE ASSESSING O FFICER FOUND THAT EVEN IF A TIME SHAREHOLDER IS ENTITLED TO ENJO Y THE PRIVILEGE OF STAYING IN THE HOLIDAY HOMES OF THE ASSESSEE FOR A PERIOD OF 25 YEARS, THE ASSESSEE COMPANY IS NOT INCURRING ANY EX PENDITURE IN THE SUBSEQUENT YEARS FOR PROVIDING SUCH FACILITIES TO THE MEMBERS. IN ADDITION TO THE MEMBERSHIP FEES COLLEC TED BY THE ASSESSEE COMPANY, THE ASSESSEE IS ALSO COLLECTING U PKEEP AND MAINTENANCE CHARGES FROM THE MEMBERS AS ANNUAL CHAR GES. THESE ANNUAL CHARGES WILL TAKE CARE OF THE EXPENSES , IF ANY, REQUIRED IN CONNECTION WITH PROVIDING THE FACILITIE S TO THE MEMBERS FOR THE SUBSEQUENT YEARS OF THE HOLIDAY PLA N. THE ASSESSING OFFICER HAS FURTHER POINTED OUT THAT THE ASSESSEE CLAIMS THE ENTIRE EXPENSES INCURRED IN A PARTICULAR YEAR AS DEDUCTION IN THAT YEAR ITSELF, BUT AT THE SAME TIME DEFERS A PORTION OF ITS INCOME TO BE SPREAD OVER THE SUBSEQUENT YEAR S, WHICH IS NOT IN CONFORMITY WITH THE MATCHING PRINCIPLE OF AC COUNTANCY. THE ASSESSING OFFICER ALSO POINTED OUT THAT THE EXP ENDITURE NOT INCURRED OR LOSS NOT SUFFERED IN A PARTICULAR ASSES SMENT YEAR - - ITA 1614, 1615, ETC. OF 2011 5 CANNOT BE DEDUCTED AGAINST THE ACTUAL RECEIPTS OF T HAT PARTICULAR YEAR. 3.4. THE ASSESSING OFFICER RELIED ON THE DECISION OF THE INCOME-TAX APPELLATE TRIBUNAL, CHENNAI BENCH, RENDE RED IN THE CASE OF STERLING HOLIDAY RESORTS(INDIA) LTD. VS. AC IT, 295 ITR (AT) 162, WHEREIN THE TRIBUNAL HAS HELD THAT THE EN TIRE FEE COLLECTED IN A PARTICULAR YEAR IN SIMILAR CIRCUMSTA NCES IS THE INCOME LIABLE FOR TAXATION IN THE YEAR OF RECEIPT. 3.5. ACCORDINGLY, THE ASSESSING OFFICER TREATED TH E ENTIRE HUNDRED PER CENT OF THE MEMBERSHIP COLLECTION AS IN COME LIABLE FOR TAXATION FOR THE IMPUGNED ASSESSMENT YEAR 2006- 07. IT IS HOW THE ADDITION OF ` 61,78,71,246/- HAS BEEN MADE BY THE ASSESSING OFFICER. 3.6. IN FIRST APPEAL, THE COMMISSIONER OF INCOME- TAX(APPEALS) ALSO CONCURRED WITH THE FINDINGS OF FA CT RECORDED BY THE ASSESSING OFFICER. HE FOUND THAT IN ADDITION T O THE MEMBERSHIP FEES, THE ASSESSEE IS ALSO COLLECTING AN NUAL MAINTENANCE CHARGES OR ANNUAL SUBSCRIPTION FEES. T HESE ANNUAL CHARGES ARE COLLECTED FROM THE MEMBERS IRRESPECTIVE OF WHETHER A MEMBER HAS OCCUPIED THE RESORT OR NOT AND, WHEN A MEMBER - - ITA 1614, 1615, ETC. OF 2011 6 OCCUPIES THE FACILITY, HE MAKES FURTHER PAYMENT TOW ARDS ELECTRICITY, WATER, AIR-CONDITIONING, ETC. THE COM MISSIONER OF INCOME-TAX(APPEALS) FURTHER OBSERVED THAT WHEN THE ASSESSEE COMPANY IS COLLECTING SUCH ANNUAL SUBSCRIPTION CHAR GES AS WELL AS ACTUAL UTILIZATION CHARGES SO AS TO MEET THE REC URRING EXPENSES IN CONNECTION WITH MAINTENANCE AND MANAGEM ENT OF THE RESORT, THE ASSESSEE IS NOT OFFERING THE ENTIRE MEMBERSHIP FEES AS ITS INCOME FOR TAXATION. ONLY 60% OF THE M EMBERSHIP FEES IS RECOGNIZED AS THE INCOME OF THE YEAR AND TH E BALANCE 40% IS SPREAD OVER THE REMAINING PERIOD OF MEMBERSH IP. THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS AGREED WITH THE ASSESSING AUTHORITY THAT THE MATCHING PRINCIPLE OF ACCOUNTANCY IS NOT OBSERVED AND, THEREFORE, THE DIVISION OF MEMBER SHIP FEE MADE BY THE ASSESSEE BETWEEN 60% AND 40%, IS NOT AC CEPTABLE FOR THE PURPOSES OF INCOME-TAX. 3.7. THE ASSESSEE, ON THE OTHER HAND, RELIED ON TH E DECISION OF THE INCOME-TAX APPELLATE TRIBUNAL, CHEN NAI B SPECIAL BENCH RENDERED IN ASSESSEES OWN CASE IN AC IT VS. MAHINDRA HOLIDAYS & RESORTS(INDIA) LTD., 131 TTJ (C HENNAI) (SB) 1. IN THE SAID SPECIAL BENCH DECISION, THE TR IBUNAL HAS HELD - - ITA 1614, 1615, ETC. OF 2011 7 THAT TWO CONDITIONS ARE NECESSARY TO SAY THAT INCOM E HAS ACCRUED TO OR EARNED BY THE ASSESSEE. THEY ARE: (I ) IT IS NECESSARY THAT THE ASSESSEE MUST HAVE CONTRIBUTED T O ITS ACCRUING OR ARISING BY RENDERING SERVICES OR OTHERW ISE, AND (II) A DEBT MUST HAVE COME INTO EXISTENCE AND HE MUST HAVE ACQUIRED A RIGHT TO RECEIVE THE PAYMENT. IN THE PRESENT CAS E, A DEBT IS CREATED IN FAVOUR OF THE ASSESSEE IMMEDIATELY ON EX ECUTION 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 M EMBERS FOR ONE WEEK EVERY YEAR TILL THE CURRENCY OF THE ME MBERSHIP. TILL THE ASSESSEE FULFILS ITS PROMISE, THE PARENTHOOD CA NNOT BE TRACED TO IT. IF THE ASSESSEE CONFIRMS THE RESERVATION BU T IS NOT ABLE TO PROVIDE THE ALLOTMENT OR THE ALTERNATE ACCOMMODATIO N, ASSESSEE IS LIABLE TO PAY LIQUIDATED DAMAGES TO THE MEMBER. THE SPECIAL BENCH CONTINUED TO OBSERVE THAT THE ASSESSEE IS LIA BLE 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 NON AVAILABILITY. THUS, THE MATTER D OES NOT END ON - - ITA 1614, 1615, ETC. OF 2011 8 SIGNING OF THE AGREEMENT AND ON A PERSON BECOMING A MEMBER. THERE IS A CONTINUING LIABILITY ON THE PART OF THE ASSESSEE NOT ONLY TO PROVIDE ACCOMMODATION BUT ALSO TO PROVIDE OTHER INCIDENTAL SERVICES ATTACHED WITH THE ACCOMMODATION. RELYING ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE O F E.D.SASSOON & CO. LTD. VS. CIT 26 ITR 27, THE SPECI AL BENCH HELD THAT FOR A LIABILITY TO QUALIFY FOR RECOGNITIO N, THERE MUST BE NOT ONLY PRESENT OBLIGATION BUT ALSO THE PROBABILITY OF AN OUTFLOW OF RESOURCES TO SETTLE THAT OBLIGATION. IN THE PRESEN T CASE, THE PAST EVENT IS ADMITTING A PERSON AS A MEMBER WITH A PROM ISE TO FULFIL THE OBLIGATION OF PROVIDING HIM ACCOMMODATION FOR O NE WEEK EVERY YEAR FOR THE NEXT 25 YEARS, WHICH IS NOT AN O RDINARY OBLIGATION. THE SPECIAL BENCH HELD ACCORDINGLY THA T THE ASSESSEE IS JUSTIFIED IN TREATING 60% OF MEMBERSHIP FEES COLLECTION AS INCOME OF THE YEAR OF COLLECTION AND THE BALANCE 40% AS THE INCOME OF THE REMAINING 24 YEARS. 3.8. THE ABOVE SPECIAL BENCH DECISION DELIVERED IN ASSESSEES OWN CASE HAS NOT BEEN FOLLOWED BY THE COMMISSIONER OF INCOME-TAX(APPEALS) IN THE PRESENT CASE. ACCORDING TO THE COMMISSIONER OF INCOME-TAX(APPEALS ), THE - - ITA 1614, 1615, ETC. OF 2011 9 CORRECT LAW ON THIS ISSUE HAS BEEN LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. CALCUTTA STOCK EXCHANGE ASSOCIATION LTD., 36 ITR 222 AND IN THE CASE OF DEL HI STOCK EXCHANGE ASSOCIATION LTD. VS. CIT, 41 ITR 495. THE COMMISSIONER OF INCOME-TAX(APPEALS) OBSERVED THAT T HE ABOVE TWO JUDGMENTS OF THE HONBLE SUPREME COURT WERE NOT PLACED BEFORE THE SPECIAL BENCH OF THE TRIBUNAL WHEN THE M ATTER WAS HEARD. ULTIMATELY, THE COMMISSIONER OF INCOME-TAX( APPEALS) FOLLOWED THE ABOVE STATED JUDGMENTS OF THE HONBLE SUPREME COURT AND HELD THAT THE ASSESSEE IS NOT JUSTIFIED I N TREATING 40% OF THE MEMBERSHIP COLLECTION AS DEFERRED TO BE SPRE AD OVER THE CURRENCY OF MEMBERSHIP ENJOYED BY A TIME SHAREHOLDE R. THE COMMISSIONER OF INCOME-TAX(APPEALS) UPHELD THE FIND ING OF THE ASSESSING AUTHORITY THAT THE ENTIRE HUNDRED PER CEN T OF THE MEMBERSHIP FEES IS IN THE NATURE OF INCOME OF THE Y EAR OF COLLECTION. 3.9. SHRI R.VIJAYARAGHAVAN, THE LEARNED COUNSEL APPEARING FOR THE ASSESSEE SUBMITTED THAT THE ISSUE STANDS COVERED BY THE DECISION OF THE INCOME-TAX APPELLATE TRIBUNAL, SPECIAL BENCH, IN ASSESSEES OWN CASE AS REPORTED I N 131 TTJ 1 - - ITA 1614, 1615, ETC. OF 2011 10 AND, THEREFORE, THE COMMISSIONER OF INCOME-TAX(APPE ALS) HAS ERRED IN UPHOLDING THE DECISION OF THE ASSESSING AU THORITY ON THIS ISSUE. HE CONTENDED THAT THE DECISION OF THE SPECI AL BENCH PASSED IN ASSESSEES OWN CASE IS BINDING ON THE COM MISSIONER OF INCOME-TAX(APPEALS) AND HE OUGHT TO HAVE ALLOWED THE CONTENTION OF THE ASSESSEE BY FOLLOWING THE SAID DE CISION OF THE SPECIAL BENCH. 3.10. SHRI SHAJI P JACOB, THE LEARNED COMMISSIONER OF INCOME-TAX APPEARING FOR THE REVENUE, SUPPORTED THE DETAILED ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX(APPE ALS) AND CONTENDED THAT THE COMMISSIONER OF INCOME-TAX(APPEA LS) WAS CONSTRAINED NOT TO FOLLOW THE SPECIAL BENCH DECISIO N, AS DECISIONS OF THE HONBLE SUPREME COURT ON THE ISSUE ARE VERY MUCH AVAILABLE AND THE COMMISSIONER OF INCOME-TAX(A PPEALS) WAS BOUND TO FOLLOW THE JUDGMENTS OF THE HONBLE SU PREME COURT ALONE AND IN THESE CIRCUMSTANCES HE IS JUSTIF IED IN REJECTING THE CONTENTION OF THE ASSESSEE. 3.11. WE HEARD BOTH SIDES IN DETAIL. THE DECISION S OF THE HONBLE SUPREME COURT, RELIED ON BY THE COMMISSIONE R OF INCOME-TAX(APPEALS), IN THE CASE OF CIT VS. CALCUTT A STOCK - - ITA 1614, 1615, ETC. OF 2011 11 EXCHANGE ASSOCIATION LTD., 36 ITR 222 AND IN THE CA SE OF DELHI STOCK EXCHANGE ASSOCIATION LTD. VS. CIT, 41 ITR 495 , ARE RENDERED IN THE CONTEXT OF COLLECTION OF MEMBERSHIP FEES MADE FROM STOCK EXCHANGE MEMBERS. EVEN THOUGH THE NATUR E OF THE SERVICES RENDERED BY THE STOCK EXCHANGE TO THE MEMB ERS AND THE NATURE OF SERVICES RENDERED BY THE ASSESSEE AS A HOLIDAY HOME PROVIDER ARE DIFFERENT, STILL CERTAIN BASIC PR INCIPLES HAVE BEEN PRONOUNCED BY THE HONBLE SUPREME COURT IN THE CASE OF DELHI STOCK EXCHANGE ASSOCIATION LTD. VS. CIT, 41 I TR 495. THE HONBLE SUPREME COURT HAS OBSERVED THAT IT WAS NOT HOW THE ASSESSEE TREATED ANY MONIES RECEIVED, BUT WHAT WAS THE NATURE OF THE RECEIPTS IN QUESTION THAT WAS DECISIVE OF TH EIR TAXABILITY AND, THEREFORE, THE FACT THAT THE ASSESSEE SHOWED T HE ADMISSION FEES AS CAPITAL IN ITS BOOKS WAS NOT DECISIVE ON TH E QUESTION OF THEIR TAXABILITY. 3.12. WHEN COMING TO THE MINUTE EXAMINATION OF THE FACTS OF THE CASE, WE FIND THAT MEMBERSHIP FEE ALONE IS N OT THE OBLIGATION COLLECTED BY THE ASSESSEE COMPANY FROM I TS MEMBERS. THE ASSESSEE COMPANY LEVIES ANNUAL CHARGES FOR THE UPKEEP AND MAINTENANCE OF THE RESORTS AND THEIR EQUIPMENTS . WHENEVER - - ITA 1614, 1615, ETC. OF 2011 12 A MEMBER OCCUPIES HIS HOLIDAY HOME PORTION, HE IS C HARGED FOR UTILITIES LIKE POWER, WATER, ETC. THE FUNDS NECESS ARY FOR THE ANNUAL SERVICES RENDERED BY THE ASSESSEE COMPANY TO ITS MEMBERS ARE THUS ANNUALLY COLLECTED FROM THE MEMBER S THEMSELVES. THEREFORE, SUCH EXPENSES NEED NOT BE R ESERVED FROM THE MEMBERSHIP FEE COLLECTED FROM THE MEMBERS AT THE TIME OF ADMISSION. 3.13. FURTHER, THE HOLIDAY HOME PROPERTY OWNED BY THE ASSESSEE COMPANY IS NOT MAINTAINED FOR A PARTICULAR MEMBER. THE PROPERTY REMAINS THAT OF THE ASSESSEE AND THE A SSESSEE HAS TO MAINTAIN THE PROPERTY AS ITS BUSINESS ASSET IRRE SPECTIVE OF THE NUMBER OF NEW MEMBERS ADMITTED AND THE NUMBER OF ME MBERS REMAINING IN THE LIST FOR THEIR UNEXPIRED PERIOD. THERE IS NO NEXUS BETWEEN A PARTICULAR MEMBER AND THE MAINTENANCE OF THE HOLIDAY HOME OWNED BY THE ASSESSEE. 3.14. FURTHER, IT IS THE EXPLANATION OF THE ASSESS EE THAT WHENEVER A MEMBER IS NOT PROVIDED WITH ACCOMMODATIO N AS RESERVED FOR, THE ASSESSEE COMPANY IS LIABLE TO PAY LIQUIDATED DAMAGES TO THE MEMBER AND IT IS NECESSARY FOR THE A SSESSEE COMPANY TO PROVIDE FOR SUCH LIABILITIES AS WELL. B UT IT SHOULD BE - - ITA 1614, 1615, ETC. OF 2011 13 SEEN THAT THOSE LIABILITIES ARE NOT IN THE NATURE O F ASCERTAINED LIABILITIES. THEY ARE ONLY CONTINGENT LIABILITIES. SUCH SITUATION MAY OR MAY NOT ARISE. THE LIABILITY IS TO BE SETTL ED ONLY IF SUCH SITUATION ARISES. THE CONNECTED EXPENSES ALSO CAN BE RECOGNIZED ONLY AT THAT POINT OF TIME. THEREFORE, THERE IS NO MUCH FORCE IN THE ARGUMENT OF THE ASSESSEE THAT SOM E PORTION OF THE MEMBERSHIP FEE COLLECTION SHOULD BE RESERVED FO R MEETING SUCH FUTURE CONTINGENT LIABILITIES. 3.15. FROM THE ACCOUNTANCY POINT OF VIEW ALSO, THE 60% AND 40% DIVISION MADE BY THE ASSESSEE IS VERY CUMBE RSOME AND PERPETUALLY INDEFINITE. THE FINAL RECOGNITION OF INCOME FROM THESE COMPOUNDING TRANSACTIONS IS INDEFINITELY POST PONED BY THE ASSESSEE. THE RESULT IS THAT THE FUTURE LIABILITY STATED BY THE ASSESSEE IS UNMEASURABLE AND UNASCERTAINABLE. IN A PARTICULAR YEAR THE ASSESSEE ADMITS CERTAIN NUMBER OF MEMBERS AND 60% OF THEIR MEMBERSHIP FEES IS TREATED AS INCOME OF TH AT PARTICULAR YEAR AND 40% IS CARRIED FORWARD TO THE SUBSEQUENT 2 4 ASSESSMENT YEARS TO BE SPREAD OVER EVENLY. THIS CA RRY FORWARD ADJUSTMENT IS MADE YEAR AFTER YEAR. THIS ADDS COMP LEXITY EVEN TO THE ACCOUNTING COMPREHENSIVENESS. - - ITA 1614, 1615, ETC. OF 2011 14 3.16. ONE OF THE BASIC POSTULATES OF ACCOUNTANCY I S THE GOING CONCERN CONCEPT. THE INCOME AND EXPENDITUR E OF AN ASSESSEE IS ASCERTAINED ON THE PRESUMPTION THAT THE ASSESSEE WILL CARRY ON THE BUSINESS FOR A LONG TIME. IF THI S GOING CONCERN CONCEPT IS APPLIED IN ASSESSEES CASE, IT IS EASY T O FIND THAT THE NOMINAL EXPENDITURE THAT MAY BE REQUIRED FOR THE AS SESSEE TO MEET THE EXPENDITURE ON MEMBERS FOR THE SUBSEQUENT YEARS OF ADMISSION IS WELL COMPENSATED BY THE COLLECTION MAD E IN THOSE SUBSEQUENT YEARS OF ADMISSION. IN THAT MANNER, TH E EXPENSES APPREHENDED BY THE ASSESSEE TO BE INCURRED IN FUTUR E FOR THE EXISTING MEMBERS ARE COMPENSATED BY THE CONTRIBUTIO NS MADE BY THE INCOMING MEMBERS YEAR AFTER YEAR. THEREFORE , IT IS COMPENSATING AND, PRACTICALLY SPEAKING, THERE IS NO NEED TO PRESERVE ANY PORTION OF THE MEMBERSHIP FEES TO MEET FUTURE LIABILITIES. 3.17. THIS IS MAINLY FOR THE REASON THAT, AS ALREA DY STATED ABOVE, THE LIABILITY OF THE ASSESSEE IS TO MAINTAIN THE ASSETS AND PROPERTIES AS A WHOLE FOR CARRYING ON ITS BUSINESS AND NOT FOR A PARTICULAR MEMBER. THE ASSESSEE IS APPORTIONING TH E MEMBERSHIP FEES BETWEEN 60% AND 40% ON THE PRINCIPL E OF - - ITA 1614, 1615, ETC. OF 2011 15 INDIVIDUAL LIABILITY EXISTING BETWEEN THE ASSESSEE AND ITS MEMBERS. THE CONCEPT OF INDIVIDUAL LIABILITY IS HY PERTECHNICAL. 3.18. THEREFORE, IT IS VERY DIFFICULT TO AGREE WIT H THE CONTENTION OF THE ASSESSEE COMPANY THAT THE REVENUE MODEL OF APPORTIONING THE MEMBERSHIP COLLECTION BETWEEN 60% AND 40% IS JUSTIFIED. WE FIND THAT THE REVENUE MODEL ADOPT ED BY THE ASSESSEE IS BASED ON HYPOTHESIS AND NOT ON FACTS. ON THE OTHER HAND, THE REVENUE MODEL OF TREATING THE ENTIRE MEMB ERSHIP FEE COLLECTION AS INCOME OF THE YEAR OF COLLECTION PROP OSED BY THE ASSESSING OFFICER IS MORE JUSTIFIED. 3.19. IT MAY BE IN THE ABOVE CONTEXT THAT ANOTHER BENCH OF THE INCOME-TAX APPELLATE TRIBUNAL, CHENNAI HAS H ELD IN THE CASE OF STERLING HOLIDAY RESORTS (INDIA) LTD. VS. A CIT, 295 ITR (AT) 162 THAT THE CONCEPT OF DEFERRED INCOME IS ALI EN TO THE INCOME-TAX ACT. INCOME ON ITS COMING INTO EXISTENC E ATTRACTS TAX. THE OBLIGATION TO USE THE INCOME IN A PARTICULAR MA NNER DOES NOT REMOVE IT FROM THE CATEGORY OF INCOME EVEN IF THE O BLIGATION IS PART OF THE ORIGINAL CONTRACT GIVING RISE TO THE IN COME. THE INCOME THAT IS RECEIVED OR DEEMED TO BE RECEIVED IN THE PREVIOUS YEAR IS EXIGIBLE TO TAX. - - ITA 1614, 1615, ETC. OF 2011 16 4. BUT, INSPITE OF THE VIEWS EXPRESSED ABOVE, WE F IND THAT WE ARE BOUND TO FOLLOW THE JUDGMENT OF THE INC OME-TAX APPELLATE TRIBUNAL, CHENNAI B SPECIAL BENCH RENDE RED IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 1998-9 9 TO 2002-03. IN THE SAID DECISION RENDERED IN THE CASE OF ACIT VS. MAHINDRA HOLIDAYS & RESORTS (INDIA) LTD., 131 TTJ ( CHENNAI) (SB) 1, THE SPECIAL BENCH HAS HELD THAT 40% OF DEFE RMENT OF MEMBERSHIP FEE RESORTED TO BY THE ASSESSEE IS JUSTI FIED. THE SAID DECISION OF THE SPECIAL BENCH IS RENDERED IN A SSESSEES OWN CASE IN EXACTLY SIMILAR CIRCUMSTANCES. THEREFO RE, THE RULE OF PRECEDENCE DEMANDS THAT THE DECISION OF THE SPECIAL BENCH MUST PREVAIL. 5. ACCORDINGLY, WITH DUE RESPECT, WE FOLLOW THE SP ECIAL BENCH DECISION RENDERED IN ASSESSEES OWN CASE AND HOLD THAT THE ASSESSEE IS JUSTIFIED IN TREATING ONLY 60% OF I TS MEMBERSHIP FEE COLLECTION AS ITS INCOME OF THE IMPUGNED ASSESS MENT YEAR. 6. ACCORDINGLY, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE AND THE ADDITION OF ` 61,78,71,246/- IS DELETED. 7. THE NEXT GROUND RAISED BY THE ASSESSEE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN DI RECTING THE - - ITA 1614, 1615, ETC. OF 2011 17 ASSESSING OFFICER TO VERIFY THE EXPENDITURE OF ` 3,12,77,264/- AND ALLOW IT, IF THE SAME WAS INCURRED ON SALARIES, REN T, INTEREST, REPAIRS AND FURNITURE. IT IS THE CASE OF THE ASSES SEE THAT THE ENTIRE OF SUCH EXPENDITURE WAS ALLOWED BY THE TRIBU NAL IN ASSESSEES OWN CASE FOR THE EARLIER ASSESSMENT YEAR 1998-99, THROUGH THEIR ORDER DATED 19-10-2005 PASSED IN ITA NO.337(MDS)/2002. IN FACT, THE COMMISSIONER OF INC OME- TAX(APPEALS) HAS FOLLOWED THE ORDER OF THE INCOME-T AX APPELLATE TRIBUNAL, A-BENCH, CHENNAI, IN ASSESSEES OWN CASE RENDERED FOR THE ASSESSMENT YEAR 1998-99 IN ITA NO.337(MDS)/ 2002. IT IS IN THE LIGHT OF THE ABOVE ORDER OF THE TRIBUNAL THA T THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS DIRECTED TH E ASSESSING OFFICER TO VERIFY THE EXPENDITURE AND ALL OW THOSE ITEMS RELATING TO SALARIES, RENT, INTEREST, REPAIRS AND F URNITURE. THE TRIBUNAL ALSO HAD GIVEN SIMILAR DIRECTION FOR THE A SSESSMENT YEAR 2005-06. THE COMMISSIONER OF INCOME-TAX(APPEALS) H AS STRICTLY FOLLOWED THE ORDER OF THE TRIBUNAL. THEREFORE, WE FIND NO MERIT IN THIS GROUND RAISED BY THE ASSESSEE. IT FAILS. 8. THE THIRD GROUND RAISED BY THE ASSESSEE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN CO NFIRMING - - ITA 1614, 1615, ETC. OF 2011 18 THE DISALLOWANCE OF SET OFF FOR LOSS OF ` 2,35,60,140/- OF M/S. MAHINDRA ENTERTAINMENT LTD. (AMALGAMATING COMPANY) IN THE HANDS OF THE ASSESSEE (AMALGAMATED COMPANY). THIS GROUND IS DISMISSED AS NOT PRESSED. 9. THE ASSESSEE IS PARTLY SUCCESSFUL IN ITS APPEAL FILED FOR THE ASSESSMENT YEAR 2006-07. 10. NEXT WE WILL CONSIDER THE APPEAL FILED BY THE REVENUE FOR THE ASSESSMENT YEAR 2006-07 IN ITA NO.1762(MDS)/2011. 11. THE FIRST ISSUE RAISED IN THIS APPEAL FILED BY THE REVENUE IS THAT THE COMMISSIONER OF INCOME-TAX(APPE ALS) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO VERIFY THE EXPENDITURE INCURRED BY THE ASSESSEE DURING CONSTRUCTION AND AL LOW THE SAME IF IT WAS INCURRED ON FURNITURE. IT IS THE CASE OF THE REVENUE THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS FAILED TO APPRECIATE THAT THE EXPENDITURE ON FURNITURE IS CLE ARLY A CAPITAL EXPENDITURE, WHICH WOULD NOT BE ALLOWABLE AS REVENU E EXPENDITURE. IT IS THE FURTHER CASE OF REVENUE THA T THE FURNITURE PROCURED DURING THE CONSTRUCTION PERIOD WERE NOT PU T TO USE AND NOT EVEN ELIGIBLE FOR DEPRECIATION. - - ITA 1614, 1615, ETC. OF 2011 19 11.1. IN FACT, THIS ISSUE WAS DECIDED IN ASSESSEE S APPEAL CONSIDERED FOR THE VERY SAME ASSESSMENT YEAR. THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS IN FACT REM ITTED THE ISSUE TO THE ASSESSING OFFICER TO VERIFY WHETHER TH E EXPENDITURE TOTALING TO ` 3,12,77,264/- WAS INCURRED ON SALARIES, RENT, INTE REST, REPAIRS AND FURNITURE AND IF SO PROVED, DEDUCTION T O BE ALLOWED THEREON. IN THIS CONTEXT THE REVENUE IS AGGRIEVED ON THE DIRECTION PERTAINING TO THAT OF FURNITURE. EXPENSE S RELATING TO SALARIES, RENT, INTEREST AND REPAIRS ARE REVENUE IN NATURE. BUT IT IS THE CASE OF THE REVENUE THAT THE EXPENDITURE FOR TH E PURPOSE OF PROCURING FURNITURE CANNOT BE REVENUE EXPENDITURE. 11.2. WE AGREE WITH THE ARGUMENT OF THE REVENUE. FURNITURE IS A CAPITAL ASSET. RULES HAVE PROVIDED SEPARATE RATE OF DEPRECIATION IN THE CASE OF FURNITURE AND FIXTUR ES. THEY ARE DISTINCT BLOCK OF ASSETS. THEREFORE, THE EXPENSES INCURRED FOR PROCURING FURNITURE CANNOT BE ALLOWED AS A DEDUCTIO N IN THE NATURE OF REVENUE EXPENDITURE. AS THE FURNITURE WA S NOT USED FOR THE PURPOSE OF THE BUSINESS, DEPRECIATION ALSO CANN OT BE GRANTED. THEREFORE, THE DIRECTION OF THE COMMISSIO NER OF INCOME-TAX(APPEALS), AS FAR AS IT RELATED TO FURNIT URE IS - - ITA 1614, 1615, ETC. OF 2011 20 CONCERNED, WE VACATE THE SAME AND HOLD THAT THE EXP ENDITURE INCURRED FOR PROCURING FURNITURE NEEDS TO BE DISALL OWED. THIS ISSUE IS DECIDED IN FAVOUR OF THE REVENUE. 12. THE NEXT GROUND RAISED BY THE REVENUE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN DE LETING THE DISALLOWANCE OF SOFTWARE EXPENSES OF ` 66,97,954/-. THE ASSESSEE HAD ACQUIRED LICENCE TO USE THE SOFTWARE F OR A PERIOD OF THREE YEARS. EVERY YEAR THE ASSESSEE IS MAKING PAYMENT AS LICENCE FEES. AS RIGHTLY POINTED OUT BY THE COMMIS SIONER OF INCOME-TAX(APPEALS), IT IS ONLY A PAYMENT OF LICENC E FEES AND THE ASSESSEE HAS NOT ACQUIRED ANY RIGHTS. THE ASSESSEE WAS HAVING ONLY A PERMISSIVE RIGHT TO USE THE SOFTWARE. THE ASSESSEE IS NOT ENJOYING ANY COPYRIGHT. IN OTHER W ORDS, IT HAS NOT BECOME THE ASSET OF THE ASSESSEE COMPANY. THER EFORE, THE COMMISSIONER OF INCOME-TAX(APPEALS) IS JUSTIFIED IN TREATING THE AMOUNT OF ` 66,97,954/- AS REVENUE EXPENDITURE DEDUCTIBLE IN COMPUTING THE INCOME OF THE ASSESSEE COMPANY. THIS ISSUE IS DECIDED AGAINST THE REVENUE. - - ITA 1614, 1615, ETC. OF 2011 21 13. THE APPEAL FILED BY THE REVENUE FOR THE ASSESS MENT YEAR 2006-07 IS PARTLY SUCCESSFUL. 14. NEXT WE WILL CONSIDER THE APPEAL FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2007-08, IN ITA NO.1615(MDS)/2011. 15. THE FIRST GROUND RAISED IN THE APPEAL IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN CO NFIRMING THE ADDITION OF ` 98,21,25,733/-. THIS RELATES TO THE 40% OF THE MEMBERSHIP FEES DEFERRED BY THE ASSESSEE FOR FUTURE ASSESSMENT YEARS. IN THE LIGHT OF OUR ORDER FOR TH E EARLIER ASSESSMENT YEAR 2006-07, THIS ISSUE IS DECIDED IN F AVOUR OF THE ASSESSEE AND THE GROUND IS ALLOWED. ACCORDINGLY, T HE ADDITION OF ` 98,21,25,733/- IS DELETED. 16. THE SECOND GROUND RAISED BY THE ASSESSEE IS TH AT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED I N DIRECTING THE ASSESSING OFFICER TO VERIFY THE EXPENDITURE OF ` 72,72,750/- AND ALLOW IT IF THE SAME WAS INCURRED ON SALARIES, RENT, REPAIRS, INTEREST AND FURNITURE. AS HELD FOR THE EARLIER AS SESSMENT YEAR 2006-07, THIS GROUND RAISED BY THE ASSESSEE IS DISM ISSED. - - ITA 1614, 1615, ETC. OF 2011 22 17. THE THIRD GROUND RAISED BY THE ASSESSEE IS THA T THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN CO NFIRMING THE DISALLOWANCE OF MARKET RESEARCH EXPENDITURE OF ` 85,28,395/- HOLDING IT TO BE CAPITAL IN NATURE. THE ASSESSEE H AD INCURRED ` 85,28,395/- TOWARDS MARKET RESEARCH EXPENSES FOR L AUNCHING A NEW HOLIDAY CONCEPT CALLED ZEST. THE EXPENDITURE WAS INCURRED IN MAKING PAYMENT TO M/S.IDEO, WHICH PROVIDES DESIG N, CONCEPTUALIZATION AND MARKET RESEARCH TO HELP THE A SSESSEE TO LAUNCH THE NEW BUSINESS CONCEPT. THE COMMISSIONER OF INCOME-TAX(APPEALS), IN AGREEMENT WITH THE ASSESSIN G OFFICER, FOUND THAT THESE EXPENSES RELATED TO SETTING UP OF ANOTHER BUSINESS, DIFFERENT FROM THE BUSINESS OF SELLING TI ME SHARE UNITS CARRIED ON BY THE ASSESSEE COMPANY. THEREFORE, HE RELIED ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF CIT VS. J.K.CHEMICALS LTD., 207 ITR 985 AND HELD TH AT THOSE EXPENSES WERE IN FACT CAPITAL IN NATURE. HE ACCORD INGLY CONFIRMED THE DISALLOWANCE. 17.1. WE AGREE WITH THE LOWER AUTHORITIES THAT THE EXPENSES WERE INCURRED BY THE ASSESSEE FOR SETTING UP A NEW - - ITA 1614, 1615, ETC. OF 2011 23 PROJECT. THE PROJECT DID NOT TAKE PLACE AND IT WAS ABANDONED. BUT THAT DOES NOT MEAN THAT THE SAID EXPENDITURE WA S INCURRED BY THE ASSESSEE FOR THE PURPOSE OF CARRYING ON THE BUSINESS REGULARLY RUN BY THE ASSESSEE. THE EXPENSES WERE I NCURRED IN EXPERIMENTING A NEW VENTURE. THEREFORE, THE EXPENS ES WERE CAPITAL IN NATURE. IF THE ASSESSEE HAD SUCCESSFULL Y IMPLEMENTED THE NEW PROJECT, THE RELEVANT EXPENSES WOULD HAVE B EEN CAPITALIZED BY THE ASSESSEE. THEREFORE, THIS GROUN D OF THE ASSESSEE IS REJECTED. 18. THE ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2007-08 IS PARTLY ALLOWED. 19. NEXT WE WILL CONSIDER THE APPEAL FILED BY THE REVENUE FOR THE ASSESSMENT YEAR 2007-08 IN ITA NO.1763(MDS)/2011. 20. THE FIRST GROUND RAISED BY THE REVENUE IS IN R ESPECT OF THE EXPENDITURE RELATING TO FURNITURE. THIS ISS UE HAS BEEN CONSIDERED BY US IN THE APPEAL FILED BY THE ASSESSE E FOR THE EARLIER ASSESSMENT YEAR 2006-07. FOLLOWING THE SAI D ORDER, THE GROUND RAISED BY THE REVENUE IS ALLOWED. THE ASSES SING - - ITA 1614, 1615, ETC. OF 2011 24 AUTHORITY IS DIRECTED TO EXCLUDE THE COST OF FURNIT URE FROM THE AMBIT OF REVENUE EXPENDITURE, REMITTED BACK BY THE COMMISSIONER OF INCOME-TAX(APPEALS) FOR VERIFICATIO N OF THE ASSESSING OFFICER. 21. THE SECOND GROUND RAISED BY THE REVENUE IS THA T THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED I N DELETING THE DISALLOWANCE OF SOFTWARE EXPENDITURE OF ` 39,59,287/-. THIS ISSUE HAS BEEN CONSIDERED BY US IN THE APPEAL FILED BY THE REVENUE FOR THE ASSESSMENT YEAR 2006-07 AND HAS HEL D THAT IT IS ONLY AN ANNUAL LICENCE PAYMENT. IN TUNE WITH THE E ARLIER FINDING FOR THE ASSESSMENT YEAR 2006-07, THIS GROUND RAISED BY THE REVENUE IS DISMISSED. 22. THE APPEAL FILED BY THE REVENUE FOR THE ASSESS MENT YEAR 2007-08 IS PARTLY ALLOWED. 23. IN RESULT, THE APPEALS FILED BY THE ASSESSEE A S WELL AS THE APPEALS FILED BY THE REVENUE ARE PARTLY ALLO WED. - - ITA 1614, 1615, ETC. OF 2011 25 ORDERS PRONOUNCED ON WEDNESDAY, THE 17 TH OF OCTOBER, 2012 AT CHENNAI. SD/- SD/- (VIKAS AWASTHY) (DR. O.K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED, THE 17 TH OCTOBER, 2012. V.A.P. COPY TO: 1. ASSESSEE 2. DEPARTMENT 3. CIT 4. CIT(A) 5. DR 6. GF.