M/S. SPORTSFIELD AMUSEMENTS, MUMBAI V. THE ACIT RG 24(3), MUMBAI

ITA 3980/MUM/2007

• Counselvise Citation: 398019914 RSA 2007
• Duration Of Justice: 4 year(s) 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-03-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Next Hearing Date: 01-03-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 23-05-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D S SUNDER SINGH
• Assessee Lawyers: R C JAIN
• Keywords: Business expenditure; Revised return; Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH J,MUMBAI BEFORE SHRI P.M. JAGTAP (AM) & SHRI S.S. GODARA (JM) I.T.A. NO.3980/MUM/2007 (A.Y. 2003-04) SPORTSFIELD AMUSEMENTS, 70-C, NEHRU ROAD, VILE PARLE (E), MUMBAI-400 099. PAN:AARFS9572J VS. ADDL. COMMR. OF INCOME-TAX, RANGE 24(3), PRATYAKSHAKAR BHAVAN, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI-400 051. APPELLANT RESPONDENT APPELLANT BY SHRI R.C JAIN. RESPONDENT BY SHRI D.S. SUNDER SINGH. DATE OF HEARING 01-03-2012 DATE OF PRONOUNCEMENT 16 -03-2012 O R D E R PER S.S. GODARA, JM : THE INSTANT APPEAL HAS BEEN PREFERRED BY THE ASSE SSEE AGAINST THE ORDER DATED 5-3-2007 PASSED BY THE LD. CIT(A). 2. IN THE INSTANT APPEAL, THE ASSESSEE HAS RAISED T HE FOLLOWING GROUNDS : 1. DISALLOWANCE OF DEFERRED REVENUE EXPENDITURE ON THE FACTS AND IN LAW THE LD. CIT (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.5,44,966/- BEING 1/10 TH OF THE DEFERRED REVENUE EXPENDITURE. 2. DISALLOWANCE OUT OF CLAIM FOR EXPENSES TOWARDS ARRE ARS OF LEASE RENT, ETC ITA NO.3980/MUM/2007. 2 I) ON THE FACTS AND IN LAW THE LD. CIT(APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.82,94,165/- BEING THE LIABILITY WHICH AROSE AS PER THE TERMS ENTERED UNDE R THE CONSENT DECREE DTD. 27.8.2002. II) THE LD. CIT(APPEALS) ERRED IN FAILING TO APPRECIATE THE FACT OF TERMINATION OF THE AGREEMENTS RESULTING INT O CESSATION OF THE LIABILITY AS THERE WAS NO CONTRACT UAL OBLIGATION SO AS TO GIVE RISE TO SUCH A LIABILITY. HE FURTHER ERRED IN NOT APPRAISING THE FACTS PLACED BEFORE HIM AND THUS COMING TO AN ERRONEOUS CONCLUSION. ADDITION IN RESPECT OF NON REFUNDABLE DEPOSITS I) ON THE FACTS AND IN LAW THE LD. CIT(APPEALS) ERRED IN CONFIRMING AS INCOME THE AMOUNT OF NON REFUNDABLE DEPOSITS TO THE EXTENT OF RS.29,55,691/- RECEIVED F ROM THE MEMBERS. II) THE LD. CIT(APPEALS) ERRED IN FAILING TO APPRECIATE THAT THE CLAIM OF APPELLANT FOR THE PROPORTIONATE INCOME WAS SUPPORTED BY THE ACCOUNTING STANDARD-9 AND CASE LAW S RELIED UPON BY THE APPELLANT. HE FURTHER ERRED IN F AILING TO APPRECIATE THAT THE APPELLANT WAS UNDER AN OBLIG ATION TO PROVIDE CLUB FACILITIES AND SERVICES FOR THE AGR EED PERIOD. III) THE LD. CIT(APPEALS) ERRED IN NOT DELETING THE AMOU NT OF RS,.4,63,908/- WHICH WAS ALREADY INCLUDED IN THE TA XABLE INCOME. YOUR APPELLANT CRAVES LEAVE TO ALTER, AMEND, ADD OR DELETE ALL OR ANY OF THE ABOVE GROUNDS OF APPEAL ON OR BEFORE THE DATE OF HEARING. GROUND NO.1: 3. THE ASSESSEE HAS RAISED THE INSTANT GROUND CHALL ENGING DISALLOWANCE OF RS.5,44,966/- CLAIMED AS DEFERRED REVENUE EXPENDITURE BEING 1/10 TH OF THE TOTAL REVENUE EXPENDITURE INCURRED. THE NECESSARY FACTS OF THE CASE ARE THAT IN THE RETURN FILED ON 1-12-2003 FOLLOWED BY REVISED RETURN ON 11-1-2005, THE ASSESSEE CLAIMED AN AMOUNT OF RS.5,44,968/- WRITTEN OFF AS REVENUE EXPENSES. THE LD. AO ISSUED SHOW CAUSE TO T HE ASSESSEE REGARDING DISALLOWANCE OF THE SAID EXPENDITURE. IN RESPONSE, THE ASSESSEE STATED THAT IT HAD INCURRED ADDITIONAL EXPENSES IN ASSESSMENT YEAR 1999-2000 FOR COLLECTING REFUNDABLE CLUB MEMBERSHIP DEPOSITS UNDER NEW SCHEME CALLED NEW KKG CLUB MEMBERSHIP. THE BENEFI T FOR THE SAID MEMBERSHIP IN ITS OPINION ITA NO.3980/MUM/2007. 3 HAD TO BE GIVEN FOR 10 YEARS UNDER THIS SCHEME. HEN CE, THE FIRM DEBITED 1/10 TH OF THE EXPENSES DURING THE YEAR AND REST OF THE EXPENSES INCURRED T O RAISE THE REFUNDABLE AMOUNT. IT RELIED ON THE DECISION OF HONBLE SUPREME COURT REPORTED IN 225 I TR 802. ACCORDINGLY, IT CLAIMED THE SAID AMOUNT AS REVENUE EXPENDITURE. HOWEVER, THE AO APPLIED THE FORMULA U/S. 37(1) OF THE ACT. CONCLUDED THAT THE ASSESSEE BEING IN SERVICE SECTOR PROVIDING HOSPITALITY FOR R UNNING CLUB SERVICE TO ITS MEMBERS, THE EXPENDITURE HAD BEEN INCURRED NOT IN THE REGULAR CO URSE OF RUNNING BUSINESS OR IN ANY INCIDENTAL ACTIVITY, BUT FOR THE PURPOSE OF MOBILIZATION OF ME MBERSHIP BY TAKING DEPOSITS FROM INTENDING MEMBERS RESULTING IN CAPITAL BASE TO SECURE ITSELF FROM FUTURE LOSSES. THE DEPOSITS DID NOT CARRY ANY INTEREST. THE SAID MEMBERSHIP ENABLED THE MEMBE RS TO USE THE FACILITIES IN QUESTION BY PAYING VARIABLE ANNUAL MAINTENANCE CHARGES. HENCE, THE AO VIDE ORDER DATED 23-2-2006 REJECTED THE ASSESSEES CLAIM. IN ASSESSEES APPEAL FILED BEFORE THE LD. CIT(A), THE FINDINGS OF THE AO HAVE BEEN UPHELD QUA THIS CLAIM IN VERBATIM BY HOLDING THAT THE CASE OF THE ASSESSEE WAS COVERED AGAINST IT AS PER THE ORDER DATED 2-9-2005 VIDE PARA 3. HENCE, THE AS SESSEE HAS RAISED THE INSTANT GROUND. IN SUPPORT OF THE GROUND RAISED, THE LD. AR APPEAR ING FOR THE ASSESSEE HAS VEHEMENTLY ARGUED THAT THE ISSUE IN HAND IS SQUARELY COVERED B Y THE DECISION OF ITAT AT PAGE 161 OF PAPER BOOK DECIDED BY THE MUMBAI BENCH IN ITA NO.2542/MUM /2005. THEREFORE, IN THE LIGHT OF THE SAID ORDER, THE AR HAS SUBMITTED THAT THE EXPENDITU RE IN HAND IS DEFERRED REVENUE EXPENDITURE ALLOWABLE AS A DEDUCTION. ON THE OTHER HAND, THE LD. DR APPEARING FOR THE DE PARTMENT HAS DEFENDED THE ORDERS OF LOWER AUTHORITIES ON THE GROUND THAT THE SAID EXPEN DITURE IS IN CAPITAL EXPENDITURE WHICH IS NOT REFUNDABLE. 4. AFTER HEARING THE ARGUMENTS OF BOTH THE LD. REPR ESENTATIVES, WE ARE OF THE OPINION THAT THE LD. CIT(A) HAS NOT DECIDED THE ISSUE BY TAKING INTO CONSIDERATION THE FACTS AS WELL AS THE ITA NO.3980/MUM/2007. 4 RELEVANT LAW ON THE SUBJECT OF CAPITAL VS. REVENUE EXPENDITURE. AS A PERUSAL OF PARA-3 OF THE LD. CIT(A) ORDER MAKES IT CLEAR, SIMILARITY BETWEEN THE ORDER DATED 2-9-2005 VIS--VIS FACTS OF THE CASE IS NOT FORTHCOMING. MEANING THEREBY THAT DESP ITE THE WELL SETTLED LAW DEFINING THE JURISDICTION OF CIT(A) THAT THE FIRST APPELLATE A UTHORITY IS COMPETENT TO RE-APPRECIATE THE FACTS AS WELL AS LAW, THE FIRST APPELLATE AUTHORITY HEREI N HAS NOT PASSED A DETAILED ORDER GIVING REASONS. IN ADDITION TO THIS, SO FAR THE CONTENTION OF THE LD. AR OF THE ASSESSEE THAT THE CASE IS SQUARELY COVERED BY THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL (SUPRA) IS CONCERNED, WE HAVE PERUSED THE SAID DECISION. HOWEVER, IN THE SAID DEC ISION, THERE IS NO SPECIFIC ADJUDICATION OF THE ISSUE IN HAND. ACCORDINGLY, IN VIEW OF THE TOTALITY OF CIRCUMSTANCES, WE DEEM IT APPROPRIATE TO REMIT THE MATTER BACK TO THE LD. CIT(A) FOR PASSING A FRESH ORDER IN ACCORDANCE WITH LAW AFTER TAKING INTO CONSIDERATION THE WELL SETTLED PARAMETE RS OF LAW DEFINING THE CONCEPTS OF CAPITAL AND REVENUE EXPENDITURE. GROUND NO. 2: 5. THE NECESSITY FOR THE ASSESSEE TO RAISE THE INST ANT GROUND IS THAT IN THE RETURN FILED, IT HAD CLAIMED AN AMOUNT OF RS.91,54,165/- AS RENT AMOUNT OF THE PREMISES IN QUESTION IN THE SHAPE OF BUSINESS EXPENDITURE. HOWEVER, THE . AO ONLY ACCEPT ED RS.8.6 LAKHS OUT OF THE SAID CLAIM OF RS.91,54,165/- (RENT/LEASE AMOUNT OF THE PREMISES S INCE 31-3-1992 TILL THE DATE OF ACTUAL PAYMENT) MINUS RS.8.6 LAKHS (YEARLY LEASE AMOUNT OF THE PROPERTIES) TOTALLING RS.82,94,165/- WAS ADDED IN THE TOTAL INCOME OF THE ASSESSEE. THE BACKDROP OF FACTS IS THAT ON 29-11-1991 A FIR M, NAMELY, BOMBAY AMUSEMENT PARK PVT. LTD., TOOK ON LEASE THE PREMISES IN QUESTION F ROM ANOTHER COMPANY NAMED AS INDO FRENCH TIME INDUSTRIES LTD. FOR YEARLY CONSIDERATION. THE SAID LEASE AGREEMENT WAS TO TAKE EFFECT BETWEEN THE SAID ENTITIES W.E.F. 1-12-1992. SIMILAR LY, ANOTHER AGREEMENT WAS ALSO EXECUTED BETWEEN THE SAME PARTIES REGARDING EQUIPMENT FACILI TIES IN THE SAME VERY PREMISES ON THE SAME DAY. THE TOTAL LEASE AMOUNT WAS RS.8.60 LACS. P.A. ITA NO.3980/MUM/2007. 5 AFTER EXECUTION OF THE SAID AGREEMENT, THE ABOVESA ID ENTITY, BOMBAY AMUSEMENT PART PVT. LTD. ENTERED INTO A PARTNERSHIP DEED WITH KAMA TS CLUB PVT. LTD. BOTH OF THEM AGREED TO ENGAGE IN THE BUSINESS OF RUNNING AND MAINTENANCE O F THE CLUB TO BE RUN FROM THE PREMISES SUBJECT MATTER OF THE AGREEMENT DATED 29-11-1991. A FTER THE SAID AGREEMENT BETWEEN BOMBAY AMUSEMENT PARK PVT. LTD. AND KAMATS CLUB PVT. LTD. W.E.F. 11-12-1991, THE PARTNERSHIP FIRM ARISING OUT OF THE SAID AGREEMENT WAS NAMED AS SPOR TSFIELD AMUSEMENT (ASSESSEE HEREIN). IT IS ALSO EVIDENT FROM THE RECORD THAT THE ASSESSEE FIRM HEREIN HAD ONLY TWO PARTNERS, BOMBAY AMUSEMENT PART PVT. LTD. AND KAMATS CLUB PVT. LTD. TO THE EXTENT OF 50% SHARE EACH. AFTER THE ASSESSEE FIRM CAME INTO BEING, THE POSIT ION AS PER PAPER BOOK OF THE CASE FILED IS THAT BOMBAY AMUSEMENT PART P.LTD. (LESSEE IN THE AGREEMENT DATED 29-11-1991) CONTRIBUTED THE SAID PREMISES IN THE CAPITAL OF THE ASSESSEE FI RM ALONG WITH ITS RIGHTS AND LIABILITIES. THE FIRM HEREIN ALSO PAID THE LEASE AMOUNT ON 31-3-1992. IT WOULD NOT BE OUT OF PLACE TO MENTION HERE THAT THE DURATION OF THE LEASE AGREEMENT DATED 29-1 1-1991 WAS 10 YEARS . AFTER THE CONSTITUTION OF THE ASSESSEE FIRM, ADMIT TEDLY, THE FIRM ITSELF PAID RS.2,86,666/- TO THE LESSOR IN VIEW OF THE FACT THAT, THE PREMISE S IN QUESTION HAD BEEN INCORPORATED IN THE ASSETS AS ITS CAPITAL ALONG WITH ALL RIGHTS AND LIABILITIE S. HOWEVER, CERTAIN DISPUTES REGARDING THE TERMS OF AGREEMENT AND COMPLIANCE THEREOF SURFACED BETWEEN T HE ASSESSEE AND THE LESSER ABOVESAID REGARDING THE TERMS OF THE AGREEMENT AND COMPLIANCE THEREOF. THE SAME LED TO TERMINATION OF THE LEASE AGREEMENT BY THE LESSER I.E. OWNER OF THE PRE MISES ON 30-6-1992. 6. THE MATTER DID NOT END THERE. IN OCTOBER, 1994, THE LESSER SENT LEGAL NOTICES TO THE PARTNER OF THE ASSESSEE FIRM FOR GETTING BACK THE V ACANT POSSESSION OF THE PREMISES. THEREAFTER, ON 20-10-1999, THE LESSER FILED CIVIL SUIT AGAINST THE ASSESSEE AS WELL AS ITS PARTNERS BEFORE THE HONBLE BOMBAY HIGH COURT EXERCISING ORIGINAL JURI SDICTION. IN THE SAID SUIT, SPECIFIC RELIEF OF VACANT POSSESSION OF THE PREMISES IN QUESTION WAS A LSO SOUGHT BY THE LESSER ALONG WITH ALL OTHER RELIEFS. ITA NO.3980/MUM/2007. 6 DURING THE PENDENCY OF THE SAID CIVIL SUIT, ULTIMA TELY, SANITY PREVAILED OVER THE PARTIES INVOLVED IN THE SUIT. CONSEQUENTLY, THE MATTER WAS AMICABLY RESOLVED. ON 13-8-2002, IN PRESENCE OF THE COURT OFFICER DEPUTED BY THE HONBLE HIGH CO URT, CONSENT TERMS WERE DRAWN BETWEEN THE PLAINTIFF (LESSER) ON THE ONE SIDE AND ASSESSEE AS WELL AS ITS PARTNERS (DEFENDANTS) ON THE OTHER SIDE. IN VIEW THEREOF , THE TERMS OF THE AGREEMENT AS WELL AS THE AGREEMENT ITSELF WERE VALIDATED W.E.F. 1-12-1991. THE SAME WERE MADE TO BE INTERPRE TED AS BINDING IN NATURE. HOWEVER, IT WAS STIPULATED IN THE SAID TERMS THAT THE ORIGINAL LESS EE I.E. BOMBAY AMUSEMENT PART PVT. LTD. (PARTNER OF THE ASSESSEE FIRM) WOULD PAY THE LEASE AMOUNT. ACCORDINGLY, IN TERMS OF THE CONSENT TERMS DRAWN BEFORE THE HONBLE HIGH COURT, VIDE ORD ER DATED 27-8-2002, THE SUIT ABOVESAID STOOD DISPOSED OF. HOWEVER, INSTEAD OF PAYMENT OF THE BALANCE LEASE AMOUNT FOR THE INTERVENING PERIOD I.E. 31-3-1992 TILL 27-8-2002 AT THE HANDS OF BOMBAY AM USEMENT PARK PVT. LTD., PARTNER OF THE ASSESSEE FIRM, THE ASSESSEE ITSELF MADE PAYMENT OF THE LEASE AMOUNT COMPUTED AS RS.91,54,165/- . ACCORDINGLY, SINCE IN THE EARLIER RETURN FILED ON 1-12-2003, IT HAD CLAIMED DEDUCTION OF THE RENT AMOUNT TO THE TUNE OF RS.2,86,665/- ONLY AS RENT P AID UPTO 31-3-1992, BUT, IN THE REVISED RETURN FILED AFTER REALIZATION OF THE AMOUNT, DEDUCTION FO R THE AMOUNT OF RS.88,67,500/- (OVER AND ABOVE THE AMOUNT OF RS.2,86,665/-) WAS CLAIMED FOR THAT VERY PURPOSE. PROVISION REGARDING THE SAME WAS MADE IN THE P & L ACCOUNT. THE AO DID NOT ACCE PT THE SAID CLAIM AS AN EXPENDITURE. HELD AS UNDER : 5.2 I HAVE CAREFULLY GONE THROUGH THE SUBMISSION M ADE BY THE ASSESSEE. THE RATIOS OF DECISIONS RELIED BY THE ASSESSEE IN THE C ASE OF CIT VS. PHALTON SUGAR WORKS LD., 192 ITR 622 AND CIT VS. SWADESHI COTTON AND FLOUR MILLS PVT. LTD. 53 ITR 134 ARE NOT APPLICABLE TO THE FACTS OF THIS CAS E BUT ALSO DIAMETRICALLY OPPOSITE. THE ASSESSEES CONTENTION THAT THE SUM OF RS.94,54, 165/- BEING AMOUNT PAYABLE TO BOMBAY AMUSEMENT PART PVT. LTD., TOWARDS LEASE R ENT AND SERVICE CHARGES AS DECIDED IN THE CONSENT TERMS FILED BEFORE THE COURT IS ALSO INCORRECT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSEE HAS F ILD COPY OF CONSENT TERMS IN SUIT NO.6036 OF 1999 DATED 27.8.2002 BEFORE THE HON BLE HIGH COURT OF JUDICATURE AT BOMBAY. ON GOING THROUGH THE CONSENT TERMS IT COULD BE SEEN THAT THE SUIT HAS BEEN FILED BY INDO FRENCH TIME INDUSTR IES LTD. (PLAINTIFF) VS. BOMBAY AMUSEMENT PART LTD. & ORS. (DEFENDANTS). THUS IT IS VERY CLEAR FROM THE CONSENT TERMS IS NOT BETWEEN THE ASSESSEE BUT BETWEEN THE P LAINTIFF AND DEFENDANTS ITA NO.3980/MUM/2007. 7 MENTIONED ABOVE. FOR THE SAKE OF BREVITY WHAT EMERG ES FROM THE ORDER OF CONSENT TERMS, I WOULD LIKE TO LIGHT THE FOLLOWING POINTS: (I) AS PER PARA (2) THE AGREEMENT IS TO PROVIDE EQUIPME NT FACILITIES AND SERVICES ALSO DATED 29.11.1991 MADE BETWEEN THE PLAINTIFF AND DEFENDANT NO. 1 MENTIONED ABOVE. (II) AS PER PARA (3) THE DEFENDANT NO. 2 IS THE LAWFUL T ENANT OF DEFENDANT NO. 1. (III) AS PER PARA (4) OF THE CONSENT TERMS THE DEFENDANT NO. 2 IS TO CONTINUE THE POSSESSION OF THE SAID AREA WHICH ARE IN ITS EXCLUSIVE POSSESSION. (IV) THE PARA (5) IS IN REGARD TO REGISTRATION OF THE PR OPERTY THAT THE PLAINTIFF IN CONSIDERATION OF SUM OF RS.80,00,000/- DO EXECUTE AN INDENTURE OF LEASE. (V) PARA (6) OF THE CONSENT TERMS IS VERY MUCH IMPORTAN CE, WHICH INDICATE THAT AGREED AND ORDERED THAT AS ON JULY 3 1, 2002 THE ARREARS OF RENT AND/OR OTHER CHARGES FOR PROVIDING EQUIPMENTS, FACILITIES AND SERVICE PAYABLE BY DEFENDANT NO. 1 T O THE PLAIANTIFF UNDER THE SAID AGREEMENTS EXHIBIT D AND E RESPE CTIVELY TO THE PLAINT AMOUNT TO RS.91,54,165/-. HERE ALSO THE CON CERNED TERM IS BETWEEN PLAINTIFF AND DEFENDANT NO.1 I.E. , INDO FR ENCH TIME INDUSTRIES LTD. AND BOMBAY AMUSEMENT PART LTD. & OR S., RESPECTIVELY. (VI) THE PARA (7) STIPULATE THE CONDITIONS IN CASE OF DE LAY IN PAYMENT OF THE SAID RENT AND OTHER CHARGES OF RS.91,54,165/ -. IT IS AGREED ON ACCOUNT OF DELAY IN PAYMENT OF RENT AND OTHER CH ARGES OF RS.91,54,165/- AS AFORESAID DEFENDANT NO. 1 DO PAY TO THE PLAINTIFF A SUM OF RS.3,28,45,835/- AS COMPENSATION. IN THIS RESPECT IT IS IMPERATIVE TO MENTION HERE THAT ONE OF THE REASONS FOR FILING THE REVISED RETURN WAS THAT THE CLAIM FOR COMPENSATION PAID TO LANDLORDS FOR NON-PAYMENT OF DUES BEING A CONDITION AL PAYMENT, NOW WITHDRAWN AS AMOUNT IS REFUNDED BY THE LANDLORD S. AS SUCH THE ASSESSEE HAS REVISED RETURN TO ADD THE SUM OF R S.3,28,45,835/- . IN ADDITION THERETO, THE AO ALSO OBSERVED THAT LUM PSUM DEDUCTION QUA THE SAID AMOUNT WAS NOT ACCEPTABLE AS THE ASSESSEE WAS FOLLOWING TH E MERCANTILE SYSTEM OF ACCOUNTING. ACCORDINGLY, IN THE OPINION OF THE AO, ONCE THIS SYSTEM IS FOLLOWED BY THE ASSESSEE, THEN IT HAS TO BE ON ACCRUAL BASIS AND NOT CASH RECEIP TWISE. THEREFORE, THE SAID AMOUNT SHOULD HAVE BEEN CLAIMED AS DEDUCTION YEARWISE INST EAD OF ON LUMPSUM BASIS AS HAS BEEN DONE BY THE ASSESSEE. CONSEQUENTLY, THE AO ON LY ACCEPTED THE DEDUCTION CLAIMED BY THE ASSESSEE HEREIN TO THE TUNE OF RS.8.6 LAKHS (YE ARLY RENT) INSTEAD OF THE ENTIRE AMOUNT OF RS.91,54,165/-. THE BALANCE AMOUNT THEREFORE WAS ADDED IN TOTAL INCOME OF THE ASSESSEE. ITA NO.3980/MUM/2007. 8 7. AGGRIEVED BY THE SAID ORDER, THE ASSESSEE ALSO F ILD APPEAL. HOWEVER, THE LD. CIT(A), AFTER RE-APPRECIATING THE ENTIRE FACTS, CAM E TO THE CONCLUSION THAT NO RECORD OF DISPUTE REGARDING AREA AS CLAIMED BY ASSESSEE WAS PROVED BY WAY DOCUMENTS. FURTHER HELD THAT THE ASSESSEE WAS LIABLE TO PAY THE YEARLY RENT AND SERVICE FEE OF RS.8.60 LAKHS IN THE BEGINNING OF EACH QUARTER IN EQUAL INSTALMENTS. HOWEVER, AFTER MAKING PAYMENT ON 31-3-1992, IT CONTINUED THE BUSINESS OF CLUB IN QUE STION BY UTILIZING THE PREMISES AND FACILITIES WITHOUT PAYING LEASE RENT AND SERVICE FE ES. FURTHER HELD THAT IT IS NOT A CASE OF DISPUTED CONTRACTUAL LIABILITY. IN THE OPINION OF LD. CIT(A), THE ASSESSEE FAILED TO SHOW THAT IT DENIED THE LIABILITY OF RENT AND SERVICE FE E AT ANY POINT OF TIME. HENCE, DID NOT TREAT THE CASE IN HAND AS OF DISPUTED LIABILITY. FURTHER CONCLUDED THAT THE ASSESSEE HAD FAILED/NEGLECTED TO PAY AFORESAID RENT DESPITE REPE ATED REQUESTS MADE BY THE LESSER. ALSO OBSERVED THAT THE LIABILITY OF THE AMOUNT TO THE TU NE OF RS.8.6 LAKHS QUA THE AGREEMENT ABOVESAID STOOD CRYSTALLIZED AND QUANTIFIED WHICH AROSE EVERY YEAR. FURTHER, JUST BECAUSE THE ASSESSEE HAD NOT PAID THE AMOUNT ON YEA RLY BASIS WAS NOT ENTITLED TO GET LUMPSUM DEDUCTION. THEREFORE, REACHING TO THE ABOVE CONCLUSIONS, THE FINDINGS OF THE LD. AO WERE UPHELD IN APPEAL. HENCE, THE INSTANT GROUND HAS BEEN RAISED BEFORE US. 8. IN SUPPORT OF THE GROUND, THE LD. AR SUBMITTED T HAT SINCE THE DISPUTE WAS PENDING BEFORE THE HONBLE BOMBAY HIGH COURT WHICH COULD ON LY BE SETTLED IN THE YEAR 2002, THEREFORE, THE ASSESSEE HEREIN COULD NOT HAVE MADE THE PAYMENT. FURTHER, ELABORATED THE FACT THAT ONCE THE CONSENT TERMS DATED 13-8-2002 HA VE BEEN ACCEPTED BY THE HONBLE COURT WHICH ULTIMATELY RESULTED IN DISPOSAL OF THE SUIT, THEREFORE, IT WAS ONLY BY WAY OF SAID CONSENT TERMS IN THE SHAPE OF A DECREE THAT T HE PAYMENT HAD BEEN MADE BY THE ASSESSEE. HE ALSO RELIED ON A VOLUMINOUS PAPER BOOK WITH THE CASE FILE BEFORE US. ALSO DREW OUR ATTENTION TO ALL THE PAGES OF THE RECORD PERTAINING TO BOTH THE AGREEMENTS, THE PLAINT, TERMS OF CONSENT AND FINAL ORDER PASSED BY THE HONBLE HIGH COURT. IN THE LIGHT OF THE SAID ELABORATION OF FACTS, THE LD. AR ARGUED TH AT THE SAME MADE IT CRYSTAL CLEAR THAT IT WAS IN FACT A CASE OF DISPUTED LIABILITY FOR WHICH THE ASSESSEE IS ENTITLED FOR DEDUCTION ON ITA NO.3980/MUM/2007. 9 THE LUMPSUM PAYMENT. RELIANCE WAS ALSO PLACED ON TH E VERDICT OF HONBLE APEX COURT CITED AS 53 ITR 134 (SWADESHI COTTON MILLS) AVAILAB LE AT PAGE 325 OF THE PAPER BOOK BEFORE US. ALSO PLACED RELIANCE ON 162 ITR 622 (CIT VS. PHALTO N SUGAR WORKS LTD.) (PAGE 319 OF THE PAPER BOOK) TO CONTEND THAT AS AND WHEN A LIABILITY IS CRYSTALLIZED, A DEDUCTION CAN BE CLAIMED REGARDING THE SAME. ON THE OTHER HAND, THE LD. DR APPEARING FOR THE RE VENUE HAS PLACED RELIANCE ON BOTH THE ORDER PASSED BY THE LD. LOWER AUTHORITIES. CONTENDED THAT THE ASSESSEE ITSELF WAS GUILTY IN NOT MAKING THE PAYMENT. THEREFORE, ALLOWI NG THE SAID DEDUCTION AT THIS STAGE WOULD AMOUNT TO CONFERRING AN ADVANTAGE OF ITS OWN WRONG TO THE ASSESSEE. 9. WE HAVE HEARD BOTH THE LD. REPRESENTATIVES. ALSO GONE THROUGH THE PAPER BOOK OF THE CASE COMPRISING 328 PAGES. THE FACTUAL POSITION WHICH WE ARE ABLE TO AASCERTAIN FROM THE FACTS IS THAT ON 29-11-1991 TWO AGREEMENTS WERE THERE REGARDING THE PREMISES IN QUESTION. SUBSEQUENTLY, THE AGREEMENT BECAME OPERAT IONAL W.E.F. 1-12-1991. ON 11-12- 1991, THE ASSESSEE FIRM CAME INTO EXISTENCE. ONE OF ITS PARTNERS TO THE EXTENT OF SHARE CONTRIBUTED THE LEASED OUT PREMISES TO THE CAPITAL OF THE ASSESSEE ALONG WITH ITS RIGHTS AND LIABILITIES. THE ASSESSEE MADE THE PAYMENT OF R ENT AMOUNT TO THE LESSOR ON 31-3- 1992. STEPPED INTO THE SHOES OF ONE OF ITS PARTRNER S/LESSEES. HOWEVER, BEFORE IT COULD MAKE THE NEXT PAYMENT OF THE LEASE AMOUNT, THE LESS ER HEREIN TERMINATED THE AGREEMENT. FOLLOWED BY A LEGAL NOTICE ON THE PARTNERS OF THE F IRM IN OCTOBER 1994. MEANING THEREBY THAT THE LESSOR/LESSEE RELATIONSHIP QUA THE SAID PR EMISES CAME TO AN ABRUPT END. THE LAW IN THIS REGARD IS VERY WELL SETTLED THAT IT IS THE CONDUCT OF THE PARTIES CONCERNED WHICH IS THE DETERMINATIVE FACTOR TO JUDGE THEIR INTER-SE RE LATIONSHIP. GOING BY THE SAME ANALOGY, ONCE THE LESSOR ITSELF HAD TERMINATED THE AGREEMENT , THEN BY NO STRETCH OF IMAGINATION, WE CAN ACCEPT THAT IT WAS READY AND WILLING TO RECE IVE THE LEASE AMOUNT WHICH WAS AN ESSENTIAL FEATURE OF THE AGREEMENT ITSELF. OR THE L ESSOR WAS NOT ENTITLED TO RECEIVE THE RENT AMOUNT AFTER ITS OWN ACTION WHICH HAD CULMINATED IN TERMINATION OF THE AGREEMENT. ITA NO.3980/MUM/2007. 10 AS THE SUBSEQUENT EVENTS UNFOLDED, ON 20-10-1999, THE LESSOR HEREIN FILED SUIT FOR POSSESSION AGAINST THE ASSESSEE AND ITS PARTNERS. I T WAS DURING THIS SUIT THAT TERMS OF CONSENT WERE DRAWN. MADE A PART OF THE DECREE OF TH E HONBLE HIGH COURT. FOLLOWED BY THE PAYMENT IN QUESTION BY THE ASSESSEE. IN VIEW OF THE ABOVE CHRONOLOGY OF EVENTS, WE FIND THAT SO FAR AS THE CONCLUSIONS ARRIVED AT BY THE LD. LOWER AUTHORITIES THAT THE TE RMS OF CONSENT ONLY BOUND THE ORIGINAL LESSEE I.E. BAPPL PARTNER OF THE ASSESSEE FIRM ARE CONCERNED, THEY ARE AGAINST THE FACTUAL POSITION. THE REASON IS THAT WHEN THE SAID LESSEE H AD CONTRIBUTED TO THE CAPITAL OF THE FIRM, THE ASSETS AND LIABILITIES ARISING OUT THE AG REEMENT DATED 29-11-1991 AND IN FURTHERANCE THERETO, THE ASSESSEE FIRM HAD MADE TH E PAYMENT ON 31-3-1992 AS WELL AS THE PAYMENT OF AMOUNT CLAIMED AS DEDUCTION. THEREFO RE, IN THE ABSENCE OF ANY DISPUTE REGARDING THE SAID PAYMENTS AT THE HANDS OF THE ASS ESSEE, IT IS SAFELY CONCLUDED THAT THE ASSESSEE FIRM IS PERFORMING ALL THE LIABILITIES OF ITS PARTNER NAMELY BAPPL. THEREFORE, THE ASSESSEE FIRM WHICH COULD NOT MAKE THE PAYMENT IN T HE EVENT OF TERMINATION OF AGREEMENT BY THE LESSER ON 30-6-1992 COULD NOT HAVE OFFERED PAYMENT IN THE ABSENCE OF ANY FIXATION OF THE RENT EITHER ORAL OR IN WRITING OR THROUGH ANY OTHER VIA MEDIA. ONCE THAT IS SO, IT IS ONLY AFTER SETTLEMENT OF THE DISPUTE B Y WAY OF CONSENT TERMS MADE PART OF THE COURT DECREE SUBSEQUENTLY COMPLIED WITH BY THE ASSE SSEE HEREIN THROUGH THE PAYMENT IN QUESTION THAT THE ASSESSEE HAS CLAIMED THE DEDUCTIO N QUA THE LUMPSUM PAYMENT. SO, WE ARE CONSTRAINED TO HOLD THAT IT IS AFTER CRYSTALLIZ ATION OF THE SAID LIABILITY, THAT THE ASSESSEE FILED ITS REVISED RETURN AND CLAIMED DEDUCTION. SO FAR AS THE MERCANTILE SYSTEM OF ACCOUNTING IS C ONCERNED, WE FIND THAT THE SAID STANDARD HAS NOT BEEN VIOLATED AS THE NECESSARY PRO CEDURE HAS BEEN FOLLOWED AFTER ASCERTAINING THE ACCRUED LIABILITY THROUGH COURT OR DER. ON DISPUTED LIABILITY, THE ABOVESAID RULINGS AS CITED BY THE LD. AR ARE APPLIC ABLE IN TOTO. ITA NO.3980/MUM/2007. 11 HENCE, IN OUR OPINION, THIS GROUND SUCCEEDS. THE O RDERS OF LD. LOWER AUTHORITIES TO THIS EXTENT ARE HEREBY SET ASIDE. GROUND NO.3: 10. IN RESPECT OF THIS GROUND, THE FACTS ARE THAT A S PER AOS ORDER, THE ASSESSEE CLAIMED THAT IT HAD RECEIVED RS.29,55,691/- AS NO N-REFUNDABLE MEMBERSHIP FROM ITS MEMBERS INCLUDING APPORTIONMENT OF RS.4,63,908/- TO INCOME AND BALANCE AMOUNT OF RS.24,91,783/- AS LIABILITY. IT WAS STATED BEFORE T HE AO THAT THE ASSESSEE FIRM STARTED COLLECTING NON-REFUNDABLE MEMBERSHIP DEPOSITS IN TH E YEAR 2002 FROM CLUB MEMBERS OPERATIONAL FOR A PERIOD OF 10 YEARS WITH A RIDER T HAT LIABILITY ATTACHED TO THE MEMBERSHIP FEE WAS FOR 10 YEARS. THE DEPOSITS WERE THEREFORE S PREAD FOR A PERIOD OF 10 YEARS FROM THEIR RECOGNITION AS INCOME. STATED BEFORE AO THA T THE AMOUNT RECEIVED IN A PARTICULAR YEAR DENOTED INCOME RELATING TO VARIOUS SUBSEQUEN T YEARS FOR CERTAIN SERVICES TO BE RENDERED COULD NOT BE TREATED AS INCOME OF ONE YEAR . IN SUPPORT THEREOF, THE ASSESSEE RELIED ON ACCOUNTING STANDARD 9. HOWEVER, THE AO FOUND THAT THE ASSESSEE HAD BEEN ACCUMULATING LARGE FUNDS AT ITS DISPOSAL BY WAY OF NON-REFUNDABLE DEPOSITS. UT ILIZED THEM FOR BUSINESS PURPOSES. NO LIABILITY WAS THERE TO REFUND THE SAID AMOUNT. NO STATEMENT WAS OFFERED BY THE ASSESSEE CLARIFYING THE UTILIZATION OF THE FUNDS FOR THE BEN EFIT OF CONCERNED MEMBER. ALSO OBSERVED THAT IT HAD BEEN CHARGING YEARLY RENEWAL FEES. ACCO RDINGLY, TREATED THE SAID AMOUNT AS TAXABLE INCOME. HOWEVER, IN APPEAL, THE LD. CIT(A) OBSERVED THAT A S THE NAME ITSELF SUGGESTED, THE DEPOSITS WERE NON-REFUNDABLE WITHOUT ANY LIABILITY TO REFUND. THEREFORE, THERE WAS NO LIABILITY QUA THE ASSESSEE TO REFUND THE AMOUNT. SO , THE ASSESSEE WAS CHARGING RENWWAL FEE FROM ITS MEMBERS WHO HAD PAID NON-REFUNDABLE DE POSITS. IN HIS OPINION, THE ASSESSEE HAD FAILED TO SHOW WITH PROPER EVIDENCE THAT IT WAS DISCHARGING ANY OBLIGATION TO THE ITA NO.3980/MUM/2007. 12 MEMBERS IN FUTURE YEARS ON ACCOUNT OF NON-REFUNDABL E DEPOSITS. THEREFORE, THE ORDER OF AO IN THIS REGARD WAS UPHELD. HENCE THE INSTANT GRO UND. 11. THE LD. AR APPEARING FOR THE ASSESSEE ARGUED TH AT IDENTICAL ISSUE HAS BEEN DECIDED BY THE SPECIAL BENCH OF ITAT, CHENNAI BENCH , IN THE CASE OF MAHINDRA HOLIDAYS IN ITA NO.2412 TO 2416/MDS/2005 VIDE ORDER DATED 26-5 -2010. COPY OF THE SAID ORDER HAS BEEN PLACED ON RECORD ON 23-2-2011. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORDERS OF LD. LOWER AUTHORITIES AND SUBMITTED THAT THE INSTANT GROUND DESERVES TO BE RE JECTED. 12. AFTER HEARING BOTH THE LD. REPRESENTATIVES AND GOING THROUGH THE ABOVE DECISION OF HONBLE SPECIAL OF ITAT, WE FIND THAT THE INSTAN T GROUND IS CONSEQUENTLY COVERED BY THE ISSUE RAISED IN THE SAID ORDER OF HONBLE SPECIAL B ENCH OF ITAT. THE ISSUE INVOLVED BEFORE THE HONBLE SPECIAL BENCH AS IT IS THERE AT PAGE 24 IS HEREBY REPRODUCED AS UNDER : 24. THE DYNAMICS OF HOW TIMESHARE INDUSTRY WORKS I S NOT DIFFICULT TO GRASP. THE COMPANY WILL SET UP SEVERAL RESORTS AT TOURIST PLACES, EITHER ON ITS OWN OR TAKE SUCH RESO RTS ON LEASE OR MAY ENTER INTO ARRANGEMENTS WITH OTHER RESORT OWNER S. THE COMPANY WILL GRANT MEMBERSHIP ON PAYMENT OF CERTAIN AMOUNT. ON PAYMENT OF THE AMOUNT, THE MEMBER ACQUIRES MEMBE RSHIP FOR A SPECIFIED NUMBER OF YEARS. DURING THE CURRENC Y OF THE MEMBERSHIP, THE MEMBER GETS A RIGHT TO HAVE A HOLID AY FOR ONE WEEK IN A YEAR AT THE PLACE OF HIS CHOICE FROM AMON GST THE PLACES OFFERED BY THE COMPANY. THE TYPES OF MEMBERSHIP MAY DIFFER DEPENDING ON THE TYPE OF ACCOMMODATION OPTED BY THE PERSON. THE COMPANY RECEIVES THE MEMBERSHIP FEE EITHER IN L UMPSUM OR IT MAY GRANT INSTALMENTS TO THE PROSPECTIVE MEMBER. IN ADDITION TO THE MEMBERSHIP FEE, THE COMPANY ALSO CHARGES ANN UAL MAINTENANCE CHARGES (AMC) OR ANNUAL SUBSCRIPTION FE ES (ASF) OR ADMINISTRATIVE CHARGES. THESE CHARGES GENERALLY ARE COLLECTED IRRESPECTIVE OF THE FACT WHETHER THE MEMBER MAKES U SE OF THE RESORT OR NOT. FURTHER, IF THE MEMBER UTILIZES THE RESORT, HE MAKES AN ADDITIONAL PAYMENT TOWARDS UTILITIES LIKE ELECTR ICITY, WATER, AIR-CONDITIONING, HEATER ETC. THERE ARE OTHER INCID ENTAL FACILITIES ALSO LIKE EXCHANGE FACILITIES, ONE-UP EXCHANGE, RCI EXCHANGE ETC. THERE ARE CERTAIN RULES PERTAINING TO CANCELLATION OF MEMBERSHIP ALSO ALONG WITH THE RULES PERTAINING TO QUANTIFICAT ION OF REFUND. THE ASSESSEE BEFORE US INITIALLY GRANTED MEMBERSHIP FOR 33 YEARS WHICH WAS LATER REDUCED TO 25 YEARS. THE ENTIRE MEM BERSHIP FEE RECEIVED BY THE ASSESSEE IS TREATED AS REVENUE RECE IPT, BUT THE ITA NO.3980/MUM/2007. 13 ENTIRE AMOUNT COLLECTED IS NOT RECOGNIZED AS REVENU E AND OFFERED FOR TAXATION IN THE YEAR OF ITS RECEIPT. DURING TH E FIRST THREE YEARS OF ITS OPERATION, THE ASSESSEE RECOGNIZED 40% OF TH E REVENUE AS INCOME IN THE YEAR OF RECEIPT AND FROM 4 TH YEAR ONWARDS, IT STARTED RECOGNIZING 60% 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 ENT IRE AMOUNT IN ONE YEAR ONLY, ITS OBLIGATION TO THE MEMBERS REMAIN SPREAD OVER THE PERIOD OF MEMBERSHIP AND THEREFORE, PART OF THE FEES ARE RECOGNIZED AS INCOME THE SUBSEQUENT YEARS. THERE IS NO BASIS FOR RECOGNIZING THE INCOME IN THE RATIO OF 40:60 AS IT IS STATED TO BE AS PER INDUSTRY NORMS. THE BASIS FOR THE RATIO OF 6 0:40 IS STATED TO BE THAT WITH EXPERIENCE, THE ASSESSEE HAS BECOME WI SER. THE CASE OF THE REVENUE IS THAT HAVING RECEIVED THE INCOME I N THE FIRST YEAR ITSELF, THE SAME SHOULD BE RECOGNIZED AS INCOME IN THAT YEAR ONLY. SO FAR AS MAINTENANCE OF RESORTS AND OTHER UTILITIE S ARE CONCERNED, THEY, ACCORDING TO THE LD. D.R., ARE BEI NG TAKEN CARE OF BY THE AMC/ASF ETC. WE PROCEED TO RESOLVE THIS DISP UTE. THE SAID ISSUE HAS BEEN DECIDED BY THE HONBLE SPEC IAL BENCH AS UNDER : 32. ACCORDINGLY, TO ANSWER THE QUESTION POSED TO T HE SPECIAL BENCH, THE ENTIRE AMOUNT OF TIMESHARE MEMBERSHIP FE E RECEIVABLE BY THE ASSESSEE UP FRONT AT THE TIME OF ENROLMENT OF A MEMBER IS NOT THE INCOME CHARGEABLE TO TAX IN THE I NITIAL YEAR ON ACCOUNT OF CONTRACTUAL OBLIGATION THAT IS FASTEN ED TO THE RECEIPT TO PROVIDE SERVICES IN FUTURE OVER THE TERM OF CONTRACT. ACCORDINGLY, WE ARE ALSO OF THE OPINION THAT SINC E THE HONBLE SPECIAL BENCH HAS DECIDED THE ISSUE IN HAND IN FAVOUR OF THE SAID ASSESSEE RU NNING BUSINESS ALIKE THAT OF THE ASSESSEE HEREIN, THEREFORE, GROUND NO. 3 SUCCEEDS. 12. IN THE RESULT, THE APPEAL IS ALLOWED QUA GROUN D NOS.2 & 3. QUA GROUND NO. 1, IT IS ALLOWED FOR STATISTICAL PURPOSE. ITA NO.3980/MUM/2007. 14 ORDER PRONOUNCED ON THE 16TH DAY OF MARCH, 2012. SD/- SD/- (P.M. JAGTAP) (S.S. GODARA) ACCOUNTANT MEMBER JU DICIAL MEMBER MUMBAI: 16TH MARCH , 2012. NG: COPY TO : 1. ASSESSEE. 2.DEPARTMENT. 3 CIT(A)-XXIV,MUMBAI. 4 CIT-24,MUMBAI. 5.DR,J BENCH,MUMBAI. 6.MASTER FILE. (TRUE COPY) BY ORDER, ASST. REGISTRAR , ITAT, MUMBAI. ITA NO.3980/MUM/2007. 15 DETAILS DATE INITIALS DESIGNATI ON 1. DRAFT DICTATED ON 05-03-2012 SR.PS/ 2. DRAFT PLACED BEFORE AUTHOR 12-03-2012 SR.PS/ 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/A M 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/ 6. KEPT FOR PRONOUNCEMENT ON SR.PS/ 7. FILE SENT TO THE BENCH CLERK SR.PS/ 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9. DATE ON WHICH FILE GOES TO THE AR 10. DATE OF DISPATCH OF ORDER