M/s. Sterling Holiday Resorts (India) Ltd., CHENNAI V. ACIT, CHENNAI

ITA 473/CHNY/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64227 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 08-08-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 05-03-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANIRUDH RAI
• Assessee Lawyers: R SU BRAMANIAN
• Keywords: Opportunity of being heard; Earning of tax free income; Additional evidence; Bad and doubtful debts; Revenue expenditure
• Section: 14A

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL D BENCH, CHENNAI. BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER & SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NOS. 471, 472, 473 AND 160/MDS/2012 ASSESSMENT YEAR: 2002- 03, 2006-07, 07-08 AND 08-09 M/S. STERLING HOLIDAY RESORTS (INDIA) LTD., CITY TOWER, NO.7, 3 RD CROSS STREET, KASTHURIBAI NAGAR, ADYAR, CHENNAI 600 020. [PAN:AADCS4841D] VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE VI (4), CHENNAI 600 034. (APPELLANT) (RESPONDENT) A PPELLANT BY : SHRI R. SUBRAMANIAN RESPONDENT BY : SHRI ANIRUDH RAI, CIT DR DATE OF HEARING : 08.08.2012 DATE OF PRONOUNCEMENT : 30.08.2012 ORDER PER CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER THESE FOUR APPEALS FILED BY THE ASSESSEE ARE DIREC TED AGAINST THE SEPARATE ORDERS OF THE COMMISSIONER OF INCOME TAX ( APPEALS) VI, CHENNAI DATED 13.12.2011 IN ITA NO. 301/10-11, ITA NO. 134/ 10-11 AND ITA NO. 300/10-11 FOR THE ASSESSMENT YEARS 2002-03, 06-07 A ND 07-08 AND DATED 29.11.2011 IN ITA NO. 159/10-11 FOR THE ASSESSMENT 2008-09. SHRI R. SUBRAMANIAN, C.A. REPRESENTED ON BEHALF OF THE ASSE SSEE AND SHRI ANIRUDH RAI, CIT DR REPRESENTED ON BEHALF OF THE REVENUE. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 2 2. THE FIRST COMMON ISSUE IN THE GROUNDS OF ALL TH ESE APPEALS RELEVANT TO THE ASSESSMENT YEARS 2002-03, 2006-07 TO 2008-09 IS THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFI RMING THE ADDITION MADE TOWARDS DEFERRED INCOME. 3. AT THE TIME OF HEARING, THE COUNSEL FOR THE ASS ESSEE SUBMITTED THAT THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE BY THE C HENNAI SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V. MAHINDRA HOLIDA YS & RESORTS (INDIA) LTD. IN I.T.A. NOS. 2412 TO 2416/MDS/2005 DATED 26.05.20 10 FOR THE ASSESSMENT YEARS 1998-99 TO 2002-03 , A COPY OF THE SAME IS PL ACED AT PAGE 8 OF THE PAPER BOOK. 4. THE CIT DR SUBMITTED THAT THIS TRIBUNAL IN AS SESSEES OWN CASE FOR EARLIER YEAR HELD THAT THE INCOME CANNOT BE DEFERRE D AS THERE IS NO PROVISION FOR DEFERMENT OF INCOME IN THE INCOME TAX ACT. THE COUNSEL FOR THE REVENUE SUBMITTED THAT THE AMOUNT DEFERRED IS NOT USED FOR ANY SERVICES IN SUBSEQUENT YEARS. THE DR SUBMITS THAT THE CHENNAI S PECIAL BENCH OF THE TRIBUNAL DID NOT CONSIDER THE DECISIONS IN THE CASE OF CIT VS. CALCUTTA STOCK EXCHANGE ASSOCIATION LTD. [36 ITR 222] AND THE DECI SION IN THE CASE OF DELHI STOCK EXCHANGE ASSOCIATION VS. CIT [41 ITR 495] WHI LE DECIDING THE ISSUE OF DEFERRED INCOME AND THEREFORE, THE ISSUE CAME TO BE DECIDED IN FAVOUR OF THE ASSESSEE. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 3 5. THE COUNSEL FOR THE ASSESSEE REPLYING TO THE SU BMISSION OF THE DR, SUBMITS THAT THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF MAHINDRA HOLIDAYS AND RESORTS INDIA LTD. V. DCIT IN ITA NO. 1613/MDS/2011 DATED 25.05.2012 FOR THE ASSESSMENT YEAR 2005-06 HAD, IN FACT, CONSIDERED THE DECISIONS IN THE CASE OF CALCUTTA STOCK EXCHANGE AS SOCIATION LTD. (SUPRA) AND DELHI STOCK EXCHANGE ASSOCIATION (SUPRA) AND FO LLOWING THE CHENNAI SPECIAL BENCH OF THIS TRIBUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE, A COPY OF THE SAME IS PLACED ON RECORD. 6. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND ORDERS OF LOWER AUTHORITIES. WE HAVE GONE THROUGH T HE DECISION OF THE CHENNAI SPECIAL BENCH OF THIS TRIBUNAL REPORTED IN 131 TTJ 1 AND ALSO THE DECISION IN THE CASE OF MAHINDRA HOLIDAYS AND RESOR TS INDIA LTD. IN ITA NO. 1613/MDS/2011 DATED 25.05.2012. ON IDENTICAL FACTS, THE CHENNAI SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF ACIT V. MAHIN DRA HOLIDAYS & RESORTS (INDIA) LTD. HELD AS UNDER: 23. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AND T HE MATERIAL ON RECORD. THOUSANDS OF LITRES OF INK HAVE BEEN CON SUMED LAVISHLY OVER THE PAST MORE THAN HUNDRED YEARS IN DISCUSSING THE CONCEPT OF ACCRUAL AND YET THERE IS NO END TO IT, AND RIGHTLY SO AS IT INDICATES THE EVER CHANGING DYNAMICS OF BUSINESS AND COMMERCE. HOSPITA LITY BUSINESS, THOUGH IN EXISTENCE SINCE MORE THAN HUNDRED YEARS, IT HAS COME INTO LIMELIGHT RECENTLY WITH SEVERAL VARIANTS AND SALE O F TIMESHARE UNIT IS ONE SUCH VARIANT WITH WHICH ARE CONCERNED IN THE PR ESENT GROUP OF APPEALS. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 4 24. THE DYNAMICS OF HOW TIMESHARE INDUSTRY WORKS IS NOT DIFFICULT TO GRASP. THE COMPANY WILL SET UP SEVERAL RESORTS AT T OURIST PLACES, EITHER ON ITS OWN OR TAKE SUCH RESORTS ON LEASE OR MAY ENT ER INTO ARRANGEMENTS WITH OTHER RESORT OWNERS. THE COMPANY WILL GRANT ME MBERSHIP ON PAYMENT OF CERTAIN AMOUNT. ON PAYMENT OF THE AMOUNT , THE MEMBER ACQUIRES MEMBERSHIP FOR A SPECIFIED NUMBER OF YEARS . DURING THE CURRENCY OF THE MEMBERSHIP, THE MEMBER GETS A RIGHT TO HAVE A HOLIDAY FOR ONE WEEK IN A YEAR AT THE PLACE OF HIS CHOICE F ROM AMONGST THE PLACES OFFERED BY THE COMPANY. THE TYPES OF MEMBERS HIP MAY DIFFER DEPENDING ON THE TYPE OF ACCOMMODATION OPTED BY THE PERSON. THE COMPANY RECEIVES THE MEMBERSHIP FEE EITHER IN LUMPS UM OR IT MAY GRANT INSTALMENTS TO THE PROSPECTIVE MEMBER. IN ADD ITION TO THE MEMBERSHIP FEE, THE COMPANY ALSO CHARGES ANNUAL MAI NTENANCE CHARGES (AMC) OR ANNUAL SUBSCRIPTION FEES (ASF) OR ADMINISTRATIVE CHARGES. THESE CHARGES GENERALLY ARE COLLECTED IRRE SPECTIVE OF THE FACT WHETHER THE MEMBER MAKES USE OF THE RESORT OR NOT. FURTHER, IF THE MEMBER UTILISES THE RESORT, HE MAKES AN ADDITIONAL PAYMENT TOWARDS UTILITIES LIKE ELECTRICITY, WATER, AIR-CONDITIONING , HEATER ETC. THERE ARE OTHER INCIDENTAL FACILITIES ALSO LIKE EXCHANGE FACI LITIES, ONE-UP EXCHANGE, RCI EXCHANGE ETC. THERE ARE CERTAIN RULES PERTAINING TO CANCELLATION OF MEMBERSHIP ALSO ALONG WITH THE RULE S PERTAINING TO QUANTIFICATION OF REFUND. THE ASSESSEE BEFORE US IN ITIALLY GRANTED MEMBERSHIP FOR 33 YEARS WHICH WAS LATER REDUCED TO 25 YEARS. THE ENTIRE MEMBERSHIP FEE RECEIVED BY THE ASSESSEE IS T REATED AS REVENUE RECEIPT, BUT THE ENTIRE AMOUNT COLLECTED IS NOT REC OGNISED 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 4 TH YEAR ONWARDS, IT STARTED RECOGNISING 60 PER CENT OF THE RECEIPT AS I NCOME 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 O VER THE PERIOD OF MEMBERSHIP AND, THEREFORE, PART OF THE FEES ARE REC OGNISED AS INCOME IN THE SUBSEQUENT YEARS. THERE IS NO BASIS FOR RECOGNI SING THE INCOME IN THE RATIO OF 40:60 AND IT IS STATED TO BE AS PER IN DUSTRY NORMS. THE BASIS FOR THE RATIO OF 60:40 IS STATED TO BE THAT WITH EX PERIENCE, THE ASSESSEE HAS BECOME WISER. THE CASE OF THE REVENUE IS THAT H AVING RECEIVED THE INCOME IN THE FIRST YEAR ITSELF, THE SAME SHOULD BE RECOGNISED AS INCOME IN THAT YEAR ONLY. SO FAR AS MAINTENANCE OF RESORTS AND OTHER UTILITIES ARE CONCERNED, THEY, ACCORDING TO THE LD. D.R., ARE BEING TAKEN CARE OF BY THE AMC/ASF ETC. WE PROCEED TO RESOLVE THIS DISP UTE. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 5 25. IT IS NOT IN DISPUTE THAT THE ASSESSEE FOLLOWS MERC ANTILE-SYSTEM OF ACCOUNTING. SECTION 5(1) OF THE ACT DEFINES THE SCO PE OF TOTAL INCOME IN CASE OF A RESIDENT AND INCLUDES ALL INCOME WHICH (A) IS RECEIVED OR IS DEEMED TO BE RECEIVED IN INDI A IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON; OR (B) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARI SE TO HIM IN INDIA DURING SUCH YEAR; OR (C) ACCRUES OR ARISES TO HIM OUTSIDE INDIA DURING S UCH YEAR. AS PER SECTION 29 OF THE ACT, THE PROFITS AND GAINS OF BUSINESS OR PROFESSION HAVE TO BE COMPUTED IN ACCORDANCE WITH T HE PROVISIONS CONTAINED IN SECTIONS 30 TO 43D OF THE ACT WHICH IN NUTSHELL MEANS THAT IT IS THE NET INCOME WHICH IS TAXABLE AND NOT THE G ROSS INCOME. NET INCOME HAS TO BE ARRIVED AT AFTER ALLOWING ALL DEDU CTIONS PERMISSIBLE UNDER THE ACT. IN THE BACKDROP OF THESE FACTS AND S TATUTORY PROVISIONS, WE HAVE TO EXAMINE WHETHER THE INCOME RECEIVED BY T HE ASSESSEE HAS REALLY ACCRUED TO IT OR NOT. THE MOST ENLIGHTENING JUDGMENT IN THIS REGARD AND WHICH HAS ALSO BEEN THE BEDROCK OF SUBSE QUENT DECISIONS, IS THAT OF THE SUPREME COURT IN THE CASE OF E.D. SASSO ON & CO. LTD. (SUPRA). 26. THE ASSESSEE IN THAT CASE (THE SASSOONS FOR SHORT) WERE THE MANAGING AGENTS FOR THREE COMPANIES. THEY WERE ENTI TLED TO RECEIVE AS THEIR REMUNERATION, A COMMISSION OF CERTAIN PER CEN T PER ANNUM ON THE ANNUAL NET PROFITS OF THE THREE COMPANIES. THE SASS OONS DECIDED TO TRANSFER THE MANAGING AGENCIES TO THREE OTHER COMPA NIES ALONG WITH ALL THEIR RIGHTS AND BENEFITS UNDER THE MANAGING AGENCY AGREEMENT. THE TRANSFER TOOK PLACE ON DIFFERENT DATES DURING THE A CCOUNTING YEAR. THE ACCOUNTS OF THE MANAGED COMPANIES WERE MADE UP AT T HE END OF THE YEAR AND THE COMMISSION PAYABLE WAS COMPUTED. THE C OMMISSION WAS PAID OVER TO THE THREE NEW MANAGING AGENTS. THE SAS SOONS DID NOT INCLUDE ANY PART OF THE COMMISSION IN THEIR INCOME BUT THE COMMISSION WAS ASSESSED IN THE HANDS OF THE THREE TRANSFEREES. THE TRANSFEREES OBJECTED TO THE SAID ASSESSMENT STATING THAT THE AG ENCY COMMISSION RECEIVED BY THEM SHOULD BE APPORTIONED ON A PROPORT IONATE BASIS AND THE TRANSFEREES SHOULD BE MADE LIABLE TO PAY TAX ON LY ON THE COMMISSION EARNED BY THEM DURING THE PERIOD THAT THEY HAD WORK ED AS MANAGING AGENTS OF THE RESPECTIVE COMPANIES. IT WAS ARGUED O N BEHALF OF THE SASSOONS THAT IT WAS A CONDITION PRECEDENT TO THE E ARNING 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 CON DITION PRECEDENT TO I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 6 THEIR EARNING THE REMUNERATION FOR THAT PERIOD. SIN CE THE STATED PERIOD OF ONE YEAR WAS NOT OVER, NO REMUNERATION WAS PAYAB LE TO THE SASSOONS TILL THE END OF THE YEAR AND IT DID NOT BECOME A DE BT DUE BY THE COMPANIES TO THE SASSOONS. THEREFORE, ACCORDING TO THE SASSOONS, NO INCOME ACCRUED TO THEM. ON THE OTHER HAND, IT WAS U RGED ON BEHALF OF THE TRANSFEREES THAT THOUGH UNDER THE DEED OF ASSIG NMENT, THEY WERE PAID THE WHOLE OF THE COMMISSION, THEY HAD MERELY E ARNED THE COMMISSION FOR THE PERIOD OF ACTUAL SERVICES RENDER ED BY THEM TO THE COMPANY. EVEN THOUGH THE ASCERTAINMENT AND THE PAYM ENT CAME LATER IT MADE NO DIFFERENCE TO THE ACCRUAL OF INCOME WHICH C OULD BE REFERRED BACK TO THE PERIOD DURING WHICH THE INCOME WAS EARN ED AND, ACCORDINGLY, WHATEVER AMOUNT WAS EARNED BY THE SASS OONS DURING THE RESPECTIVE PERIODS THAT THEY HAD ACTED AS AGENTS, H AD ACCRUED TO THEM DURING THOSE PERIODS. THE COURT BY MAJORITY DECISIO N HELD THAT NO INCOME ACCRUED TO THE SASSOONS. 27. NOW LET US EXAMINE THE PRINCIPLES LAID DOWN IN THE CASE OF SASSOONS AND TRY TO APPLY THEM TO THE FACTS OF THE PRESENT CASE. ONE OF THE IMPORTANT OBSERVATIONS THE COURT MADE IS AT PAG E 52 OF ITR 26. IT OBSERVED THAT THE SASSOONS HAD NO DOUBT RENDERED SE RVICES AS MANAGING AGENTS OF THE COMPANIES FOR THE BROKEN PER IODS. BUT UNLESS AND UNTIL THEY COMPLETED THEIR PERFORMANCE, VIZ., T HE COMPLETION OF THE DEFINITE PERIOD OF SERVICE OF A YEAR WHICH WAS A CO NDITION PRECEDENT TO THEIR BEING ENTITLED TO RECEIVE THE REMUNERATION OR COMMISSION STIPULATED THEREUNDER NO DEBT PAYABLE BY THE COMPAN IES WAS CREATED IN THEIR FAVOUR AND THEY HAD NO RIGHT TO RECEIVE ANY P AYMENT FROM THE COMPANIES. NO REMUNERATION OR COMMISSION COULD, THE REFORE, BE SAID TO HAVE ACCRUED TO THEM AT THE DATES OF THE RESPECTIVE TRANSFERS. IN THE PRESENT CASE, OF COURSE, THE FEES ARE PAYABLE ON TH E EXECUTION OF THE CONTRACT BETWEEN THE COMPANY AND THE PROSPECTIVE ME MBER. ONCE A PERSON AGREES TO BECOME MEMBER THE FEES ARE IMMEDIA TELY PAYABLE TO THE COMPANY. IT BECOMES A DEBT PAYABLE BY THE PERSO N TO THE COMPANY. IN THAT SENSE INCOME HAS ARISEN TO THE COMPANY. HOW EVER, THE QUESTION IS WHETHER IT HAS ACCRUED TO THE COMPANY OR NOT. IN THIS CONNECTION, THE SUPREME COURT HAS EXPLAINED THE MEANING OF THE WORD EARNED AND WE REPRODUCE THE RELEVANT OBSERVATION BELOW (PAGES 51 & 52 OF 26 ITR) : 'THE WORD 'EARNED' EVEN THOUGH IT DOES NOT APPEAR I N SECTION 4 OF THE ACT HAS BEEN VERY OFTEN USED IN THE COURSE OF THE J UDGMENTS BY LEARNED JUDGES BOTH IN THE HIGH COURTS AS WELL AS THE SUPRE ME COURT, (VIDE CIT BOMBAY V. AHMEDBHAI UMARBHAI & CO., BOMBAY [195 0] 18 ITR 472 , AND CIT MADRAS V. K.R.M.T.T. THIAGARAJA CHETT Y & CO. [1953] I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 7 24 ITR 525 AT 533). IT HAS ALSO BEEN USED BY THE JU DICIAL COMMITTEE OF THE PRIVY COUNCIL IN COMMISSIONERS OF TAXATION V. K IRK[1900] A.C. 588 AT 592. THE CONCEPT, HOWEVER, CANNOT BE DIVORCE D FROM THAT OF INCOME ACCRUING TO THE ASSESSEE. IF INCOME HAS ACCR UED TO THE ASSESSEE IT IS CERTAINLY EARNED BY HIM IN THE SENSE THAT HE HAS CONTRIBUTED TO ITS PRODUCTION OR THE PARENTHOOD OF THE INCOME CAN BE T RACED TO HIM. BUT IN ORDER THAT THE INCOME CAN BE SAID TO HAVE ACCRUE D TO OR EARNED BY THE ASSESSEE IT IS NOT ONLY NECESSARY THAT THE ASSE SSEE MUST HAVE CONTRIBUTED TO ITS ACCRUING OR ARISING BY RENDERING SERVICES OR OTHERWISE BUT HE MUST HAVE CREATED A DEBT IN HIS FA VOUR. A DEBT MUST HAVE COME INTO EXISTENCE AND HE MUST HAVE ACQUIRED A RIGHT TO RECEIVE THE PAYMENT. UNLESS AND UNTIL HIS CONTRIBUTION OR P ARENTHOOD IS EFFECTIVE IN BRINGING INTO EXISTENCE A DEBT OR A RI GHT TO RECEIVE THE PAYMENT OR IN OTHER WORDS A DEBITUM IN PRAESENTI, S OLVENDUM IN FUTURO IT CANNOT BE SAID THAT ANY INCOME HAS ACCRUED TO HI M. THE MERE EXPRESSION 'EARNED' IN THE SENSE OF RENDERING THE S ERVICES 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 EARN ED BY THE ASSESSEE. THEY ARE: (I) IT IS NECESSARY THAT THE ASSESSEE MUS T HAVE CONTRIBUTED TO ITS ACCRUING OR ARISING BY RENDERING SERVICES OR OT HERWISE, AND (II) A DEBT MUST HAVE COME INTO EXISTENCE AND HE MUST HAVE ACQUIRED A RIGHT TO RECEIVE THE PAYMENT. IN THE PRESENT CASE, A DEBT IS CREATED IN FAVOUR OF THE ASSESSEE IMMEDIATELY ON EXECUTION OF THE AGR EEMENT. HOWEVER, IT CANNOT BE SAID THAT THE ASSESSEE HAS FULLY CONTRIBU TED TO ITS ACCRUING BY RENDERING SERVICES. THE ASSESSEE IS BOUND TO PROVID E ACCOMMODATION TO THE MEMBERS FOR ONE WEEK EVERY YEAR TILL THE CURREN CY OF THE MEMBERSHIP. TILL THE ASSESSEE FULFILLS ITS PROMISE, THE PARENTHOOD CANNOT BE TRACED TO IT. IN THIS CONNECTION, CERTAIN CLAUSES IN THE MEMBERSHIP RULES NEED TO BE EXAMINED. THE RESERVATI ON FOR HOLIDAY CAN BE DONE 90 DAYS TO 1 DAY BEFORE THE COMMENCEMENT OF HOLIDAY BUT THE SAME IS SUBJECT TO AVAILABILITY. IN OTHER WORDS, IF THE RESORT REQUESTED FOR IS NOT AVAILABLE, THE MEMBER WOULD BE DEPRIVED OF THE HOLIDAY. IF THE ASSESSEE CONFIRMS THE RESERVATION BUT IS NOT ABLE T O PROVIDE THE ALLOTTED OR THE ALTERNATE ACCOMMODATION, ASSESSEE IS LIABLE TO PAY LIQUIDATED DAMAGES TO THE MEMBER. IT IS WORTH NOTING THAT THE ASSESSEE IS LIABLE TO PAY LIQUIDATED DAMAGES ONLY IF IT IS NOT IN A POSIT ION TO PROVIDE ACCOMMODATION AS PER CONFIRMED RESERVATION. BUT IT IS NOT LIABLE TO PAY ANY DAMAGES IF IT IS NOT ABLE TO PROVIDE AN ACCOMMO DATION ON ACCOUNT OF NON-AVAILABILITY. UNDER SUCH CIRCUMSTANCES, THE ONLY RECOURSE FOR THE MEMBER IS TO APPROACH THE CONSUMER FORUM WHICH WILL TERM IT AS DEFICIENCY IN SERVICES AND DIRECT THE ASSESSEE TO P AY DAMAGES. THE POINT I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 8 WE ARE TRYING TO DRIVE HOME IS THAT THE MATTER DOES NOT END ON SIGNING OF THE AGREEMENT AND ON A PERSON BECOMING A MEMBER. THERE IS A CONTINUING LIABILITY ON THE PART OF THE ASSESSEE NO T ONLY TO PROVIDE ACCOMMODATION BUT ALSO TO PROVIDE OTHER INCIDENTAL SERVICES ATTACHED WITH THE ACCOMMODATION. THIS IS AN IMPORTANT ASPECT OF THE MATTER. 28. IT HAS BEEN ARGUED ON BEHALF OF THE ASSESSEE THAT T HE MAIN REASON TO SPREAD THE BALANCE AMOUNT OF MEMBERSHIP F EES OVER THE TENURE OF MEMBERSHIP IS THAT IT HAS TO INCUR HEAVY EXPENDITURE FOR THE UPKEEP AND MAINTENANCE OF ITS VARIOUS RESORTS. HOWE VER, WE ARE NOT IMPRESSED WITH THIS ARGUMENT. SEPARATE CHARGES ARE COLLECTED FOR MAINTENANCE AND FOR USE OF UTILITIES AND THEREFORE, THE MATCHING CONCEPT CANNOT BE PRESSED INTO SERVICE SO FAR AS ME MBERSHIP FEE IS CONCERNED. NO DOUBT, IT WILL BE THE CONSTANT ENDEAV OUR OF THE ASSESSEE TO GO ON ADDING NEW RESOURCES WHICH WILL BE AVAILAB LE TO THE EXISTING MEMBERS ALSO. TO THAT EXTENT ONE CAN SAY THAT SOME PORTION OF THE MEMBERSHIP FEES WILL GO TO FINANCE NEW PROPERTIES. BUT MEMBERSHIP FEE IS ESSENTIALLY A CONSIDERATION FOR THE RIGHT TO OCC UPY 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, I F THE ASSESSEE IS NOT ABLE TO PROVIDE ACCOMMODATION IN ANY OF ITS NOT IFIED RESORTS, IT WILL TRY TO PROCURE ALTERNATE ACCOMMODATION. THIS ALSO W ILL ENTAIL ADDITIONAL EXPENDITURE ON THE PART OF THE ASSESSEE OVER AND AB OVE 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 LI ABILITY IS UNDOUBTEDLY THERE. HOWEVER, NO SCIENTIFIC BASIS HAS BEEN BROUGH T TO OUR NOTICE TO QUANTIFY THE SAME EVEN REASONABLY. JUST AS LIFE INS URANCE 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 PRESE NT CASE. IN THE CASE OF LIFE INSURANCE, THE PREMIUM IS COMPUTED ON ACTUARIA L BASIS ONLY FOR THE LIFE ASSURED WHOSE LONGEVITY CAN BE REASONABLY ESTI MATED. IN THE CASE OF ENCASHMENT OF LEAVE, DESPITE THE CHANGE IN THE NUMB ER OF EMPLOYEES, REASONABLE NUMBER OF RETIREMENTS EVERY YEAR CAN BE ESTIMATED AND, HENCE, THE PROVISION THEREOF IS NOT RENDERED THAT D IFFICULT. HOWEVER, IN THE CASE BEFORE US, THE MEMBERSHIP IS EVER INCREASI NG AND IN WHICH YEAR HOW MANY CONTINGENCIES OF NON-AVAILABILITY OF ACCOMMODATION CAN ARISE, CAN BE ANYBODYS GUESS. AT THIS JUNCTURE WE MAY CLARIFY THE USE OF THE WORD 'CONTINGENCIES'. IT IS NOT USED IN THE SENSE THAT THE EVENT OF NONAVAILABILITY OF ACCOMMODATION IS WHOLLY UNCERTAIN. THE EVENT IS CERTAIN, ONLY HOW MANY SUCH EVENTS CAN OCC UR IS UNCERTAIN. AS A MATTER OF FACT, THE SUPREME COURT HAS ALSO USED T HE WORDS I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 9 'CONTINGENT LIABILITY' FOR WARRANTY EXPENSE AND ALL OWED DEDUCTION IN THE CASE OF ROTORK CONTROLS INDIA (P.) LTD. V. CIT [2009] 314 ITR 62 1. THEREFORE, COMING BACK TO THE POINT OF MAKING PROVI SION, EVEN IF THE ASSESSEE HAD CHOSEN TO PROVIDE FOR THE LIABILITY IN EVERY YEAR TO COMPLY WITH THE MATCHING CONCEPT, IT WOULD HAVE BEEN WHOLL Y UNSCIENTIFIC AND ARBITRARY. AT THIS JUNCTURE, WHEN WE ARE MAKING THE OBSERVATION THAT THE ASSESSEE HAS INCURRED A LIABILITY TO PROVIDE ACCOMM ODATION, IT WOULD BE APPROPRIATE TO DEAL WITH THE ARGUMENT OF THE DEPART MENT IN CONNECTION WITH BE AFFIDAVIT FILED BY THE ASSESSEE BEFORE THE SERVICE TAX AUTHORITIES. THE DEPARTMENT IS BANKING ON THE AVERMENT IN THE AF FIDAVIT TO THE EFFECT THAT ONCE THE AGREEMENT IS SIGNED, THERE IS NO SERV ICE LEFT TO BE RENDERED BY THE ASSESSEE. THIS ARGUMENT HAS TO BE REJECTED. THE DEPARTMENT ITSELF ADMITS, THAT THE ASSESSEE IS BOUND TO PROVIDE ACCOM MODATION FOR ONE WEEK IN A YEAR DURING THE TENURE OF THE MEMBERSHIP. SECONDLY, BY SAYING THAT NO SERVICE IS LEFT TO BE RENDERED, WHAT THE ASSESSEE MEANS TO SAY IS THAT THERE IS NO TAXABLE EVENT UNDER THE SER VICE TAX LAWS ONCE A PERSON BECOMES MEMBER. THEREFORE, THE RELIANCE OF T HE DEPARTMENT ON THE AFFIDAVIT HAS NO SUBSTANCE AT ALL. 29. WE AGAIN REVERT TO THE ASPECT OF LIABILITY. IN THIS CONNECTION, THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P.) LTD. (SUPRA) IS QUITE USEFUL. OF COURSE, WE AR E CONSCIOUS OF THE FACT THAT THAT CASE PERTAINED TO PROVISION FOR WARRANTIE S, NONETHELESS, CERTAIN PRINCIPLES ENUNCIATED THEREIN ARE QUITE APT FOR THE CASE ON HAND AS WELL. IN THE SAID CASE, THE ASSESSEE HAD MADE PR OVISION FOR WARRANTIES. THE MADRAS HIGH COURT IN THEIR JUDGMENT IN CIT V. ROTORK CONTROLS INDIA LTD. [2007] 293 ITR 311 DENIED DEDUCTION OF THE PROVISION FOR WARRANTIES ON THE GROUND THAT THE LIA BILITY WAS NOT CERTAIN. IN FACT AT PAGE 315 THE HIGH COURT EXPRESS ED THIS VIEW BY STATING THAT CONSIDERING THE NATURE OF THE LIABILIT Y, WHICH IS YET TO CRYSTALLISE BUT LOADED, WITH UNCERTAINTY OF THE EVE NT, 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 RESO URCES EMBODYING ECONOMIC BENEFITS. IT WAS FURTHER OBSERVED THAT A P AST 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 OBLIGATI ON BUT ALSO THE PROBABILITY OF AN OUTFLOW OF RESOURCES TO SETTLE TH AT 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 PROM ISE TO FULFIL THE I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 10 OBLIGATION OF PROVIDING HIM ACCOMMODATION FOR ONE W EEK EVERY YEAR FOR THE NEXT 33/25 YEARS. IT IS NOT AN ORDINARY OBL IGATION. IN FACT, IN OUR VIEW, THE OBLIGATION IS HEAVIER THAN THAT IN THE CA SE OF SALE OF GOODS. IN THE CASE OF SALE OF GOODS, THE GOODS ARE ALREADY IN POSSESSION OF THE BUYER AND ARE BEING USED BY THE BUYER. ON THE OTHER HAND, THE SALE OF TIMESHARE UNIT: IS NOT AS TANGIBLE AS SALE OF GOODS BUT BECOMES TANGIBLE WHEN THE ASSESSEE FULFILS ITS PROMISE. LET US CONSI DER CERTAIN FACTORS WHICH MAY PREVENT THE ASSESSEE FROM KEEPING ITS PRO MISE. MOST OF THE MEMBERS WOULD OPT FOR A HOLIDAY DURING THE PEAK SEA SON, I.E. DURING VACATION IN SCHOOLS AND THIS CAN PUT A LOT OF PRESS URE ON THE ASSESSEE TO SATISFY EACH AND EVERY MEMBER. IT WILL HAVE TO DISA PPOINT CERTAIN MEMBERS FOR NON-AVAILABILITY OF ACCOMMODATION AND T HIS MAY INVITE OUTFLOW OF RESOURCES. THERE MAY BE A DEMAND FOR A P ARTICULAR RESORT BUT THE ASSESSEE MAY NOT BE ABLE TO PROVIDE IT IF T HE SAME IS UNDER SOME MAJOR REPAIRS OR RENOVATION. THESE TYPES OF CONTING ENCIES WILL ALWAYS ENTAIL OUTFLOW OF RESOURCES FOR THE ASSESSEE IN FUT URE. THEREFORE, WE ARE OF THE VIEW THAT THERE IS EVERY POSSIBILITY OF AN O BLIGATING EVENT ARISING WHICH WILL RESULT IN AN OUTFLOW OF RESOURCES. 30. A QUESTION MAY BE RAISED THAT IF THE OBLIGATING EVE NT IS SURE TO ARISE, THE ASSESSEE COULD HAVE MADE REASONABLE PROV ISION EVERY YEAR WHICH WOULD MEET THE MATCHING CONCEPT ALSO. LET US SEE HOW IT IS NOT POSSIBLE. IN THE CASE OF ROTORK CONTROLS (SUPRA), T HE SUPREME COURT HAS OBSERVED THAT A PROVISION IS RECOGNISED WHEN: (A) A N ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNI SED. IN THE PRESENT CASE, WE HAVE ALREADY OBSERVED IN THE PRECEDING PAR AGRAPHS THAT THE ASSESSEE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT. THUS, THE FIRST CONDITION IS SATISFIED. WE HAVE ALSO OBSERVED THAT OUTFLOW OF RESOURCES IS PROBABLE TO SETTLE THE OBLIGATION. THE SECOND CONDITION IS ALSO SATISFIED. HOWEVER, CONSIDERING THE NATURE OF ACTIVITY, IT IS THE THIRD CONDITION WHICH IS DIFFICULT TO SATISFY. THE DEMAND FOR ACCOMMODATION BY THE MEMBERS IS ESSENTIALLY TOURISM ORIENTED. TOU RISM, IN TURN, DEPENDS ON SEVERAL FACTORS. THEY MAY BE SOCIAL, POL ITICAL, 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 AF FECTED. SUDDEN CHANGE IN WEATHER CAN ALSO AFFECT TOURISM. FURTHER, AVAILABILITY OF RAIL OR AIR RESERVATION CAN ALSO AFFECT TOURISM. THE POS SIBILITY OF LEAVE TRAVEL CONCESSION (LTC) GETTING LAPSED CAN SEE SUDDEN SPUR T IN TOURISM. THESE ARE ONLY A FEW ILLUSTRATIONS WHICH CAN AFFECT THE D EMAND FOR I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 11 ACCOMMODATION EITHER WAY. THERE MAY BE MANY POSSIBI LITIES WHICH MAY NOT COME TO MIND BUT MAY PUT THE ASSESSEE INTO TREM ENDOUS PRESSURE. ALL THESE FACTORS ARE SUCH WHICH ARE TWINED WITH TH E NORMAL HUMAN LIFE AND, HENCE, ARE NOT ONLY CERTAIN TO OCCUR BUT ALSO MAKES IT DIFFICULT TO REASONABLY ESTIMATE THE PROBABLE OUTFLOW OF RESOURC ES. MOREOVER, AS MENTIONED EARLIER, MOST OF THE GRIEVANCES ARE SETTL ED BY CONSUMER FORUM AND IT CAN BE ANYBODYS GUESS AS TO WHAT DAMA GES THE FORUM WILL AWARD. SOME ORDERS OF THE CONSUMER FORUM AWARD ING DAMAGES TO THE COMPLAINANTS HAVE BEEN PLACED ON RECORD. CONSID ERING THE DIFFICULTY IN ESTIMATING REASONABLY THE OBLIGATION IN MONETARY TERMS, NO PROVISION CAN BE MADE. 31. WE HAVE HELD THAT THERE IS A DEFINITE LIABILITY CAS T ON THE ASSESSEE TO FULFIL ITS PROMISE AND, THEREFORE, IT CANNOT BE SAID THAT THE ENTIRE FEE RECEIVED BY IT HAS ACCRUED AS INCOME. WE HAVE ALSO CONSIDERED THE PECULIAR NATURE OF THE ACTIVITY ALONG WITH THE COMP LEXITY ATTACHED TO IT AS A RESULT OF WHICH NO REASONABLE PROVISION FOR TH E LIABILITY CAN BE MADE. THEREFORE, RECOGNIZING THE ENTIRE RECEIPT AS INCOME IN THE YEAR OF RECEIPT CAN LEAD TO DISTORTION. SOMEWHAT SIMILAR, T HOUGH NOT EXACTLY IDENTICAL, SITUATION WAS FACED BY THE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPN. LTD. (SUPRA). I N THAT CASE, THE ASSESSEE HAD ISSUED DEBENTURES OF `. 1.5 CRORES AT A DISCOUNT OF 2 PER CENT REDEEMABLE AFTER 12 YEARS. AT PAGE 813 OF THE REPORT, THE COURT OBSERVED THAT 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 INCURRED. IT CANNO T 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 A N ASSESSEE WHO HAS INCURRED EXPENDITURE IN A PARTICULAR YEAR TO SPREAD AND CLAIM IT OVER A PERIOD OF ENSUING YEARS. IN FACT, ALLOWING THE ENTI RE EXPENDITURE IN ONE YEAR MIGHT GIVE A VERY DISTORTED PICTURE OF THE PRO FITS OF A PARTICULAR YEAR. IT IS THIS DISTORTION WE HAVE TALKED ABOUT IN THE EARLIER PART OF THIS PARAGRAPH. THE ONLY DIFFERENCE IS THAT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPN. (SUPRA), THE DISTORTION WAS SUPPO SED TO BE ON ACCOUNT OF EXPENDITURE, IN THE PRESENT CASE THE DIS TORTION IS ON ACCOUNT OF THE ENTIRE INCOME BEING ACCOUNTED IN THE YEAR OF RECEIPT. EARLIER, WE HAVE ALSO DISCUSSED AS TO HOW DIFFICULT IT IS TO ES TIMATE THE LIABILITY WHICH IS LIKELY TO BE INCURRED IN FUTURE, MORE SO I N THE ABSENCE OF ANY SCIENTIFIC BASIS OR HISTORICAL DATA. THEREFORE, THE ONLY WAY TO MINIMISE THE DISTORTION IS TO SPREAD OVER A PART OF THE INCO ME OVER THE ENSUING YEARS. AT THIS JUNCTURE, WE MAY DEAL WITH ONE OF TH E ARGUMENTS MADE ON BEHALF OF THE ASSESSEE AND THE INTERVENER. IT WAS A RGUED THAT ACCOUNTING FOR THE WHOLE OF THE INCOME IN ONE YEAR WOULD GIVE A DISTORTED VIEW OF I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 12 THE PROFITS OF THE COMPANY WHICH WILL BE AGAINST TH E TRUE AND FAIR PRINCIPLE REQUIRED FOR THE ANNUAL ACCOUNTS. WELL, T HE DISTORTION THE LD. COUNSEL TALKED ABOUT WAS VIS-AVIS THE PRESENTATION OF PUBLISHED ACCOUNTS WHEREAS THE DISTORTION THE SUPREME COURT T ALKED ABOUT AND WHICH WE ARE INCLINED TO FOLLOW, IS VIS-A-VIS THE R EAL TAXABLE INCOME FOR A PARTICULAR YEAR. THEREFORE, IN VIEW OF THE FOREGO ING DISCUSSION, WE ACCEPT THE PROPOSITION OF THE ASSESSEE THAT IT IS N OT JUSTIFIABLE TO TAX THE ENTIRE INCOME IN A SINGLE YEAR AS IS THE CASE OF TH E DEPARTMENT. 32. ACCORDINGLY, TO ANSWER THE QUESTION POSED TO THE SP ECIAL BENCH, THE ENTIRE AMOUNT OF TIMESHARE MEMBERSHIP FEE RECEI VABLE BY THE ASSESSEE UP FRONT AT THE TIME OF ENROLMENT OF A MEM BER IS NOT THE INCOME CHARGEABLE TO TAX IN THE INITIAL YEAR ON ACC OUNT OF CONTRACTUAL OBLIGATION THAT IS FASTENED TO THE RECEIPT TO PROVI DE SERVICES IN FUTURE OVER THE TERM OF CONTRACT. 7. THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CA SE OF MAHINDRA HOLIDAYS AND RESORTS INDIA LTD IN ITA NO. 1613/MDS/ 2011 DATED 25.05.2012 CONSIDERED THE DECISION IN THE CASE OF CALCUTTA STO CK EXCHANGE AND DELHI STOCK EXCHANGE ASSOCIATION (SUPRA), TO WHICH THE CO UNSEL FOR THE REVENUE WAS REFERRING TO AND BY FOLLOWING THE SPECIAL BENCH DECISION (SUPRA) DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. HENCE, RESPECT FULLY FOLLOWING THE DECISION OF THE CHENNAI SPECIAL BENCH IN THE CASE O F MAHINDRA HOLIDAYS AND RESORTS INDIA LTD (SUPRA), WE DECIDE THE ABOVE COMM ON ISSUE IN FAVOUR OF THE ASSESSEE FOR ALL THE RELEVANT ASSESSMENT YEARS. 8. THE NEXT ISSUE IN THE APPEAL OF THE ASSESSEE FO R THE ASSESSMENT YEAR 2006-07 IS RELATING TO DISALLOWANCE OF PROVISION FO R DOUBTFUL DEBTS. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 13 DURING THE COURSE OF HEARING, THE COUNSEL FOR THE ASSESSEE SUBMITS THAT THIS GROUND OF APPEAL IS NOT PRESSED. ACCORDIN GLY, THE GROUND OF APPEAL RAISED ON DISALLOWANCE OF PROVISIONS FOR DOUBTFUL D EBTS IS DISMISSED AS NOT PRESSED. 9. THE NEXT ISSUE IN THE APPEAL OF THE ASSESSEE FO R THE ASSESSMENT YEAR 2006-07 IS RELATING TO DISALLOWANCE OF MANAGEMENT E XPENSES. 10. THE ASSESSING OFFICER WHILE COMPLETING THE ASS ESSMENT DISALLOWED 50% OF INCREASE IN MANAGEMENT EXPENSES INCURRED BY THE ASSESSEE ON THE GROUND THAT THERE IS SUBSTANTIAL INCREASE IN EXPENS ES INCURRED WHEN COMPARED TO THE IMMEDIATE PRECEDING YEAR. THE ASSES SING OFFICER ALSO OBSERVED THAT THE ASSESSEE HAS NOT EXPLAINED THE EX PEDIENCY TO MEET SUCH HUGE EXPENDITURE WHEN THERE HAS BEEN SUBSTANTIAL RE DUCTION IN INCOME. 11. ON APPEAL, THE COMMISSIONER OF INCOME TAX (APP EALS) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AGREEING WITH THE VIEW OF THE ASSESSING OFFICER THAT THERE HAS BEEN INCREASE IN T HE MANAGEMENT EXPENSES COMPARED TO LAST YEAR AND THERE IS DECREAS E IN THE INCOME. 12. THE COUNSEL FOR THE ASSESSEE SUBMITS THAT THE ASSESSEE ENTERED INTO AN AGREEMENT WITH THE STERLING RESORTS MANAGEMENT S ERVICES LTD. [FOR SHORT SRMS] FOR MAINTENANCE AND UPGRADATION OF ITS RESORT . AS PER ARTICLE 11 AND 12 OF THE AGREEMENT, THE ASSESSEE HAS TO PAY SRMS M ANAGEMENT FEE AT I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 14 15% OF GROSS OPERATING PROFIT GENERATED BY THE RESO RT AND MARKETING FEE AT THE RATE OF 5% OF GROSS REVENUE OF THE RESORT. BOTH THESE EXPENSES CONTAINED TOGETHER HAVE BEEN TERMED AS MANAGEMENT E XPENSES IN THE BOOKS OF ASSESSEE. THEREFORE, HE SUBMITS THAT THE M ANAGEMENT EXPENSES PAYOUT IS DIRECTLY LINKED TO RESORT INCOME OF THE A SSESSEE. THE COUNSEL FOR THE ASSESSEE INVITED OUR ATTENTION TO PAGE 99 OF TH E PAPER BOOK CONSISTING OF ABSTRACT TAKEN FROM SCHEDULE 9 OF THE ANNUAL REPORT FOR THE FINANCIAL YEAR 2005-06 CONTAINING THE DETAILS OF REVENUE AS UNDER: SCHEDULE 9 SALES LESS RETURNS AS AS 31 ST MARCH 2006 AS AT 31 ST MARCH, 2005 TIME SHARES AND OTHERS 97,223,256 275,701,144 RESORT OPERATIONS 175,169,558 166,126,138 TOTAL 272,392814 441,827,282 13. REFERRING TO THE ABOVE TABLE, THE COUNSEL FOR THE ASSESSEE SUBMITS THAT THE TOTAL INCOME CONSISTS OF BOTH TIME SHARE I NCOME AND INCOME FROM RESORT OPERATIONS. THE TOTAL INCOME AS ON 31.03.200 6 FROM BOTH THESE OPERATIONS HAS REDUCED BY ` .16,94,34,468/- WHEN COMPARED TO THE INCOME OF THE IMMEDIATE PRECEDING YEAR I.E. 31.03.2005. HO WEVER, THE RESORT INCOME AS ON 31.03.2006 HAS INCREASED BY ` .90,43,420/- WHEN COMPARED TO THE IMMEDIATE PRECEDING YEAR I.E. 31.03.2005. THE COUNS EL SUBMITS THAT SINCE THE MANAGEMENT FEE AND MARKETING FEE IS DIRECTLY LI NKED WITH RESORT INCOME, THE MANAGEMENT EXPENSES GOT INCREASED DURING THE CU RRENT ASSESSMENT YEAR BECAUSE OF THE INCREASE OF THE RESORT INCOME. THEREFORE, HE SUBMITS THAT THE ASSESSING OFFICER AND THE COMMISSIONER OF INCOME TAX (APPEALS) I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 15 FELL IN ERROR IN CALCULATING THE INCREASE IN THE MA NAGEMENT EXPENSES WITH THE DECREASE IN TOTAL INCOME INSTEAD OF CALCULATING ON THE RESORT INCOME. THEREFORE, HE SUBMITS THAT THERE IS NO JUSTIFICATIO N IN DISALLOWING 50% OF THE MANAGEMENT EXPENSES STATING THAT HUGE EXPENSES WERE INCURRED AND THERE IS SUBSTANTIAL REDUCTION IN INCOME. 14. THE COUNSEL FOR THE REVENUE SUBMITS THAT THERE IS NO VALID REASON FOR PAYMENT OF ALL THESE EXPENSES OVER AND ABOVE THE NO RMAL MAINTENANCE EXPENSES. THE COUNSEL FOR THE REVENUE SUPPORTED THE ORDERS OF LOWER AUTHORITIES IN MAKING THE SAID DISALLOWANCE BY THE ASSESSING OFFICER. 15. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIAL S AVAILABLE ON RECORD AND ORDERS OF LOWER AUTHORITIES. AS COULD BE SEEN F ROM THE DETAILS OF REVENUE FURNISHED BY THE ASSESSEE, IN FACT, THERE IS INCREA SE OF ` . 90,43,420/- FROM THE RESORT OPERATION OF THE ASSESSEE. THE MANAGEMEN T FEE IS PAYABLE ON THE INCOME FROM RESORT OPERATIONS. IN THE CIRCUMSTANCES , THERE IS NO REDUCTION OF INCOME AS COMPARED TO IMMEDIATE PRECEDING YEAR AS O BSERVED BY THE LOWER AUTHORITIES. THE MANAGEMENT FEE IS PAYABLE AS PER T HE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH SRMS. IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT THE AGREEMENT ENTERED INTO WITH SRMS BY THE AS SESSEE IS NOT GENUINE AND NO PAYMENT IS REQUIRED TO BE MADE TO SRMS AND T HE PAYMENT MADE IS NOT GENUINE. THE ONLY GRIEVANCE OF THE DEPARTMENT I S THAT THE EXPENSES INCURRED ARE EXCESSIVE DURING THIS ASSESSMENT YEAR WHEN COMPARED TO I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 16 IMMEDIATELY PRECEDING ASSESSMENT YEAR AND THERE IS DECREASE IN INCOME. WHEN THE EXPENSES INCURRED BY THE ASSESSEE ARE GENU INE AND INCURRED WHOLLY FOR THE PURPOSE OF BUSINESS, THE SAME CANNOT BE DISALLOWED ON THE GROUND THAT THE EXPENSES ARE EXCESSIVE PARTICULARLY ON THE GROUND THAT THERE IS SUBSTANTIAL REDUCTION IN INCOME COMPARED TO LAST YEAR, WHICH IS NOT A FACT BORN OUT FROM THE RECORD. THEREFORE, WE DELETE THE DISALLOWANCE OF ` .55,49,807/- MADE ON ACCOUNT OF MANAGEMENT EXPENSES . 16. THE SECOND ISSUE IN THE GROUNDS OF APPEAL OF T HE ASSESSEE FOR THE ASSESSMENT YEAR 2007-08 IS THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN SUSTAINING THE ADDITION MADE TOWARDS REVER SAL OF INCOME. 17. THE ASSESSING OFFICER WHILE COMPLETING THE ASS ESSMENT MADE ADDITION OF ` .1,31,51,275/- STATING THAT THE ASSESSEE HAD REVERS ED THESE EXPENSES ON 01.04.2007. THE ASSESSING OFFICER OBSER VED THAT THE ASSESSEE MADE PROVISION FOR THE EXPENSES ON 31.03.2007 AND T HE SAME WAS WRITTEN OFF SUBSEQUENTLY ON 01.04.2007. THE ASSESSEE FAILED TO PRODUCE ANY EVIDENCE TO THE FACT THAT THE SAME WERE PAID BY CHE QUE, ETC. EXCEPT SHOWING SOME JOURNAL ENTRIES IN RELATION TO THESE EXPENSES. 18. IT WAS CONTENDED BEFORE THE COMMISSIONER OF IN COME TAX (APPEALS) THAT OUT OF THE PROVISION OF ` .1,31,51,275/- MADE FOR OUTSTANDING LIABILITIES AS ON 31.03.2007, THE ASSESSEE MADE PAYMENT TO THE TUN E OF ` . 98,76,080/- I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 17 AFTER 01.04.2007. IT WAS CONTENDED BEFORE THE COMMI SSIONER OF INCOME TAX (APPEALS) THAT THE ASSESSEE HAS INCURRED THE EXPEND ITURE TO THE EXTENT OF ` . 98,76,080/- AND IT SHOULD BE ALLOWED AS DEDUCTION. THE COMMISSIONER OF INCOME TAX (APPEALS) REJECTED THE ADDITIONAL EVIDEN CE FURNISHED BY THE ASSESSEE AND FURTHER HELD THAT CREATION OF PROVISIO N AND SUBSEQUENT WRITTEN OFF IN THE BOOKS IS AN ABNORMAL ACT AND DESERVES PR OPER EXPLANATION AND IN THE ABSENCE OF SUCH EXPLANATION, THE DISALLOWANCE M ADE BY THE ASSESSING OFFICER IS CONFIRMED. 19. THE COUNSEL FOR THE ASSESSEE SUBMITS THAT THE COMPANY IS FOLLOWING REGULAR PRACTICE OF MAKING PROVISION FOR EXPENSES A S ON THE LAST DAY OF THE ACCOUNTING YEAR AND WHENEVER THE EXPENSES ARE PAID OUT SUBSEQUENTLY, THE PROVISION WAS REVERSED LATER. THE COUNSEL SUBMITTED THAT THE ASSESSEE HAD DEFINITELY INCURRED EXPENDITURE OF ` .98,76,080/- AS THE SAID AMOUNT WAS PAID TO THE CREDITORS AND THE EVIDENCE WAS ALSO PRODUCED BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS) FOR SUCH PAYME NTS. THEREFORE, HE SUBMITS THAT THERE IS NO JUSTIFICATION IN DISALLOWI NG THE EXPENSES AT LEAST TO THE EXTENT OF ` .98,76,080/-. THE COUNSEL SUBMITS THAT THE COMMISSI ONER OF INCOME TAX (APPEALS) SHOULD HAVE ADMITTED THE ADDIT IONAL EVIDENCE FILED BY THE ASSESSEE BEFORE HIM WITHOUT REJECTING THE SAME. 20. THE COUNSEL FOR THE REVENUE SUPPORTED THE ORDE RS OF LOWER AUTHORITIES. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 18 21. HAVING HEARD BOTH SIDES AND ON GOING THROUGH T HE ORDERS OF LOWER AUTHORITIES, WE DEEM IT NECESSARY TO RESTORE THIS I SSUE TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE ISSUE AFRESH IN TH E LIGHT OF THE ADDITIONAL EVIDENCE PRODUCED BY THE ASSESSEE BEFORE THE COMMIS SIONER OF INCOME TAX (APPEALS). THE ASSESSEE MAY PRODUCE THE EVIDENC E BEFORE THE ASSESSING OFFICER AND THE ASSESSING OFFICER SHALL C ONSIDER SUCH EVIDENCE AND DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW AFTER PROVIDING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 22. THE NEXT COMMON GROUNDS OF APPEAL OF THE ASSES SEE FOR THE ASSESSMENT YEARS 2002-03 AND 2008-09 IS THAT THE CO MMISSIONER OF INCOME TAX (APPEALS) ERRED IN SUSTAINING THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. FOR THE ASSESSMENT YEAR 2002-03, THE AS SESSING OFFICER DISALLOWED ` . 11,00,577/- UNDER SECTION 14A READ WITH RULE 8D O F THE ACT. 23. ON APPEAL, THE COMMISSIONER OF INCOME TAX (APP EALS) FOLLOWING THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF SP IC VS. DCIT RESTRICTED THE DISALLOWANCE TO 2% OF THE DIVIDEND EARNED AND DELET ED THE REST OF THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. 24. AGAINST THIS ORDER OF THE COMMISSIONER OF INCO ME TAX (APPEALS), THE ASSESSEE HAS COME UP IN APPEAL AND CONTENDED THAT T HE ASSESSEE HAS NOT EARNED ANY DIVIDEND INCOME DURING THE ASSESSMENT YE AR 2002-03. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 19 THEREFORE, RESTRICTING THE DISALLOWANCE TO 2% OF DI VIDEND INCOME BY THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT JUSTIFI ED. 25. THE COUNSEL FOR THE REVENUE SUPPORTED THE ORDE RS OF LOWER AUTHORITIES. 26. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIAL S AVAILABLE ON RECORD AND ORDERS OF LOWER AUTHORITIES. WE SEE THAT THE AS SESSEE HAS NOT RECEIVED ANY INCOME BY WAY OF DIVIDEND DURING THIS ASSESSMEN T YEAR. THOUGH THE COMMISSIONER OF INCOME TAX (APPEALS) RESTRICTED THE DISALLOWANCE TO 2% OF DIVIDEND INCOME EARNED, SINCE THERE IS NO DIVIDEND INCOME RECEIVED BY THE ASSESSEE IN THIS YEAR, NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE ACT AND THEREFORE THERE IS NO GRIEVANCE TO THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS). THEREF ORE, WE DISMISS THE GROUNDS OF APPEAL OF THE ASSESSEE ON THIS ISSUE FOR THE ASSESSMENT YEAR 2002-03. 27. FOR THE ASSESSMENT YEAR 2008-09, THE ASSESSING OFFICER DISALLOWED RS.6,09,403/- UNDER SECTION 14A READ WITH RULE 8D. THE ASSESSEE FILED APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEA LS) CONTENDING THAT THERE IS NO EXEMPT INCOME, WHICH FORM PART OF TOTAL INCOME FOR THE ASSESSMENT YEAR 2008-09 AND THEREFORE NO DISALLOWAN CE IS CALLED FOR UNDER SECTION 14A OF THE ACT. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 20 28. THE COMMISSIONER OF INCOME TAX (APPEALS) FOLLO WING THE DELHI SPECIAL BENCH DECISION OF THE TRIBUNAL IN THE CASE OF CHEMINVEST LTD. V. ITO [124 TTJ 577 (DEL)] REJECTED THE CONTENTION OF THE ASSESSEE THAT NO DISALLOWANCE CAN BE MADE IF THERE IS NO EXEMPT INCO ME. 29. THE COUNSEL FOR THE ASSESSEE SUBMITS THAT THE ASSESSEE HAS NOT RECEIVED ANY INCOME DURING THE ASSESSMENT YEAR, WHI CH IS EXEMPT AND ALSO SUBMITS THAT NO EXPENDITURE WAS INCURRED BY THE ASS ESSEE AND THEREFORE, NO DISALLOWANCE CAN BE MADE BY THE ASSESSING OFFICER U NDER SECTION 14A OF THE ACT. 30. THE COUNSEL FOR THE REVENUE SUPPORTED THE ORDER S OF LOWER AUTHORITIES. 31. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF G ODREJ & BOYCE MFG. CO. LTD. V. DCIT [2010] 328 ITR 81 (BOM.) HELD THAT THE PROVISIONS OF SECTION 14A READ WITH RULE 8D ARE APPLICABLE FOR THE ASSESS MENT YEAR 2008-09 ONWARDS. THEREFORE, WE RESTORE THIS ISSUE TO THE FI LE OF THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH IN THE LIGHT OF THE DECI SION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. THE ASSESSEE IS FREE TO RAISE ANY OBJECTION AND THE ASSESSING OFFIC ER SHALL CONSIDER ALL THOSE OBJECTIONS AND DECIDE THE ISSUE AFRESH IN ACCORDANC E WITH LAW. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 21 32. THE NEXT ISSUE IN THE GROUNDS OF APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2008-09 IS THAT THE COMMISSIONER OF INCOME (APPEALS) ERRED IN SUSTAINING THE ORDER OF THE ASSESSING OFFI CER IN DETERMINING THE LOSSES TO BE CARRIED FORWARD AT ` .53,06,83,140/- AS AGAINST ` .138,01,61,035. WHILE DISPOSING OF THE APPEAL, THE COMMISSIONER OF INCOME (APPEALS) STATED IN HIS ORDER THAT NO MATERIAL OR EVIDENCE HAS BEEN BROUGHT ON RECORD BY THE ASSESSEE DURING THE COURSE OF APPEAL PROCEEDINGS TO SUBSTANTIATE ITS CLAIM. 33. THE COUNSEL FOR THE ASSESSEE PLEADED BEFORE U S THAT THE ISSUE MAY BE REMITTED BACK TO THE FILE OF THE ASSESSING OFFIC ER TO EXAMINE AFRESH AS THE MATTER RELATES TO ONLY DETERMINING THE CARRY FORWAR D OF LOSSES FROM THE RECORDS. 34. THE COUNSEL FOR THE REVENUE DID NOT SERIOUSLY OBJECT FOR SENDING BACK THE ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR DETERMINING THE CORRECT AMOUNT OF CARRY FORWARD LOSSES. 35. WE HAVE HEARD BOTH SIDE, PERUSED THE MATERIALS ON RECORD. WE SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICE R TO RE-EXAMINE AND DETERMINE THE CORRECT LOSSES TO BE CARRIED FORWARD SINCE IT IS ONLY A RECONCILIATION OF LOSSES AS PER THE RECORDS. THE AS SESSEE MAY SUBMIT THE RECONCILIATION LOSSES TO THE ASSESSING OFFICER IN S UPPORT OF ITS CLAIM AND THE I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. . 471 471471 471- -- -473 & 160 473 & 160 473 & 160 473 & 160/M/12 /M/12 /M/12 /M/12 22 ASSESSING OFFICER SHALL CONSIDER THE DETAILS FURNIS HED BY THE ASSESSEE AND DETERMINE THE CORRECT LOSSES TO BE CARRIED FORWARD. 37. IN THE RESULT, THE APPEALS OF THE ASSESSEE IN I.T.A. NOS. 471& 472/MDS/2012 ARE PARTLY ALLOWED AND I.T.A. NOS. 473 & 160/MDS/2012 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THURSDAY, THE 30 TH OF AUGUST, 2012 AT CHENNAI. SD/- SD/- (ABRAHAM P. GEORGE) ACCOUNTANT MEMBER (CHALLA NAGENDRA PRASAD) JUDICIAL MEMBER CHENNAI, DATED, THE 30.08.2012 VM/- TO: THE ASSESSEE//A.O./CIT(A)/CIT/D.R.