M/s. Body Scapes, Pune V. ITO, Wd 2(2), Pune,

ITA 500/PUN/2006

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 7552 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 9 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-02-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 10-02-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 28-04-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: HEMANT KUMAR LEUVA
• Assessee Lawyers: NILESH KHANDELWAL
• Keywords: Revenue expenditure
• Section: 143(3); 145; 6; 10; 2; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIALMEMBER AND SHRI G.S. PANNU, ACCOUNTANT MEMBER ITA NO. 500/PN/2006 (ASSESSMENT YEAR: 2003-04) M/S BODY SCAPES, 120 SOHRAB HALL, 21 SASSOON ROAD, PUNE .. APPELLANT PAN AAEFB3286F VS. INCOME-TAX OFFICER .. RESPOND ENT WARD 2(2), PUNE APPELLANT BY : SHRI NILESH KHANDELWAL RESPONDENT BY : SHRI HEMANT KUMAR LEUVA ORDER PER G.S. PANNU, A.M .: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-II, PUNE DATED 23.2.2006 WHICH, IN TURN, HAS ARISEN FROM AN ORDER DATED 30.11.2005 PAS SED BY THE ASSESSING OFFICER UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT) PERTAINING TO THE ASSESSMENT YEAR 2002-03. 2. THE FIRST ISSUE RAISED IN THIS APPEAL RELATES TO THE ADDITION OF RS 21,22,828/- MADE BY THE ASSESSING OFFICER ON ACCOUN T OF EXTRA PROFIT. THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE IS A PARTNER SHIP FIRM ENGAGED IN THE BUSINESS OF PROVIDING, RUNNING AND MAINTAINING A HE ALTH/FITNESS CLUB, WITH EQUIPMENT AND RELATED SERVICES. THE FIRM OFFERS A C USTOMER/MEMBER A TIME SLOT TO VISIT THE CLUB, AVAIL OF ITS SERVICES AND U TILIZE THE FITNESS EQUIPMENTS. A CUSTOMER CAN OPT FOR MEMBERSHIP FROM VARIOUS SCHEME S OFFERED BY THE CLUB. ITA NO 500/PN/06 M/S BODY SC APES, PUNE 2 THE RIGHT OF MEMBER TO ATTEND THE CLUB WOULD DEPEND ON THE TYPE OF MEMBERSHIP OPTED FOR. THEREFORE, THE TIME AND PERIO D WOULD BE AS AGREED WHILE TAKING THE MEMBERSHIP. WHEN A CUSTOMER OPTS F OR MEMBERSHIP PERIOD WHICH EXTENDS BEYOND 31.3.2003, THE FIRM HAS TREATE D PROPORTIONATE AMOUNT OF MEMBERSHIP FEES ON A TIME METHOD AS PRE RECEIVED IN COME, WHICH IS IN THE NATURE OF ADVANCE MEMBERSHIP FEES/ADVANCE FROM CUST OMER. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE RECEIVED TOTAL AMOUNT OF RS 79,50,919/- (RS 58,28,091/- + RS 21,22,828/-) DURING THE ASSESSMENT YEAR 2003-04 FROM VARIOUS HEALTH COURSES JOINED BY THE MEMBERS, BUT O UT OF THAT, ONLY RS 58,28,091/- WAS SHOWN AS RECEIPTS IN THE PROFIT & L OSS ACCOUNT AND THE BALANCE AMOUNT OF RS 21,22,828/- WAS SHOWN AS LIABI LITY (ADVANCE) IN THE FORM OF PRE-RECEIVED MEMBERSHIP FEES (PRMF IN SHORT) A S ON 31.3.2003. IT WAS EXPLAINED BY THE ASSESSEE THAT PRMF WAS ADVANCE F EES COLLECTED FROM THE MEMBERS AT THE TIME OF JOINING A PARTICULAR PACKAGE OF THE HEALTH CLUB FOR WHICH THE SERVICES ARE YET TO BE RENDERED DURING TH AT PREVIOUS YEAR. IT WAS NOTED BY THE ASSESSING OFFICER THAT THE ASSESSEE WA S FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND AS PER THE RULES OF THE CL UB, NO AMOUNT WAS REFUNDABLE IF A MEMBER LEAVES THE PACKAGE/OR DOES N OT AVAIL THE SERVICES. ACCORDING TO THE ASSESSING OFFICER, FROM THE CONDUC T OF THE ASSESSEES BUSINESS, IT WAS APPARENT THAT THE RECEIPT OF MONEY AT THE TIME OF JOINING OR BECOMING A MEMBER OF THE CLUB FOR A PARTICULAR PACK AGE, WAS LIABLE TO BE TREATED AS INCOME IN THE YEAR IN WHICH IT WAS RECEI VED SINCE THE RIGHT TO RECEIVE HAD ACCRUED TO THE ASSESSEE FOLLOWING MERCANTILE SY STEM OF ACCOUNTING. SINCE THE ASSESSEE HAD NOT INCLUDED THE RECEIPTS TO THE E XTENT OF RS 21,22,828/- IN THE CREDIT SIDE OF THE PROFIT & LOSS ACCOUNT, AND WAS SHOWING THE SAME AS PRMF IN THE BALANCE SHEET AS AN ADVANCE RECEIVED, THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE SAME MAY NOT BE BROU GHT TO TAX IN THE ITA NO 500/PN/06 M/S BODY SC APES, PUNE 3 ASSESSMENT YEAR 2003-04. THE ASSESSEE EXPLAINED THA T THE TERM OF MEMBERSHIP WAS FOR A PERIOD OF TIME, SAY FOR A MONT H, THREE MONTHS, ONE YEAR, THREE YEARS OR FIVE YEARS. HAVING PAID THE AMOUNT, A MEMBER WAS ENTITLED TO USE THE CLUB FOR THE AGREED PERIOD. IT WAS FURTHER EXPLAINED THAT THE AMOUNT RECEIVED FOR PERIODS BEYOND 31.3.2003 WAS IN THE NA TURE OF ADVANCE, AS THE SERVICES WERE TO BE RENDERED IN FUTURE PERIOD BEYON D 31.3.2003. IT WAS SUBMITTED THAT SINCE THE MEMBERS WOULD BE USING THE FACILITIES OF THE CLUB IN SUBSEQUENT PERIODS, THE AMOUNT OF PRMF RECEIVED B Y ASSESSEE FROM MEMBERS WAS ONLY IN THE NATURE OF ADVANCE SUBSCRIPT ION, AND SUCH ADVANCES WOULD BECOME THE REVENUE RECEIPT ONLY IN THE YEAR I N WHICH THE MEMBERS ACTUALLY AVAILED THE FACILITY AND NOT BEFORE THAT. 4. THE ABOVE SUBMISSIONS OF THE ASSESSEE DID NOT FI ND FAVOUR WITH THE ASSESSING OFFICER. HE OBSERVED THAT AS PER THE TERM S AND CONDITIONS OF THE CLUB, THE MONEY GIVEN FOR A PARTICULAR PACKAGE WAS NON-REFUNDABLE AND THAT THERE WAS NO CASE OF REFUND DURING THE YEAR UNDER C ONSIDERATION. AS PER THE ASSESSING OFFICER, THE VERY FACT THAT THE AMOUNT IS NON-REFUNDABLE, IT IS CLEAR THAT THE RIGHT TO RECEIVE THE AMOUNT HAS ACCRUED AN D ARISEN TO THE ASSESSEE. SINCE THE RECEIPTS RELATED TO THE ACTIVITY CARRIED ON BY THE ASSESSEE, THEY WERE LIABLE TO BE TREATED AS SALES DURING THE YEAR IN WH ICH THEY WERE RECEIVED AND HENCE SHOULD BE SHOWN IN THE PROFIT & LOSS ACCOUNT. ON EXAMINATION OF THE ASSESSEES BALANCE SHEET AS ON 31.3.2003, THE ASSES SING OFFICER FOUND THAT THERE WAS NO PROVISION MADE FOR REFUND OF THE AMOUN T RECEIVED FROM CUSTOMERS, WHICH FURTHER SUGGESTED THAT AS PER THE ACCOUNT BOOKS OF THE ASSESSEE ALSO, AMOUNTS RECEIVED HAD REACHED FINALIT Y AND HENCE ACCRUED TO THE ASSESSEE FULLY. THE ASSESSING OFFICER ALSO HELD THAT SERVICES TO BE RENDERED IN FUTURE FLOWING FROM CONTRACTUAL OBLIGAT ION IN RESPECT OF THE PRMF, IS NOT A RELEVANT CONSIDERATION FOR TAXABILITY OF A N AMOUNT IF THE RIGHT TO RECEIVE HAD ACCRUED AND ARISEN. THE ASSESSING OFFICER FURTH ER OBSERVED THAT IT WAS ITA NO 500/PN/06 M/S BODY SC APES, PUNE 4 CLEAR THAT MOST OF THE RECEIPTS OF THE ASSESSEE WER E FOR SHORT TERM PACKAGES WHICH WERE TO BE AVAILED WITHIN 12 MONTHS. AS PER T HE ASSESSING OFFICER, IT WAS CLEAR THAT IN MERCANTILE SYSTEM, THE METHOD ADO PTED BY THE ASSESSEE FOR ACCOUNTING THE RECEIPTS IN RESPECT OF PRMF WAS NO T CORRECT AS BY THIS METHOD THE TRUE AND CORRECT PROFITS OF THE ASSESSEE COULD NOT BE WORKED OUT. THEREFORE, HE REJECTED THE METHOD OF ACCOUNTING OF THE ASSESSEE UNDER SECTION 145 OF THE ACT. HE ACCORDINGLY ADOPTED THE GROSS RECEIPTS OF THE ASSESSEE DURING THE YEAR AT RS 79,50,919/- AS AGAIN ST RS 58,28,091/- SHOWN BY THE ASSESSEE. THEREFORE, THE RECEIPTS OF 21,22,8 28/- WERE TAXED AS EXTRA PROFIT OVER AND ABOVE THE PROFIT DISCLOSED AS PER PROFIT & LOSS ACCOUNT AND ADDED BACK TO THE INCOME OF THE ASSESSEE. AGGRIEVED , THE ASSESSEE PREFERRED APPEAL BEFORE THE COMMISSIONER OF INCOME-TAX (APPEA LS). 5. BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS), BESIDES CHALLENGING THE FINDINGS OF THE ASSESSING OFFICER, THE SUBMISSI ONS AS WERE MADE BEFORE THE ASSESSING OFFICER WERE REITERATED. IN SHORT, TH E SUBMISSION OF THE ASSESSEE WAS THAT THE AMOUNT OF RS 21,22,828/- WAS MERE ADVA NCE AND NOT INCOME ACCRUED TO THE ASSESSEE. IN SUPPORT OF ITS CONTENTI ONS, THE ASSESSEE RELIED ON THE FOLLOWING JUDGMENTS: (A) ACIT V ASIA RESORTS LTD 96 TTJ 909 (CHD), (B) DCIT V NAGARJUNA INVESTMENT TRUST LTD 65 ITD 17 (SB)(HYD) (C) AMERICAN EXPRESS INTERNATIONAL BANKING CORPORAT ION V CIT 258 ITR 601 (BOM.) (D) CIT V SHAIK MOHAMED ROWTHER SHIPPING & AGENCIES (P) LTD 246 ITR 161(MAD.) (E) CIT V M/S SHOORJI VALLABHDAS & CO. 46 ITR 144 ( SC). AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE I N DETAIL, THE COMMISSIONER OF INCOME-TAX (APPEALS) CAME TO THE CONCLUSION THAT WHAT WAS SHOWN BY THE ASSESSEE AS ADVANCE OF MONEY BY WAY OF UNEXECUTED P ACKAGES REPRESENTED ITA NO 500/PN/06 M/S BODY SC APES, PUNE 5 INCOME IN RESPECT OF WHICH THE RIGHT TO RECEIVE HAD ARISEN DURING THE YEAR UNDER CONSIDERATION, AS NOTHING OUT OF RS 21,22,828 /- WAS REFUNDABLE. ACCORDINGLY, THE COMMISSIONER OF INCOME-TAX (APPEAL S) HELD THAT THE SUBMISSION OF THE ASSESSEE THAT TILL THE CONTRACTUA L OBLIGATION OF RENDERING SERVICES WAS OVER, INCOME DID NOT ARISE OR ACCRUE, WAS WRONG ON FACTS AND IN LAW. ON FACTS, HE HELD THAT THE ASSESSEE HAD RIGHT TO RECEIVE THE PAYMENT REPRESENTED BY UNEXECUTED PACKAGES AND SUCH PAYMENT S WERE IN FACT RECEIVED DURING THE YEAR UNDER CONSIDERATION. THE C OMMISSIONER OF INCOME- TAX (APPEALS) HELD THE CLAIM OF THE ASSESSEE TO BE WRONG IN LAW BECAUSE THE ASSESSEE HAD RIGHT TO RECEIVE RS 21,22,828/-, WHICH WAS IRREVERSIBLE AND IN MERCANTILE SYSTEM OF ACCOUNTING, INCOMES ACCRUE IRR ESPECTIVE OF SERVICES TO BE RENDERED. ACCORDINGLY, THE COMMISSIONER OF INCOME-T AX (APPEALS) UPHELD THE ADDITION OF RS 21,22,828/- MADE BY THE ASSESSING OF FICER IN ITS ENTIRETY. STILL AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 6. BEFORE US, THE LEARNED COUNSEL FOR THE APPELLANT VEHEMENTLY ARGUED THAT THE LOWER AUTHORITIES HAVE ERRED IN TREATING T HE PRMF AS A PART OF TAXABLE INCOME OF THE YEAR, WHEREAS THE SAME WERE MERELY AD VANCES, FOR WHICH SERVICES WERE TO BE PROVIDED BY THE ASSESSEE IN THE SUBSEQUENT YEARS. IT WAS ALSO POINTED OUT THAT ASSESSEE IS ALSO REQUIRED TO INCUR EXPENDITURE IN PROVISION OF SERVICES IN RELATION TO THE SAID RECEI PTS IN THE SUBSEQUENT ASSESSMENT YEARS. IT WAS POINTED OUT THAT THE ASSE SSEE HAD RECEIVED MEMBERSHIP FEE IN ADVANCE, BUT MERELY BECAUSE IT WA S NON-REFUNDABLE WOULD NOT MAKE IT AN INCOME IN THIS YEAR BECAUSE THE ASSE SSEE WAS UNDER A CONTRACTUAL OBLIGATION TO PROVIDE SERVICES AND INCU R EXPENDITURE THEREOF, IN FUTURE PERIODS. IT WAS POINTED OUT THAT EVEN UNDER THE MERCANTILE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE, ONLY REAL INCO ME IS ASSESSABLE TO TAX AND NOT EVERY AMOUNT RECEIVED BY THE ASSESSEE. IN S UPPORT OF HIS SUBMISSIONS, RELIANCE HAS BEEN PLACED ON THE FOLLOW ING JUDGMENTS: ITA NO 500/PN/06 M/S BODY SC APES, PUNE 6 (A) MOLLY BOBAN V ITO VIDE ITA NO 1/COCH/07 DATED 11.3.2008, (B) MAHINDRA HOLIDAY & RESORTS (I) LTD. 131 TTJ 1 ( CHEN)(SB), (C) TREASURE ISLAND RESORTS (P) LTD 90 ITD 814 (HYD ) (D) ASIA RESORTS LTD 96 TTJ 909 (CHD) (E) K K KHULLAR 116 ITD 301 (DEL) (F) FOX MANDAL & CO 6 DTR 266 (DEL) (G) CIT V SHAH CONSTRUCTION CO LTD 237 ITR814 (BOM) (H) CIT V DINESH KUMAR GOEL 9 TAXMANN188 (DEL) (I) CALCUTTA CO. LTD 37 ITR 1 (SC) (J) BHARAT EARTH MOVERS LTD. 245 ITR 428 (SC) 7. APART FROM THE AFORESAID, IT WAS SUBMITTED THAT THE ASSESSEE HAS RECOGNIZED INCOME WITH RESPECT TO PRMF IN TERMS OF ACCOUNTING STANDARD (AS-9) PRESCRIBED BY THE INSTITUTE OF CHARTERED ACC OUNTANTS OF INDIA, WHEREBY INCOME HAS BEEN RECOGNIZED VIS--VIS THE RENDERING OF SERVICES. 8. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE, APPEARING FOR THE REVENUE HAS ASSAILED THE ARGUMENT S OF THE ASSESSEE BY PLACING RELIANCE ON THE ORDERS OF THE AUTHORITIES B ELOW. ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, IT IS CLEAR TH AT THE INCOME IN QUESTION HAS ACCRUED TO THE ASSESSEE AND THAT THERE WAS NO O BLIGATION TO REFUND THE MONEY TO THE CUSTOMER/MEMBER EVEN IF THE SERVICES W ERE NOT EVENTUALLY PROVIDED BY THE ASSESSEE. THEREFORE, MERELY BECAUSE THE ASSESSEE HAD SHOWN THE SUM AS AN ADVANCE IN THE ACCOUNT BOOKS OR THAT THERE WAS A CONTRACTUAL OBLIGATION TO RENDER SERVICES IN THE FU TURE, CANNOT BE INTERPRETED TO MEAN THAT THE SAID AMOUNT WAS NOT LIABLE TO BE ASSE SSED AS INCOME IN THE CURRENT YEAR ITSELF. IN NUTSHELL, THE ARGUMENTS RA ISED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE ARE ON THE SAME LINES A S TAKEN BY THE ASSESSING ITA NO 500/PN/06 M/S BODY SC APES, PUNE 7 OFFICER, WHICH WE HAVE ALREADY NOTED IN THE EARLIER PART OF THIS ORDER AND THE SAME ARE NOT BEING REPEATED FOR THE SAKE OF BREVITY . 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY. AS NOTED EARLIER, THE APPELLANT IS IN THE BUSINESS OF RUNNING AND MAI NTAINING A HEALTH CLUB. IN THE YEAR UNDER CONSIDERATION, ASSESSEE RECEIVED A SUM O F RS 79,50,919/- FROM CUSTOMERS WHO JOINED AS MEMBERS OF THE HEALTH FITNE SS CLUB RUN BY THE ASSESSEE. HOWEVER, INCOME WAS RECOGNIZED ONLY OF R S 58,21,091/- BY WAY OF CREDIT IN THE PROFIT AND LOSS ACCOUNT AND THE BALAN CE OF RS 21,22,828/- WAS SHOWN IN THE BALANCE SHEET AS ADVANCE RECEIVED (I.E . LIABILITY IN THE FORM OF PRE-RECEIPT MEMBERSHIP FEES I.E. PRMF.) THE CLAI M OF THE ASSESSEE WAS THAT THE AMOUNT OF RS 21,22,828/- THOUGH RECEIVED IN TH IS YEAR, WAS NOT AN INCOME OF THE CURRENT YEAR, SINCE THE SERVICES THERETO WER E TO BE PROVIDED BY THE ASSESSEE IN FUTURE PERIOD. THE ASSESSING OFFICER DI D NOT ACCEPT THE PLEA OF THE ASSESSEE ON THE PREMISE THAT UNDER THE MERCANTILE S YSTEM OF ACCOUNTING, INCOME BECOMES TAXABLE ON ACCRUAL BASIS AND IN THIS CASE, ASSESSEE HAD RECEIVED THE IMPUGNED AMOUNT WHICH WAS NON-REFUNDAB LE, AND THUS IT CAN BE SAID TO HAVE ACCRUED. AS PER THE ASSESSING OFFICER, THE RIGHT TO RECEIVE THE AMOUNT REPRESENTED BY PRMF, HAD ARISEN DURING THE YEAR UNDER CONSIDERATION AND THEREFORE, THE SAME WAS LIABLE T O BE ASSESSED IN THIS YEAR ITSELF ON THE BASIS OF THE MERCANTILE SYSTEM OF ACC OUNTING FOLLOWED BY THE ASSESSEE. THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS ALSO AFFIRMED THE STAND OF THE ASSESSING OFFICER. 10. IN THIS CASE, IT IS NOT IN DISPUTE THAT THE ASS ESSEE HAS RECEIVED THE SUM OF RS 21,22,828/- AS ADVANCE FROM CUSTOMERS/MEMBERS FOR SERVICES TO BE AVAILED BY THEM IN THE SUBSEQUENT YEARS. SECONDLY, IT IS ALSO NOT IN DISPUTE THAT, IN THE COURSE OF RENDERING SERVICES IN FUTURE , ASSESSEE IS LIABLE TO INCUR CERTAIN EXPENDITURE, THOUGH THE ASSESSING OFFICER H AS OBSERVED THAT THE QUANTUM OF EXPENDITURE SO LIABLE TO BE INCURRED IS NOT MAJOR. NEVERTHELESS, ITA NO 500/PN/06 M/S BODY SC APES, PUNE 8 FACTUALLY SPEAKING THE ASPECT OF THE ASSESSEE BEING UNDER AN OBLIGATION TO INCUR EXPENDITURE AND RENDER SERVICES IN FUTURE IN RELATION TO THE IMPUGNED AMOUNT RECEIVED AS PRMF, IS NOT IN DISPUTE. SECT ION 4 OF THE ACT PRESCRIBES THAT INCOME-TAX IS CHARGEABLE IN RESPECT OF THE TOT AL INCOME OF THE PARTICULAR PREVIOUS YEAR. SECTION 5 OF THE ACT PRESCRIBES THE SCOPE OF TOTAL INCOME WHICH, INTER ALIA, PROVIDES THAT THE TOTAL INCOME INCLUDES ALL INCOME FROM WHATEVER SOURCE DERIVED WHICH IS RECEIVED OR IS DEEMED TO BE RECEIVED IN SUCH YEAR OR ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE D URING SUCH YEAR. IT IS QUITE CLEAR FROM THE PHRASEOLOGY OF THE SECTION 5 THAT WH ERE AN AMOUNT FALLS IN THE SCOPE OF TOTAL INCOME FOR HAVING ACCRUED DURING THE PREVIOUS YEAR, IT MUST BEAR THE CHARACTER OF INCOME, AS ENVISAGED IN THE STAT UTE. IN OTHER WORDS, WHAT IS OF IMPORTANCE IS THAT AN AMOUNT INCLUDIBLE IN TOTA L INCOME FOR THE PURPOSES OF CHARGEABILITY OF TAX, SHOULD BEAR THE CHARACTER OF INCOME. IN THIS CONTEXT, WE MAY REFER TO THE FOLLOWING PORTION OF THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF E. D. SASSOON & CO. LTD & ORS. V. CIT 26 ITR 27 (SC): MUKERJI J. HAS DEFINED THESE TERMS IN ROGERS PYATT SHELLAC & CO. V SECRETARY OF STATE FOR INDIA 1 ITC 163: NOW WHAT IS INCOME? THE TERM IS NOWHERE DEFINED IN THE ACT.. IN THE ABSENCE OF A STATUTORY DEFINITION WE MUST TAKE ITS ORDINARY DICT IONARY MEANING THAT WHICH COMES IN AS THE PERIODICAL PRODUCE OF ONES WORK, BUSINES S, LANDS OR INVESTMENTS (CONSIDERED IN REFERENCE TO ITS AMOUNT AND COMMONLY EXPRESSED I N TERMS OF MONEY); ANNUAL OR PERIODICAL RECEIPTS ACCRUING TO A PERSON OR CORPORA TION (OXFORD DICTIONARY). THE WORD CLEARLY IMPLIES THE IDEAL OF RECEIPT, ACTUAL OR CON STRUCTIVE. THE POLICY OF THE ACT IS TO MAKE THE AMOUNT TAXABLE WHEN IT IS PAID OR RECEIVED EITHER ACTUALLY OR CONSTRUCTIVELY. ACCRUES, ARISES AND IS RECEIVED ARE THREE DIS TINCT TERNS, SO FAR AS RECEIVING OF INCOME IS CONCERNED THERE CAN BE NO DIFFICULTY, IT CONVEYS A CLEAR AND DEFINITE MEANING, AND I CAN THINK OF NO EXPRESSION WHICH MAK ES ITS MEANING PLAINER THAN THE WORD RECEIVING ITSELF. THE WORDS ACCRUE AND AR ISE ALSO ARE NOT DEFINED IN THE ACT. THE ORDINARY DICTIONARY MEANINGS OF THESE WORKS HAV E GOT TO BE TAKEN AS THE MEANINGS ATTACHING TO THEM. ACCRUING IS SYNONYMOU S WITH ARISING IN THE SENSE OF SPRINGING AS A NATURE OF GROWTH OR RESULT. THE THR EE EXPRESSIONS ACCRUES, ARISES AND IS RECEIVED HAVING BEEN USED IN THE SECTION, STRICTLY SPEAKING ACCRUES SHOULD NOT BE TAKEN AS SYNONYMOUS WITH ARISES BUT IN THE DISTINCT SENSE OF GROWING UP BY WAY OF ADDITION OR INCREASE OR AS AN ACCESSION OR A DVANTAGE, WHILE THE WORD ARISES MEANS COMES INTO EXISTENCE OR NOTICE OR PRESENTS IT SELF. THE FORMER CONNOTES THE IDEA OF A GROWTH OR ACCUMULATION AND THE LATTER OF THE G ROWTH OR ACCUMULATION WITH A TANGIBLE SHAPE SO AS TO RECEIVABLE. IT IS DIFFICULT TO SAY THAT THIS DISTINCTION HAS BEEN THROUGHOUT MAINTAINED IN THE ACT AND PERHAPS THE TW O WORDS SEEM TO DENOTE THE SAME IDEA OR IDEAS VERY SIMILAR, AND THE DIFFERENCE ONLY LIES IN THIS THAT ONE IS MORE APPROPRIATE THAN THE OTHER WHEN APPLIED TO PARTICUL AR CASES. IT IS CLEAR, HOWEVER, AS POINTED OUT BY FREY L.J. IN COLQUHOUN V. BROOKS (18 88) 21 Q.B.D 52, (THIS PART OF THE DECISION APP. CAS.493 THAT BOTH THE WORDS ARE USED IN CONTRADISTINCTION TO THE WORD RECEIVE AND INDICATE A RIGHT TO RECEIVE. THEY REP RESENT A STAGE ANTERIOR TO THE POINT OF TIME WHEN THE INCOME BECOMES RECEIVABLE AND CONNOTE A CHARACTER OF THE INCOME WHICH IS MORE OR LESS INCHOATE. ONE OTHER MATTER NE ED BE REFERRED TO IN CONNECTION ITA NO 500/PN/06 M/S BODY SC APES, PUNE 9 WITH THE SECTION. WHAT IS SOUGHT TO BE TAXED MUST B E INCOME AND IT CANNOT BE TAXED UNLESS IT HAS ARRIVED AT A STAGE WHEN IT CAN BE CAL LED INCOME. (UNDERLINED FOR EMPHASIS BY US) 11. THUS, IT WOULD BE APPROPRIATE TO NOTE THAT A ME RE RIGHT TO RECEIVE A PARTICULAR SUM MAY NOT BE SUFFICIENT TO TREAT IT AS INCOME UNLESS SUCH RIGHT HAS ACCRUED ON ACCOUNT OF RENDERING OF SERVICES AND NOT BY MERE PROMISE TO RENDER SERVICES. AS PER THE PARITY OF REASONING LAI D DOWN BY THE HONBLE SUPREME COURT, IT CAN BE DEDUCED THAT WHERE THE RIG HT TO RECEIVE AN AMOUNT IS ANTERIOR TO THE RENDERING OF SERVICES, THE ACCRUAL OF INCOME WITHIN THE PROVISIONS OF THE ACT WOULD TAKE PLACE ONLY ON THE RENDERING OF SERVICES, BECAUSE IT IS AT THAT STAGE, THE SUM WOULD ACQUIRE THE CHARACTER OF INCOME. 12. IN THE FACTS OF THIS CASE, IT IS CLEARLY EVIDEN T THAT AT THE TIME OF TAKING OF THE MEMBERSHIP, A MEMBER PAYS THE FEES FOR THE ENTI RE FITNESS COURSE, AND THE COURSE MAY EXTEND FOR A PERIOD BEYOND THE YEAR OF P AYMENT. IN OTHER WORDS, MEMBERSHIP FEE IS CHARGED IN ADVANCE FOR THE ENTIRE PERIOD. APPLYING THE PRINCIPLE NOTED IN E. D. SASSOON & CO LTD (SUPRA), THE AMOUNT OF PMRF RECEIVED, FOR WHICH THE SERVICES ARE TO BE RENDERED IN FUTURE CAN ONLY BE TREATED AS AN ADVANCE AND NOT AS AN INCOME OTHE RWISE IT WOULD LEAD TO AN ANOMALOUS SITUATION. IF ONE WERE TO GO BY THE STAND OF THE REVENUE, THE ENTIRE RECEIPT WOULD BECOME TAXABLE INCOME, EVEN WHEN THE CORRESPONDING EXPENSES ARE YET TO BE INCURRED, WHICH WOULD BE INC URRED IN THE NEXT ASSESSMENT YEAR. THE REVENUE HAS CONTENDED THAT EVE N IF ASSESSEE IS UNDER A CONTRACTUAL OBLIGATION TO RENDER SERVICES IN SUBS EQUENT YEAR QUA THE IMPUGNED AMOUNT BUT THE SAME WOULD NOT DISTRACT FRO M THE FACT THAT THE INCOME HAS ACCRUED AS PER THE METHOD OF ACCOUNTING EMPLOYED AND ACCRUAL IS NOT DEPENDENT ON THE RENDERING OF SERVICES BY THE A SSESSEE. IN OTHER WORDS, AS PER THE REVENUE THE INCOME HAD ACCRUED WITH RESP ECT TO IMPUGNED SUM ALSO ON ACCOUNT OF THE METHOD OF ACCOUNTING EMPLOYE D BY THE ASSESSEE, ITA NO 500/PN/06 M/S BODY SC APES, PUNE 10 WHETHER OR NOT ASSESSEE HAD RENDERED THE SERVICES A ND THE PRIMARY REASON EXTENDED IS THAT EVEN IF ON A LATER DATE SERVICES A RE NOT RENDERED, THE ASSESSEE IS NOT LIABLE TO REFUND ANY AMOUNT, MEANIN G THEREBY THAT THE RECEIPT OF THE SUM HAS BECOME FINAL. IN OUR CONSIDERED OPIN ION, THE AFORESAID ARGUMENT OF THE REVENUE TO ARRIVE AT TOTAL INCOME O F THE ASSESSEE WITH RESPECT TO THE AMOUNT OF PRMF CLEARLY MILITATES A GAINST THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CALCUTTA CO. L TD. (SUPRA). AS PER THE HONBLE SUPREME COURT THE PROFITS OR GAINS UNDER TH E ACT HAVE TO BE UNDERSTOOD IN ITS COMMERCIAL SENSE AND THE SAME CAN BE ARRIVED AT ONLY AFTER DEDUCTING THE EXPENDITURE WHICH IS NECESSARY FOR TH E PURPOSE OF EARNING THE IMPUGNED RECEIPTS. ACCORDING TO THE HONBLE SUPREME COURT WHETHER OR NOT SUCH EXPENDITURE IS ACTUALLY INCURRED IS NOT MATERI AL, AND WHENEVER A CONTRACTUAL LIABILITY IN RESPECT THEREOF HAS ACCRUE D EVEN THOUGH IT MAY BE DISCHARGED AT SOME FUTURE DATE, SUCH EXPENDITURE IS DEDUCTIBLE. THEREFORE, THE ARGUMENT OF THE REVENUE TO DISREGARD THE EXPENDITUR E LIKELY TO BE INCURRED AND TREAT THE ENTIRE PRMF RECEIPT AS INCOME, IS A LSO OTHERWISE FALLACIOUS. CONSIDERING THE ENTIRETY OF CIRCUMSTANCES AND THE P ARITY OF REASONING LAID DOWN IN THE JUDGMENTS OF E.D. SASSOON & CO LTD (SUP RA) AND CALCUTTA CO LTD (SUPRA), THE SUM OF RS 21,22,828/- CANNOT BE CONSTR UED AS AN INCOME ACCRUING IN THE HANDS OF THE ASSESSEE WITHIN THE SC OPE OF THE MERCANTILE SYSTEM OF ACCOUNTING EMPLOYED BY THE ASSESSEE IN TH E CAPTIONED ASSESSMENT YEAR BECAUSE THE SERVICES AND EXPENDITURE THEREOF I S LIABLE TO BE INCURRED AT SOME FUTURE DATE. 13. AT THE PRESENT STAGE, WE MAY ALSO REFER TO THE SPECIFIC ARGUMENT TAKEN BY THE REVENUE THAT ONCE ASSESSEE HAS RECEIVED THE MONEY WITH THE BENEFIT OF BEING NON-REFUNDABLE, IT IS FIT TO BE TREATED AS AN INCOME ACCRUING IN THE HANDS OF THE ASSESSEE AT THE TIME OF RECEIPT ITSELF . IN OUR CONSIDERED OPINION, THIS ARGUMENT FAILS THE MATCHING CONCEPT. THE MATCH ING CONCEPT HAS BEEN ITA NO 500/PN/06 M/S BODY SC APES, PUNE 11 EXPLAINED BY THE HONBLE SUPREME COURT IN THE CASE OF CIT V BILAHARI INVESTMENT P.LTD. 299 ITR 1 (SC) BY REFERRING TO TH E FOLLOWING PORTION OF ITS EARLIER JUDGMENT IN THE CASE OF J K INDUSTRIES V U NION OF INDIA (2007) 13 SCALE 204 AS UNDER: MATCHING CONCEPT IS BASED ON THE ACCOUNTING PERIO D CONCEPT. THE PARAMOUNT OBJECT OF RUNNING A BUSINESS IS TO EARN PROFIT. IN ORDER TO ASCERTAIN THE PROFIT MADE BY THE BUSINESS DURING A PERIOD, IT IS NECESSARY THAT REVENUES OF THE PERIOD SHOULD BE MATCHED WITH THE COSTS (EXPENSES) OF THAT PERIOD. I N OTHER WORDS, INCOME MADE BY THE BUSINESS DURING A PERIOD CAN BE MEASURED ONLY WITH THE REVENUE EARNED DURING A PERIOD IS COMPARED WITH THE EXPENDITURE INCURRED FO R EARNING THAT REVENUE. HOWEVER, IN CASES OF MERGERS AND ACQUISITIONS, COMPANIES SOM ETIMES UNDERTAKE TO DEFER REVENUE EXPENDITURE OVER FUTURE YEARS WHICH BRINGS IN THE CONCEPT OF DEFERRED TAX ACCOUNTING. THEREFORE, TODAY IT CANNOT BE SAID THAT THE CONCEPT OF ACCRUAL IS LIMITED TO ONE YEAR. IT IS A PRINCIPLE OF RECOGNIZING COSTS (EXPENSES) A GAINST REVENUES OR AGAINST THE RELEVANT TIME PERIOD IN ORDER TO DETERMINE THE PERIODIC INCOME. THIS PRINCIPLE IS AN IMPORTANT COMPONENT OF ACCRUAL BASIS OF ACCOUNTING. AS STATED ABOVE, THE OBJECT OF AS 22 IS TO RECONCILE THE MATCHING PRINCIPLE WITH T HE FAIR VALUATION PRINCIPLES. IT MAY BE NOTED THAT RECOGNITION, MEASUREMENT AND DISCLOSU RE OF VARIOUS ITEMS OF INCOME, EXPENSES, ASSETS AND LIABILITIES IS DONE ONLY BY AC COUNTING STANDARDS AND NOT BY PROVISIONS OF THE COMPANIES ACT. 14. FROM THE AFORESAID, IT CAN BE FAIRLY DEDUCED TH AT EVEN THE MATCHING CONCEPT ENUNCIATED IN THE ACCOUNTING STANDARDS HAS BEEN ADOPTED AS A PRINCIPLE TO DETERMINE PERIODIC INCOME. THEREFORE, THE ARGUMENT OF THE REVENUE SEEKING TO DISREGARD THE MATCHING CONCEPT A ND TO RECOGNISE THE INCOME INDEPENDENT OF THE SAME IN A MERCANTILE SYST EM OF ACCOUNTING IS UNTENABLE. THEREFORE, WE FIND NO JUSTIFICATION ON T HE PART OF THE REVENUE TO TREAT THE SUM OF RS 21,22,828/- REPRESENTING PMRF AS INCOME IS UNJUSTIFIED. 15. WE HAVE ADJUDICATED THE ISSUE IN THE FOREGOING PARAGRAPHS BY REFERRING TO THE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COURT IN THE ABOVE REFERRED CASES. WITH REGARD TO THE CASE LAWS REFERRED IN THE ORDERS OF THE AUTHORITIES BELOW, ALTHOUGH WE HAVE NOT INDIVIDUALLY DISCUSSED THE SAME, BUT THE SAME ARE NOT APPLICABLE TO THE PRESENT CASE, AND IN OUR CONSIDERED OPINION, THE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COURT I N THE AFORESAID TWO JUDGMENTS ARE APPLICABLE IN THE PRESENT CASE. ITA NO 500/PN/06 M/S BODY SC APES, PUNE 12 16. RESULTANTLY, WE SET ASIDE THE ORDER OF THE CIT( A) AND DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS 21,2 2,828/-. 17. IN THE GROUNDS OF APPEAL, THE ASSESSEE HAS RAIS ED GROUNDS RELATING TO DISALLOWANCE OF RS 3915/- AND RS 50,000/- MADE BY T HE ASSESSING OFFICER UNDER SECTION 40(A)(II) OF THE ACT. HOWEVER, ON A P ERUSAL OF THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS), WE FIND THAT HE HAS NOT DEALT WITH SUCH ASPECTS AND THE ISSUES DO NOT ARISE OUT OF THE IMPU GNED ORDER AND, THEREFORE, WE DECLINE TO ADJUDICATE ON THESE ISSUES. THE SAME ARE ACCORDINGLY DISMISSED. 18. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED, AS ABOVE. PRONOUNCED IN THE OPEN COURT ON THIS 23RD FEBRUARY, 2011. SD/- SD/- (SHAILENDRA KUMAR YADAV) (G.S. PAN NU) JUDICIAL MEMBER ACCOUNTANT M EMBER PUNE, DATED: 23RD FEBRUARY, 2011 COPY TO:- 1) M/S BODY SCAPES, PUNE 2) THE ITO WD 2(2) PUNE 3) THE CIT (A) II PUNE 4) THE CIT II PUNE 5) THE DEPARTMENTAL REPRESENTATIVE, B BENCH, I.T. A.T., PUNE. BY ORDER TRUE COPY ASST. REGISTRAR, I.T.A.T., PUNE B