TMI Blog2003 (8) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... ide order of the Assessing Officer dated 31-3-1999, which is the last date of the limitation period. The assessee questioned the validity of this assessment before the CIT(A) on the ground that it was time-barred. This appeal was disposed off, by the order of the CIT(A) dated 10th December, 1999, whereby he set aside the assessment, with directions to reframe the same after giving due opportunity of being heard to the assessee and after considering a certain note regarding membership fees filed before him. The first of these appeals, viz., ITA No. 136/Hyd/2000 is directed against the above order of the Commissioner (Appeals). 4. Subsequently, the Assessing Officer completed the assessment de novo in pursuance of the above order of the Commissioner (Appeals), vide his assessment order dated 27-3-2002, and the Commissioner (Appeals) disposed off the appeal arising out of the said order of assessment, vide his order dated 9th December, 2002. The latter of these appeals, viz., ITA No. 244/Hyd/03, is directed against the said order of the Commissioner (Appeals) dated 9th December, 2002. 5. That is how, there are two appeals filed by the assessee for one assessment year before us. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... know about such change vide a notice issued to the assessee on 8-4-1999 dated 22-2-1999. The assessment files were transferred and the department has not bothered to inform the assessee. Under section 127 of the Income-tax Act, the assessee need not be informed as far as the files are transferred from one assessing authority to the other within the same city. However, natural justice and the assessment procedures demand that the assessee be informed about the change and be given an opportunity of being heard afresh even the matters that were already heard by the earlier Assessing Officer under section 129 of the Income-tax Act. When a case is transferred under section 127 there is a change in the income-tax officer and though fresh notices need not be issued by the new Assessing Officer the assessee can claim the right to reopen the case under section 129. The officer need not issue a fresh notice but he should inform the assessee of the change so that if the latter so desires, he can ask for a rehearing - Anantha Naganna Chetty v. CIT [1970] 78 ITR 743 (AP). The Assessing Officer has issued a notice under section 143(2) dated 22-2-1999 which was served on the assessee on 8-4-1999 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the notice under section 143(2) dated 12-2-1999. As per learned A.R. of the appellant, the aforesaid notice was served on the appellant on 8-4-1999 and the notice showed date of hearing as 12-4-1999. But the copy of the 143(2) notice as available in the record of the Assessing Officer shows that the case was initially fixed on 23-2-1999. Another date was shown in the same notice as 'DH 15-3-1999'. It appears that the notice was actually despatched for service on 10-3-1999. The date of 12-4-1999 does not appear anywhere in the copy of the notice available in the record of the Assessing Officer. The charge from the side of the appellant that it was given a date of hearing on 12-4-1999 is therefore not correct. There is also nothing in the order sheet of the Assessing Officer that he had telephonically contacted the learned A.R. of the appellant twice before 31-3-1999. However, the Assessing Officer has also not been able to produce any evidence about the actual date of service of the notice dated 12-2-1999 on the appellant. The question that arises in this regard is whether the non-service of the notice will make any difference to the validity of the assessment. The learned A.R., h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessment order in this case was passed within the statutory limitation period allowed under the Income-tax Act, 1961. Coming to the merits of the addition, I find that the addition in respect of depreciation claim and expenses have been made by the Assessing Officer on the ground of non-compliance which allegation is not correct as the relevant books of account and documents were in the custody of the Department. Regarding addition on account of membership subscription, the learned A.R. had submitted a note on the accountancy principle followed by appellant in this regard and the same requires consideration by the Assessing Officer. Therefore, considering the totality of the facts and circumstances of the case, I feel it will be just and fair to set aside the assessment and restore the same to the file of the Assessing Officer to reframe the same de novo after giving opportunity to the appellant." 9. Before us, the learned counsel for the assessee stressed that after the vesting of the jurisdiction in the DCIT 4(1) Inv. consequent to the above-mentioned order of the Chief Commissioner dated 30-12-1998, the Assessing Officer apparently issued only one notice under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copy of the letter dated 17-8-1998 addressed by the authorized representative of the assessee, Shri Raghavachari Co., Chartered Accountants, which reads as under: - To The Asstt. Commissioner of Income-tax, Comp. 4(6), Hyderabad. Sub-Treasure Island Resorts (P.) Ltd.- A.Y. 96-97 Madam, I came here to attend on behalf of our clients M/s. Treasure Island Resorts (P.) Ltd. I am leaving for Bhimavaram. I wanted a short adjournment. Kindly adjourn the matter for two days. I shall come and attend on 19th. Kindly do the needful and oblige. Thanking you, Yours sincerely Sd/- (Srinivasachary) There is another letter dated 22nd October, 1998 of the authorised representative for the assessee, copy of which may be seen at pages 6-7 of the Department's paper-book. In that letter, some information called for by the Assessing Officer was furnished, and this letter ends with a request for grant of further time to furnish the rest of the information. Similarly, there is another letter-dated 16th November, 1998, in which M/s. Raghavachari and Co. made a request for further time. There is a further letter dated 23-11-1998 addressed by the Assessing Officer to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reheard." In the light of the above provision, it is contended that the DC 4(1) Inv., who succeeded AC 4(6) with effect from 1-1-1999, could legitimately continue the proceedings from the stage at which it was left by his predecessor, and so, it is not a case where the assessment had been made without the issuance of any notice under section 143(2) or section 142(1). In this context, he also relied on the decision of the A.P. High Court in the case of K. Venkataramana and Budha Appa Rao v. CIT [1987] 168 ITR 747, in which it was held, that when there is a change of incumbency of office during pendency of the assessment proceedings, rehearing is not necessary. He has also pointed out that, as per the clear findings of the CIT(A), which are not controverted, the assessment was completed on 31st March, 1999, and as per section 153(1) of the Act, the limitation is saved if the assessment is made before the date of limitation, and it is not necessary for the order to be communicated to the assessee before the said date. For this proposition, he relied upon the decision of the Hon'ble A.P. High Court in the case of K.U. Srinivasa Rao v. CWT [1985] 152 ITR 128. In that case, it was he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Son relied on by the learned Departmental Representative supports the case of the Revenue. The relevant portion of the head-note of the said decision reads as under: - "......In revenue matters the violation of natural justice in the completion of an assessment will not lead to nullity of the entire proceeding. Such violation merely results in illegality or irregularity supervening the course of proceeding under the law but does not destroy the jurisdiction of the authority, if he had seisin at the initial stage when the proceedings arose and if the authority while acting had lawfully assumed jurisdiction to proceed to Act. Misdirection of the proceeding would merely vitiate the course of the proceeding but that supervening irregularity or illegality has to be set right by putting the proceeding back on its rails. When such error is curable, it is the duty of the court to cure it. Where the Income-tax Officer commits an error in the course of completing the assessment proceeding after having duly assumed jurisdiction, it is the duty of the appellate authority to remove the particular defect or irregularity occurring in the course of the proceeding." 14. The predecessor Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notices have also to be considered and the DCIT 4(1)(Inv.) could continue the proceeding from the stage at which it was left by his predecessor. So this is a case where, at the most, an irregularity supervened after the jurisdiction vested in the DCIT 4(1) Inv. inasmuch as he did not give a notice of hearing to the assessee. We are of the view that such supervening irregularity can be removed by the appellate authority by remitting the matter to the Assessing Officer for fresh consideration as done in the present case. It has to be remembered that, as already mentioned, this is not a case where the Assessing Officer did not have legitimate jurisdiction at any stage. Both the predecessor and the concerned Assessing Officer did have legitimate jurisdiction and so any supervening irregularity can be rectified. Further, the distinction sought to be made by the learned counsel for the assessee between an assessment under section 143(3) and the assessment under section 144 does not seem to have any relevance. It makes no difference so far as the powers of the Commissioner of Income-tax (Appeals) are concerned, whether the assessment is made under one section or the other. In either case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red income, the subscriptions collected and thereby ignoring the accounting standards adopted in the treatment of the money collected from the members. The CIT(A) has failed to understand the accounting standards and hence his order is ought to be rejected. For the above grounds among the other that may be permitted to be urged at the time of hearing, it is prayed that this Honourable authority may be pleased to quash the order passed by the assessing authority and pass such order or other orders in the interest of justice." 17. We have already extracted the directions given by the CIT(A) in his order dated 10-12-1999, while setting aside the original assessment made under section 144 of the Act dated 31-3-1999. It may be noticed that the CIT(A) mentioned that the assessee has submitted a note on the accounting principle followed by the assessee. In the impugned order, the Assessing Officer has given a full extract of the said note filed before the CIT(A) in the earlier proceedings. The said note reads as under: - "Note on membership fees collections M/s. Treasure Island Resorts (P.) Ltd. has commenced its business as a club to provide service to its members. It charges rates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent is taken to profit and loss account every year. The shorter duration membership fee collection is taken to income spread over the life of the membership. The company has only one shorter duration membership, that is, Temporary membership. The decision to recognise revenue in the above fashion is taken in consonance with Accounting Standards (AS) 9 - Revenue Recognition, as issued by the Institute of Chartered Accountants of India. The annexure to AS-9 relates to 'Special circumstances of revenue recognition from rendering of services'. The relevant portion to Membership Fees reads as follows: 'In the case of Revenue Recognition for membership fees, it must be noted that if membership fee permits only membership, the fee should be recognised when received. However, if the membership feel entitles the member to receive publications or services to be provided during the year, it should be recognized on a systematic and rational basis having regard to the timing and nature of all services provided.' Based on the above accounting standard the company has taken to revenue 20 per cent of the collection. This is on account of the reason that the membership entails the members to serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pheld the order of the Assessing Officer, observing that the entire membership fee, which is shown in the Balance Sheet under the head 'advance subscription' has been utilised for the acquisition of fixed assets, on which depreciation was also claimed and so, entire membership fee is correctly taxed in the year under appeal. He accordingly, upheld the order of the Assessing Officer, with the following remarks: - "A perusal of the balance sheet indicates that the entire subscription collected by the appellant along with the borrowed funds is utilized for creation of the fixed assets in the resort. The entire capital including the borrowed funds and, the subscriptions totals to Rs. 96,65,764. It is clear that the entire subscription is utilized or creation for fixed assets for the use of the members. Further the appellant has claimed depreciation on the fixed assets which has been allowed by the Assessing Officer to the extent of Rs. 23,25,217. The assets created by the appellant at the resort utilizing the subscription of the members are available for the use of the members. The depreciation on the assets is also claimed by the appellant. The subscription fee received from the mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creation of the fixed assets which are used by the members by payment of relevant charges as evidenced by the details mentioned above. The deferment of income is not relevant for the facts and circumstances of the appellant's case. The subscription received by the appellant is assessable as income for this assessment year. The Assessing Officer is correct as per law in assessing the subscription as the appellant's income for this assessment year. The assessment of the subscription is in consonance with the accountancy principles and fully supported by the legal provisions. The Assessing Officer's action is upheld. The grounds of appeal fail and are rejected. In the result the appeal is dismissed." 20. In the course of hearing before us, we required the learned counsel for the assessee to file before us, the bye-laws for all categories of members. In pursuance of our requirement in terms of Rule 29 of the Income-tax Appellate Tribunal Rules, 1963, the assessee has filed the general bye-laws for all categories of members bye-laws for life members, bye-laws for permanent members bye-laws or temporary members. 21. The Assessing Officer himself reproduced in his order bye-laws fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facilities of Permanent and Life Members are applicable to this category. The membership fee collected under this category is spread over a period of two years as income." From the above, it may be observed that following membership fees are collected from different categories of members- -------------------------------------------------------- (a) Privileged Members Rs. 15,000 to Rs. 20,000 (b) Life Members Rs. 10,000 to Rs. 20,000 (c) Permanent Members Rs. 5,000 to Rs. 10,000 (d) Temporary Members Rs. 2,000 to Rs. 3,000 -------------------------------------------------------- The services rendered to the above categories of members are more or less similar. Privileged members gel 12 nights free stay in cottages in a calendar year, and this privilege is enjoyed for lifetime. The only distinction between life members and privileged members is the additional facility in respect of enjoyment of cottages in a calendar year for the privileged members, which is not given to life members. The permanent members get all the facilities of a life member and they are also excluded horn the free enjoyment of cottages. Permanent members, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only recommendatory in nature. The Accounting Standard No. 9 has been mandatory from 1-4-1991. In support of this statement, he read before us the relevant portion of the commentary on Companies Act by Shri A. Ramaiah (14th Edition 1998 at p. 1082). An extract of the said commentary in relation to section 227 is also filed before us, and relevant portion thereof reads as under :- II. Accounting Standards 1, 7, 8, 9 and 10 made mandatory 1. It is hereby notified that the Council of the Institute, at its 144th meeting, held on June 7-9, 1990, has decided that the following Accounting Standards will become mandatory in respect of accounts for periods commencing on or after 1-4-1991. (a) A.S. 1 - Disclosure of Accounting Policies (b) A.S. 7 - Accounting for Construction Contracts (c) A.S. 8 - Accounting for Research and Development (d) A.S. 9 - Revenue Recognition (e) A.S. 10 - Accounting for Fixed Assets 2. The Companies Act, 1956, as well as many other statutes require that the financial statements of an enterprise should give a true and fair view of its financial position and working results. This requirement is implicit even in the absence of a specific statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e necessary intimation is received by the agency, as opposed to production commission which will be recognized when the project is completed. Insurance agency commissions should be recognised on the effective commencement or renewal dates of the related policies. 3. Financial service commissions: A financial service may be rendered as a single act or may be provided over a period of time. Similarly, charges for such services may be made as a single amount or in stages over the period of the service or the life of the transaction to which it relates. Such charges may be settled in full when made or added to a loan or other account and settled in stages. The recognition of such revenue should therefore have regard to: (a) whether the service has been provided 'once and for all' or is on a 'continuing' basis (b) the incidence of the costs relating to the service. (c) when the payment for the service will be received. In general commissions charged for arranging or granting loan or other facilities should be recognised when a binding obligation has been entered into. Commitment, facility or loan management fees which relate to continuing obligations or services should norma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D of the Notes forming part of accounts in Schedule 12, and the relevant portion reads as under: 1. Accounting Policies: D. Revenue Recognition: 1. All revenue is recognized on accrual system of accounting. 2. The subscriptions collected by the Company shall be taken to revenues based on the term of the subscription. 3. The income on account of the subscriptions collected shall be spread over a period of five years excepting temporary membership, which is for a period of 2 years and shall be taken to revenue in the two year period. It may be observed that in the accounts and the notes forming part of the accounts, the membership fee collected has been described as subscriptions collected. He has also invited our attention the Profit Loss Account, which shows on the credit side, an amount of Rs. 87,08,603 as per the following details. ----------------------------------------------- Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ardly applicable. In terms of the said proviso, the Assessing Officer is empowered to compute the income upon such basis and in such manner as the Assessing Officer may deem fit, only when the accounts are correct and complete but the method employed by the assessee is such that in the opinion of the Assessing Officer, income cannot be properly deduced from the same. It is claimed that when the accounts of the assessee are based on mandatorily applicable Accounting Standard prescribed by the Institute of Chartered Accountants, it cannot be said that income cannot be deduced from the accounting method employed by the assessee. It is claimed that the reverse should be the case, in the sense that if the assessee is not following the relevant accounting standard, it may be claimed that income cannot be deduced correctly and it is pleaded that the assessee cannot be penalized when it has followed the applicable Accounting Standard. 31. The learned counsel for the assessee has filed before us a brochure issued by the assessee-club under the title 'Spend another day in Paradise' and mentioned that the assessee has to provide various facilities like cottages, swimming pool, tennis lawns, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 25-11-1998, i.e., the date of survey in the premises of the assessee, in which in reply to question No. 6, it was mentioned by the deponent there were no other rules, regulations or bye-laws. A copy of this deposition may be seen at pages 9 and 10 of the Department's paper-book, and relevant portion thereof reads as under:- Please identify. How you are connected with Treasure Island Resorts P. Ltd. A. I am Ch. Baba Prasad Reddy, aged 41 years. Residing at above given address. I am the Managing Director of Treasure Island Resorts P. Ltd. I am in charge of the total management of this company including supervision of books of account as also the day to day affairs of the company. I have a Finance Manager Mr. Nagaraj who looks after financial aspects and day to day entries in the books. My wife Smt. Nivedeta looks after the kitchen and the F B. Q. I am showing you the application forms, the 4 types of membership. Please detail the membership offered and the benefits alongwith the subscription amounts and other members. A. No. 1: Privileged Members : As is written in the bye laws enclosed to the application form the members falling in this category are entitled to the mention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in myself, my wife and Auditor is present. Q. Please produce the minutes of the Board meetings held as also any other record maintained of meetings held by the Directors, if any. A. There is no minutes books or any other book maintained for meetings held. The resolutions passed at the meetings held from the date of incorporation of company are filed in an office File Ashok-3 titled as Resolutions. Q. Can you produce the bye-laws/rules, regulation for different memberships. A. I have already detailed the rules and regulation for the answer to the question No. 2. There are no other written rules, regulations or bye laws. Q. Where are the books of account for the assessment year 1998-99. A. We held a meeting in annual meeting to finalise accounts as on March 98 i.e., for the financial year April 97 to March 98 and thereafter we have handed over the books of account to the auditor in the 1st week of October for finalization. The audit work is going on and we are going to file returns of income, by the end of this month. Q. Can you show me the final accounts as on 31-3-1998 i.e., financial year relevant for assessment year 1998-99. A. Everything is with the Auditors. And ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36. The assessee had filed audited accounts along with return of income and there was supporting note of the auditor regarding the applicability of the Accounting Standard No. 9. So, all along it has been the case of the assessee that the membership fee is spread over five years as the services are rendered on a continuing basis and such spread over is as per Accounting Standard No. 9. When that is the issue, i.e., whether the services are rendered on a continuing basis or not, and whether the allocation of income done over five years or two years has been done on a rational basis in terms of Accounting Standard 9, the Assessing Officer has not brought any material on record either in the course of the first assessment or the second which can controvert the claim of the assessee that services were rendered on a continuing basis to various categories of members. 37. On the other hand, the Assessing Officer mentioned various other reasons for disallowing the claim of the assessee for the spread over of the membership fee as done by the assessee. He mentioned that the accounting standard is only recommendatory in nature. He also observed that the membership fee collected is not re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so, at least so far as this class of members is concerned, the relevant papers in support of the claim of the assessee that it has to render services either free of cost or at reduced rates in subsequent years was available before the Assessing Officer. He did not make any exception even in the case of the privileged members in respect of whom the bye-laws were available with him. He made a remark that the members were not given any document containing the terms and conditions except identity cards, and so, he held that the Accounting Standard 9 did not apply. When the bye-laws are there, stipulating that the services are to be rendered as claimed by the assessee, it is immaterial whether the members Were given any separate document containing the terms and conditions. The bye-laws themselves are the requisite documents incorporating the understanding between the assessee-club and its members. We do not see why any other documents are necessary. The question is whether there is any understanding between the assessee-club and its members in regard to the provision of services as claimed by the assessee-club, and it is immaterial whether the said understanding is reduced to writing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilization of the membership fee collected for the creation of assets, fixed or otherwise. Simply because the depreciation is claimed on assets acquired by utilization of membership fee, it does not follow that the entire membership fee has to be brought to tax in the same year ignoring the liability of the assessee to incur expenditure by way of provision of services to the members in the subsequent years. This is a totally unacceptable proposition. 41. Under the circumstances, neither the Assessing Officer nor the Commissioner of Income-tax (Appeals) disputed the claim of the assessee that the membership fee came saddled with a liability to provide services either free or at a reduced rate. We have required the assessee to file the bye-laws relating to the other categories of members in terms of rule 29 of ITAT Rules only to verify in their light the contents of the above mentioned note filed by the assessee before the Commissioner of Income-tax (Appeals) in the first round detailing the services rendered to various categories of members. The learned counsel for the assessee explained before us that the bye-laws of other categories of members were not filed before the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocated over a number of years, in effect, it means that a provision is created to the extent of Rs. 63,63,200 in the first year against receipt of Rs. 86,86,250 and a part of the said provision is written back to the revenue in each of the subsequent four years. In short, the entire membership fee collected is recognised as revenue over a period of five years. In the case of temporary members whose period of membership is only two years, the spread over is restricted to two years. Such allocation is quite rational and in conformity with the Accounting Standard 9 as the liability to provide services subsists on a continuing basis almost indefinitely. As the entire amount is offered to tax though over a period of five years, it makes no difference whether the amount is refundable or not. 44. We also find that the reliance placed by the Assessing Officer on the decision or the Apex Court in Tuticorin Alkali Chemicals Fertilisers Ltd s case is misplaced. Provisions of the Income-tax Act take precedence over accounting standard, as held in that case, only in a case of conflict between them. This does not appear to be a case where there is any conflict. It has been held in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 46. Similarly, the plea taken by the learned Departmental Representative on the analogy of deferred revenue expenditure is not acceptable though it is smart. In the case of deferred revenue expenditure is incurred and the assessee may or may not get any benefit in future years. So, the entire expenditure is allowed in the year in which it is incurred though it is deferred in the books. Revenue of the type being considered here can be deferred as it is fastened with a liability which entails expenditure in the future years. We accordingly reject this plea. 47. The learned Departmental Representative pleaded before us that entrance fee is a revenue receipt in the light of the decision of the Patna High Court in the case of United Club and so, the entire membership fee which is on par with such entrance fee has to be taxed in one year. This contention has to be rejected for more than one reason. Firstly, strictly speaking, there is no entrance fee as such in the present case. Secondly, the jurisdictional High Court has held in the case of Addl. CIT v. Secunderabad Club [1984] 150 ITR 401 (AP) that the entrance fee is a capital receipt. Even as per accounting standard 9, entran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng standard 9 itself is clear. The import of item 6 has to be seen in the light of other illustrations given under other headings of the appendix like installation fees, advertising and insurance agency commission, financial service commissions, admission fees, tuition fees, etc. Reading them all together, the principle is that when service is provided on a continuing basis and the cost relating to the service falls in a different year, revenue should be recognized on a time basis. Going by this general import of item 6 in the appendix and the wording in the body of the accounting standard 9 itself, it is clear that the assessee conformed to the accounting standard 9 and as such, the book results deserve to be accepted. 51. In the light of the foregoing discussion, we are of the view that the Assessing Officer is not justified in bringing to tax the entire membership fee collected to tax in the year under appeal. We accordingly set aside the impugned orders of the Revenue authorities on this aspect and direct the Assessing Officer to modify the assessment accordingly. 52. In the result, assessee's appeal, ITA No. 136/Hyd/99 is dismissed, and appeal, ITA No. 244/Hyd./03 is allow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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