TMI Blog2010 (10) TMI 717X X X X Extracts X X X X X X X X Extracts X X X X ..... . A. Nos. 4280/Ahd/2007, 2682, 3625/Ahd/2008 and 374/Ahd/2009, - - - Dated:- 15-10-2010 - Bhavnesh Saini, D. C. Agrawal, JJ. M. K. Patel for the Assessee S. K. Meena for the Department ORDER In these four appeals grounds have been raised by the parties as under:- I. T. A. No. 4280/Ahd/2007, Assessment year : 2001-02 (the assessee's appeal):- "(1) That the learned Commissioner of Income-tax (Appeals)-I, Baroda has grievously erred in law and on facts in confirming the addition of Rs. 1,04,38,400 being the capital contribution received treated as revenue income in the year of receipt itself. (2) That the learned Commissioner of Income-tax (Appeals) has grievously erred in confirming the addition made under section 43B of the Act of the employer's contribution of Rs. 2,92,365 and employees' contribution of Rs. 2,26,074." I. T. A. No. 374/Ahd/2009, Assessment year : 2001-02 (the Revenue's appeal):- "1(a) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in cancelling the penalty of Rs. 33,03,000 levied under section 271(1)(c) of the Act. 1(b) The learned Commissioner of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 being capital contribution of this year as well as the next four years as income of the appellant. As against the one-fifth capital contribution of Rs. 1,62,000 offered to tax, the learned Commissioner of Income-tax (Appeals) has brought to tax the entire capital contribution of Rs. 8,10,000 received during the year. That the learned Commissioner of Income-tax (Appeals)-I, Baroda has erred in law and on facts in confirming the addition of Rs.8,10,000 being the capital contribution received treated as revenue income in the year of receipt itself. Since the common issues are involved in these appeals, these are taken up together for the sake of convenience." I. T. A. No. 4280/Ahd/2007, Assessment year : 2001-02 (the assessee's appeal):- The lead year is assessment year 2001-02 wherein the issue regarding contribution being treated as revenue receipt has first arisen. The assessee-company is a co-operative venture (called ECPL in brief) sponsored by the State Government. It is looking after several disposals of effluents discharged by its member-industries. It is claimed that there are about 300 industry-members to whom the assessee-company provides channel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from every member at the time of his admission as member. Initially the member sends a request indicating the quantity of effluent. The board of directors has decided capital contribution structure to be collected from potential members. It is based on his capacity booking. Once the member pays the fees and Gujarat Pollution Control Board grants permission, the membership is given to the industry. The said membership is lifetime. It is also transferable in the event of transfer of ownership, amalgamation and merger or otherwise of the member. However, it is not refundable. The membership gives enduring advantage and it is a type of capital asset. Equity shares are not issued to new members, as the original members are large Government undertakings. They have statutory and administrative problems for allotting the share capital to small industries (new members). Many of them are directly under their respective Ministry. Moreover, they do not want to jeopardize the system in the event of default of any small member. The board of directors had initially decided that the said capital contribution collected from new members be offered as income over a period of five years though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s revenue in the first place. It is another matter that the appellant wants this to be treated as deferred revenue over a period of five years. But in the same breath the appellant is vehemently arguing that it is not a revenue receipt and is a capital receipt. It is observed that the appellant it totally confused and its views in the matter are contrary to its conduct. It is observed that the appellant has failed to show as to why the receipt should be spread over five years. Even otherwise, it is seen that by linking the quantification of the contribution from the new members to the original capital cost incurred by the appellant, which has been contributed by the five original users-cum-shareholders, the nature of the receipt received during the year does not get altered. It still remains and retains the character of a revenue receipt. This contribution does not make the new members as new shareholders. In other words, it is not a capital contribution. Under the circumstances, it is held that the amount of Rs. 104.38 lakhs is a revenue receipt and liable to tax in the year of receipt. The action of the Assessing Officer is confirmed and addition so made is upheld." Before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iling on number of members and refundability or otherwise of the fees are immaterial for purposes of applicability of AS-9 AS-9 has been made mandatory by ICAI w.e.f. 1st April, 1991 and no auditor certifying accounts can afford to ignore it Fact that membership fee was utilized in creation/acquisition of fixed assets on which depreciation was claimed is no ground to reject the claim for spread over Whenever there is a receipt giving rise to a liability, a provision can be created against the receipt for the liability There being no conflict between the provisions of Income-tax Act and AS-9, there is no question of precedence of former over the latter When duly mandated accounting standard is followed, it cannot be said that income cannot be deduced properly in terms of proviso to section 145 but the things are other way round Further, if the entire receipt is shown in the current year, there would be substantial deficit in future years giving a completely distorted picture of working results." He referred to following Accounting Standard 9, as reproduced in the above judgment in paragraph 26 as under:- "10. Revenue from sales or service transactions should be recognised wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 normally be recognised over the life of the loan or facility having regard to the amount of the obligation outstanding the nature of the services provided and the timing of the costs relating thereto. 4. Admission fees:- Revenue from artistic performances, banquets and other special events should be recognised when the event takes place. When a subscription to a number of events is sold the fee should be allowed to each even on a systematic and rational basis. 5. Tuition fees:- Revenue should be recognised over the period of instruction. 6. Entrance and membership fees:- Revenue recognition from these sources will depend on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard By saying so, the assessee meant that there is no taxable event under the service-tax laws once a person becomes a member Since a definite liability is cast on the assessee to fulfil its promise, it cannot be said that the entire fee received by it has accrued as income and recognizing the entire receipt as income in the year of receipt would lead to distortion Only way to minimize the distortion is to spread over a part of the income over the ensuing years Therefore, the entire amount of time-share membership fee receivable by the assessee upfront at the time of enrolment of a member is not income chargeable to tax in the initial year." On the above basis the learned authorised representative pointed out that Accounting Standard 9 enables the assessee to defer the receipt if matching services are not provided against such receipts. Since entire receipts did not accrue as income in favour of the assessee, entire receipts could not have been taxed in one year. Against this, the learned Departmental representative submitted that the concept of deferred revenue is alien to the Income-tax Act. Sections 4, 5 and 9 of the Act on which the Assessing Officer has relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax entire receipts in the year of receipt. The hon'ble Special Bench referred to the decision of the hon'ble Supreme Court in E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27 and referred to observation of their Lordships on page 52 of 26 ITR, wherein the hon'ble apex court observed that unless and until managing agents complete their performance, viz., the completion of the definite period of service of a year which was a condition precedent to their being entitled to receive the remuneration or commission stipulated thereunder no debt payable by the companies was created in their favour and they had no right to receive any payment from the companies. Thus no remuneration or commission could therefore be said to have accrued to them at the dates of the respective transfers. Thus unless and until the agents earn their commission it will not accrue to them. But in order that the income can be said to have accrued to or earned by the assessee, it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re fee received by it has accrued as income. We have also considered the peculiar nature of the activity along with the complexity attached to it as a result of which no reasonable provision for the liability can be made. Therefore, recognising the entire receipt as income in the year of receipt can lead to distortion. Somewhat similar, though not exactly identical situation was faced by the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802. In that case, the assessee had issued debentures of Rs. 1.5 crores at a discount of 2 per cent. redeemable after 12 years. At page 813 of the Reports, 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 is incurred. It cannot 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 an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansion thereof, if any, or modification thereof, if made by the assessee-company in future. Now we refer to the user agreement which the new member signed with the assessee-company. The following clauses are considered as important:- "(8) Capital contributions means contribution towards capital expenditure incurred/to be incurred by Effluent Channel Project Ltd. for its activities. (9) M and R contribution means payment of fees for the maintenance and repairs of the effluent channel annually. (10) Treated effluent means liquid effluent discharged after treatment as per the GPCB Consent conditions into the effluent channel of Effluent Channel Project Ltd. (11) Company means Effluent Channel Project Ltd. (ECPL) provided for the conveyance of treated effluent as per the GPCB conditions up to the safe disposal, received from the participants. (12) Committed quantity means the quantity of effluent per day, to be discharged by each participant as agreed and specified in his application. Period of agreement:- (13) This agreement shall come into force from the date it is signed and shall remain operational for a period of 99 years. Delivery of effluent:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in one year. It is a receipt in advance for an obligation to be rendered in future. Thus it cannot be said that income has actually accrued to the assessee in one year even though it might have received it in one year. Mere receipt does not ensure accrual unless an equivalent part of the agreed services by the receiver is rendered. In fact by paying the one-time fee a part of debt is created against the assessee which has to be discharged by meeting the equivalent obligation in the form of continuing to provide use of the capital structure for efficient discharge of effluents emitted by member-industries. Even Accounting Standard 9 provides such deferring of revenue for taxation. Accounting Standard 9 has been referred to above and paragraph 6 thereof is relevant. Following the above decision of the Special Bench in the case of Asst. CIT v. Mahindra Holidays and Resorts (India) Ltd. [2010] 3 ITR (Trib) 600 (Chennai) we hold that the assessee was justified in deferring the revenue for taxation for four years. Accordingly this ground of the assessee is allowed. Ground No. 2 relates to employer's contribution towards provident fund. The issue is now covered in favour of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e penalty levied under section 271(1)(c) of the Income-tax Act, 1961. On appeal to the High Court:- Held, dismissing the appeal, that as regards the deletion by the Commissioner (Appeals) after referring to the additional evidence led before him, the Tribunal had examined the matter and recorded that a remand report was duly sought and thus no prejudice was caused by considering the additional evidence. With regard to the amount received from S the matter was in the realm of appreciation of evidence. Even if it is held that two views are possible, the inference drawn by the Tribunal, being the final fact finding authority, could not be held to be perverse. The cancellation of penalty was valid." Similar view has been taken in the following judgments also:- CIT v. Reliance Petroproducts P. Ltd. [2010] 322 ITR 158 (SC); Addl. CIT v. Badri Prasad Kashi Prasad [1993] 200 ITR 206 (All); Prabhat Oil Traders v. ITO (No. 3) [1996] 218 ITR (AT) 39 (Ahd); City Dry Fish Co. v. CIT [1999] 238 ITR 63 (AP); CIT v. Mohd. Bux Sokat Ali [2004] 265 ITR 326 (Raj); and Asst. CIT v. VIP Industries Ltd. [2009] 122 TTJ (Mumbai) 289. Therefore, following the above judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the hon'ble Delhi High Court in the case Triveni Engineering Works Ltd. v. CIT [1998] 232 ITR 639 and CIT v. Ambica Mills Ltd. [1999] 236 ITR 921 (Guj) the learned Commissioner of Income-tax (Appeals) held that expenditure incurred on feasibility report of tertiary plant or for preparing feasibility report was an expenditure of capital nature. We have heard the learned Departmental representative and the learned authorised representative. We are unable to agree with the learned Departmental representative that expenditure incurred for consultancy would be a capital expenditure. In fact by incurring this expenditure no new project has come into existence. Erection of a tertiary treatment plant would be rather a continuation of the existing effluent treatment facilities and therefore, would be only an expansion of the existing plant. Even if it is presumed that the tertiary treatment plant would have been a new project and, therefore, expenditure incurred in connection with such new project would be a capital expenditure, as such no new project has come into existence, the expenditure cannot be treated as capital expenditure. When the assessee is carrying on business ..... X X X X Extracts X X X X X X X X Extracts X X X X
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