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TMI Blog2010 (10) TMI 717X X X X Extracts X X X X X X X X Extracts X X X X ..... aw, 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 Income-tax (Appeals) failed to appreciate that since the assessee was maintaining the mercantile system of accounting the assessee ought to have offered the entire income of Rs. 104.38 lakhs during the year under consideration instead of deferring it to five years. By not doing so, the assessee had clearly furnished inaccurate particulars of its income, therefore, levy of penalty under section 271(1)(c) was fully justified." I. T. A. No. 2682/Ahd/2008, Assessment year : 2004-05 (the assessee's appeal):- "1. Addition of Rs. 35,60,000 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. 7,12,000 offered to tax, the learned Commissioner of Income-tax (Appeals) has brought to tax the entire capital contribution of Rs. 35,60,000 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CPL 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 effluent disposal of member-industries. This channel is 15 kms and ends up to Gulf of Cambay. It is further stated that effluent discharge per day is 10 million gallons. A parallel road is constructed along the pipe lines for maintenance work. All the activities of ECPL are only for environment protection. It has provided an user agreement and any industry which intends to become a member, can sign the user agreement and make the contribution to the assessee-company which is a one-time payment. In addition to this, the member industries also make annual payment towards maintenance which is offered by the assessee-company for tax. By making a one-time payment to the assessee-company the members can avail of the facilities of effluent discharge. Such receipt by ECPL is shown as revenue receipt but only one-fifth thereof is offered for tax in one year. In other words entire one-time contribution received from the members at the time of their join ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istry. 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 normally industry runs life time. The said capital receipt, which is not credited to share capital account, is being offered as income spread over a period of five years." The Assessing Officer rejected the above explanation for the following reasons:- (i) The capital contribution by the new members (which is treated as deferred revenue receipt by the assessee) is in proportion of capacity booked by the member in the said effluent treatment and discharge facilities. (ii) Even though members are paying every year charges for the collection/treatment/disposal of its effluent emitting from their industrial processes, the capital contribution by the members to the assessee-company is in the nature of additional charges which is collected from them for set-up of disposal system in a place. (iii) Such charges are not taken into share capital and are accounted for as revenue receipt by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w 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, the learned authorised representative for the assessee submitted that even though the assessee has received the payment from the new members in the current year it has to provide services to the members in future, in coming years. The payment received by the assessee at the time of entry of new members is used for carrying out capital work and providing more facilities. The assessee has invested in constructing the road for operational convenience along side the effluent discharge pipe line. In fact, the learned authorised representative submitted, what the assessee receives from the new members is a consolidated rental for the use of capital set-up of the assessee-company in addition to operational and maintenance charges received annually from the members. Since the capital set-up of the assessee is utilised by the members for several years in future the assessee consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 when the requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, recognition should be postponed. 11. In a transaction involving the sale of goods . . . 12. In a transaction involving the rendering of service, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering of the service . . . There is an appendix to the above Stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the nature of the services being provided. Entrance fee received is generally capitalised. If the membership fee permits only membership and all other services or products are paid for separately or if there is a separate annual subscription, the fee should be recognised when received. If the membership fees entitles the member to services or publications to be provided during the year, it should be recognised on a systematic and rational basis having regard to the timing and nature of all services provided . . ." From the judgment in the case of Asst. CIT v. Mahindra Holidays and Resorts (India) Ltd. [2010] 3 ITR (Trib) 600 (Chennai) ; [2010] 131 TTJ (Chennai) 1 [SB], the learned authorised representative referred to the following headnotes:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard 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 upon only permits taxing of the receipts if it is actually received by the assessee. Further the learned Departmental representative submitted that it might be in the year a capital contribution in the hands of the member industries but it is in fact revenue receipt in the hands of the assessee and it is a charge for en-abling the new industry to become its member. Once it is a charge or equivalent to entry fee, then it would be taxable in the year of receipt. In rejoinder the learned authorised representative submitted that even entry fee has been treated as deferred receipt if matching services are not provided. In any case he summed up by submitting that the issue is now covered by the decision of the Tribunal, Chennai Special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words unless there is a debitum in praesenti solvendum in future, it cannot be said that any income has accrued to the agents. From this observation of the hon'ble apex court the Special Bench of the Tribunal observed that two conditions are necessary to be satisfied to say that income has accrued or earned by the assessee. They are:- (i) it is necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise, and (ii) a debt must have come into existence and the assessee must have acquired a right to rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 profits 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. Ltd. [1997] 225 ITR 802, the distortion was supposed to be on account of expenditure, in the present case in the distortion 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 estimate the liability which is likely to be incurred in future, more so in 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 income over the ensuing years. At this juncture, we may dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eans 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:- (14) That the participant is a private limited/public limited/partnership/proprietorship company. (15) Participant should be made liable only for not meeting the effluent discharged to the ECPL and not for any violation arose at ECPL in conveyance to Gulf of Cambay. (16) The participant shall get the consent from the Gujarat Pollution Control Board directing the participant to send its treated effluent to the effluent channel of Effluent Channel Project Ltd. for safe disposal. (17) The participant shall not send in any case any effluent containing any pollutant beyond permissible limits from his company or his sister company or any other co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 assessee by the decision of the hon'ble Supreme Court in the case of CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306. Accordingly the addition so made by the Revenue is deleted. This ground of the assessee is allowed. As a result, the appeal filed by the assessee is allowed. I. T. A. No. 374/Ahd/2009 assessment year 2001-02 (the Revenue's appeal):- The effective ground raised in this appeal relates to levy of penalty under section 271(1)(c) on the addition made by the Assessing Officer in respect of entire income of Rs. 104.38 lakhs being membership fees received by the assessee-company from new members this ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 judgments, we uphold the order of the learned Commissioner of Income-tax (Appeals). The appeal filed by the Revenue is dismissed. I. T. A. No. 2682/Ahd/2008 assessment year 2004-05 (the assessee's appeal):- In this year the assessee had received fresh membership fees of Rs. 35,60,000 which it sought to offer for taxation in 5 years. Since the facts and circumstances of the case are similar to the facts of the assessment year 2001-02, following our judgment in the assessment year 2001-02, we hold here also that entire Receipt of Rs. 35,60,000 received from the new members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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 and for its expansion it incurs expenditure for obtaining consultancy report then so long as the new project does not come into existence or is shelved the expenditure would be expenditure of the existing business. Similar view was taken by the hon'ble Punjab and Haryana High Court in CIT v. ECO Auto Components Ltd. [2010] 323 ITR 11. Since the assessee did not get any enduring benefit by making payment of consultancy charges no new asset had come into existence and the tertiary treatment plant was really expansion of existing effluent treatment plant the expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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