TMI Blog2011 (3) TMI 890X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is inclusive of a premium over and above the collected value - The CIT's direction that the receipt should be treated as income and keeping silent about repayment being treated as expenditure, gives a distorted picture and such a direction cannot be upheld - Decided in favor of the assessee Regarding Holiday Membership Surrendered Value - The surrender value is nothing but the amount paid by the customer/member plus a certain amount which is in the form of a premium or compensation - When a member does not utilise room nights in any year, including the first year, he looses his right to certain quantity of room night and gets entitled to a certain amount of surrender value - Just collecting voluminous details and not perusing the same and completing the assessment in hurry by accepting the submission of the assessee at face value and without application of mind, is valid reason for invoking the powers under section 263 - Appeals are allowed in part - 2389 AND 2418 (MUM.) OF 2009 - - - Dated:- 16-3-2011 - J. SUDHAKAR REDDY, R.S. PADVEKAR, JJ. S.E. Dastur, Nitesh Doshi and D.V. Lakhani for the Appellant. Naresh Kumar Balodia for the Respondent. ORDER J. Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall commence utilization of their room nights entitlement after 60 days from the date of the membership (subject to maximum utilization of 25 per cent of the total room nights bought by the member). 3.3 The card members are entitled to surrender the room nights in case they do not utilize them. The members may surrender their unused entitlement of room nights in writing to the company and opt for surrender value. The actual surrender value shall be determined at the time of surrender of room nights and shall be paid on the expiry of membership. In lieu of surrender value members may opt to buy or utilize the products and services of the company and its group companies. The products and services inter alia includes Herbal products, Food and Frozen yogurt coupons of TCBY/Nathan's IT Training, Software Development, Auditorium/Hall at Clubs." 4. For the assessment year 2005-06, the assessee filed its return of income on 31-10-2005 declaring a total loss of Rs. 46,34,99,474. The return was accompanied by a profit loss account, balance sheet and a tax audit report in Form No. 3CD. The appeal was processed under section 143(1) on 5-4-2006 and thereafter it was selected for scruti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the tenure of the option i.e., when option to avail of is not exercised. That deduction on account of surrender value is not allowable for the reason that the assessee has not offered the receipts, on advance sale of room nights. The CIT directed the Assessing Officer to disallow the deduction amount of Rs. 22,09,84,169, claimed as Holiday membership surrender value. (d) Deduction of marketing expenses cannot be allowed for the reason that the assessee has debited entire expenses which goes against his own theory that the expenses should be amortized. That the Assessing Officer was duty bound to look into the expenditure claimed by the assessee, as incurred towards awards and prizes and towards payment to Insurance Companies. The Assessing Officer did not properly examine the expenditure claimed by the assessee towards performance bonus, development bonus and field allowances, with a view to finding out the genuineness of the said expenditure as well as the allowability of the same. The CIT directed the Assessing Officer to look into this aspect and allow the expenditure only after proper verification. (e) that the Non-Utilization Compensation Allowance (hereinafter ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be satisfied. Therefore, the liability to pay the surrender value on expiry of the tenure of the scheme is only a contingent liability. Secondly, the pro rata allocation on tenure basis is also not a scientific basis to claim the expenditure because, the surrender value is payable only after expiry of the tenure of the scheme when option to avail of is not exercised. The manner in which a particular liability is provided for on the preparation of accounts is not a determining factor as regards its allowability under the Income-tax Act. The reliance placed by the assessee on the ratio of decision in the case of CIT v. Swaroop Vegetable Products (supra) is also not correct since the facts in that case are different. In that case, as per terms and conditions of the manufacturer, certain amount was payable on the sugarcane purchased by them. The assessee was supposed to pay additional amount as per Government rules. In spite of the dispute on the issue of payment of additional amount, the assessee had claimed the same as an allowable deduction. The claim was held allowable on the basis of mercantile system followed by the assessee. It is evident from this that the liability in the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of Rs. 11,66,60,401 as claimed by the appellant for assessment year 2004-05. 7. The Commissioner of Income-tax has erred in directing the Assessing Officer to examine the assessability of Rs. 64,70,32,729 being the difference between Rs. 159,99,63,858 (total membership funds) and Rs. 95,29,31,129 (the Non-Utilisation allowance payable by the appellant). The Commissioner of Income-tax has erred in directing the Assessing Officer to examine the chargeability to tax of Rs. 64,70,32,729 without recording a finding as to how any part thereof could at all be subjected to tax. 8. The Commissioner of Income-tax has erred in directing the Assessing Officer to allow the marketing expenses of Rs. 14,46,76,029 after proper verification and "looking into this aspect". 9. The Commissioner of Income-tax has erred in stating that it was not the appellant's case that the expenditure had been allowed by the Assessing Officer after proper examination. 10. The Commissioner of Income-tax has erred in restoring the issue of allowability of the marketing expenditure without stating specifically how the Assessing Officer had erred in allowing the same. 11. The Commissioner of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 30-4-2007, calling for details and fixing the case for hearing. He pointed out that in the copy of the order-sheet entry, the last noting of the date of hearing was recorded as 26-4-2007 and that there are no entries thereafter except that the assessment was completed on 27-4-2007. The learned counsel filed a paper book running into 379 pages and submitted that all the details called for, vide notice dated 30-4-2007, had already been furnished to the Assessing Officer during the original assessment and that this is evident from the paper book pages 20 to 277. His case is that the Assessing Officer, after receiving all the information and documents, has once again called for the same after completing the assessment. (iii) that in the notice dated 30-4-2007, the Assessing Officer referred to four items, i.e., (a) Disallowance under section 40A(2)(b). (b) Details of marketing expenses. (c) Production of bank account, and (d) The addition to the block assets. He pointed out that the CIT in section 263 order has not touched upon the issue of disallowance under section 40A(2)(b), the issue of addition to block assets nor found any discrepancy in the bank accounts. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Mahindra Holidays Resorts (India) Ltd. (supra). He further pointed out that in the case of Mahindra Holidays Resorts (India) Ltd. (supra) there was an annual payment to be made by the assessee and whereas in the case of the assessee there is no such annual payment. 9. The learned counsel furnished a chart giving facts and figures, to demonstrate that less than 0.5 per cent of the persons who have paid advances for room night, have actually utilized the room, and to demonstrate that in almost all the cases, the assessee was bound to refund the advances, along with a marked up compensation. Thus he submitted that even on facts, the advances cannot be taken as income as ultimately they had been returned. 10. On the second issue of provision for expenditure by way of surrender value, the learned counsel submitted that based on the facts and figures, hardly any customer who has paid advance for room night, has actually utilized the room and that the assessee was forced to refund the amount of advance with compensation and hence looking at the experience and the facts and figures, the provision made by the assessee as surrender value is correct. He pointed out to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the full Bench of the Hon'ble Delhi High Court in the case of CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1/123 Taxman 433 for the proposition that there is a presumption in law that the Assessing Officer has properly verified all the claims of the assessee. 14. Similarly he submitted that the addition on account NUCA there was no collection or payment in the year and that NUCA stopped in June, 2002 and here also the issue is just set aside to the Assessing Officer with a direction to look into the matter and ultimately the Assessing Officer has not made any addition. Thus he submits that the order of the CIT is erroneous. 15. Lastly, Mr. Dastur submits that setting aside the issue to the file of the Assessing Officer for examining the disallowance under section 40A(ia) is erroneous as there is nothing pointed out by the CIT as to what constitutes an error and what prejudice is caused to the revenue. He submitted that the assessments cannot be set aside just to enable the Assessing Officer to once again examine the issue by making roving enquiries. He submitted that the orders under section 263 for both the assessment years have to be quashed as illegal and without juri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok the assessee's reply to the query of the Assessing Officer dated 30-4-2007 mentions the date of submissions by hand against each item for requisition and that these dates mentioned, contradict the dates in the assessment order sheet entries. That the CIT has noted some of these contradictions in his order clearly. Thus no evidence as mentioned in items 4 to 13 of the requisition made by the Assessing Officer on 30-4-2007, were ever produced as per the order sheet. (iii) The Assessing Officer has not examined the details of NUCA, the provision for surrender value. That business development expenses of Rs. 12.96 crores, consists of insurance premium of Rs. 5.67 crores and the Assessing Officer has not enquired into the genuineness and allowabilities of these expenses with respect to inter alia matching concept. (iv) That the Assessing Officer in the assessment order has not discussed the various issued raised by the CIT in section 263 proceedings and the order is stereo type and mechanical. (v) Marketing expenses have not been properly examined by the Assessing Officer. The basis of quantification, was not examined by the Assessing Officer, warranty an order under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent, additional commission under the head business development expenses , insurance premium etc., are debited to the profit loss account and claimed as expenses but no corresponding revenue has been credited. In addition, provisions for surrender value of Rs. 417 has also been made. Thus merely on advance sale of room night, a loss of Rs. 1042 has been booked where an amount of Rs. 3000 is collected as advance sale for a period of 3 years, allowing 5 nights stay and in the alternative, total surrender value of Rs. 4250. The learned DR submits that the Assessing Officer has not examined the matching concept inasmuch as the corresponding credits of revenue has not been offered to tax. As far as the provision for surrender value is concerned, the learned DR submits that the subscriber is entitled to utilize 25 per cent of the night i.e., one night in each year and in case he does not utilize the same, he is entitled for Rs. 250 per room night as surrender value. On completion of each year of membership, a provision of unutilized room night is made for every completed year. His case is that, though the assessee is bound Accounting Standard 29, the method of computation of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escribed by the CBDT, to be followed by the Assessing Officers on completion of assessment and submitted that the entry in the DCR should be made on the date of passing the assessment order. 19. The learned DR submits that the Assessing Officer has passed an order acting in defiance of all binding guidelines and instructions and completed the assessment without conducting necessary and relevant enquiries in a hurried and highly irregular manner which is prejudicial to the interest of the revenue. He submitted that the request of the Assessing Officer dated 30-4-2007, for filing details of payment under section 40A(2b) along with supporting evidence was not filed as the assessee has only given details vide letter dated 6-4-2007, which are similar to the details in the tax audit report but also that the assessee has not enclosed any evidence with the reply. 20. The learned DR submits that though the assessee claims proof, produced purchase bills in respect of addition to fixed assets, no such recording is there in the order sheet entry and hence the claim is incorrect and the Assessing Officer has not applied his mind. That though the Assessing Officer has directed the assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d its accounts with the sale proceeds of room nights but on the other hand, debited direct expenses on account of marketing etc. (g) that the CIT has clearly recorded that the Assessing Officer has not raised any queries in this regard and hence there is no application of mind. 22. On the issue of allowability of Rs. 22.10 crores under the head "Holiday Membership surrender value", the learned DR submitted that : (a) the Assessing Officer has not raised any query in this regard nor examined the method of computation or the allowability on the ground of matching concept. (b) that the CIT has recorded that certain conditions are to be fulfilled as per the scheme and the contract, before the claim of surrender value can be made by the subscriber and hence it is at best a contingent liability. (c) that the CIT has also held that the pro rata allocation of the surrender and offered price on tenure basis to claim the expenditure on this account because the surrender value is payable only after expiry of the tenure of the scheme when no utilization is made. (d) that the liability has not accrued and the judgment of the Hon'ble Court in the case of CIT v. Swarup Veget ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ull Bench Judgment of the Delhi High Court in the case of Kelvinator of India Ltd. (supra) for the proposition laid down in para 15 where it is held that the CIT is empowered under section 263 to review the order of the revenue. (iii) that reliance is placed on Sohamn Data Processing Finance (P.) Ltd. [IT Appeal No. 774/Mum./2009, dated 26-10-2010] wherein the Mumbai Bench considered the judgment in the case of Kelvinator of India Ltd. (supra) and held that the CIT has power of revision under section 263 where the Assessing Officer has overlooked a vital aspect of assessment and that the proposition laid down in the case of Kelvinator of India Ltd. (supra) is for proceedings under section 147 and not for proceedings under section 263. (iv) Reliance is placed on the decision in the case of Tata BP Solar India Ltd. [2011] 9 taxmann.com 8 (Mum.) for the proposition that if the Assessing Officer did not raise any specific query, and having not done so, it was a failure on the part of the Assessing Officer to make enquiry which was necessary in the facts and circumstances of the case and hence the CIT was right in exercising jurisdiction under section 263. (v) that failure t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jagdish Kumar Gulati v. CIT [2004] 269 ITR 71/139 Taxman 369 for the proposition that when the assessment order is very brief and it is evident from the assessment order that the Assessing Officer did not try to make any enquiry on the relevant issue and the details furnished by the assessee, the order is prejudicial and erroneous. Reliance is placed in the case of Saipem S.P.A. v. CIT [2010] 123 ITD 153 (Delhi) for the proposition that a view taken by the Assessing Officer without proper enquiry cannot be regarded as a plausible view. (x) that the Assessing Officer failed to take into consideration the decision of the Tribunal in the case of Sterling Holiday Resorts (India) Ltd. v. Asstt. CIT [2008] 111 ITD 116 (Chennai), which was a decision applicable at the time of passing of the assessment order, wherein the Bench held that there is absolutely nothing in the Act to permit the assessee to treat part of the income as deferred income and hence the order is prejudicial. (xi) that the Assessing Officer has not examined the abnormal result thrown up in the profit loss account, for the reason that the matching concept has not been followed. For the principles of matching con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of room night in a year in case of comfort scheme is 33 per cent and whereas the brochure of this scheme suggests that the subscriber can utilize only 25 per cent of the total room nights in a year and, therefore, the scheme is unworkable from conception itself. 30. That distinguishing the decision of Mahindra Holidays Resorts (India) Ltd. s case (supra) on the ground that, there is no annual maintenance change in the case of the assessee and on the contrary, a refund obligation is existing in the case of the assessee and not in the case of Mahindra Holidays Resorts (India) Ltd. (supra) the learned DR submitted that the room rent collected includes AMC and hence such distinguishing is destructions uncalled for. Regarding refund obligation, his case is that in para 24 of the order of the Special Bench, it is made clear that there are certain rules wherein refund has to be given. 31. That the Special Bench has examined the guidance note issued by ICAI and held that the goal of accrual basis of accounting is to relate the accomplishment and efforts so that the reported net income measures an enterprise's performance during the period. He submits that crux of the internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the senior counsel that a scientific method has been used by the assessee for estimation of liability. He submitted that the grounds of review taken by the CIT was correct and the quantum is not material and what is material is the foundation of the order. 34. The learned DR made an alternative submission that 60 per cent of the gross receipts of advance sale of room nights may be considered as income affront, by following the ratio of the Special Bench of the Tribunal in the case of Mahindra Holidays Resorts (India) Ltd. (supra). 35. The learned DR also filed written submissions running into 70 pages and attached four Annexures and three other loose sheets. He also filed a paper book running into 343pages, consisting of copies of 19 case laws relied upon by the revenue. 36. The learned Senior Counsel, Mr. Dastur, in his rejoinder, submitted that the order of the CIT has to be judged on the reasons given by the CIT. He contended that the Bench has to see the reasons recorded by the Commissioner in exercising his power of a revision under section 263 and that it is not open to the DR to lead arguments contrary to the facts recorded by the CIT. He submitted that the CIT did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer has taken a permissible view after application of his mind. He submitted that there is a presumption that the Assessing Officer has applied his mind and seen all the aspects and for this he relied on the judgment of Supreme Court in the case of Kelvinator of India Ltd. (supra). He referred to the judgment of the Supreme Court in the case of Bazarpur Co-operative Sugar Factory Ltd. (supra) and submitted that this was explained by the Supreme Court in the case of Siddheshwar Sahakari Sakhar Karkhana Ltd. (supra) and submitted that refund of deposit was not the issue there. On the provision made, the learned counsel submitted that the liability is spread over the period of the scheme and in each year the right to recover the surrender value accrues to the subscriber. He relied on the decision in the case of Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802 (SC)/91 Taxman 340. 37. Mr. Dastur referred to the judgment of the Special Bench of the Tribunal in the case of Mahindra Holidays Resorts (India) Ltd. (supra) and submitted that the Special Bench held that no part of the receipt is taxable for the reason that, the expenditure is yet to be incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e liability and for making the calculation, certain amount was also considered from the initial or first months. He relied on the judgment of the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. (supra) 225 ITR 802 and submitted that the decision in the case of CIT v. Tungabhadra Industries Ltd. [1994] 207 ITR 553 (Cal.) relied upon by the learned DR is no more good law and for the same, he referred to the judgment in the case of National Engg. Industries Ltd. v. CIT [1999] 236 ITR 577/106 Taxman 443 (Cal.) specifically at page 579. On the submission that the provision is not made on a scientific basis, Mr. Dastur filed a calculation sheet and submitted that based on historical data and customer beheviour, the estimate is made, as the entire amount is to be returned with premium. He pointed out that the CIT has no basis for issuing the directions to disallow the provisions. In respect of the first sixty days, he submitted that once the moratorium is over i.e., on 60 days, the liability would arise for that first 60 days also. On the submission of the DR that certain schemes are unworkable, he submitted that this is all the more reason to justify the provision m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the application after proper verification of the facts and further submitted that though this being a stay granted matter and the learned DR has taken numerous adjournments on various grounds and that this has caused grave prejudice to the assessee and that there should be no further delay in resolving the issue. The learned DR sought a short adjournment on personal grounds. In view of the request for adjournment, we adjourned the case to 25-2-2011. On this date, the learned Departmental Representative submitted a letter stating that his information about a Special Bench being pending is wrong and expressed his regret and indicated that the order may be pronounced. 44. After hearing both the parties on this issue, as the Cuttack Bench of the Tribunal has already disposed of the case of T.K. International (supra) and as there is no other Special Bench decision which is awaited on date on this very issue, we proceed to dispose of the issue on hand. 45. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below as well as the case laws cited, we have to hold as foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer has examined these vital aspects during the course of assessment proceedings or not, we find that the Assessing Officer has not specifically examined this issue and this is conceded by the learned Sr. Counsel, Shri Dastur, when he submitted that the Assessing Officer has not asked any specific question as to why the amount was not taxable in this year. He tried to defend the assessee by submitting that, in the earlier assessment year, the opinion of a leading Chartered Accountants firm was filed on the issue of taxability of advance sale of room nights. Filing of an opinion in the previous assessment years, in our opinion, does not lead to our conclusion that the Assessing Officer has applied his mind and examined the issue of taxability on accrual of the amounts received on advance sale of room nights during the impugned assessment years. We do not agree with the argument that the Assessing Officer has, after due verification, and after application of mind, has come to a considered view that these advances are not taxable as income. We are inclined to uphold the order passed under section 263 on this particular aspect of non-application of mind on the issue whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each and every argument, when it is clear that the argument was not on the basis of which the CIT has passed his order of revision under section 263. 46(c) The issue that we have to consider is whether the order of the CIT passed under section 263 has to be examined based on the reasons and findings recorded therein and not based on reasons and submissions which are given by the Revenue at the time of hearing, to substantiate the order passed under section 263. The law on this subject is clear. The Hon'ble Punjab Haryana High Court in the case of CIT v. Jagadhri Electric Supply Industrial Co. [1983] 140 ITR 490/[1981] 7 Taxman 56, held as follows : "Held - The jurisdiction vested in the CIT under section 263(1) is of a special and exclusive nature. At the time of hearing of the appeal against CIT's order under section 263(1), if the assessee can satisfy the Tribunal that the grounds for decision given in the order by the CIT are wrong on facts or are not tenable in law, the Tribunal has no option, but to accept the appeal and to set aside the order of the CIT. The Tribunal cannot uphold the order of the CIT on any other ground which, in its opinion, was available to the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. L.F.D Silva [1991] 192 ITR 547/[1992] 62 Taxman 161 observed as follows : "The jurisdiction vested in the Commissioner under section 263(1) of the Income-tax Act, 1961, is of a special nature or, in other words, the Commissioner has the exclusive jurisdiction under the Act to revise the order passed by the Income-tax Officer if he considers that any order passed by him was erroneous insofar as it was prejudicial to the interests of the Revenue. In the memorandum of appeal, the assessee is supposed to attack the order of the Commissioner and to challenge the grounds for decision given by him in his order. At the time of the hearing, if the assessee can satisfy the Tribunal that the grounds for decision given in the order by the Commissioner are wrong on facts or are not tenable in law, the Tribunal has no option but to accept the appeal and to set aside the order of the Commissioner. The Tribunal cannot uphold the order of the Commissioner on any other ground which, in its opinion, was available to the Commissioner as well. Held, that, in the instant case, the sole basis of the notice issued under section 263 was that the contribution to the share in the immovable proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TO, the revenue is losing the tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase "prejudicial to the interest of the Revenue" is to be read in conjunction with an erroneous order passed by the Assessing Officer. (g) every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the revenue. For example, if the Assessing Officer adopted one of the view permissible in law, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order which is prejudicial to the interests of the Revenue, unless the view taken by the ITO is unsustainable in law. (h) if the Assessing Officer passed an order without application of mind or failed to apply his mind to the case in all perspective, the order passed by him was erroneous. (i) mere acceptance of a statement filed by the assessee, in the absence of any supporting material and without making any enquiry, would make the order of the Assessing Officer erroneous. 52. The case of Green World Corporation (supra) was a case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer should have made further enquiries, before accepting the statement made by the assessee in his return. It pointed out that the Assessing Officer is not only an adjudicator but is also an investigator and hence he cannot remain passive in the face of a return which is apparently in order but calls for further enquiry. 57. In the case of Jagdish Kumar Gulati (supra) the Hon'ble Allahabad High Court has held that the assessment order can be held to be erroneous and prejudicial when it is passed without proper enquiries. 58. In the case of Saipem S.P.A. (supra) was considering the case where the Assessing Officer had taken a view which is neither as per the DTAA nor as per section 44BB and in such a situation it cannot be held that it was a possible view, though the Department had in earlier years accepted such claims of the assessee. The Tribunal held that due to lack of proper enquiry and for want of proper application of mind, by the Assessing Officer, the CIT was justified in exercising his jurisdiction under section 263. 59. In the case of Kelvinator of India Ltd. (supra) the Hon'ble Court was considering the validity of reopening. The Hon'ble Court hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in post assessment proceedings, sought the very same information, which he had asked prior to the completion of assessment; and (iii) whether in view of the voluminous details filed by the assessee, it could be said that the Assessing Officer did not have enough time to examine the same and has passed the assessment order without verifying the detailed submitted and without proper application of mind. 65(i) The CIT, in this case has revised an order of assessment dated 27-4-2007. The case of the learned Departmental Representative is that, the Assessing Officer's order is anti-dated. In our considered opinion, it should not lie in the mouth of revenue, to argue that the assessment order in question was not passed on 27-4-2007 but was passed possibly somewhere between 18-5-2007 and before 24-5-2007. Such an argument is self destructive, as, in our opinion, if it is accepted, then there is no valid assessment order passed on 27-4-2007, which could have been revised by the CIT. This is not the case of CIT. The learned Departmental Representative is wrong and factually incorrect in arguing that the assessment order is anti-dated. A perusal of the assessment record and the order she ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Assessing Officer was functus officio after 27-4-2007, the letter dated 30-4-2007, has no legal sanction. Thus, looking at the issue from any angle, in our opinion, the CIT was wrong in revising the order on the ground that the assessment order was passed prior to the date of final hearing. This is factually incorrect as the date of final hearing, as per assessment record, was on 26-4-2007. In fact, the CIT himself, at Page-5 of his order, recorded that the last hearing took place on 26-4-2007. 68. Coming to the issue, as to whether the Assessing Officer has not applied his mind and has completed the assessment without verifying the details submitted and overlooking vital aspects, we find that the CIT has specifically considered the letter dated 6-4-2007 filed by the assessee, wherein the assessee has furnished details of payment under section 40A(2b). These details were similar to Annexure-B of the Tax Audit Report. The Commissioner observed that the assessee has not explained with evidence as to how the payments amounting to Rs. 19,52,988 were reasonable. No evidence was given. Similarly, though the assessee claimed to have produced bills in respect of addition of fix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision i.e., accounting of advance sale of room nights, the facts have already been brought out both in the assessment order as well as in the order of CIT and the arguments of the parties. The Departmental Representative, in his arguments, stressed on the point that the pre-dominant purpose is to sell the room nights. The undisputed fact is that the assessee has collected an advance, under promise to make available to its customers, rooms in at any of its hotels/Clubs owned by it or by its subsidiary as well as owned by the other affiliated destinations. It is also undisputed that a customer is entitled to surrender the room nights in case they do not utilize them and opt for surrender value. When a customer opts for surrender value, he shall be paid in cash by the assessee or in the alternative, the customer may opt to buy or utilise the products and services of its company and its group companies. The CIT has brought out the scheme which is the basis on which we have to adjudicate the issue for ready reference, we extract the same from Pages-8 and 9 of the CIT's order. "I have gone through the advertisement brochure in respect of all the nine schemes in operation during the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in favour of the nominee. The aforesaid features exist in all the schemes of membership floated by the assessee company." [Emphasis added] A perusal of the scheme shows that a member pays Rs. 3,000 for a five night package and that if he does not avail of any of the room or facilities, he is entitled to Rs. 4,250, as surrender value. The right to claim of surrender value accrues to the customer/member on payment of Rs. 3,000. The assessee has no right to appropriate or take as income, the amount of Rs. 3,000 before the customer/member, exercise any of the options given in the scheme i.e., (i) avail the room in the assessee's hotel or resort; (ii) avail room in affiliated facilities (in such case, the receipt has to be transferred to affiliated facility); (iii) opt for surrender value; (iv) opt to utilise the surrender value, in availing of the services or purchasing the product of the company. Unless the customer/member utilises the services, or exercises his option of purchase, etc., in our opinion, income does not accrue to the assessee. Another vital point is that, if the receipt of Rs. 3,000 from member as a floating advance for room nights is income, then the ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 91,935 - - 1,021,700 894,970,350 Premium 31,210,880 25,500,000 5,236,000 - - 51,474,880 Regular 47,090,000 58,266,000 13,056,000 - - 92,300,000 Royal 184,185,680 98,562,520 - - 1,479,240 281,268,960 Standard 84,933,760 42,609,320 - - 136,640 127,406,440 Supreme 23,607,640 15,951,275 - - 46,760 39,515,135 Golden 1,846,800 2,462,400 615,600 3,693,600 Platinum 15,748,700 40,065,300 - - 55,814,000 Total 1,224,648,575 902,334,150 18,907,600 3,416,940 2,104,658,185 0.16% 2005-06 Comfort 558,214,800 196,698,671 58,102,450 75,900 996,735,121 Luxury 894,970,350 609,871,969 2,867,675 191,675 1,501 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Luxury 3,238,246,465 315,780,435 2,147,060 136,850 3,551,742,990 Premium 111,826,000 26,283,700 1,700 138,108,000 Regular 282,214,550 134,640,000 416,854,550 Royal 770,391,440 59,561,205 996,445 38,080 828,918,120 Standard 298,066,150 28,425,080 11,200 21,880 326,458,150 Supreme 150,128,775 137,329,055 462,725 1,680 286,993,425 Golden 4,668,300 410,400 564,300 4,514,400 Regal 19,353,875 41,783,465 61,137,340 Platinum 45,250,605 280,947,395 326,198,000 New Comfort 1,189,351,500 1,800 1,189,349,700 New Luxury 1,572,129,900 3,600 1,572,126,300 New Royal 279,784,750 279,784,750 Total 6,786,424 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eipt does not become a revenue receipt, just because some expenditure is incurred on the capital receipt and claimed by the assessee. Thus, we do not agree on this issue with the learned CIT as well as the learned Departmental Representative. (ii) In Siddheshwar Sahakari Sakhar Karkhana Ltd. (supra) the Hon'ble Supreme Court has held as follows : "Held - (i) reversing the decision of the High Court, that the line of enquiry, in order to determine the true nature and character of the receipts, did not stop at ascertaining the mere fact whether the realization was in the course of trading. Although the use of the expression "deposit" did not conclude the issue, the expression was used in the bye-laws to mean just what it said. The repayment of loans taken for capital expenditure and the share capital of the govt. were two specified events which were by no means uncertain, though the time of repayment was indefinite. On the occurrence of the two events the right to demand refund would accrue to the member-depositor. Such a right, though contingent in nature initially, inhered in the depositor from the beginning. The word "may" in the bye-laws had to be construed as "shall" and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly administrative charge was collected from customer/member irrespective of the fact as to whether the customer/member makes uses of resort or not. In the case on hand, there is no such annual maintenance charge collected. These are the fundamental difference between these two cases. The Special Bench did consider all the points including the accounting standard AS/29 and AS/9, relied upon by the learned Departmental Representative and has come to conclusion that the entire receipt cannot be in the first year. In fact, the Special Bench decision clearly covers the case on hand to the extent that, the direction of the CIT that the entire advance have to be taxed, is bad-in-law. The Tribunal held as follows : "Income Accrual Time-share membership fee receivable at the time of enrolment of members Though a debt is created in favour of the assessee immediately on execution of the agreement, it cannot be said that the assessee has fully contributed to accrual of income by rendering services Assessee is bound to provide accommodation to the members for one week every year till the currency of the membership Till the assessee fulfils its promise, the parenthood cannot be traced to it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w.e.f. April 1, 1991, and no auditor certifying accounts can afford to ignore it Fact that membership fee was utilised 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 IT 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". [Emphasis added] (v) The Tribunal held that when membership fee is collected giving the right to the member over the period of five years, the allocation of income or the recognition of revenue, over a period of five years, is quite rational and in conformity with the AS/9. It held that if the entire membership fee is taxed in the first year, it would gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equipment and that in differing the remaining expenditure to the years corresponding to their income years the assessee had sought to match the expenditure to the corresponding revenue earning years. The Tribunal held that the expenditure in question should be allocated to over the period of five years. (ix) In Punjab Tractors Co-operative Multipurpose Society Ltd. (supra), the assessee was engaged in the business of purchase and sale of tractor and motorcycle and their parts, besides undertaking repairs of the same. The assessee had received advance from buyers of tractor to cover service charges of tractor for the period of one year after the expiry of warranty period of one year. The assessee's contention was that there is an obligation on the part of assessee to prove very services to the tractor for one year, as required by the manufacturers and after the expiry of warranty period, a further period of one year was also covered by the assessee for servicing the tractor and that those services of the post warranty period, the assessee received money from the buyers. The Assessing Officer brought the same on tax to proportionate basis. The CIT invoked his power under section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccrued or arisen. So long as the right did not exist, the money received from the buyers remained advance money. It is the appropriation of the money towards the object and purpose for which it was received, which is relevant. Deposits or advances received by the assessee became trading receipts when the assessee became entitled to appropriate the same to its income at the time of rendering the service." (Emphasis added) This case applies on all forums to the facts of this case. The assessee did not become an owner of the amount, unless the services are rendered. This case covers the case on hand and applying this judgment, we have to decide the case in favour of the assessee. (x) In Bazpur Co-operative Sugar Factory Ltd. (supra), the Hon'ble Supreme Court has held as follows : "If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as a trading receipt. The same principle can be derived from the decision of this Court in Punjab Distilling Industries Ltd. v. CIT [1959] 35 ITR 519 (SC) : TC 13 R 487. In that case, the assessee carried on business as a distiller of coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account book that would prove decisive. They relied on the judgment of the Hon'ble Supreme Court in Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542. Applying this proposition to the facts of the case, the advance receipt on sale of room nights cannot be treated as a trading receipt in view of the obligation fastened on the assessee to refund the advance and also in view of the historical data which demonstrate that the assessee has refunded the amount in more than 99 per cent of the cases. We do not agree with the argument of the learned Departmental Representative that the receipt in a trading receipt, on the facts of this case. 74. After discussing the case laws cited by both the parties and after applying to the proposition laid down therein to the facts of the case, we are of the considered opinion that the entire advance received on sale of room nights cannot be treated as income of the assessee for the reason that - (a) the assessee has an obligation to refund the money along with certain compensation, if the customer/member exercise such an option; (b) the amount received is an advance and it is not against any specific item, in the sense that the customer/mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the assessee for the relevant period. 76. The third issue is the allowability of an amount of Rs. 22,09,84,169, debited under the head "Holiday Membership Surrendered Value". As already explained, the customer/member has the option to collect surrender value. The surrender value is nothing but the amount paid by the customer/member plus a certain amount which is in the form of a premium or compensation. A perusal of the scheme clearly demonstrate that the surrendered value payable in refund of the advance room nights collected with a premium/compensation and that this compensation is a time based or a period based cost. It is not connected to the performance or other criteria. If the customer/member chooses not to avail of the facility of room night in a particular year, the particular amount accrues to him as surrendered value in that year. An important fact to be noticed in the scheme is that there is a "cap" on the number of room nights a member can use in a year. When a member does not utilise room nights in any year, including the first year, he looses his right to certain quantity of room night and gets entitled to a certain amount of surrender value. If, for the entir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted and the company worked out the additional liability incurred by it. The Hon'ble Supreme Court has laid down the following principles - (i) for an assessee maintaining the accounting system as mercantile, the liability already accrued, though to be discharged at a future date, would be a proper deduction for working out profits and gains of its business, regard being to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actual expended or paid; (ii) just as receipts, though not actual receipts but accrued and due are brought in, for Income-tax assessment, so also the liabilities accrued and due would be taken into account while working out the profits and gains of business; (iii) a condition, subsequent to the fulfilment of which may result in the rejection or even expansion of liability, would not have the effect of converting that liability into the contingent liability; (iv) a trader computing its taxable profits for a particular year may properly deduct, not only the payments actually made to his employees, but also the present value of any payments in respect of the services in that year to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g., product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole." 80. Learned Departmental Representative sought to distinguish this judgment by holding that the assessee had no past experience or historical data to determine the liability by substantial degree of reliability. In our opinion, this line of argument cannot be accepted on the facts of the case. At the end of the accounting year, the assessee knows that customer/member who has not availed the room nights and based on this factual information, the period cost in the form of surrendered value has been estimated and a proper provision made. This is what the assessee did. When the provision is made on facts, the question of scientific estimation etc., does not arise. The data of this very year is relevant and the provision is on actual. This provision cannot be called a contingent liability. The CIT was wrong in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case laws relied upon by the learned Counsel for the assessee as well as the learned Departmental Representative. 83. In K.C.P. Ltd. s case (supra), the Hon'ble Supreme Court was considering the case whether the assessee had excess realisation of price over and above the levy price of sugar and such a receipt was held as a trading receipt liable to tax. Though the Learned Departmental Representative tried to take assistance of this case law, we are of the considered opinion that this does not help the case of the revenue. 84. Learned Departmental Representative placed reliance on the judgment of the Hon'ble Jurisdictional High Court in Rajendra Trading Co. v. CIT [1976] 104 ITR 39 (Bom.), for the proposition that the dominant object of the scheme has to be seen. For the same purpose, he relied on an another judgment of the Hon'ble Bombay High Court rendered in Nutan Warehousing Co. (P.) Ltd. v. Dy. CIT [2010] 326 ITR 94, wherein it has been held that the dominant intention of the assessee has to be ascertained. Both these case laws were relied upon, with an object to derive home to point, that what the assessee collected was advance for sale of room nights and not anything else ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is incurred on account of surrendered value on the passage of time and it is an actual liability and making a provision for the same, in our considered opinion, is correct and also that no income accrues to the assessee on receipt of this advance. 88. Even otherwise, it is not within our powers to disturb the quantification of the amount, the CIT has directed the Assessing Officer to disallow. We have already discussed the judgment of Hon'ble Supreme Court and other Courts which have held that revisionary order under section 263 would stand or fall on the reason given by the CIT in his order and not otherwise. In this case, a specific direction has been given by the CIT to the Assessing Officer to disallow a particular amount on the ground that this is a contingent liability. Such a direction is held as erroneous by us. The learned DR pointed out, with the help of a chart, that there might be some inaccuracies in quantification of provisions. Based on the facts brought out, though we have no hesitation in vacating this direction of the CIT, on disallowing the provision made for "Holiday Scheme Surrender Value", we also hold, that as the validity of the order under section 263 is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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