TMI Blog2012 (6) TMI 481X X X X Extracts X X X X X X X X Extracts X X X X ..... the time share period Claim of Interest Expenditure - assessee contention that the CIT(A)erred in holding that the interest paid by the assessee to PHRC was expenditure not incurred wholly and exclusively for the purpose of business Held that:- The duties and liabilities of both the parties to the agreement viz. the assessee and PHRC are clearly laid out and there is nothing to mandate that the interest earned out of the fixed deposit representing Capital Bond Account was to be paid by the assessee to PHRC. The said deposits were to be maintained for the purpose of creation of mortgage over properties by PHRC - The assessee’s claim that the interest paid is out of interest earned on joint funds is unacceptable as the assessee had no liability or obligation to pay the same to PHRC and nor could the latter legally enforce payment of the same by the assessee. The interest on fixed deposits were received by the assessee only because of the failure of PHRC, as it did not mortgage the properties. If it had done so, the amount in the fixed deposits would have been returned - against assessee. Charge of interest u/s.234B and 234D - Held that:- The charging of interest u/s. 234B is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 650 per member. The assessee is also compensated separately by way of an annual fee of Rs.5,000 per villa and annual inspection charges of Rs.12,500 plus travel expenses over the total period of the time share; which is of 78 years upto A.D. 2073. 2.2 The Assessing Officer on examination of the Deed of Trust, details filed, such as the nature of receipts, notes to accounts forming part of the audited financial statements and the material on record found that the assessee was recognizing as revenue only 25% of the Administration / Contract Fee of Rs.1,650 per member of time share in the year of receipt and the balance 75% was recognized as revenue spread over the remaining period of the time share. The Assessing Officer was of the opinion that the assessee has deferred revenue recognition of 75% of these Administration / Contract Fees from members over the remaining portion of the time share period to a maximum period of 78 years in order to reduce its tax liability in the year of reoperative receipt and rejected the assessee s claim. He, then held that the Administration / Contract Fees of Rs.1,650 per member received by the assessee for time share has accrued / arisen to it in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the initial two years and the balance 50% should be spread over the balance period of time share upto 2073. This view was concurred with and followed by the CIT(A) in his order for A.Y. 2001-02 in ITA No.72/04-05 dt.28.10.2004. However, for Asst. Years 1997-98, 1998-99 and 2002-03, the learned CIT(A) held that the Administration / Contract Fees of Rs.1,650 per member was income of the year in which it was received and cannot be spread over a period of 78 years or the remaining period of the time share and therefore brought it to tax entirely in the year of receipt. This view of the revenue recognition of the entire Administration Contract Fees of Rs.1,650 per member to be taxed entirely in the year of receipt without any spread over in the period of time share was concurred with by the ld. CIT(A) for Asst. Years 1999-2000, 2000-01, 2003-04 and 2004-05. Since common issues are involved, these nine appeals are being heard together and disposed off by this common order issue-wise. 4.0 The main grounds of appeal, in brief, are tabulated year-wise and issue-wise as under : ITA No., Asst. Year Filed By Assessee / Revenue Issue 700/Del/03; 1996-97 Filed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n concluding revenue recognition as done by appellant is incorrect. 3. CIT(A) erred in accounting treatment adopted for recognizing interest income as well as expenditure. 4. CIT(A) erred in holding legal expenses paid to auditors is capital in nature. 5. CIT(A) ought to have followd SC in 219 ITR 521 . 910/Bang/2009; 2003-04 Filed by Assessee 1. CIT(A) ought not to have upheld validity of reopening u/s. 147 of the Act. 2. CIT(A) ought to have appreciated that appellant s method of accounting in respect of contract fee. 3. CIT(A) erred in holding nature of receipt as revenue. 4. CIT(A) ought to have appreciated accounting principle of revenue recognition before confirming addition. 5. CIT(A) erred in holding interest expenditure not incurred wholly for business. 911/Bang/2009; 2004-05 Filed by Assessee - Do - Validity of proceedings initiated u/s. 147 of the I.T. Act, 1961. 5.0 From the grounds of appeal, it is seen that the assessee has challenged the ld. CIT(A) s orders for Asst. Years 1997-98, 1998-99, 1999-2000, 2000-01 and 2003-04 on the ground that he/she erred in upholding the validity of proceedings initiated by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer went wrong in treating the entire amount as income in the year of receipt for the reason that the services which the assessee has to provide to members does not end with the initial period of registration of members of the time share. Rather, the services spread to the entire period of the time share for provision of services like confirmation of reservations, provision of allotted or alternate accommodation, and incidental services attendant thereto. It was argued by the ld. A.R. that it cannot be said that the entire Administration/Contract Fee received by it from members has accrued as income in the year of receipt. It is contended that this would lead to a distortion especially with regard to matching of income and future expenditure over the time share period. It is in order to minimize the mismatch that revenue recognition of the Administration / Contract Fee is taken as income at 25% of the first year and balance is spread over the remaining period of the time share. The ld. A.R. also assailed the orders of the ld. CIT(A) in not accepting the assessee s claim in all these years on this issue and submitted that his case was squarely covered by the facts in the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis is legally protected etc. While it cannot be denied that a major portion of services rendered by the assessee would be in the initial years of the time share period of 78 years, we do not agree with the Assessing Officer s view that all the services rendered to the members are completed in the first year itself and therefore the entire Administration / Contract Fee of Rs.1,650 per member be recognised as 100% revenue in the first year of receipt. This, we feel would result in a grave mismatch by the recognition of entire receipt as income in the first year and disregarding subsequent expenditure that the assessee would incur for services to be rendered to members the balance period of the time share. In coming to this view, we draw support from the facts of the case and the decision therein rendered by the ITAT, Special Bench, Chennai in the case of Mahindra Holidays Resorts (India) Ltd. (supra) and on which the ld. A.R. has placed reliance for his claim, which are squarely applicable to the instant case. The Tribunal in this case was of the view that time share membership fee receivable at the time of enrolment of members Though a debt is created in favour of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services in future over the term of contract; it has to be spread over the ensuing years. 6.4 The assessee s claim in the present appeals is that out of the one time Administration Contract Fee of Rs.1,650 per member, it has admitted in its returns of income that 25% of the same is recognized as income in the year of receipt and the balance 75% is to be offered as income equally spread over the time share period and that this position should be accepted. Though this is the assessee s claim, the ld. CIT(A) in orders for Asst. Years 1996-97 and 2001-02 was of the view that considering the facts of the case he had no doubt that the assessee had to carry out services for members for 78 years (viz. Time share period). The ld. CIT(A) further noted that while most of the work was to be done in the initial years as the assessee company itself has admitted, by offering 25% of the receipt in initial year and taking into consideration the overall facts of the case proceeded to hold that 50% of the receipts be taken as income in the first two years @ 25% per year and the balance 50% is to be spread equally over the balance period of time share. It is pertinent and relevant to note that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructions from M/s. PHRC and signified the liability of the assessee to be discharged to M/s. PHRC in the event of the equitable mortgage being created. Consequently it was claimed by the assessee that the interest from fixed deposits on the Capital Board Account did not constitute the assessee s income and that the interest was paid to M/s. PHRC after deducting TDS as part of a business arrangement. 7.3 The submissions made by the ld. A.R., ld. D.R., the orders of the lower authorities and agreements between the assessee and PHRC have been perused. The duties and liabilities of both the parties to the agreement viz. the assessee and PHRC are clearly laid out therein and there is nothing to mandate that the interest earned out of the fixed deposit representing Capital Bond Account was to be paid by the assessee to PHRC. The said deposits were to be maintained for the purpose of creation of mortgage over properties by PHRC. Since these mortgages were not created, in the intervening period, the same funds were placed in fixed deposits by the assessee. The agreement between the parties do not evidence that the creation of deposits or payment of interest to PHRC was warranted by any ..... X X X X Extracts X X X X X X X X Extracts X X X X
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