TMI Blog2016 (2) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee claims to have followed the accrual basis of accounting and recognizing the income on accrual basis then this very fact of recognizing the entire upfront premium as income in the books of account shows that the entire receipt accrued during the year under consideration. Though the C&AG has raised some objections in his Audit report in respect of recognizing the entire income as income of the year under consideration and recommended only proportionate amount of upfront premium to be considered as income of the year under consideration, however, the said remarks of the C&AG would not change the character or the incidence of accrual of the income. No error or illegality in the orders of the authorities below in treating the entire upfront premium received by the assessee as income for the year under consideration. Disallowance on account of provision for accounting and auditing - Held that:- There is no dispute that audit of the accounts by the C&AG is a definite requirement as well as a certain procedure of conducting the audit by the audit team. Therefore, there is no question of any contingency in respect of said expenditure except the fact that the audit has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant's case. 3[B]. The learned CIT[A] is not justified in sustaining the disallowance of a sum of ₹ 5,61,71,744/- being the upfront premium paid by M/s.ABG Infralogistics Limited under the facts and in the circumstances of the appellant's case. 3[C]. The learned CIT[A] is not justified in sustaining the disallowance of a sum of ₹ 9,99,69,073/- being the upfront premium paid by M/s.Ambuja Cements Ltd., under the facts and in the circumstances of the appellant's case. 4. The learned CIT[A] is not justified in sustaining the disallowance of a s um of ₹ 3 9 ,6 2, 2 3 1/ - u/ s. 1 4A of t h e Ac t u n d er t he f a ct s a n d i n t h e circumstances of the appellant's case. 5. The learned CIT[A] is not justified in sustaining the disallowance of a sum of ₹ 27,60,000/- being the provision for Accounting and Auditing under the facts and in the circumstances of the appellant's case. 5. Ground No.1 is general in nature and does not require any specific adjudication. 6. Ground No.2 is regarding disallowance of prior period expenses. The assessee claimed ₹ 4,47,44,564/- as prior period expenses in the schedule to the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crystallized only during the year under consideration. Since the details of expenditure filed by the assessee do not throw much light on this fact that the expenditure pertaining to enhanced liability towards pay to the employees on account of revised salary were finalized and crystallized only during the year under consideration, accordingly, in the facts and circumstances of the case, as well as in the interest of justice, we remand this issue to the record of the AO with a direction to the assessee to furnish better particulars for examination of the AO and accordingly the claim of the assessee has to be decided as per law. 9. Ground No.3 regarding ad hoc upfront premium received by the assessee under the concession agreement with three parties. The assessee carries on the business of providing port, berthing and docking facilities at New Mangalore Port. The assessee stated to have control and domain over vast tracks of land known as designated port area at New Mangalore Port. Thus, the assessee provides various facilities for docking of ships, loading and unloading of container on the ships and warehousing within the designated port area. The assessee formulated a scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year in which the agreement was signed. Thus it was submitted that in accordance with the advice of the C AG, the assessee has recognized 1/30th of the upfront premium as income. The assessee has also supported its claim by referring to the accounting standard 19 issued by the ICAI. The CIT(A) did not accept the contention of the assessee and held that upfront premium is a one-time amount received by the assessee without any thing to do for the period of lease. This is not a refundable amount even if the lease is cancelled for any reason. Thus, the CIT(A) has held that one-time payment received by the assessee is income in the year of receipt. 9.2 Before us, learned AR of the assessee submitted that the license fee/upfront premium was paid by the concessionaire for utilizing the facility for 30 years. Therefore, income on account of license fee for the year under consideration cannot be more than1/30th of the entire fee amount. He has referred to the clauses of the concession agreement and submitted that the payment in question though received upfront, it was for the entire period of license of 30 years. The learned AR of the assessee has referred to the schedule to the P LA ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er hand, learned departmental representative has submitted that that there is no provision in the Income-tax Act to spread over the income in future period of time. The assessee has not shown the amount in question as advance and recognized the receipt as income. Therefore, income received by the assessee during the year without any corresponding obligation to be discharged by the assessee in the future years the entire income is assessable in the year under consideration. She has also relied upon the orders of the AO and the CIT(A). 9.4 We have considered the rival submissions as well as the relevant material on record. There is not dispute that the assessee has granted lease for 30 years in respect of the port land to three companies viz. UPCL, ABG Infralogistics and M/s Ambuja Cements Ltd., vide respective concession agreement. The assessee has received upfront premium from these three concessionaries at the time of execution of the agreements. We find that the transaction of leasing out the land to these companies for 30 years is completed by execution of the agreement and thereafter the assessee was not required to do or perform any act or obligation under the agreement. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... premium to be considered as income of the year under consideration, however, the said remarks of the C AG would not change the character or the incidence of accrual of the income. The learned AR of the assessee has heavily relied upon the decision of the Chennai Special bench of the Tribunal in the case of Mahendra Holidays (supra) wherein it has been observed by the Special bench in paras.23 to 28 and 31 as under: 23. We have duly considered the rival contentions and the material on record. Thousands of litres of ink have been consumed lavishly over the past more than hundred years in discussing the concept of accrual and yet there is no end to it, and rightly so as it indicates the ever changing dynamics of business and commerce. Hospitality business, though in existence since more than hundred years, it has come into limelight recently with several variants and sale of timeshare unit is one such variant with which we are concerned in the present group of appeals. 24. The dynamics of how time-share industry works is not difficult to grasp. The company will set up several resorts at tourist places, either on its own or take such resorts on lease or may enter into arrangeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same should be recognized as income in that year only. So far as maintenance of resorts and other utilities are concerned, they, according to the learned Departmental Representative, are being taken care of by the AMC/ASF etc. We proceed to resolve this dispute. 25. It is not in dispute that the assessee follows mercantile system of accounting. Sec. 5(1) of the Act defines the scope of total income in case of a resident and includes all income which- (a) Is received or is deemed to be received in India in such year by or on behalf of such person; or (b) Accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) Accrues or arises to him outside India during such year. As per s. 29 of the Act, the profits and gains of business or profession have to be computed in accordance with the provisions contained in ss. 30 to 43D of the Act which in nutshell means that it is the net income which is taxable and not the gross income. Net income has to be arrived at after allowing all deductions permissible under the Act. In the backdrop of these facts and statutory provisions, we have to examine whether the income received by the assessee has reall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount was earned by the Sassoons during the respective periods that they had acted as agents, had accrued to them during those periods. The Court by majority decision held that no income accrued to the Sassoons. 27. Now let us examine the principles laid down in the case of Sassoons and try to apply them to the facts of the present case. One of the important observations the Court made is at p. 52 ITR 26. It observed that the Sassoons had no doubt rendered services as managing agents of the companies for the broken periods. But unless and until they completed 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. No remuneration or commission could therefore be said to have accrued to them at the dates of the respective transfers. In the present case, of course, the fees are payable on the execution of the contract between the company and the prospective member. Once a person agrees to become member the fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. In this connection, certain clauses in the membership rules need to be examined. The reservation for holiday can be done 90 days to 1 day before the commencement of holiday but the same is subject to availability. In other words, if the resort requested for is not available, the member would be deprived of the holiday. If the assessee confirms the reservation but is not able to provide the allotted or the alternate accommodation, assessee is liable to pay liquidated damages to the member. It is worth noting that the assessee is liable to pay liquidated damages only if it is not in a position to provide accommodation as per confirmed reservation. But it is not liable to pay any damages if it is not able to provide an accommodation on account of non-availability. Under such circumstances, the only recourse for the member is to approach the Consumer Forum which will term it as deficiency in services and direct the assessee to pay damages. The point we are trying to drive home is that the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is ever increasing and in which year how many contingencies of non-availability of accommodation can arise, can be anybody s guess. At this juncture we may clarify the use of the word contingencies . It is not used in the sense that the event of non-availability of accommodation is wholly uncertain. The event is certain, only how many such events can occur is uncertain. As a matter of fact, the Supreme Court has also used the words contingent liability for warranty expense and allowed deduction in the case of Rotork Controls India (P) Ltd. vs. CIT (2009) 223 CTR (SC) 425 : (2009) 23 DTR (SC) 79 : (2009) 314 ITR 62 (SC) at 75. Therefore, coming back to the point of making provision, even if the assessee had chosen to provide for the liability in every year to comply with the matching concept, it would have been wholly unscientific and arbitrary. At this juncture, when we are making the observation that the assessee has incurred a liability to provide accommodation, it would be appropriate to deal with the argument of the Department in connection with the affidavit filed by the assessee before the service-tax authorities. The Department is banking on the averment in the affidavit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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 deal with one of the arguments made on behalf of the assessee and the intervener. It was argued that accounting for the whole of the income in one year would give a distorted view of the profits of the company which will be against the true and fair principle required for the annual accounts. Well, the distortion the learned counsel talked about was vis-a-vis the presentation of published accounts whereas the distortion the Supreme Court talked about and which we are inclined to follow, is vis-a-vis the real taxable income for a particular year. Therefore, in view of the foregoing discussion, we accept the proposition of the assessee that it is not justifiable to tax the entire income in a single year as is the case of the Department. 9.5 Thus it is clear that the Special bench has analyzed the respective obligations of the parties and found that in the said case, assessee contributed to the accruing or arising of the income by rendering services or otherwise. It was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The AO found that the assessee could not prove existence of liability of ₹ 27,60,000/- out of the total amount debited to the P L Account and accordingly disallowed the said amount. 11.1 On appeal before the CIT(A), the assessee submitted that the accounts of the assessee are subject to audit by the C AG and the expenditure incurred on accounting and auditing is reckoned having regard to the amount payable for such audit. A sum of ₹ 27,00,000/- is provision relating to C AG audit and balance of ₹ 60,000/- is provision for accounting. Thus the assessee submitted that this provision has been spent in the subsequent year and the payment has been made. The CIT(A) did not agree with the contention of the assessee and confirmed the disallowance made by the AO. 11.2 Before us, learned AR of the assessee has submitted that auditing is always after the closing of the financial year. However, this expenditure pertains to the year under consideration. This is not a provision but the actual expenditure. Since audit is conducted post closure of the account and therefore, the assessee is showing this expenditure by making provision on this account. The learned AR of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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