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2016 (2) TMI 76 - ITAT BANGALORE

2016 (2) TMI 76 - ITAT BANGALORE - TMI - Disallowance of prior period expenses - Held that:- From the details filed by the assessee, it appears that some of the expenditure pertains to the salary revision of the employees. The assessee has claimed that due to revision of salary, the liability on account of enhanced salary has been 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 .....

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front premium received by the assessee under the concession agreement with three parties - Held that:- When 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 a .....

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unting 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 done only post closure of the accounts. If the assessee is following this practice consistently, then it is revenue neutral because every year this expenditure is required to be allowe .....

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Bang/2013 - Dated:- 6-11-2015 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER For The Appellant : Shri V.Srinivasan, CA. For The Respondent : Smt.Chandana Ramachandran, CIT(DR) ORDER Per VIJAY PAL RAO, JM : This appeal by the assessee is directed against the order dated 5/02/2012 of the CIT(A), Mysore, for the assessment year 2009-10. 2. The assessee is a local authority and derives income from providing port facilities at New Mangalore Port. For the assessment yea .....

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The assessee has filed the appeal before this Tribunal and raised the following grounds: 1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case. 2. The learned CIT[A] is not justified in sustaining the disallowance of ₹ 4,47,45,000/- towards prior period expenses under the facts and in the circumstances of the appellant's case. 3[A]. The learned CIT[A] is not .....

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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 fo .....

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the assessee is following mercantile system of accounting. The AO noted that the assessee has not given any justification in this regard. Accordingly, the AO disallowed the said amount of ₹ 4,47,44,564/- by following the decision of the Hon ble Bombay High Court in the case of Taparia Tools Ltd. vs. JCIT (260 ITR 102) as well as the judgment of the Hon ble Supreme Court in the case of J.K.Industries Ltd. vs. Union of India (165 taxman 323). The CIT(A) has confirmed the action of the AO in .....

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as submitted that the expenses pertain to employees benefit due to revision of pay has been crystallized only during the year under consideration and therefore, the same is an allowable claim The learned AR of the assessee has further submitted that one more opportunity may be given to the assessee to furnish the better particulars regarding this issue and to show that the expenditure on account of revision of pay of the employees has been crystallized during the year under consideration. On the .....

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From the details filed by the assessee, it appears that some of the expenditure pertains to the salary revision of the employees. The assessee has claimed that due to revision of salary, the liability on account of enhanced salary has been 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 w .....

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he 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 of BOT Model under which the assessee permitted some of the compan .....

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o develop the facilities and use the same for a period of 30 years. Apart from the aforesaid upfront premium, the commissionaire were also required to pay the assessee regular facilities charges/royalty for handling of cargo in the designated port area at the rate fixed/agreed upon by the parties. In the computation of income, the assessee offered 1/30th of upfront premium as income for the year under consideration and has shown the balance received as liability being in the nature of pre-paid i .....

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al income. 9.1 The assessee challenged the action of the AO before the CIT(A) and submitted that upfront premium is a consideration paid by the concessionaire is a license fee for the entire period of lease. Therefore, the logical inference is that upfront premium paid is for the use of the facility for a period of 30 years under the said agreement and only that part of the premium that relates to the year under consideration can be described as income of the year. It was also contended that the .....

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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 year .....

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aper book and submitted that the assessee has recognized the income on accrual basis. It was further contended that the premium received for leasing out of land for a long term has been amortized over the term of the lease period as per the guidelines of accounting standard 19. Therefore, only proportionate amount has been accounted in the year under consideration. The learned AR of the assessee has referred to the note No.17 to 19 of the notes to schedule 24 to the P&L Account and submitted .....

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en given in the case of M/s Ambuja Cements wherein the land has been allotted for a period of 30 years for setting up facilities for bulk consignment handling at the port on payment of upfront rent of ₹ 10.34 crores with a nominal rental of Re.1 per annum. Thus, the learned AR of the assessee has submitted that that the entire lease rent received for a period of 30 years cannot be treated as the income of one year. He also made reference to the audit report of the C&AG and submitted th .....

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learned AR of the assessee has placed heavy reliance on the decision of the Chennai Special bench of this Tribunal in the case of ACIT vs. Mahendra Holidays & Resorts (India) Ltd. (131 TTJ 1) and submitted that the income must be recognized on the basis of matching concept of each year. 9.3 On the other 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 t .....

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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 .....

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n there is no corresponding liability or obligation to be discharged by the assessee after receipt of this amount as upfront, then this argument of the assessee of matching concept goes against the claim of the assessee. Even as per the matching concept of recognizing the income the amount received by the assessee is required to be considered as income of the current year when the assessee has completed and discharged all its obligation by executing the agreement and no further liability was to .....

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would be no question of accrual of income in future years. We further note that the assessee itself has recognized the entire upfront premium received as income for the year under consideration as per the P&L Account as well as schedule 15 to the P&L Account wherein the assessee has recognized ₹ 26,85,19,000/- as lease rental comprising the upfront premium received from three concessionaries. Therefore, when the assessee claims to have followed the accrual basis of accounting and .....

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id 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 hun .....

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up several resorts at tourist places, either on its own or take such resorts on lease or may enter into arrangements with other resort owners. The company will grant membership on payment of certain amount. On payment of the amount, the member acquires membership for a specified number of years. During the currency of the membership, the member gets a right to have a holiday for one week in a year at the place of his choice from amongst the places offered by the company. The types of membership .....

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owards utilities like electricity, water, air-conditioning, heater, etc. There are other incidental facilities also like exchange facilities, one-up exchange, RCI exchange etc. There are certain rules pertaining to cancellation of membership also along with the rules pertaining to quantification of refund. The assessee before us initially granted membership for 33 years which was later reduced to 25 years. The entire membership fee received by the assessee is treated as revenue receipt, but the .....

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has received the entire amount in one year only, its obligation to the members remain spread over the period of membership and therefore, part of the fees are recognized as income in the subsequent years. There is no basis for recognizing the income in the ratio of 40 : 60 and it is stated to be as per industry norms. The basis for the ratio of 60 : 40 is stated to be that with experience, the assessee has become wiser. The case of the Revenue is that having received the income in the first yea .....

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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 .....

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r three companies. They were entitled to receive as their remuneration, a commission of certain per cent per annum on the annual net profits of the three companies. The Sassoons decided to transfer the managing agencies to three other companies along with all their rights and benefits under the managing agency agreement. The transfer took place on different dates during the accounting year. The accounts of the managed companies were made up at the end of the year and the commission payable was c .....

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ing agents of the respective companies. It was argued on behalf of the Sassoons that it was a condition precedent to the earning of the remuneration that they fulfilled the terms of their employment and completed the period for which the remuneration was payable to them and the service for the particular period was a condition precedent to their earning the remuneration for that period. Since the stated period of one year was not over, no remuneration was payable to the Sassoons till the end of .....

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ch could be referred back to the period during which the income was earned and accordingly whatever 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. 5 .....

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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 fees are immediately payable to the company. It becomes a debt payable by the person to the company. In that sense income has arisen to the company. However, the question is whether it has accrued to the com .....

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R 525 (SC) at 533]. It has also been used by the Judicial Committee of the Privy Council in Commrs. of Taxation vs. Kirk (1900) A.C. 588 at 592. The concept however cannot be divorced from that of income accruing to the assessee. If income has accrued to the assessee it is certainly earned by him in the sense that he has contributed to its production or the parenthood of the income can be traced to him. But in order that the income can be said to have accrued to or earned by the assessee it is n .....

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o him. The mere expression earned in the sense of rendering the services etc. by itself is of no avail." From the above observations, it is evident that two conditions are necessary to say that income has accrued to 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 he must have acquired a right to receive the payment. In the present .....

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r 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 .....

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nuing liability on the part of the assessee not only to provide accommodation but also to provide other incidental services attached with the accommodation. This is an important aspect of the matter. 28. It has been argued on behalf of the assessee that the main reason to spread the balance amount of membership fees over the tenure of membership is that it has to incur heavy expenditure for the upkeep and maintenance of its various resorts. However, we are not impressed with this argument. Separ .....

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rt for one week in a year for 33/25 years. But the contingency of non-availability of accommodation will always be there. Sometimes, if the assessee is not able to provide accommodation in any of its notified resorts, it will try to procure alternate accommodation. This also will entail additional expenditure on the part of the assessee over and above paying liquidated damages to the assessee. Unlike the case in Calcutta Co. Ltd. (supra), the liability in this case is difficult not only to quant .....

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whose longevity can be reasonably estimated. In the case of encashment of leave, despite the change in the number of employees, reasonable number of retirements every year can be estimated and hence the provision thereof is not rendered that difficult. However, in the case before us, the membership 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 "contingenc .....

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ng 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 averme .....

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liance of the Department on the affidavit has no substance at all. ………………………………… 31. We have held that there is a definite liability cast on the assessee to fulfil its promise and therefore, it cannot be said that the entire 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 provis .....

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nditure 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 pictu .....

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uture, 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 acc .....

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h 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 noted that in case of failure of the assessee to provide the allotted accommodation or the alternative accommodation, the assessee is liable to pay liquid damage to the members. On those peculiar facts of the said case, the Special bench concluded that there was a continuing liability on the part of .....

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considering the peculiar facts, Special bench held that the entire fee received by the assessee cannot be said to be accrued as income in the year of receipt. In the case in hand, after receiving upfront premium, assessee was no longer required to provide any service or to perform any other act/obligation under the agreement for 30 years. Therefore, we are of the considered opinion that the judgment of the Special bench in the case of Mahendra Holidays (supra) cannot be applied in the facts of t .....

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has raised no objection if ground No.4 is dismissed as prayed for by the assessee. Accordingly, ground No.4 of the assessee s appeal is dismissed being not pressed. 11. Ground No.5 is regarding disallowance of ₹ 27,60,000/- on account of provision for accounting and auditing. The AO noted that in the P&L Account under Management and General Administration Expenses, the assessee has debited an amount of ₹ 301.16 lakhs including the expenses towards accounting and auditing. The AO .....

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d 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 .....

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