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2017 (3) TMI 480 - ITAT BANGALORE

2017 (3) TMI 480 - ITAT BANGALORE - TMI - Expenditure incurred for re- possession of the club - capital or revenue in nature or is an allowable expenses for determining real income - said expenditure though paid by the assessee for an amount already spent by the SP for earlier years after taking the loan from the bank - Held that:- The undisputed facts are that as per the joint development agreement the ownership of the assets of the club to be developed by the assessee was belonging to the asse .....

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evenue with SP. - From these facts, it comes out that the providing of club facility and running of club is a doing of business in the present case because the assets of the club is property of the assessee and any accretion in the value of asset will be a gain to the assessee. Similarly, the club can charge admission fees and other fees without any cap and it will result in to income which was initially shared between the assessee and SP and after 20207. it was fully accruing to the assesse .....

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d in the assessee and the plot owners have no right in the assets of the club, it cannot be said that creating the asset of the club is a revenue expenditure. - Regarding commercial expediency aspect, we are of the considered opinion that this may be helpful in those cases where the expense is revenue in nature but the objection of the revenue is this much only that it is not for the purpose of business of the assessee. If the assessee is incurring some maintenance loss because the facility .....

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e expenditure which is akin to allowing of Guest House construction cost in the given example, which is not allowable by any stretch of imagination. Hence, there is no merit in the claim of the assessee. - Decided against assessee - ITA No. 1439//Bang/2010 - Dated:- 3-3-2017 - Shri A. K. Garodia, Accountant Member Shri Laliet Kumar, Judicial Member Appellant by : Shri K.R Pradeep, C.A Assessee by : Shri M.K Biju, JCIT ORDER Per Laliet Kumar, Judicial Member This appeal by the assessee is directe .....

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3. The Learned CIT-Appeals erred in confirming the disallowance of Club House Facility Expenses amounting to ₹ 117,67,253/-. 4. The Learned CIT-Appeals erred in holding the above expenditure as capital in nature and reasons given by him is unsustainable and untenable in law. 5. The ld CIT(A)- Appeals erred in rejecting the relevant evidences while relying on irrelevant factors. 6. The ld authorities below erred in disallowing the claim for deduction u/s 8-IB of the Act of ₹ 7,54,533/ .....

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which may be submitted during the course of hearing of this appeal, the assessee requests that the appeal be allowed as prayed and justice be rendered. 3. The brief facts of the case are that the assessee is a firm engaged in the business activity of builder and property developer and filed its return of income on 19/10/2007 declaring a total income of ₹ 71,21,040/-. The case was selected for scrutiny through CASS. The AO has mentioned in the assessment order that the assessee has offered .....

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had provided the club facility through their nominee as per the sale deed executed between the owner of the plots and this assessee. 4. It was also submitted that the assessee had entered into joint venture agreement with Shri Rajani Kanth and Shri Krishan Prasad owners of land and as per the joint development agreement dated 27/3/2005, the assessee was required to develop the land and according to which they share the profits generated by the development of plots in the ratio of 40:60. It was a .....

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s and conditions and on receipt of entry fees and sums as may be decided. The assessee was remain to be controlled by the management of the club house. 5. In order to provide the Club Facility the assessee entered Into a lease agreement with M/s Suman Motels Ltd. Vide agreement dated 1210211997 as amended by the amendment deed dated 2610311997 to provide club facility to the site owners. As per the deed M/s Suman Motels Ltd., were having over 18 years experience in the construction of hotels, cl .....

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rs and others from the general public, can use the facility after paying the respective fees and charges to the Club as per applicable Rules. The S.P. has to share the profit after claiming the expenses for running it with the Developer In the ratio of 60:40. 6. The SP had constructed the Club House after availing loan form Punjab National bank and run the club house up to 2003. Subsequently the S.P. had become bankrupt and could not pay back the dues to the bank and, therefore, the bank took ov .....

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ub expenses of ₹ 117,67,253/-. 8. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A) who was also not convinced with the submissions of the assessee disallowed the expenses towards club facility for the following reasons: 4.10 In. the light of the aforesaid decisions, the claim of ₹ 1,00,00,000/- as a liability creates certain doubts. The judgement on the suit has been delivered by the learned Civil Judge on 9/11/2fJ07. Thus the subject matter of sui .....

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II}, Mumbai, whether approval for such negotiation has been obtained or whether the matter has been withdrawn. The appellant has proposed to make payment of ₹ 1,00,00,000/- and take back the property (Club House) at Byanahalli Village, Bangalore North also with the Chief Manager, Punjab National Bank, fixing the date for meeting for negotiation regarding the dues against the aforesaid property, The appellant has not furnished other details with regard to the result· of negotiation, .....

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expenses as revenue in nature on the basis of letter of offer made by them. In fact, no actual transaction had taken place. Thus, the liability itself is an uncertain liability claimed against the property. Hence, -it is capital in nature. Under the facts and 'circumstances, the liability had not crystallised during the year. Therefore, the claim is not allowable this year. 9. Aggrieved, by the order of CIT, the assessee is before us. 10. We have heard the rival submissions and perused the m .....

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lopment agreement to the following extent: 5.4 That under the scheme of development the property measuring six acres in survey NO.61/3, Byanahalli Village, Jala Hobli, Bangalore North Taluk is agreed to be developed for locating club house with three star hotel facilities and also with necessary infrastructure including restaurant and bar, Indoor games, health club, business centre, meeting hall, departmental store, swimming pool, shuttle court, tennis court, children play ground and other facil .....

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s of the sites in the schedule property shall not have any manner of right, title and interest therein and except the right to become members and make use of said club house area by the first party and owners of the sites in the schedule property as per the byelaws of the club house. The second party shall admit the members of the first party and the purchasers of the sites in the schedule property as members of the club house subject to payment of necessary admission fee and other fees payable .....

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shall not be sold to third parties except int eh event of impossibility of subjecting the schedule property for development in terms of this agreement. However the second party shall give first option to the first party and on their failure to purchase the second party shall be entitled to sell to third parties on no less terms offered to first party. 5.5) The first party agrees to sell the aforesaid six acres in survey No.61/3 of Byanahalli Village for establishing club house as stated above wi .....

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greement to the following effect. 9eMembership of the club to be located in schedule C herein subject to payment of monthly subscription and fees and compliance of rules and regulations. 12. It was also submitted by the learned AR that the members who have purchased the plots formed an association and they have served legal notice, as SP failed to provide club facility to the members for that our attention was drawn to page nos. 90 and 91 of the paper book. 13. Therefore , on the basis of this d .....

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has incurred an amount of ₹ 1,00,00,000/- as prudent business man and this has been done considering the commercial expediency in mind and it was submitted that the Revenue should now sit in the arm chair of the assessee and should not decide which and how much expenses should be made. For that purpose, the learned AR relied upon the judgment of the Hon ble Supreme Court in the case of S.A Builders ltd [2007] 158 TAXMAN 74 (SC) which held as under : 34. We agree with the view taken by the .....

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usinessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning prof .....

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ot;Income tax is a tax on, the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act. The real profits can be ascertained only by making the permissible deductions. There is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case whether the outgoings fall in one or the other of the heads is a question of fact to be found on the relevant circumstances, having r .....

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Apex Court, held as under: "An acceptable formula of co-relating the notion of real income in conjunction with the method of accounting for the purpose of the computation of income for the purpose of taxation is difficult to evolve. Besides, any strait-jacket formula is bound to create problems in its application to every situation, it must depend upon the facts and circumstances of each case. When and how does an income accrue and what are the consequences that follow from accrual of incom .....

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to be taken into account. It would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only. What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on t .....

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ty or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity which were added by the Income-tax Officer while passing the assessment orders in respect of the assessment years under consideration. The Appellate Assistant Commissioner was right in deleting the said addition made by the Income-tax Officer and th .....

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f CIT v. Dinesh Kumar Goel [2011] 331 ITR 10 / 197 Taxman 375 explaining the meaning of the word 'accrued', held as under: "Section 145 of the Act deals with the method of accounting and states that in case of business income, inter alia, the same is to be computed in accordance with the cash or mercantile system of accounting. Sub-section (2) thereof authorizes the Central Government to notify in the Official Gazette from time to time accounting standards to be followed by any clas .....

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alance-sheet. Sub-section (3C) defines "accounting standards" as under: "(3C) For the purposes of this section, the expression 'accounting standards' means the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949) as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub- section (1) of s .....

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the accounting standards prescribed. The Government of India has notified accounting standards in exercise of its power under section 145(2) of the Act, which are dated May 29, 1996. Accounting Standard-1 relates to the disclosure of accounting policy and puts an obligation on the assessee to disclose all significant accounting policies adopted in the preparation and presentation of financial statements. Paragraph 6 thereof defines certain expression which occurred in paragraphs 1 to 5. Clause .....

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s not accrued. Likewise, the expenses unless are incurred, cost in respect thereof cannot he treated as accrued. Secondly, it recognizes the matching concept, viz., receipts are to be matched income to arrive at the net income, which would then be eligible to tax." 10. The Apex Court in the case of J.K. Industries v. Union of India [2008] 297 ITR 176 / [2007] 165 Taxman 323 , has explained the 'matching' concept as under: "We may refer to the passage extracted by the Supreme Co .....

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, income made by the business during a period can be measured only with the revenue earned during a period is compared with the expenditure incurred for earning that revenue. However, in cases of mergers and acquisitions, companies sometimes undertake to defer revenue expenditure over future years which brings in the concept of deferred tax accounting. Therefore, today it cannot be said that the concept of accrual is limited to one year. 83. It is a principle of recognizing costs (expenses) agai .....

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High Court in the case of Hotel Shiv (2014) 44 taxman.com 470 has held as under:- 16. As per the policy only those owners, who apply and pay the conversion charges, were permitted to put their residential properties to commercial or mixed use. Once a property stands converted to commercial/mixed land use, there was substantial enhancement and increase in value of the said property. There being an enduring benefit from the said conversion. 17. The conversion charge paid for conversion of the pro .....

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. The one time conversion charge permanently converts the use of the property from residential to commercial/mixed land use. Once the property is converted, the benefit of the same will ensure to the owners of the property. It enhances and adds to the value of the capital asset i.e. the property. 18. In the present case, the owners of the property are the partners in their individual capacity and as such the enduring benefit of conversion from residential to commercial ensures to the owners. In .....

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al expenditure and has brought about an advantage of an enduring nature, and this advantage is attached to the property. Since the advantage of enduring nature is attached to the property, the benefit of the same will ensure to the owners of the said property. The expenditure for acquiring the said advantage is an expenditure incurred purely for the individual partners. Had this expenditure been incurred by the individual owner, it would have been a capital and not a revenue expense. There is no .....

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nd are liable to pay income tax on their income after reducing revenue expenditure. But in the facts of the present case while deciding the question of enduring benefit, we cannot be oblivious and ignore the practical reality that unless the partners of the petitioner want the partnership firm i.e. the petitioner cannot continue to operate and run the guest house. Therefore, while determining and deciding the question whether the expenditure was capitalor revenue in nature, the fact and also the .....

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re has been disallowed. 17. In the light of the above law laid down by Hon ble High Court, now will decide whether the expenditure incurred by the assessee for re- possession of the club was on account of capital or revenue in nature or is an allowable expenses for determining real income as the said expenditure though paid by the assessee for an amount already spent by the SP for earlier years after taking the loan from the bank. 18. The undisputed facts are that as per the joint development ag .....

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ber of the club on payment of donations, entry fees and other fees. This is also agreed position of facts that the club was built by SP and the assessee was sharing revenue with SP. In course of hearing, the bench wanted to see the Income and Expenditure Account of the club for the period after taking over by the assessee and in reply. learned AR of the assessee submitted that after 2007, the club is being run by the association of the plot owners. Thereafter, this query was also raised by the b .....

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rly, the club can charge admission fees and other fees without any cap and it will result in to income which was initially shared between the assessee and SP and after 20207. it was fully accruing to the assessee. The impugned payment of Rs. I Crore in the present year to PNB in settlement of the liability of SP had resulted into ownership of assets of the club to the assessee and therefore, it is as cost of purchase of assets of club and it cannot be allowed as revenue expenditure. Had the owne .....

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