TMI Blog2007 (11) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 1994-95 and T. C. (A) No. 2432 of 2006 relates to the assessment year 1996-97. 2. The issues raised in these tax cases are one and the same except the question relating to the deductibility of the entire expenditure incurred under completed contract method of accounting. The following are questions of law raised in these tax case appeals : (T. C. (A) No. 3 of 2004) : "1. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the amenities charges paid for central air-conditioning of the shops sold should be treated only as an advance and not as a trading receipt ? 2. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the receipt for allotment of car park should be treated as a returnable deposit, when as per the sale deed, the ownership of the shop and the car park are inseparable ? 3. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the entire expenditure incurred during the year should be allowed as a deduction, although the asses-see is following a 'completed contract method' of accounting its income ?" (T. C. (A) No. 626 of 2004) : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rges paid by the buyers for air-conditioning the shops and for allotment of car park. The assessing authority disallowed the claim on the entirety of expenditure on advertisement, sales promotion and legal charges on the ground that the assessee followed the completed contract method of accounting. Hence, he held that only a portion of the expenditure relating to the space already constructed during the year could be allowed. Thus the amortization done in the accounts over a period of 10 years was considered as against the claim for deduction of the entire expenditure as per the income-tax adjustment statement. 4. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) dismissed the appeals on all counts, taking the view that the amenities charges paid for the air-conditioning was not an advance but part of the consideration for the shops and hence, to be treated as trading receipts. The Commissioner of Income-tax also held that the transfer deed clearly stated that the reserved car park space and the shop are inseparable and hence, the consideration received on the car park could not be treated as advance. On t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... system of maintenance, learned counsel submitted that the Tribunal misdirected itself in allowing the receipts to be spread over a period of five years and in granting the deduction on the expenditure. As to the claim on the deduction on legal expenses, advertisement expenses and sales promotion expenses, she submitted that consistent with the method of maintenance of accounts, the deductions on legal expenses, advertisement expenses and sales promotion expenses have to be spread over. Since the receipts and costs are taken on the basis of the completed contract, the expenses incurred cannot, in entirety, be attributed to the completed con-tract method. 7. Per contra, Mr. Arvind Datar, learned senior counsel appearing for the assessee pointed out that befitting the nature of the asset, the amount received on the amenities provided for was spread over for a period of five years. In terms of the contract, the assessee had an obligation to maintain the air-conditioning system for a period of five years. He submitted that matching the character of the receipt with the obligation under the agreement, the Tribunal has rightly held that the receipts have to be spread over to a period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment and computed the profits and gains with reference to the method of accounting regularly employed by the assessee. The Income-tax Officer rejected the return based on the income-tax adjustment statement, which did not form part of the accounts of the assessee on the view that the Assessing Officer was not in any manner bound by the adjustment statement. The Assessing Officer pointed out that the assessee had been systematically following the mercantile system of maintenance of accounts in a method whereby, revenue receipts and related costs were recognised with respect to the completed phase of construction and sold. He pointed out that the assessee recognised the revenue only on the completed contract basis and costs and receipts are accumulated till the completion of the first phase of the project. During the previous year relevant to the assessment year 1992-93, the assessee had completed the first phase of construction and prepared its profit and loss account. 10. The Income-tax Officer pointed out that the entire shopping complex is a centrally air-conditioned one. As such, all buyers, in general, have the facility without any exception. He pointed out that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the Tribunal's order on this issue shows that it accepted the case of the assessee by stating that the Commissioner of Income-tax (Appeals) went wrong in stating that the entire building was centrally air-conditioned and that, according to the assessee, only the commercial space situated in the ground, first and second floors were centrally air-conditioned and not the office and other places. Consequently, the amenity charges should not have been assessed as income in the year under consideration. It also pointed out that the assessee had not provided the facility to the shops during the relevant assessment year and that the amount was received only from persons, who were willing to purchase the shops and this was specifically intended for the commercial space situated in the ground, first and second floors. Thus the Tribunal upheld the claim of the assessee. 14. On the question of providing car park, the assessing authority held that the car park space merged with the right over the undivided share of the land. The Revenue pointed out that, as a developer, the assessee acquired no right of ownership over the land or the superstructure. The assessee rendered his services a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred along with the right to occupy and use the car park, neither the principal buyer nor the subsequent buyer would be required to surrender vacant possession of the car park space to the assessee. The appellate authority pointed out that though the deposit was called refundable deposit, considering the nature of the business of the assessee, which is development and sale of property, the consideration received for assigning the rights on car parking space to various buyers was a trading receipt in the course of the appellant's business. He pointed out that the sale of car park space was linked to the sale of undivided sale of the land. Hence, he upheld the assessment as a trading receipt. On appeal by the assessee, the Tribunal, however, allowed the claim of the assessee treating it as a refundable amount and hence not taxable as income. 16. On the question of deferred revenue expenditure on advertisement, sales, promotion and legal charges, it is seen that as the accounts were maintained on the completed contract basis, the same was amortized over a period of ten years. However, in the income-tax adjustment statement account, the assessee claimed the entire expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we need to advert to the deeds under which advances for centralised air-condition and the deposits for car parking are received and the claim considered by the authorities. Learned counsel for the respondent filed before us copies of sample documents covering sale deed of an undivided portion of the land, builder's agreement, air-conditioning agreement, car park agreement. On every sale of the shop/office space effected, the purchaser enters into a contract one with the owner, viz., Spencer and Co. Ltd. for transfer of undivided share of the land and the second with the developer, the asses-see herein for construction as per the specification. Apart from this, there is an agreement for providing air-conditioning facility and an agreement for providing car park facility. 20. A perusal of the sample sale deed dated May 31, 2000, for the shop shows that Spencer and Co. sold undivided share of the land. Apart from conveying the undivided share in the land, the deed contained various clauses pertaining to the enjoyment of common amenities, the rights of the developer, allotment of the car park as well as the rights of the purchaser. Schedule C in the sale deed relates to the restr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all enter into such agreements for maintenance of Spencer Plaza and its appurtenances as stipulated by the builder covering upkeep of all common areas, all kinds of repairs, maintenance of elevators, air-conditioning system, standby generators, periodical colour wash of all common areas, etc. 22. It is seen that in respect of sale of office space, the assessee entered into two contracts, one for the transfer of an undivided share and the second for construction as per the specification. In respect of office space, the consideration received is inclusive of the provision of amenities and they are treated as part of the revenue from the property development. As regards the sale of shop space, the assessee entered into three such agreements. 23. A sample of the air-conditioning agreement between the builder and the purchaser shows that the builder shall install the necessary central air-conditioning plant and accessories at their cost to enable them to extend the air-condition facilities. 24. The agreement entered into between the purchaser and the assessee herein reveals that as per clause (1), the builder is to purchase and install necessary central air-conditioning plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he terms of the sale agreement. Through a separate agreement, the cost of providing for the machinery is separately stated to claim the adjustment over a period of five years. The charges collected are the rate per square foot. In the background of the various terms of the agreements, the view of the Tribunal cannot be upheld. We reject the plea of the assessee for a spread over on the receipts relating to the amenities pro-vided. The contract contemplates that the facility on air-conditioning is not something exclusively given to the shops alone. 26. As already seen, the assessee is in the business of construction and sale of built-up areas. Read in the context of the sale agreement and the one with the developer, the execution of a separate agreement on air-conditioning facility appears to be nothing but a device to suit the convenience of the assessee. Admittedly, the entire office-cum-shopping complex is a centrally air-conditioned one. The purchasers, without any exception, take this facility and there is no option to stay out of this common facility. Although the construction might have been split into more than one contract, as may be seen from the model agreement, what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar park space is inseparable with the transfer of undivided share. Clause (e) to schedule C of the sale deed touches on the rights of the owner as to the car park : "(e) to sell or dispose of the undivided share of the land conveyed herein only along with the apartment referred to in the schedule B hereto and the reserved car park space if any. The undivided share in the land and the apartment referred to in the schedule together with the reserved car park space shall always be considered as inseparable and one cannot be sold or disposed of without the other or others." 28. Clause 12 of the sale deed touches on what is given to the developer. This reads as follows : "The terraces/basement/atriums/unreserved car park space of the buildings in Spencer Plaza shall always remain under the control, ownership and use of the developer or their nominees. The developer or their nominees shall be exclusively entitled to any income that may be derived from the same. The purchaser shall have no right to object to such use of the terraces/basement/atriums/unreserved car park space on any grounds whatsoever. The use of the unreserved car park space shall be regulated by the developer or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y for the purpose of arriving at its real income. Learned counsel appearing for the Revenue filed a copy of the Accounting Standards issued by the Institute of Chartered Accountants of India on accounting for construction contract. This provides for costs to be accumulated in a construction contract to work out the profit and loss of the business. The revenue of the assessee is worked out on the basis of the completion of the part phase of construction. Admittedly, the assessee completed the first phase of construction during this period. The Assessing Officer held that the method of accounting adopted by the assessee was such that the profits and gains of the assessee could be properly deduced by applying the completed contract method. It is not denied by the asses-see that the adjustment statement on the basis of which the claim is made by the assessee for the spread over, did not form part of the accounts. Hence, he ignored the statement to go by the regular method by which the assessee maintained the accounts, namely, the mercantile accounting, and worked out the income as referable to the completed phase of construction. The assessment order referred to the notes under the not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over a period of 12 years. The apex court held that claiming deduction of a proportionate part of the expenditure during the relevant accounting period was in conformity with the accounting practice of issuing a discount in the discount of debentures account which was written off over a period of debentures. The Supreme Court pointed out that the assessee had the benefit of the money on the issuance of debentures to the business over the entire definite period. The apex court held that the liability was a continuing liability and hence, the liability was to be spread over for a period of 12 years. Touching on the deduction to be given to business expenditure, the apex court held that (headnote) "Ordinarily, revenue expenditure 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". 36. The said decision of the apex court was applied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the trading receipts are to be assessed this year, the expenditure cannot be amortized over the period of years. In the course of the argument, learned senior counsel for the assessee placed reliance on the decision of this court reported in CIT v. Brilliant Tutorials P. Ltd. [2007] 292 ITR 399 as to the necessity of application of the matching principle. 39. It must be noted that the assessment of the receipts as income and on the completed contract basis is referable to the facts as regards the receipt forming part of the sale and development agreement and has no relevance to the issue on the assessment on the amortisation of the expenditure. In the decision of the apex court and that of the Bombay High Court, there was no doubt that the assessee derived a continued benefit over the period of years. The benefit is given by way of a contractual obligation. We do not find any such facts to accept the plea of matching concept as invoked by the assessee. However as already seen, considering the nature of business, the principle laid down by the apex court has relevance to the facts herein for the limited purpose of understanding that the revenue expenditure, normally, mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature of business and the relevancy of expenditure and the character of the same, we uphold the order of the Tribunal in so far as legal expenses and advertisement are concerned. In the circumstances, we hold that the assessee is entitled to have the deduction of the expenditure on advertisement and legal expenses in full in the year in which it was incurred. On the question of sales promotion charges, the Tribunal remanded the matter back to the Assessing Officer to consider the claim to the extent law permitted. Taking note of the overall facts and the nature of business, we confirm the order of the Tribunal on this expenditure. 42. In the circumstances, the order of the Tribunal stands reversed as regards the charges collected on the air-conditioning facility and the deposit on car park, holding that they are revenue receipts assessable in the year of receipt ; that the assessee is not entitled to spread over the same over a period of five years. Accordingly, questions Nos. 1 and 2 in T. C. No. 3 of 2004 and all the questions in T. C. Nos. 626 of 2004, 904 of 2004 and 2432 of 2006 stand allowed in favour of the Revenue. However, on the third question raised in T. C. No. 3 of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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