ACIT, CHENNAI v. M/s Mahindra Holidays & Resorts (India) Ltd., CHENNAI

ITA 2416/CHNY/2005 | 2002-2003
Pronouncement Date: 26-05-2010 | Result: Dismissed

Appeal Details

RSA Number 241621714 RSA 2005
Assessee PAN AAACM6468L
Bench Chennai
Appeal Number ITA 2416/CHNY/2005
Duration Of Justice 4 year(s) 6 month(s) 29 day(s)
Appellant ACIT, CHENNAI
Respondent M/s Mahindra Holidays & Resorts (India) Ltd., CHENNAI
Appeal Type Income Tax Appeal
Pronouncement Date 26-05-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 26-05-2010
Date Of Final Hearing 15-03-2010
Next Hearing Date 15-03-2010
Assessment Year 2002-2003
Appeal Filed On 28-10-2005
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH B (SPECIAL BENCH CASE) BEFORE SHRI PRADEEP PARIKH VICE-PRESIDENT SHRI N.BARATHVAJA SANKAR VICE PRESIDENT AND SHRI HARI OM MARATHA JUDICIAL MEMBER I.T.A. NOS.2412 TO 2416/MDS/2005 ASSESSMENT YEARS: 1998-99 TO 2002-03 THE ASST. COMMISSIONER OF IT/THE DY. COMMISSIONER OF IT COMPANY CIRCLE-IV(1) CHENNAI 34. VS. M/S. MAHINDRA HOLIDAYS & RESORTS (INDIA) LTD. 2 LALITHAPURAM GAUDIA MUTT ROAD ROYAPETTAH CHENNAI 600 014. PAN AAACM 6468 L (APPELLANT) (RESPONDENT) C.O.NOS. 7 TO 11/MDS/2006 (IN I.T.A. NOS.2412 TO 2416/MDS/2005) ASSESSMENT YEARS: 1998-99 TO 2002-03 M/S. MAHINDRA HOLIDAYS & RESORTS (INDIA) LTD. CHENNAI-14. VS. THE ASST. COMMISSIONER OF IT/ THE DY. COMMISSIONER OF IT CHENNAI 34. (CROSS OBJECTOR) (APPELLANT IN APPEAL) DEPARTMENT BY: S/SHRI P.B.SEKARAN CIT-DR & SHAJI P. JA COB CROSS OBJECTOR BY: S/SHRI B.K.KHARE & H .P.MAHAJANI INTERVENER BY: SHRI T. BANUSEKAR O R D E R PER PRADEEP PARIKH V.P. A SPECIAL BENCH WAS CONSTITUTED UNDER SEC.255 (3) OF THE INCOME-TAX ACT 1961 (THE ACT) BY THE HON'BLE P RESIDENT AT THE INSTANCE OF THE ASSESSEE BY HIS ORDER DATED 5.3.2008 IN THE ABOVE MATTERS TO CONSIDER THE FOLLOWING QUES TION: 2 ITA 2412 TO 2416/05 & CO 7 TO 11/06 WHETHER THE ENTIRE AMOUNT OF THE TIME-SHARE MEMBERSHIP FEE RECEIVABLE BY THE ASSESSEE UPFRONT AT THE TIME OF ENROLMENT OF A MEMBER IS THE INCOME CHARGEABLE TO TAX IN THE INITIAL YEAR WHEN THERE IS A CONTRACTUAL OBLIGATION FASTENED TO THE RECEIPT TO PROVIDE THE SERVICES IN FUTURE OVER THE TERM OF THE CONTRACT? SUBSEQUENTLY AGAIN AT THE INSTANCE OF THE ASSESSEE THE HON'BLE PRESIDENT REFERRED THE FOLLOWING QUESTION A LSO TO THE SPECIAL BENCH BY HIS ORDER DATED 16.1.2009: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE INITIATION OF PROCEEDINGS UNDER SEC.147/148 IN THE ABOVE CASES IS LEGAL OR VALID? IT HAS ALSO BEEN DIRECTED BY THE HON'BLE PRESIDENT TO DISPOSE OF THE ENTIRE APPEALS WHILE CONSIDERING THE ABOVE T WO QUESTIONS. AS A MATTER OF FACT THE FIRST QUESTION MENTIONED ABOVE CONSTITUTES THE ONLY GROUND RAISED BY THE DEP ARTMENT IN ITS APPEALS. SIMILARLY THE SECOND QUESTION REF ERRED TO ABOVE CONSTITUTES THE ONLY GROUND RAISED BY THE ASS ESSEE IN ITS CROSS OBJECTIONS. ALL THE APPEALS OF THE DEPAR TMENT AND THE CROSS OBJECTIONS OF THE ASSESSEE ARISE FROM A C OMBINED ORDER OF THE LD. CIT (A) DATED 15.7.2005 FOR ASSESS MENT YEARS 1998-99 TO 2002-03. SINCE THE GROUND RAISED BY THE ASSESSEE IN ITS CROSS OBJECTIONS GOES TO THE ROOT O F THE MATTER AND HAS A BEARING ON THE VALIDITY OF THE ASS ESSMENTS WE DEEM IT PROPER TO DEAL WITH THAT QUESTION FIRST IN THIS ORDER. 3 ITA 2412 TO 2416/05 & CO 7 TO 11/06 2. AT THE OUTSET IT MAY BE POINTED OUT THAT THE ASSESSMENT FOR ASSESSMENT YEAR 2002-03 IS A NORMAL ASSESSMENT UNDER SEC.143 (3) OF THE ACT AND IS NOT AN ASSESSMENT REOPENED UNDER SEC.147 OF THE ACT. THER EFORE SO FAR AS THE CROSS OBJECTION OF THE ASSESSEE FOR A SSESSMENT YEAR 2002-03 IS CONCERNED IT IS MISCONCEIVED AND H ENCE DISMISSED. 3. OUT OF THE REMAINING FOUR YEARS THE ASSESSMENT FOR ASSESSMENT YEAR 1998-99 IS REOPENED FOUR YEARS AFTE R THE END OF THE RELEVANT ASSESSMENT YEAR WHEREAS FOR ASS ESSMENT YEARS 1999-2000 TO 2001-02 THEY ARE REOPENED WITHI N FOUR YEARS. ACCORDINGLY WE FIRST DEAL WITH THE ISSUE O F REOPENING OF ASSESSMENTS WITH REGARD TO ASSESSMENT YEARS 1999 -2000 TO 2001-02. 4. AT THE OUTSET IT WAS POINTED OUT BY THE LD. D. R. THAT IN GROUND NO.2 TAKEN BY THE ASSESSEE IN ITS CROSS OBJE CTIONS FOR THESE YEARS IT HAS BEEN MENTIONED THAT THE ASSESSM ENTS ARE REOPENED AFTER FOUR YEARS. THIS IS FACTUALLY INCOR RECT AND THE SAME IS CONFIRMED BY THE LEARNED COUNSEL FOR THE AS SESSEE ALSO. ON MERITS THE LD. D.R. RELIED ON THE JUDGME NT OF THE MADRAS HIGH COURT IN THE CASE OF ITO VS. K.M.PACHIA PPAN (311 ITR 31) AND ALSO ON THE JUDGMENT OF THE SUPREM E COURT IN THE CASE OF ACIT VS. RAJESH JHAVERI STOCK BROKER S PVT. LTD. (291 ITR 500). 5. THE CONTENTION OF MR. KHARE WAS THAT EVEN WHERE ASSESSMENTS WERE MADE UNDER SEC.143(1) OF THE ACT THE BASIC CONDITION OF SEC.147 THAT IS THAT THE ASSES SING OFFICER SHOULD HAVE REASON TO BELIEVE THAT INCOME HAS ESCAP ED ASSESSMENT HAS TO BE FULFILLED. THE REOPENING CAN NOT BE 4 ITA 2412 TO 2416/05 & CO 7 TO 11/06 BASED MERELY ON CHANGE OF OPINION. IT WAS SUBMITTE D THAT IN ASSESSMENT YEAR 1997-98 THE ENTIRE FACTS RELATING TO THE ISSUE INCLUDING THE AGREEMENTS ENTERED INTO WITH TH E CUSTOMERS WERE CONSIDERED BY THE ASSESSING OFFICER. THEREFORE IT CANNOT BE SAID THAT THE REAL CAUSA CA USANS VIZ. REASON TO BELIEVE EXISTED. THUS IT WAS CONTENDE D THAT THE REOPENING OF ASSESSMENTS FOR ASSESSMENT YEARS 1999- 2000 TO 2001-02 WAS BAD IN LAW. 6. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AN D THE MATERIAL ON RECORD. IT IS UNDISPUTED THAT THE ASSE SSMENTS FOR THESE YEARS WERE COMPLETED UNDER SEC.143 (1). THE CONTENTION OF THE LEARNED COUNSEL IS THAT SINCE THE ISSUE WAS DULY CONSIDERED IN ASSESSMENT YEAR 1997-98 THIS AM OUNTS TO A CHANGE OF OPINION. IN OUR VIEW THE VIEW TAKE N IN A PARTICULAR ASSESSMENT YEAR CANNOT BIND THE ASSESSIN G OFFICER FOR SUBSEQUENT ASSESSMENT YEARS. IT IS TRUE THAT A COMPLETED ASSESSMENT CANNOT BE REOPENED ON A MERE CHANGE OF OPINION. HOWEVER THAT OPINION MUST HAVE BEEN EXPRESSED IN THE SAME YEAR ITSELF. IT IS WELL ESTA BLISHED THAT EACH ASSESSMENT YEAR IS A SEPARATE UNIT OF ASSESSME NT AND THE LAW RELATING TO REOPENING OF ASSESSMENT HAS TO BE APPLIED KEEPING THE FACTS AND CIRCUMSTANCES OF THAT YEAR ON LY IN MIND. OF COURSE THE BASIC REQUIREMENT THAT THERE HAS TO BE A REASON TO BELIEVE THAT INCOME HAS ESCAPED ASSESSM ENT HAS TO BE FULFILLED. THERE IS NO ALLEGATION BY THE ASS ESSEE THAT THE ASSESSING OFFICER HAS NOT RECORDED DUE REASONS TO REOPEN THE ASSESSMENTS. AT THE SAME TIME SINCE THE ASSES SMENTS ARE COMPLETED UNDER SEC.143 (1) OF THE ACT IT CANN OT BE SAID THAT A DEFINITE OPINION HAS BEEN EXPRESSED BY THE A SSESSING OFFICER. AS A MATTER OF FACT CONSIDERING THE WIDE SCOPE GIVEN IN EXPLANATION 2 TO SEC.147 THE ASSESSING OF FICER CAN 5 ITA 2412 TO 2416/05 & CO 7 TO 11/06 BE SAID TO BE OF THE VIEW THAT INCOME CHARGEABLE TO TAX HAS BEEN UNDER-ASSESSED. IT HAS BEEN HELD BY THE SUPR EME COURT IN THE CASE OF CIT VS. KELVINATOR OF INDIA LT D. (320 ITR 561) THAT THE ASSESSING OFFICER HAS POWER TO REOPEN PROVIDED THERE IS TANGIBLE MATERIAL TO COME TO THE CONCLUSIO N THAT THERE IS ESCAPEMENT OF INCOME FROM ASSESSMENT. THE TANGIBLE MATERIAL AVAILABLE WITH THE ASSESSING OFFI CER IS THAT THE ASSESSEE HAS RECEIVED CERTAIN SUBSCRIPTION FROM CUSTOMERS ONLY A PORTION OF WHICH HAS BEEN DECLARED AS INCOME. THEREFORE IT CAN BE SAID THAT THE ASSESSI NG OFFICER HAD REASON TO BELIEVE ABOUT THE ESCAPEMENT OF INCOM E. THE FACT THAT THE MATERIAL WAS AVAILABLE IN EARLIER ASS ESSMENT YEAR ON THE BASIS OF WHICH A VIEW WAS TAKEN CANNOT BE RELEVANT FOR THE YEARS UNDER CONSIDERATION. THEREF ORE IN OUR VIEW THE REOPENING OF THE ASSESSMENTS FOR ASSESSME NT YEARS 1999-2000 TO 2001-02 IS VALID. 7. NOW WE TAKE UP THE ISSUE OF REOPENING FOR ASSESS MENT YEAR 1998-99. ADMITTEDLY THE ASSESSMENT HAS BEEN REOPENED AFTER THE EXPIRY OF FOUR YEARS FROM THE EN D OF RELEVANT ASSESSMENT YEAR AND THE ASSESSMENT HAS BEE N COMPLETED UNDER SEC.143 (3) OF THE ACT. THEREFORE THE FIRST PROVISO TO SEC.147 WOULD COME INTO PLAY. IN THIS CONNECTION THE LD. D.R. DREW OUR ATTENTION TO PAGE 3 OF THE AS SESSEES PAPER BOOK I WHICH IS THE PROFIT AND LOSS ACCOUNT O F THE ASSESSEE FOR THE ACCOUNTING YEAR 1997-98. IT WAS P OINTED OUT THAT THE ASSESSEE HAS SHOWN TIMESHARE INCOME TO THE EXTENT OF RS.9.45 CRORES AGAINST THE ACTUAL COLLECT ION OF RS.23.56 CRORES. THERE IS NO SCHEDULE TO THIS ITEM OF THE PROFIT AND LOSS ACCOUNT NOR HAS ANY NOTE BEEN INSER TED TO EXPLAIN AS TO WHAT THE BASIS OF BIFURCATION IS AND WHY THE REMAINING COLLECTION HAS NOT BEEN SHOWN AS INCOME. THE LD. 6 ITA 2412 TO 2416/05 & CO 7 TO 11/06 D.R. THEN REFERRED TO THE ACCOUNTING POLICIES DECLA RED BY THE ASSESSEE IN ITS ANNUAL ACCOUNTS. THE NOTE MENTIONE D THAT RELEVANT PORTION OF MEMBERSHIP FEE WHICH IS REASONA BLY ATTRIBUTABLE TOWARDS DIRECT COST REQUIRED TO SELL T IMESHARE UNIT IS RECOGNISED AS TIMESHARE INCOME. IN THIS CO NNECTION THE CONTENTION OF THE LD. D.R. WAS THAT THERE ARE N O DETAILS AS TO WHAT ARE THE DIRECT COSTS AND NO OTHER RELEVANT DETAILS ARE AVAILABLE. IN THE ASSESSMENT ORDER ALSO THERE IS N O DISCUSSION AND HENCE IT CANNOT BE SAID THAT THE ASS ESSEE HAD FULLY AND TRULY DISCLOSED ALL THE MATERIAL FACTS NE CESSARY FOR THE ASSESSMENT. HE RELIED ON SEVERAL JUDGMENTS INC LUDING THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN TH E CASE OF M/S.WCI MADRAS PVT. LTD. VS. ACIT IN TAX CASE (APPE ALS) NOS.26 TO 32 OF 2008 DATED 10.8.2009. 8. MR. MAHAJANI LD. COUNSEL FOR THE ASSESSEE CONT ENDED THAT THE ANNUAL ACCOUNTS OF THE ASSESSEE AS WELL AS THE PREVIOUS FILE WHICH IS ON THE RECORD OF THE DEPARTM ENT CLEARLY SHOWS THAT THE ASSESSEE IS IN TIMESHARING BUSINESS. UNLIKE LAST YEAR THIS YEAR THE ASSESSEE DID DISCLOSE THE RATIO OF 40:60 IN WHICH THE INCOME WAS SHOWN. ACCORDING TO HIM THE ASSESSING OFFICER SHOULD HAVE EXERCISED DUE DIL IGENCE BY REFERRING TO THE EARLIER RECORDS. IT WAS CONTENDED THAT EXPLANATION 2 WILL NOT HIT THE ASSESSEE BECAUSE IT HAD FILED EVERYTHING THAT WAS MANDATORILY REQUIRED. IT WAS SU BMITTED THAT ALL THE RELEVANT MATERIAL INCLUDING THE AGREEM ENTS WERE ON THE RECORD OF THE DEPARTMENT AND WERE EXAMINED I N THE PROCEEDINGS FOR ASSESSMENT YEAR 1997-98. THE METHO D OF ACCOUNTING WAS SPELT OUT IN THE EARLIER ASSESSMENT YEAR AND THE ASSESSING OFFICER WAS REQUIRED TO MAKE A MENTIO N ABOUT THE SAME IN THE SUBSEQUENT YEARS ONLY IF THERE WAS A CHANGE. SIMILARLY IN THE TAX AUDIT REPORT ALSO ONLY THE CH ANGE WAS TO 7 ITA 2412 TO 2416/05 & CO 7 TO 11/06 BE INDICATED IF THERE WAS ANY. THERE BEING NO SUCH CHANGE IN THE YEAR UNDER CONSIDERATION THE ASSESSING OFFICER WAS NOT REQUIRED TO RE-EXAMINE IT AND RECORD HIS FINDING ON CE AGAIN. OUR ATTENTION WAS DRAWN TO SECTION 143(2) TO POINT OUT THAT THE NOTICE UNDER THE SAID SUB-SECTION WAS TO BE ISS UED INTER- ALIA TO ENSURE THAT THE ASSESSEE HAS NOT UNDERSTAT ED THE INCOME. THEREFORE HAVING PASSED THE ORDER UNDER S ECTION 143(3) IT CANNOT BE SAID THAT THERE WAS ESCAPEMENT OF INCOME AND MORE SO FOUR YEARS AFTER THE END OF THE ASSESSMENT YEAR. THEREFORE THE CONTENTION WAS THA T THE FIRST PROVISO TO SECTION 147 WAS CLEARLY APPLICABLE AS THE ASSESSEE HAD DISCLOSED FULLY AND TRULY ALL THE MATE RIAL FACTS NECESSARY FOR THE ASSESSMENT. RELIANCE WAS PLACED O N THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF ITO VS LAKHMANI MEWAL DAS (103 ITR 437). THE JUDGMENT OF THE PUNJAB & HARYANA HIGH COURT IN THE CASE OF WINSOME TEXTILES INDUSTRIES LTD VS UNION OF INDIA (278 ITR 470) WAS ALSO RELIED UPON. ANOTHER CONTENTION OF THE LEARNED CO UNSEL WAS THAT UNDER SEC.151 OF THE ACT THE ASSESSING OFFICE R WAS REQUIRED TO OBTAIN NECESSARY APPROVAL OF THE COMPET ENT AUTHORITY BEFORE ISSUING NOTICE UNDER SEC.148 OF TH E ACT. IN THIS CONNECTION ATTENTION WAS DRAWN TO THE NOTICE OF REOPENING DATED 27.10.2003 IN WHICH THE RELEVANT PO RTION SIGNIFYING THE APPROVAL WAS SCORED OFF. FURTHER I N THE ASSESSMENT ORDER ALSO THERE IS NO MENTION OF THE FA CT THAT THERE WAS ANY FAILURE ON THE PART OF THE ASSESSEE T O DISCLOSE RELEVANT MATERIAL. THEREFORE IT WAS PLEADED THAT THE RE- ASSESSMENT SHOULD BE HELD TO BE INVALID. 9. ON THE ISSUE OF NOTICE BEING WITHOUT PROPER APPR OVAL THE REPLY OF THE LD. D.R. WAS THAT THIS ISSUE HAD N OT BEEN RAISED EARLIER BEFORE ANY AUTHORITY AND HENCE IT CA NNOT BE 8 ITA 2412 TO 2416/05 & CO 7 TO 11/06 RAISED NOW. IT IS ALSO NOT KNOWN WHETHER THE COPY OF THE NOTICE NOW PRODUCED BEFORE THE TRIBUNAL IS A TRUE C OPY OF THE ORIGINAL OR NOT. IF AT ALL IT HAS TO BE ADMITTED A S EVIDENCE THEN RECORDS SHOULD BE CALLED FOR VERIFICATION. 10. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND THE MATERIAL ON RECORD. AS REGARDS THE APPROVAL OF THE COMPETENT AUTHORITY WE CALLED FOR THE ORIGINAL REC ORDS FROM THE DEPARTMENT AND FOUND THAT THE APPROVAL OF THE COMPETENT AUTHORITY WAS DULY OBTAINED BEFORE ISSUIN G NOTICE UNDER SEC. 147 OF THE ACT. HOW THE RELEVANT PORTIO N IN THE COPY OF THE NOTICE PRODUCED BY THE LD. COUNSEL GOT TO BE SCORED OFF COULD NOT BE ASCERTAINED. HOWEVER SINC E THE RECORDS CLEARLY INDICATED THE APPROVAL HAVING BEEN OBTAINED WE REJECT THIS CONTENTION OF THE LD. COUNSEL. ON THE MERITS OF THE RE-OPENING OF THE ASSESSMENT HERE ALSO AS I N OTHER ASSESSMENT YEARS THE MAIN CONTENTION IS THAT ALL T HE RELEVANT MATERIAL WAS ON THE RECORD OF THE DEPARTME NT FURNISHED AT THE TIME OF THE ASSESSMENT OF THE PREV IOUS YEAR. WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE LD. C OUNSEL. AS MENTIONED IN PARAGRAPH 6 ABOVE EACH ASSESSMENT YEAR IS TO BE CONSIDERED A SEPARATE UNIT OF ASSESSMENT AND THE VIEW TAKEN IN AN EARLIER ASSESSMENT YEAR CANNOT BIND THE ASSESSING OFFICER FOR THE SUBSEQUENT ASSESSMENT YEA RS. BY STATING THIS WE ARE NOT IN ANY WAY SUGGESTING THAT CONSISTENCY SHOULD NOT BE MAINTAINED. CONSISTENCY IS UNDOUBTEDLY NECESSARY BUT IT MAY NOT BE RELEVANT FO R ALL THE ISSUES. EACH ISSUE HAS TO BE WEIGHED ON ITS OWN ME RITS AND LEGAL PRINCIPLES CANNOT BE SACRIFICED ON THE ALTAR OF CONSISTENCY. WE ARE IN AGREEMENT WITH THE CONTENTI ON OF THE LD. DR THAT THERE IS NO EXPLANATION ABOUT THE BASIS FOR OFFERING PART OF THE RECEIPTS AS INCOME FOR TAXATIO N. IT IS ALSO 9 ITA 2412 TO 2416/05 & CO 7 TO 11/06 TRUE THAT THE ASSESSEE HAS GIVEN THREE CONTRADICTOR Y ARGUMENTS TO JUSTIFY THE OFFER OF PART RECEIPTS AS INCOME. ONE ARGUMENT IS THAT THE ASSESSEE IS REQUIRED TO IN CUR MAINTENANCE EXPENSES DURING THE ENTIRE PERIOD OF TI MESHARE. SECOND ARGUMENT IS THAT THE ASSESSEE HAS TO INCUR REASONABLE DIRECT EXPENSES TO SELL THE TIMESHARE AN D THIRDLY BEFORE THE SERVICE TAX AUTHORITIES AN AFFIDAVIT HA S BEEN FILED TO THE EFFECT THAT ONCE THE TIMESHARE IS SOLD THE TRANSACTION IS OVER. THESE INHERENTLY CONTRADICTORY ARGUMENTS GO TO PROVE THAT THE ASSESSEE HAS NOT FULLY AND TRULY DIS CLOSED ALL THE MATERIAL FACTS DURING THE YEAR FOR THE PURPOSE OF ASSESSMENT. IF THE ARGUMENT OF THE LD. COUNSEL WI TH REGARD TO THE ISSUE OF NOTICE UNDER SEC.143 (2) IS TO BE A CCEPTED THEN THE ENTIRE SECTION 147 WILL BE RENDERED OTIOSE . SIMILAR WOULD BE THE FATE OF SEC. 147 IF IT IS HELD THAT AN ASSESSMENT CANNOT BE RE-OPENED AS THERE IS NO CHANGE IN THE AC COUNTING METHOD OVER THE PREVIOUS YEAR. THEREFORE CONSIDER ING ALL THE FACTS AND CIRCUMSTANCES OF THE CASE WE ARE OF THE VIEW THAT THE ASSESSMENT FOR 1998-99 THOUGH RE-OPENED A FTER FOUR YEARS IS VALIDLY RE-OPENED. 11. IN THE RESULT THE CROSS OBJECTIONS OF THE A SSESSEE FOR ALL THE YEARS ARE DISMISSED. 12. WE NOW GO TO THE MERITS OF THE ADDITION MAD E. THE MAIN GRIEVANCE OF THE DEPARTMENT IS AGAINST THE DEL ETION OF THE ADDITION MADE BY THE ASSESSING OFFICER TOWARDS SUBSCRIPTION RECEIVED FROM CUSTOMERS. IN SUPPORT O F THIS GROUND THE DEPARTMENT HAS RELIED ON THE JUDGMENT O F THE MADRAS HIGH COURT IN THE CASE OF CIT V. A.R. SANTHANAKRISHNAN (256 ITR 187). IN THE GROUNDS IT HAS ALSO ASSAILED THE ORDER OF THE CIT(A) FOR RELYING ON TH E JUDGMENT 10 ITA 2412 TO 2416/05 & CO 7 TO 11/06 OF THE SUPREME COURT IN THE CASE OF CALCUTTA COMPA NY LTD. V. CIT (37 ITR 1) WHICH ACCORDING TO THE REVENUE IS DISTINGUISHABLE ON FACTS. THE DEPARTMENT HAS ALSO ASSAILED THE ARGUMENT OF THE ASSESSEE THAT IT HAS TO SET APA RT A SIZEABLE PORTION OF SUBSCRIPTION CHARGES RECEIVED F OR PROVIDING FACILITIES THROUGHOUT THE PERIOD OF TIMES HARE IN THE LIGHT OF THE FACT THAT THE ASSESSEE RECEIVES FROM I TS CUSTOMERS ANNUAL MAINTENANCE CHARGES (AMC) AS WELL AS OTHER UTILITY CHARGES. 13. EXCEPT FOR THE FIGURES THE FACTS IN ALL THE YE ARS ARE THE SAME AND HENCE FOR THE SAKE OF CONVENIENCE WE SHAL L NARRATE THE FACTS PERTAINING TO ASSESSMENT YEAR 199 8-99 ONLY. THE ASSESSEE COMPANY IS IN THE BUSINESS OF S ELLING TIMESHARE UNITS IN ITS VARIOUS RESORTS. FOR THE SA ID YEAR THE ASSESSEE DECLARED A TOTAL LOSS OF RS.3 90 42 370/- WHICH LOSS WAS DETERMINED AT RS.1 87 58 252/- BY AN ORDER UNDE R SEC.143(3) OF THE ACT. SUBSEQUENTLY THE ASSESSMEN T WAS REOPENED UNDER SEC.147 OF THE ACT AND THE PRESENT A PPEAL ARISES FROM THE RE-ASSESSMENT PROCEEDINGS. IT WAS NOTICED BY THE ASSESSING OFFICER THAT THE RELEVANT BALANCE SHEET SHOWED AN AMOUNT OF RS.14 98 30 966/- UNDER THE HEA DING DEFERRED INCOME ADVANCE TOWARDS MEMBERS FACILITI ES SEE NOTE 1(VI)(A). THIS FIGURE REPRESENTED THE AM OUNT COLLECTED FROM TIMESHARE MEMBERS BUT NOT RECOGNISED AS REVENUE FOR THE CURRENT YEAR. THE EXPLANATION OF T HE ASSESSEE WAS THAT IT HAD CONSIDERED ONLY 40% OF THE MEMBERSHIP FEES COLLECTED AS INCOME AND THE BALANCE 60% WAS TREATED AS DEFERRED INCOME. IT WAS STATED THAT THE BALANCE AMOUNT WAS TO BE SPREAD OVER THE NEXT 33 YE ARS DURING WHICH THE ASSESSEE IS EXPECTED TO PROVIDE TI MESHARE FACILITIES TO THE MEMBERS. IT WAS ALSO STATED THAT IN ORDER TO 11 ITA 2412 TO 2416/05 & CO 7 TO 11/06 PROVIDE VARIOUS FACILITIES DURING THE NEXT 33 YEARS IT HAS TO INCUR MANY COSTS. FURTHER EXPLANATION OF THE ASSES SEE WAS THAT THE AMC WAS EXCLUSIVELY MEANT TO COVER THE MAINTENANCE OF VARIOUS FACILITIES WHICH ARE AN INTE GRAL PART OF THE TIMESHARE PROPERTY. THESE CHARGES WERE FOR THE MAINTENANCE OF VARIOUS ELECTRONIC GADGETS MADE AVAI LABLE IN THE ACCOMMODATION FURNITURE KITCHEN EQUIPMENTS C ENTRAL AIR-CONDITIONING ETC. ON THE OTHER HAND THE CONSI DERATION FOR FUTURE OBLIGATIONS RECEIVED IN THE INITIAL STAG ES IS TOWARDS TRANSFER FACILITY FROM ONE RESORT TO ANOTHER SPLIT ACCUMULATION AND ADVANCING FACILITY DOMESTIC AND INTERNATIONAL EXCHANGE TRANSMISSION UP-GRADATION ETC. THE ASSESSEE MAINLY RELIED ON THE JUDGMENT OF THE SUPRE ME COURT IN THE CASE OF CALCUTTA CO. LTD. (SUPRA). TH E ASSESSING OFFICER OBSERVED THAT THE ASSESSEE IS FOLLOWING MER CANTILE SYSTEM OF ACCOUNTING AND HENCE INCOME HAS TO BE AC COUNTED FOR ON ACCRUAL BASIS. HE WAS OF THE VIEW THAT THE RECEIPT WAS UNDISPUTEDLY INCOME AS THE ASSESSEE ITSELF HAD SHOW N IT AS DEFERRED INCOME. HOWEVER THE ACT DOES NOT RECOGNI SE THE CONCEPT OF DEFERRED INCOME AND HENCE THE ASSESSEES EXPLANATION CANNOT BE ACCEPTED. THE ASSESSING OFFI CER REFERRED TO THE VARIOUS CLAUSES OF THE AGREEMENT AN D ALSO A CONFIRMATION OBTAINED FROM EACH CUSTOMER. THE CONF IRMATION STATED THAT THE CUSTOMER AGREES TO PAY THE AMC AS T HE COMPANY NEEDS TO MAINTAIN THE RESORT. THUS THE AS SESSING OFFICER WAS NOT CONVINCED ABOUT THE FUTURE COSTS TO BE INCURRED BY THE ASSESSEE. HE ALSO POINTED OUT FROM THE AGREEMENT THAT THE ASSESSEE WAS NOT UNDER ANY CONTR ACTUAL OR OTHER OBLIGATION TO PROVIDE THE FACILITIES AS AL L THE REQUESTS FOR HOLIDAY WERE SUBJECT TO AVAILABILITY. CONSIDER ING ALL THESE ASPECTS THE ASSESSING OFFICER ADDED A SUM OF 12 ITA 2412 TO 2416/05 & CO 7 TO 11/06 RS.14 10 85 366/- BEING 60% OF THE RECEIPTS SHOWN BY THE ASSESSEE AS ADVANCE SUBSCRIPTION. 14. THE CIT (A) OBSERVED THAT THE ASSESSEE HAS TO CONSTRUCT HOLIDAY RESORTS AND PROVIDE TIMESHARE FAC ILITIES OVER A PERIOD OF TIME. FURTHER THE ANNUAL SUBSCRI PTION FEE COLLECTED MEETS ONLY THE MAINTENANCE OF THE RESORTS . THE UTILITY CHARGES COLLECTED ARE AS PER ACTUAL CONSUMP TION OF THINGS LIKE ELECTRICITY WATER ETC. IT DOES NOT CO VER MAJOR RENOVATION AND REPAIRS. THE CIT (A) ALSO TOOK NOT E OF THE FACT THAT OVER A PERIOD OF 24 YEARS THE ASSESSEE H AS TO INCUR ABOUT 171% OF THE ORIGINAL INVESTMENT FOR MAJOR REN OVATION AND REPLACEMENT OF ASSETS. HE ALSO RELIED ON THE J UDGMENT IN THE CASE OF CALCUTTA CO. LTD. (SUPRA) AND ALSO O N THE DECISION OF THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF TREASURE ISLAND RESORTS PVT. LTD. REPORTED IN 90 ITD 814. DECISION OF THE CUTTACK BENCH OF THE TRIBUNAL IN TH E CASE OF T.K. INTERNATIONAL LTD. (91 ITD 481) WAS ALSO RELIE D UPON. ACCORDINGLY HE UPHELD THE CONTENTIONS OF THE ASSES SEE AND DELETED THE ADDITION IN ALL THE YEARS. 15. OPENING HIS ARGUMENTS THE LD. D.R. FIRSTLY POI NTED OUT FROM THE ASSESSMENT ORDER FOR ASSESSMENT YEAR 1997- 98 THAT THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE I S MERCANTILE SYSTEM OF ACCOUNTING. THE ASSESSEE IS I N THE BUSINESS OF SELLING TIMESHARE UNITS. TAKING US THR OUGH THE MEMBERSHIP RULES IT WAS POINTED OUT THAT A PERSON CAN BECOME A MEMBER EITHER BY PAYING THE FULL AMOUNT AT A TIME OR BY PAYING INSTALMENTS. THE MEMBERS ARE ENTITLED TO ENJOY THE HOLIDAYS ONLY AFTER 12 OR 18 MONTHS FROM THE DA TE OF MEMBERSHIP DEPENDING ON THE NUMBER OF INSTALMENTS T HAT HAVE BEEN OPTED FOR BY THE MEMBER. OUR ATTENTION W AS THEN 13 ITA 2412 TO 2416/05 & CO 7 TO 11/06 DRAWN TO THE RULES RELATING TO THE CONSEQUENCES FOL LOWING DEFAULT IN PAYMENT OF INSTALMENTS AND THE RULES REL ATING TO CANCELLATION OF MEMBERSHIP. BARRING THESE FEW CIRCUMSTANCES THE MONEY COLLECTED BY THE ASSESSEE BECOMES ITS EXCLUSIVE ASSET. FROM THE RULES IT WAS ALSO POINTED OUT AS TO WHAT CONSTITUTES THE COST OF MEMB ERSHIP. THE COST OF ACCOMMODATION CONSTITUTES 40% OF THE TO TAL COST OF MEMBERSHIP AND ADVANCE PAYMENT TOWARDS FACILITIE S (APF) CONSTITUTES 60% OF THE TOTAL COST OF MEMBERSHIP. THE MEMBER WAS ALSO LIABLE TO PAY ANNUAL MAINTENANCE CH ARGES (AMC) FOR THE MAINTENANCE AND UPKEEP OF THE VARIOUS RESORTS. AMC WAS PAYABLE IRRESPECTIVE OF THE FACT WHETHER THE FACILITIES WERE USED OR NOT. IN ESSENCE IT W AS SUBMITTED A PERSON BECOMING MEMBER WAS ACTUALLY PURCHASING OCCUPANCY RIGHT FOR A SPECIFIC FLOOR ARE A FOR SPECIFIED DAYS. IT WAS FURTHER SUBMITTED THAT THE MEMBER HAD A RIGHT TO TRANSFER BEQUEATH OR GIFT HIS MEMBERSHIP/TIMESHARE UNIT TO ANY PERSON. ONE OF TH E ARGUMENTS OF THE ASSESSEE BEFORE THE CIT(A) WAS TH AT IT HAD TO INCUR SUBSTANTIAL EXPENSES EITHER TO CONSTRUCT N EW PROPERTIES OR FOR RENOVATION AND REPLACEMENT OF VA RIOUS ASSETS AND HENCE THE INCOME WAS SPREAD OVER 33/25 Y EARS DEPENDING ON THE SCHEME. TO COUNTERACT THIS ARGUME NT THE LD. D.R. DREW OUR ATTENTION TO THE AFFIDAVIT FILED BY THE MANAGING DIRECTOR OF THE ASSESSEE COMPANY BEFORE TH E MADRAS HIGH COURT IN A LITIGATION RELATING TO SERVI CE TAX MATTER. IN THIS AFFIDAVIT IT WAS AVERRED THAT THE COMPANY HAD NO FURTHER SERVICE TO BE RENDERED ONCE THE CONT RACT AND ENROLMENT MAKING A PERSON MEMBER WERE EXECUTED. THEREFORE THE ARGUMENT WAS THAT THE CLAIM OF THE A SSESSEE THAT IT HAD TO INCUR EXPENSES IN FUTURE WAS NOT COR RECT. THE LD. D.R. SUPPORTED THE CONTENTION OF THE ASSESSING OFFICER 14 ITA 2412 TO 2416/05 & CO 7 TO 11/06 THAT THERE WAS NO CONCEPT OF DEFERRED INCOME IN THE INCOME- TAX ACT AND THAT ALL THE EXPENSES INCURRED DURING T HE YEAR WERE ALLOWED. HE ALSO ASSAILED THE ORDER OF THE CI T (A) ON THE POINT THAT THE ASSESSEE HAD TO INCUR MARKETING EXPENSES. HOWEVER THE ARGUMENT WAS THAT WHEN ONCE SALE TO A PARTICULAR PERSON HAS TAKEN PLACE THERE IS NO FURTH ER NEED FOR ADVERTISEMENT QUA THAT PERSON. IT IS NOT LIKE A HO TEL WHICH WOULD ALWAYS EXPECT REPEAT CUSTOMERS. FURTHER THE RE WAS NO OBLIGATION ON THE PART OF THE ASSESSEE TO REFUND THE AMOUNT AND THERE WAS NO PROVISION MADE FOR ANY LIAB ILITIES WHICH THE ASSESSEE CLAIMED IT WOULD INCUR IN FUTURE . REFERRING TO THE ASSESSEES CONTENTION BEFORE THE L OWER AUTHORITIES THAT IT HAD FOLLOWED AS 9 EVEN ACCORDI NG TO THE SAID STANDARD IT WAS CONTENDED THAT ONCE THE SALE HAS TAKEN PLACE REVENUE HAD TO BE RECOGNISED. FOR ALL HIS C ONTENTIONS THE LD. D.R. RELIED ON THE FOLLOWING DECISIONS: 1. MAHARAJKUMAR GOPAL SARAN NARAIN SINGH V. CIT - 3 ITR 237 (PC) 2. KESHAV MILLS LTD. V. CIT 23 ITR 230 (SC) 3. E.D.SASSOON & CO. LTD. V. CIT 26 ITR 27 (SC) 4. PARIMISETTI SEETHARAMAMMA V. CIT 57 ITR 532 (SC) 5. SUTLEJ COTTON MILLS LTD. V. CIT 116 ITR 1 (SC) 6. CIT V. BAZPUR CO-OP. SUGAR FACTORY LTD. 172 ITR 3 21 (SC) 7. SHREE NIRMAL COMMERCIAL LTD. V. CIT 193 ITR 695 (BOM) 8. TUTICORIN ALKALI CHEMICALS & FERTLIZERS LTD. V. CIT 227 ITR 172 (SC) 9. CIT V. VARGHESE MANI 252 ITR 735 (KER) 15 ITA 2412 TO 2416/05 & CO 7 TO 11/06 10. E.I.D. PARRY (I) LTD. VS. CIT 258 ITR 4 04 (MAD.) 11. CIT V. G.S.R.KRISHNAMURTHY 262 ITR 392 (MAD. ) 12. P.L.GANAPATHI RAO VS. CIT 285 ITR 501 (A P) 13. CIT V. MANGAL TIRTH ESTATES LTD. 303 ITR 366 (MAD.) 14. CIT V. K.THANGAMANI 309 ITR 15 (MAD.) 15. STERLING HOLIDAY RESORTS (INDIA) LTD. VS. ACIT 111 ITD 116 (CHENN.) THUS THE LD. D.R. STRONGLY SUPPORTED THE ORDER OF THE ASSESSING OFFICER. 16. SHRI B.K. KHARE LEARNED COUNSEL FOR THE ASSESS EE FIRST TOOK US THROUGH THE DIRECTORS REPORT FOR THE FINAN CIAL YEAR 1997-98. THIS FINANCIAL PERIOD COMPRISED OF 15 MON THS AND POINTED OUT THAT THE ASSESSEE HAS TAKEN RESORTS UND ER LEAVE AND LICENCE ARRANGEMENTS AT GOA MUSSOURIE AND SHIM LA. THE MEMBERS HAVE ALREADY STARTED AVAILING THE HOLID AYS AT THESE RESORTS. FROM THE AUDITORS REPORT IT WAS PO INTED OUT THAT THE COMPANY HAS MAINTAINED PROPER RECORDS RELA TING TO FIXED ASSETS STORES SUPPLIES ETC. AND HAD ADEQUA TE INTERNAL CONTROL PROCEDURES COMMENSURATE WITH THE SIZE AND T HE NATURE OF ITS BUSINESS. COMING TO THE ACCOUNTS PRO PER AND THE NOTES THEREON IT WAS POINTED OUT THAT MEMBERS WHO PAID THE ENTIRE AMOUNT IN LUMP SUM 60% OF THAT SUM WAS TREATED AS DEFERRED INCOME AND 40% WAS OFFERED FOR TAXATION. THE REASON FOR NOT OFFERING THE ENTIRE A MOUNT AS INCOME WAS STATED TO BE THAT THE ASSESSEE HAD TO IN CUR HUGE MARKETING EXPENSES AND THAT IT WAS UNDER AN OBLIGAT ION TO PROVIDE SERVICE TO THE MEMBERS FOR 33 YEARS DURING WHICH THE MEMBERSHIP SUBSISTED. LATER THIS PERIOD WAS REDUC ED TO 25 YEARS. FURTHER THE IMMEDIATE REASON TO BIFURCATE THE SUM 16 ITA 2412 TO 2416/05 & CO 7 TO 11/06 RECEIVED IN THE RATIO OF 40:60 WAS STATED TO BE TO FOLLOW WHAT STERLING HOLIDAY RESORTS A COMPANY ENGAGED IN SIMI LAR BUSINESS HAD DONE. THREE YEARS LATER WHEN THE IN DUSTRY GAINED MORE MATURITY AND WHEN THE ASSESSEE ALMOST R EACHED THE BREAK-EVEN POINT 60% OF THE AMOUNT RECEIVED WA S OFFERED AS INCOME AND BALANCE 40% WAS TREATED AS DE FERRED INCOME. THE PRIME ARGUMENT OF THE LEARNED COUNSEL WAS THAT THOUGH THE ASSESSEE RECEIVED THE AMOUNT IN FUL L IN REALITY IT HAD NOT BECOME RICHER AS THERE WAS A COR RESPONDING LIABILITY TO SERVICE THE MEMBERS FOR 33/25 YEARS. I T WAS SUBMITTED THAT THE ASSESSEE CAN BE SAID TO BE THE O WNER OF THE ENTIRE SUM ONLY WHEN SERVICE IS FULLY DISCHARGE D FOR THE ENTIRE PERIOD OF MEMBERSHIP. TILL THEN IT WAS ONL Y AN ADVANCE IN THE HANDS OF THE ASSESSEE. IT WAS ARGUE D THAT THOUGH INCOME MAY ACCRUE BUT WHEN THE BENEFIT IS SP READ OVER A PERIOD INCOME ALSO SHOULD BE SPREAD OR ELSE THE ACCOUNTS WILL SHOW DISTORTED PROFITS. THE IMPORTAN CE OF THE ACCOUNTS SHOWING A TRUE AND FAIR VIEW OF THE PROFIT S / LOSSES AND THE STATE OF AFFAIRS WAS EMPHASISED. SHRI KHAR E THEN DREW OUR ATTENTION TO THE MEMBERSHIP RULES. OUR PA RTICULAR ATTENTION WAS DRAWN TO CLAUSE 10.17 WHICH STATED TH AT NOTHING IN THE MEMBERSHIP RULES WILL AFFECT THE MEM BERS STATUTORY RIGHTS WHICH PREVAIL OVER ANYTHING INCONS ISTENT WITH THEM IN THE RULES. ELABORATING ON THIS ISSUE THE LEARNED COUNSEL EMPHASISED THE CONTRACTUAL OBLIGATION WHICH THE ASSESSEE HAD UNDERTAKEN AND IT WAS ARGUED THAT SUCH A CONTRACT ALMOST ASSUMED THE CHARACTER OF A STATUTE. IT WAS CONTENDED THAT THE ASSESSEE WAS SELLING ONLY THE RI GHT TO THE USE OF OCCUPANCY AND THEREFORE IT WAS TO BE TREAT ED AS A LICENCE. THE SPACE COULD NOT BE GIVEN OR USED FOR OFFICE PURPOSES. THEREFORE THE CONTENTION WAS THAT QUITE AN OPPORTUNITY COST WAS INVOLVED. 17 ITA 2412 TO 2416/05 & CO 7 TO 11/06 17. THE LEARNED COUNSEL THEN TURNED TO THE PROVISIO NS OF SECTION 145 OF THE ACT. IT WAS POINTED OUT THAT AF TER THE SAID PROVISION WAS AMENDED W.E.F. 1.4.1997 THE ASSESSIN G OFFICER HAD NO RIGHT TO TINKER WITH THE ACCOUNTS OF THE ASSESSEE IF THE METHOD OF ACCOUNTING WAS SYSTEMATIC ALLY FOLLOWED AND ALSO HAD BEEN ACCEPTED BY THE DEPARTME NT. THE METHOD FOLLOWED WAS NOT IRRATIONAL BUT WAS SANC TIFIED BY USAGE. OUR ATTENTION WAS DRAWN TO THE COMMENTARY B Y KANGA PALKIWALA AND VYAS IN THE NINTH EDITION OF T HE LAW AND PRACTICE OF INCOME TAX. HE REFERRED TO PAGES 3 21 TO 323 IN VOL. I OF THE SAID TREATISE. DISTINCTION WAS SO UGHT TO BE DRAWN BETWEEN THE WORDS ACCRUE AND ARISE. IT I S STATED THAT INCOME PROFITS AND GAINS ACCRUE WHEN THEY FIR ST COME INTO EXISTENCE OR THE RIGHT TO RECEIVE THEM COMES I NTO EXISTENCE; BUT THEY MAY BE SAID TO ARISE WHEN THE M ETHOD OF ACCOUNTING SHOWS THEM IN THE SHAPE OF PROFITS OR GA INS. IT WAS SUBMITTED THAT DEPENDING ON THE SYSTEM OF ACCOU NTING A CASE MAY VERY WELL ARISE WHERE INCOME ACCRUES IN ONE YEAR ARISES (ACCORDING TO THE METHOD OF ACCOUNTING ) IN A DIFFERENT YEAR AND IS RECEIVED AT SOME THIRD POINT OF TIME. WHEN THE STATUTE REQUIRES THAT INCOME PROFITS OR G AINS SHOULD ACCRUE ARISE OR BE RECEIVED IN THE PREVIOUS YEAR IT CONTEMPLATES THREE DIFFERENT POINTS OF TIME AT WHIC H THEY CAN POSSIBLY BE BROUGHT TO CHARGE THE ACTUAL CHARGE BE ING AT SUCH ONE OF THE THREE POINTS OF TIME AS THE ASSESSE ES METHOD OF ACCOUNTING WARRANTS. EMPHASIS WAS PLACED ON THIS PART OF THE COMMENTARY BY THE LEARNED COUNSEL. THE LEARNED COUNSEL REFERRED TO THE DEFINITION OF PREV IOUS YEAR AND REFERRING TO SECTION 4 IT WAS CONTENDED THAT T HE ONLY OCCASION FOR THE ASSESSING OFFICER TO CHANGE THE YE AR OF TAXABILITY WAS AS PROVIDED IN THE PROVISO TO SECTIO N 4. 18 ITA 2412 TO 2416/05 & CO 7 TO 11/06 OTHERWISE HE COULD NOT DO IT. AT THIS JUNCTURE T HE LEARNED COUNSEL RELIED ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF SIR KIKABHAI PREMCHAND VS. CIT (24 ITR 506) . 18. FROM THE SYNOPSIS OF FACTS PLACED ON RECORD TH E LD. COUNSEL POINTED OUT THAT ITS RESORTS AT MUNNAR GOA AND COORG HAVE BEEN CONSISTENTLY RATED AS FIVE STAR CAT EGORY AND THE SERVICES PROVIDED AT ALL THE RESORTS HAVE BEEN CONSISTENTLY RATED BY RCI (RESORT CONDOMINIUM INTER NATIONAL INC.) AS GOLD CROWN (HIGHEST RATING) FOR EXCELLE NCE OF SERVICE. IT WAS FURTHER POINTED OUT AS TO HOW THE COMPANY HAS BEEN INCREASING THE NUMBER OF RESORTS FROM TIME TO TIME HOW THE NUMBER OF MEMBERSHIP HAS BEEN GROWING FROM YEAR TO YEAR AND HOW THE REVENUES HAVE BEEN RISING EVERY YEAR. THE POINT HE WAS TRYING TO DRIVE HOME IS THAT THE A SSESSEE HAD TO INCUR HEAVY COSTS TO INDUCE CUSTOMERS TO BEC OME MEMBERS AND IT HAD TO INCUR HUGE COSTS FOR THE UPKE EP OF THE RESORTS. HE THEN TURNED HIS ATTENTION TO THE ORDER OF THE TRIBUNAL IN THE CASE OF STERLING HOLIDAYS & RESORTS (111 ITD 116) WHICH IS AGAINST THE ASSESSEE. OUR PARTICULAR ATTENTION WAS DRAWN TO THE OBSERVATION IN THE ORDER THAT THE CONCEPT OF DEFERRED INCOME IS ALIEN TO INCOME TAX ACT. THE CO NTENTION WAS THAT IT IS NOT DEFERRED INCOME BUT IT IS THE AM OUNT WAITING IN THE WINGS TO ASSUME THE FORM OF INCOME. IT ASSUMES THE FORM OF INCOME ONLY WHEN THE OBLIGATION SPREAD OVER THE 33/25 YEAR PERIOD IS DISCHARGED. HE TOOK PARTICULAR EXCEPTION TO THE OBSERVATION IN THE ORDER THAT NOT OFFERING THE ENTIRE RECEIPT AS INCOME WAS A SUBTERFUGE DEVIS ED TO HOODWINK THE REVENUE. THE CONTENTION WAS THAT IT W AS PURELY A COMMERCIAL TRANSACTION AND THERE IS NOTHIN G LIKE SUBTERFUGE. HE DISTINGUISHED THE CASES RELIED UPON BY THE TRIBUNAL IN THE CASE OF STERLING HOLIDAYS SUPRA. 19 ITA 2412 TO 2416/05 & CO 7 TO 11/06 19. SHRI KHARE THEN TOOK US ON A LONG JOURNEY OF VA RIOUS CASE LAWS ON WHICH HE RELIED AND ALSO TO DISTINGUIS H THOSE ON WHICH THE DEPARTMENT RELIED. HIS MAIN RELIANCE WAS ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CALCUT TA CO. LTD. IN 37 ITR 1. IN THAT CASE THE ASSESSEE HAD CL AIMED EXPENSES ON DEVELOPMENT OF LAND THOUGH NO MONEY WAS ACTUALLY SPENT. THE COURT HELD THAT THE UNDERTAKING OF THE ASSESSEE TO CARRY OUT THE DEVELOPMENT WAS UNCONDITI ONAL AND IT IMPORTED A LIABILITY ON THE ASSESSEE WHICH A CCRUED ON THE DATE OF SALE OF THE PLOTS. IT WAS THUS AN ACCRU ED LIABILITY AND THE EXPENDITURE WHICH WOULD BE INCURRED WAS HEL D TO BE DEDUCTIBLE. DRAWING ANALOGY FROM THIS IT WAS CONTEN DED BY THE LD. COUNSEL THAT THE JUDGMENT WAS APPLICABLE NO T ONLY TO EXPENDITURE BUT ALSO TO INCOME AND IT WAS ALSO CONT ENDED THAT IN THE PRESENT CASE THE ASSESSEE WAS BOUND TO INCUR EXPENSES ON THE UPKEEP OF THE RESORTS. THUS THE UNDERTAKING TO SPEND THE MONEY WAS EXPENDITURE. HIS NEXT RELIANCE WAS ON THE JUDGMENT OF THE SUPREME COURT I N THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LT D.(225 ITR 802). ON THE BASIS OF THIS JUDGMENT IT WAS CONT ENDED THAT EXPENDITURE INCLUDES A LIABILITY WHICH HAS A CCRUED OR WHICH HAS BEEN INCURRED ALTHOUGH TO BE DISCHARGED A T A FUTURE DATE. IT WAS ALSO ARGUED THAT WHERE THE LIAB ILITY IS A CONTINUING ONE THE AMOUNT OF EXPENDITURE IF ALLOWE D IN ONE YEAR WOULD GIVE A DISTORTED PICTURE OF THE PROFITS OF A PARTICULAR YEAR AND THAT WHERE THERE IS A CONTINUIN G BENEFIT TO THE BUSINESS OVER A PERIOD OF TIME THE LIABILIT Y SHOULD BE SPREAD OVER THE PERIOD OF SUCH BENEFIT. SIMILARLY MANY OTHER DECISIONS WERE RELIED UPON MAINLY TO PRESS IN SERVI CE THE PRINCIPLES OF MATCHING CONCEPT DISTORTION OF PROFI TS TRUE ACCOUNTING PRINCIPLES IN THE LIGHT OF THE METHOD OF ACCOUNTING 20 ITA 2412 TO 2416/05 & CO 7 TO 11/06 FOLLOWED ASCERTAINMENT OF PROFITS AS PER NORMAL BO OK KEEPING PRACTICE EMPHASIS ON BUSINESS ASPECT RATHE R THAN A THEORETICAL OR DOCTRINAIRE ASPECT AND SO ON. SHRI KHARE REFERRED TO THE AFFIDAVIT FILED IN THE SERVICE TAX MATTER TO CONTEND THAT THE RELIANCE OF THE DEPARTMENT ON THE SAME IS OUT OF CONTEXT. 20. SHRI MAHAJANI ALSO REFERRED TO THE AFFIDAVIT AN D SUBMITTED THAT COLLECTION OF INSTALMENTS FROM THOSE WHO OPTED TO BECOME MEMBERS BY PAYING IN INSTALMENTS W AS MERELY REALISATION OF DEBTS AND THEREFORE IN THAT CONTEXT IT WAS STATED IN THE AFFIDAVIT THAT NO SERVICE IS REND ERED ONCE THE PERSON ACQUIRED THE MEMBERSHIP. OUR ATTENTION WAS THEN DRAWN TO AS9 ISSUED BY ICAI WITH REGARD TO REV ENUE RECOGNITION. OUR PARTICULAR ATTENTION WAS DRAWN TO PARAGRAPH 7. PARAGRAPH 7 PERTAINS TO RECOGNITION OF REVENUE FROM SERVICE TRANSACTIONS. IT STATES THAT REVENUE FROM SUCH TRANSACTIONS IS USUALLY RECOGNISED AS THE SERVICE I S PERFORMED EITHER BY THE PROPORTIONATE COMPLETION M ETHOD OR BY THE COMPLETED SERVICE CONTRACT METHOD. THE EMPH ASIS WAS ON PROPORTIONATE COMPLETION METHOD. IT STATES INTER ALIA THAT FOR PRACTICAL PURPOSES WHEN SERVICES AR E PROVIDED BY AN INDETERMINATE NUMBER OF ACTS OVER A SPECIFIC PERIOD OF TIME REVENUE IS RECOGNISED ON A STRAIGHT LINE BASI S OVER THE SPECIFIC PERIOD UNLESS THERE IS EVIDENCE THAT SOME OTHER METHOD BETTER REPRESENTS THE PATTERN OF PERFORMANCE . SHRI MAHAJANI WENT ON TO ARGUE THAT MEMBERSHIP IS AN INDEPENDENT MARKETABLE COMMODITY AND THEREFORE THE FEES ARE NOT REFUNDABLE. THERE IS A CONTINUING OBLIGATI ON TO PROVIDE OCCUPANCY TO THE MEMBERS. THE RESORTS ARE HIGHLY RATED AND THEREFORE THE ASSESSEE IS OBLIGED TO MAI NTAIN THEM IMMACULATELY. MARKETING EXPENSES HAVE TO BE I NCURRED 21 ITA 2412 TO 2416/05 & CO 7 TO 11/06 NOT ONLY TO ATTRACT NEW MEMBERS BUT ALSO TO MOTIVAT E THE EXISTING MEMBERS TO USE THE RESORTS. IT IS A CONTI NUOUS AND A SEAMLESS ACTIVITY RELATED TO THE NEW AND OLD MEMB ERS ALIKE. THERE IS NO PROVISION FOR REFUND BECAUSE IT IS NOT ANTICIPATED BY THE ASSESSEE. DESPITE THESE FACTS 60% OF THE COLLECTION (EARLIER 40%) IS ALREADY TAXED. IF TAXI NG THE ENTIRE RECEIPT IN A SINGLE YEAR WOULD HAVE GIVEN A DISTORT ED PICTURE TAXING 1/33 RD OF THE RECEIPTS IN EACH YEAR WOULD HAVE MADE THE PICTURE MORE DISTORTING. IT WAS SUBMITTED THAT THERE WAS NO CONTINUING OBLIGATION IN MOST OF THE CASES RELIE D UPON BY THE LD. D.R. 21. SHRI T.BANUSEKAR APPEARED AS INTERVENER ON BEHA LF OF T.K.INTERNATIONAL. HE EXPLAINED THE RELEVANCY OF I NCURRING MARKETING EXPENSES WHICH WAS STATED TO BE TO MAKE TIMESHARING SALEABLE. BY AND LARGE HE SUPPORTED T HE ARGUMENTS ADVANCED ON BEHALF OF THE ASSESSEE BEFORE US WITH THE ONLY DIFFERENCE THAT IN THE CASE OF THE IN TERVENER IT DID NOT COLLECT ANY MAINTENANCE CHARGE. ONLY MANAG EMENT FEE WAS COLLECTED WHICH WAS SUFFICIENT TO RECOVER C ERTAIN ADMINISTRATIVE EXPENSES LIKE TAKING CARE OF BOOKING S ETC. HE ALSO VENTURED TO STATE THAT WHAT WAS MEANT BY MENTI ONING IN THE AFFIDAVIT BEFORE THE SERVICE TAX AUTHORITIES TH AT NO SERVICES WERE RENDERED AFTER SELLING THE MEMBERSHIP WAS THAT THERE WAS NO TAXABLE EVENT ONCE THE MEMBERSHIP WAS SOLD. SHRI BANUSEKAR REFERRED TO THE OBSERVATION OF THE TRIBUNAL AT PARAGRAPH 15 IN THE CASE OF STERLING HO LIDAY RESORTS (SUPRA). IT IS OBSERVED THAT THE COMPUTATI ON OF INCOME IS TO BE MADE IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. IT WAS ARGUED THAT THE ASSESSEE ADOPTED THE PROPORTIONATE COMPLETION METHOD AS MENTIONED IN AS9. IT IS ALSO STATED IN 22 ITA 2412 TO 2416/05 & CO 7 TO 11/06 THE SAID STANDARD THAT IF THE MEMBERSHIP FEE PERMIT S ONLY MEMBERSHIP AND ALL OTHER SERVICES OR PRODUCTS ARE P AID FOR SEPARATELY OR IF THERE IS A SEPARATE ANNUAL SUBSCR IPTION THE FEE SHOULD BE RECOGNISED WHEN RECEIVED. IF THE MEM BERSHIP FEE ENTITLES THE MEMBER TO SERVICES OR PUBLICATIONS TO BE PROVIDED DURING THE YEAR IT SHOULD BE RECOGNISED O N SYSTEMATIC AND RATIONAL BASIS HAVING REGARD TO THE TIMING AND NATURE OF ALL SERVICES PROVIDED. THUS THE CONTENT ION WAS THAT THE ASSESSEE IS FOLLOWING A CONSISTENT METHOD TO RECOGNISE THE REVENUE WHICH IS IN ACCORDANCE WITH A S9 AND HENCE THE SAME SHOULD NOT BE DISTURBED BY THE ASSES SING OFFICER. REFERENCE WAS THEN MADE TO THE GUIDANCE N OTE ON ACCRUAL BASIS OF ACCOUNTING ISSUED BY ICAI. AS PER THE SAID GUIDANCE NOTE THE GOAL OF ACCRUAL BASIS OF ACCOUNT ING IS TO RELATE THE ACCOMPLISHMENTS (MEASURED IN THE FORM OF REVENUE) AND THE EFFORTS (MEASURED IN TERMS OF COST ) SO THAT REPORTED NET INCOME MEASURES AN ENTERPRISES PERFOR MANCE DURING A PERIOD INSTEAD OF MERELY LISTING ITS CASH RECEIPTS AND PAYMENTS. REFERENCE WAS THEN MADE TO INTERNATIONAL ACCOUNTING STANDARD (IAS) 18 PERTAINING TO REVENUE. THE CRUX OF THIS STANDARD IS THAT WHEN THE OUTCOME OF A TRANSACTION INVOLVING THE RENDERING OF SERVICES CAN BE ESTIMATED RELIABLY REVENUE ASSOCIATED WITH THE TRA NSACTION SHOULD BE RECOGNISED BY REFERENCE TO THE STAGE OF C OMPLETION OF THE TRANSACTION AT THE BALANCE SHEET DATE. THE OUTCOME OF A TRANSACTION CAN BE ESTIMATED RELIABLY WHEN ALL TH E FOLLOWING CONDITIONS ARE SATISFIED: (A) THE AMOUNT OF REVENUE CAN BE MEASURED RELIABLY; (B) IT IS PROBABLE THAT THE ECON OMIC BENEFITS ASSOCIATED WITH THE TRANSACTION WILL FLOW TO THE ENTERPRISE; (C) THE STAGE OF COMPLETION OF THE TRAN SACTION AT THE BALANCE SHEET DATE CAN BE MEASURED RELIABLY; AN D (D) THE COSTS INCURRED FOR THE TRANSACTION AND THE COSTS TO COMPLETE 23 ITA 2412 TO 2416/05 & CO 7 TO 11/06 THE TRANSACTION CAN BE MEASURED RELIABLY. HE ALSO ADVOCATED THE REAL INCOME THEORY BY REFERRING TO THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF GODHRA ELECTRICITY CO. LTD. V. CIT (225 ITR 746). 22. IN HIS COUNTER-REPLY THE LD. D.R. STATED THAT THE BASIC FACT REMAINED THAT WHAT THE ASSESSEE SOLD WAS THE OCCUPANCY RIGHT OF A SPECIFIED AREA FOR SPECIFIED D AYS FOR SPECIFIED YEARS. THE AMC WAS COLLECTED COMPULSORIL Y. DEPRECIATION AND MARKETING EXPENSES WERE ALLOWED AN D WHEN A PERSON BECAME A MEMBER HE GOT A TELEVISION AS GIFT WHICH WAS ALLOWED AS REVENUE EXPENDITURE. THEREFOR E THERE IS NO LOGIC TO INCUR ANY MARKETING EXPENDITURE IN F UTURE AND HOW CAN IT BE MATCHED WITH THE REVENUE WHICH IS COL LECTED TODAY. AS AN ILLUSTRATION HE REFERRED TO THE AMC/ ASF CHART SHOWING THE AMOUNT CHARGED TO MEMBERS PER ROOM NIGH T FOR EACH CATEGORY OF APARTMENT. IT WAS SUBMITTED THAT THE CHARGES COLLECTED ON ANNUAL BASIS WAS SUFFICIENT TO CARRY OUT THE NORMAL MAINTENANCE. REFERRING TO PARAGRAPH 5 O F THE MEMBERSHIP RULES IT WAS SUBMITTED THAT THE MERE ST ATEMENT BY THE ASSESSEE TO TREAT CERTAIN PORTION AS ADVANCE PAYMENT TOWARDS FACILITIES (APF) DOES NOT MAKE THE RECEIPT NON- TAXABLE. REFERRING TO PARAGRAPH 5.1 IN THE REVISED MEMBERSHIP RULES IT WAS SUBMITTED THAT UNLIKE THE PREVIOUS RULES THERE WAS NO BIFURCATION ABOUT THE COST OF MEMBERSHIP. IT WAS SUBMITTED THAT IN FACT THE COM MENTARY OF THE LD. AUTHORS KANGA & PALKHIVALA SUPPORTED THE CASE OF THE REVENUE AND FURTHER AS PER THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CIT V. BRITISH PAINTS INDIA LT D. (188 ITR 44) THE ASSESSING OFFICER WAS JUSTIFIED IN BRINGIN G TO TAX THE ENTIRE MEMBERSHIP FEE COLLECTED BY THE ASSESSEE PA RTICULARLY 24 ITA 2412 TO 2416/05 & CO 7 TO 11/06 WHEN NO PROVISION IN THE ACT HAS BEEN POINTED OUT T O SHOW AS TO HOW 60%/40% OF THE FEE COLLECTED IS LEFT OUT. 23. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND THE MATERIAL ON RECORD. THOUSANDS OF LITRES OF INK HAV E BEEN CONSUMED LAVISHLY OVER THE PAST MORE THAN HUNDRED Y EARS IN DISCUSSING THE CONCEPT OF ACCRUAL AND YET THERE IS NO END TO IT AND RIGHTLY SO AS IT INDICATES THE EVER CHANGIN G DYNAMICS OF BUSINESS AND COMMERCE. HOSPITALITY BUSINESS T HOUGH IN EXISTENCE SINCE MORE THAN HUNDRED YEARS IT HAS COM E INTO LIMELIGHT RECENTLY WITH SEVERAL VARIANTS AND SALE O F TIMESHARE UNIT IS ONE SUCH VARIANT WITH WHICH ARE CONCERNED I N THE PRESENT GROUP OF APPEALS. 24. THE DYNAMICS OF HOW TIMESHARE INDUSTRY WORKS IS NOT DIFFICULT TO GRASP. THE COMPANY WILL SET UP SEVERA L RESORTS AT TOURIST PLACES EITHER ON ITS OWN OR TAKE SUCH RESO RTS ON LEASE OR MAY ENTER INTO ARRANGEMENTS WITH OTHER RESORT OW NERS. THE COMPANY WILL GRANT MEMBERSHIP ON PAYMENT OF CER TAIN AMOUNT. ON PAYMENT OF THE AMOUNT THE MEMBER ACQUI RES MEMBERSHIP FOR A SPECIFIED NUMBER OF YEARS. DURIN G 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 COMPA NY. THE TYPES OF MEMBERSHIP MAY DIFFER DEPENDING ON THE TYPE OF ACCOMMODATION OPTED BY THE PERSON. THE COMPANY RECEIVES THE MEMBERSHIP FEE EITHER IN LUMPSUM OR IT MAY GRANT INSTALMENTS TO THE PROSPECTIVE MEMBER. IN A DDITION TO THE MEMBERSHIP FEE THE COMPANY ALSO CHARGES ANNUAL MAINTENANCE CHARGES (AMC) OR ANNUAL SUBSCRIPTION FE ES (ASF) OR ADMINISTRATIVE CHARGES. THESE CHARGES GEN ERALLY ARE COLLECTED IRRESPECTIVE OF THE FACT WHETHER THE MEMBER MAKES USE OF THE RESORT OR NOT. FURTHER IF THE ME MBER 25 ITA 2412 TO 2416/05 & CO 7 TO 11/06 UTILISES THE RESORT HE MAKES AN ADDITIONAL PAYMENT TOWARDS UTILITIES LIKE ELECTRICITY WATER AIR-CONDITIONING HEATER ETC. THERE ARE OTHER INCIDENTAL FACILITIES ALSO LIKE EXC HANGE FACILITIES ONE-UP EXCHANGE RCI EXCHANGE ETC. THE RE ARE CERTAIN RULES PERTAINING TO CANCELLATION OF MEMBERS HIP ALSO ALONG WITH THE RULES PERTAINING TO QUANTIFICATION O F REFUND. THE ASSESSEE BEFORE US INITIALLY GRANTED MEMBERSHIP FOR 33 YEARS WHICH WAS LATER REDUCED TO 25 YEARS. THE ENT IRE MEMBERSHIP FEE RECEIVED BY THE ASSESSEE IS TREATED AS REVENUE RECEIPT BUT THE ENTIRE AMOUNT COLLECTED IS NOT RECOGNISED AS REVENUE AND OFFERED FOR TAXATION IN THE YEAR OF ITS RECEIPT. DURING THE FIRST THREE YEARS OF ITS O PERATION THE ASSESSEE RECOGNISED 40% OF THE REVENUE AS INCOME IN THE YEAR OF RECEIPT AND FROM 4 TH YEAR ONWARDS IT STARTED RECOGNISING 60% OF THE RECEIPT AS INCOME IN THE YEA R OF RECEIPT. THE BALANCE AMOUNT WAS EQUALLY SPREAD OVE R THE PERIOD OF MEMBERSHIP I.E. 25 OR 33 YEARS AS THE CA SE MAY BE. THE CASE OF THE ASSESSEE IS THAT THOUGH IT 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 RECOGNISED AS INCOM E IN THE SUBSEQUENT YEARS. THERE IS NO BASIS FOR RECOGNISIN G 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 I S STATED TO BE THAT WITH EXPERIENCE THE ASSESSEE HAS BECOME WI SER. THE CASE OF THE REVENUE IS THAT HAVING RECEIVED THE INCOME IN THE FIRST YEAR ITSELF THE SAME SHOULD BE RECOGN ISED AS INCOME IN THAT YEAR ONLY. SO FAR AS MAINTENANCE O F RESORTS AND OTHER UTILITIES ARE CONCERNED THEY ACCORDING TO THE LD. D.R. ARE BEING TAKEN CARE OF BY THE AMC/ASF ETC. WE PROCEED TO RESOLVE THIS DISPUTE. 26 ITA 2412 TO 2416/05 & CO 7 TO 11/06 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 RECEIVE IN INDIA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON; OR (B) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARI SE TO HIM IN INDIA DURING SUCH YEAR; OR (C) ACCRUES OR ARISES TO HIM OUTSIDE INDIA DURING S UCH YEAR. AS PER SEC.29 OF THE ACT THE PROFITS AND GAINS OF BUSINESS OR PROFESSION HAVE TO BE COMPUTED IN ACCORDANCE WITH T HE PROVISIONS CONTAINED IN SECTIONS 30 TO 43D OF THE A CT WHICH IN NUTSHELL MEANS THAT IT IS THE NET INCOME WHICH IS T AXABLE 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 W E HAVE TO EXAMINE WHETHER THE INCOME RECEIVED BY THE ASSESSEE HAS REALLY ACCRUED TO IT OR NOT. THE MOST ENLIGHTENING JUDGMENT IN THIS REGARD AND WHICH HAS ALSO BEEN THE BEDROCK OF SUBSEQUENT DECISIONS IS THAT OF THE SUPREME COURT IN THE CASE OF E.D. SASSOON & CO. LTD. V. CIT IN 26 ITR 27 . 26. THE ASSESSEE IN THAT CASE (THE SASSOONS FOR SHO RT) WERE THE MANAGING AGENTS FOR THREE COMPANIES. THEY WERE ENTITLED TO RECEIVE AS THEIR REMUNERATION A COMMIS SION OF CERTAIN PER CENT. PER ANNUM ON THE ANNUAL NET PROFI TS OF THE THREE COMPANIES. THE SASSOONS DECIDED TO TRANSFER T HE MANAGING AGENCIES TO THREE OTHER COMPANIES ALONG WI TH ALL THEIR RIGHTS AND BENEFITS UNDER THE MANAGING AGENCY AGREEMENT. THE TRANSFER TOOK PLACE ON DIFFERENT DAT ES DURING THE ACCOUNTING YEAR. THE ACCOUNTS OF THE MANAGED 27 ITA 2412 TO 2416/05 & CO 7 TO 11/06 COMPANIES WERE MADE UP AT THE END OF THE YEAR AND T HE COMMISSION PAYABLE WAS COMPUTED. THE COMMISSION WA S PAID OVER TO THE THREE NEW MANAGING AGENTS. THE SA SSOONS DID NOT INCLUDE ANY PART OF THE COMMISSION IN THEIR INCOME BUT THE COMMISSION WAS ASSESSED IN THE HANDS OF THE THREE TRANSFEREES. THE TRANSFEREES OBJECTED TO THE SAID A SSESSMENT STATING THAT THE AGENCY COMMISSION RECEIVED BY THEM SHOULD BE APPORTIONED ON A PROPORTIONATE BASIS AND THE TRA NSFEREES SHOULD BE MADE LIABLE TO PAY TAX ONLY ON THE COMMIS SION EARNED BY THEM DURING THE PERIOD THAT THEY HAD WORK ED AS MANAGING AGENTS OF THE RESPECTIVE COMPANIES. IT WA S ARGUED ON BEHALF OF THE SASSOONS THAT IT WAS A COND ITION PRECEDENT TO THE EARNING OF THE REMUNERATION THAT T HEY FULFILLED THE TERMS OF THEIR EMPLOYMENT AND COMPLET ED THE PERIOD FOR WHICH THE REMUNERATION WAS PAYABLE TO TH EM AND THE SERVICE FOR THE PARTICULAR PERIOD WAS A CONDITI ON PRECEDENT TO THEIR EARNING THE REMUNERATION FOR THA T PERIOD. SINCE THE STATED PERIOD OF ONE YEAR WAS NOT OVER N O REMUNERATION WAS PAYABLE TO THE SASSOONS TILL THE E ND OF THE YEAR AND IT DID NOT BECOME A DEBT DUE BY THE COMPAN IES TO THE SASSOONS. THEREFORE ACCORDING TO THE SASSOONS NO INCOME ACCRUED TO THEM. ON THE OTHER HAND IT WAS URGED ON BEHALF OF THE TRANSFEREES THAT THOUGH UNDER THE DEE D OF ASSIGNMENT THEY WERE PAID THE WHOLE OF THE COMMISS ION THEY HAD MERELY EARNED THE COMMISSION FOR THE PERIO D OF ACTUAL SERVICES RENDERED BY THEM TO THE COMPANY. EVEN THOUGH THE ASCERTAINMENT AND THE PAYMENT CAME LATER IT MADE NO DIFFERENCE TO THE ACCRUAL OF INCOME WHICH C OULD BE REFERRED BACK TO THE PERIOD DURING WHICH THE INCOME WAS EARNED AND ACCORDINGLY WHATEVER AMOUNT WAS EARNED B Y THE SASSOONS DURING THE RESPECTIVE PERIODS THAT THEY HA D ACTED AS AGENTS HAD ACCRUED TO THEM DURING THOSE PERIODS . THE 28 ITA 2412 TO 2416/05 & CO 7 TO 11/06 COURT BY MAJORITY DECISION HELD THAT NO INCOME ACCR UED 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 T HE PRESENT CASE. ONE OF THE IMPORTANT OBSERVATIONS THE COURT MADE IS AT PAGE 52 OF ITR 26. IT OBSERVED THAT THE SASSOON S HAD NO DOUBT RENDERED SERVICES AS MANAGING AGENTS OF THE COMPANIES FOR THE BROKEN PERIODS. BUT UNLESS AND U NTIL THEY COMPLETED THEIR PERFORMANCE VIZ. THE COMPLETION O F THE DEFINITE PERIOD OF SERVICE OF A YEAR WHICH WAS A CO NDITION PRECEDENT TO THEIR BEING ENTITLED TO RECEIVE THE RE MUNERATION OR COMMISSION STIPULATED THERE UNDER NO DEBT PAYABL E 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 TRAN SFERS. IN THE PRESENT CASE OF COURSE THE FEES ARE PAYABLE O N THE EXECUTION OF THE CONTRACT BETWEEN THE COMPANY AND T HE PROSPECTIVE MEMBER. ONCE A PERSON AGREES TO BECOME MEMBER THE FEES ARE IMMEDIATELY PAYABLE TO THE COMP ANY. IT BECOMES A DEBT PAYABLE BY THE PERSON TO THE COMP ANY. IN THAT SENSE INCOME HAS ARISEN TO THE COMPANY. HOWEV ER THE QUESTION IS WHETHER IT HAS ACCRUED TO THE COMPANY O R NOT. IN THIS CONNECTION THE SUPREME COURT HAS EXPLAINED TH E MEANING OF THE WORD EARNED AND WE REPRODUCE THE R ELEVANT OBSERVATION BELOW (PAGES 51 & 52 OF 26 ITR): THE WORD EARNED EVEN THOUGH IT DOES NOT APPEAR IN SECTION 4 OF THE ACT HAS BEEN VERY OFTEN USED IN THE COURSE OF THE JUDGMENTS BY LEARNED JUDGES BOTH IN THE HIGH COURTS AS WELL AS 29 ITA 2412 TO 2416/05 & CO 7 TO 11/06 THE SUPREME COURT (VIDE COMMISSIONER OF INCOME-TAX BOMBAY V. AHMEDBHAI UMARBHAI & CO. BOMBAY 18 ITR 472 AND COMMISSIONER OF INCOME-TAX MADRAS V. K.R.M.T.T.THIAGARAJA CHETTY & CO. 24 ITR 525 AT533). IT HAS ALSO BEEN USED BY THE JUDICIAL COMMITTEE OF THE PRIVY COUNCIL IN COMMISSIONERS OF TAXATION V. 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 NOT ONLY NECESSARY THAT THE ASSESSEE MUST HAVE CONTRIBUTED TO ITS ACCRUING OR ARISING BY RENDERING SERVICES OR OTHERWISE BUT HE MUST HAVE CREATED A DEBT IN HIS FAVOUR. A DEBT MUST HAVE COME INTO EXISTENCE AND HE MUST HAVE ACQUIRED A RIGHT TO RECEIVE THE PAYMENT. UNLESS AND UNTIL HIS CONTRIBUTION OR PARENTHOOD IS EFFECTIVE IN BRINGING INTO EXISTENCE A DEBT OR A RIGHT TO RECEIVE THE PAYMENT OR IN OTHER WORDS A DEBITUM IN PRAESENTI SOLVENDUM IN FUTURO IT CANNOT BE SAID THAT ANY INCOME HAS ACCRUED TO 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 ACC RUED TO OR EARNED BY THE ASSESSEE. THEY ARE (I) IT IS NEC ESSARY THAT 30 ITA 2412 TO 2416/05 & CO 7 TO 11/06 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 RIG HT TO RECEIVE THE PAYMENT. IN THE PRESENT CASE A DEBT I S CREATED IN FAVOUR OF THE ASSESSEE IMMEDIATELY ON EXECUTION OF THE AGREEMENT. HOWEVER IT CANNOT BE SAID THAT THE ASS ESSEE HAS FULLY CONTRIBUTED TO ITS ACCRUING BY RENDERING SERVICES. THE ASSESSEE IS BOUND TO PROVIDE ACCOMMODATION TO T HE MEMBERS FOR ONE WEEK EVERY YEAR TILL THE CURRENCY O F THE MEMBERSHIP. TILL THE ASSESSEE FULFILS ITS PROMISE THE PARENTHOOD CANNOT BE TRACED TO IT. IN THIS CONNECT ION 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 I F IT IS NOT IN A POSITION TO PROVIDE ACCOMMODATION AS PER CONFI RMED RESERVATION. BUT IT IS NOT LIABLE TO PAY ANY DAMAG ES IF IT IS NOT ABLE TO PROVIDE AN ACCOMMODATION ON ACCOUNT OF NON- AVAILABILITY. UNDER SUCH CIRCUMSTANCES THE ONLY R ECOURSE FOR THE MEMBER IS TO APPROACH THE CONSUMER FORUM WHICH WILL TERM IT AS DEFICIENCY IN SERVICES AND DIRECT THE AS SESSEE TO PAY DAMAGES. THE POINT WE ARE TRYING TO DRIVE HOME IS THAT THE MATTER DOES NOT END ON SIGNING OF THE AGREEMENT AND ON A PERSON BECOMING A MEMBER. THERE IS A CONTINUING LIABILITY ON THE PART OF THE ASSESSEE NOT ONLY TO PROVIDE ACCOMMODATION BUT ALSO TO PROVIDE OTHER INCIDENTAL SERVICES 31 ITA 2412 TO 2416/05 & CO 7 TO 11/06 ATTACHED WITH THE ACCOMMODATION. THIS IS AN IMPOR TANT ASPECT OF THE MATTER. 28. IT HAS BEEN ARGUED ON BEHALF OF THE ASSESSEE TH AT THE MAIN REASON TO SPREAD THE BALANCE AMOUNT OF MEMBERS HIP FEES OVER THE TENURE OF MEMBERSHIP IS THAT IT HAS T O INCUR HEAVY EXPENDITURE FOR THE UPKEEP AND MAINTENANCE OF ITS VARIOUS RESORTS. HOWEVER WE ARE NOT IMPRESSED WIT H THIS ARGUMENT. SEPARATE CHARGES ARE COLLECTED FOR MAINT ENANCE AND FOR USE OF UTILITIES AND THEREFORE THE MATCHIN G CONCEPT CANNOT BE PRESSED INTO SERVICE SO FAR AS MEMBERSHIP FEE IS CONCERNED. NO DOUBT IT WILL BE THE CONSTANT ENDEAV OUR OF THE ASSESSEE TO GO ON ADDING NEW RESOURCES WHICH WILL B E AVAILABLE TO THE EXISTING MEMBERS ALSO. TO THAT EXT ENT ONE CAN SAY THAT SOME PORTION OF THE MEMBERSHIP FEES WI LL GO TO FINANCE NEW PROPERTIES. BUT MEMBERSHIP FEE IS ESSEN TIALLY A CONSIDERATION FOR THE RIGHT TO OCCUPY A RESORT 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 WI LL TRY TO PROCURE ALTERNATE ACCOMMODATION. THIS ALSO WILL EN TAIL ADDITIONAL EXPENDITURE ON THE PART OF THE ASSESSEE OVER AND ABOVE PAYING LIQUIDATED DAMAGES TO THE ASSESSEE. U NLIKE THE CASE IN CALCUTTA CO. LTD. V. CIT (37 ITR 1) TH E LIABILITY IN THIS CASE IS DIFFICULT NOT ONLY TO QUANTIFY BUT ALS O TO REASONABLY ESTIMATE IT. THE LIABILITY IS UNDOUBTED LY THERE. HOWEVER NO SCIENTIFIC BASIS HAS BEEN BROUGHT TO OU R NOTICE TO QUANTIFY THE SAME EVEN REASONABLY. JUST AS LIFE INSURANCE PREMIUM OR PROVISION FOR ENCASHMENT OF LEAVE CAN BE QUANTIFIED REASONABLY ON ACTUARIAL BASIS THERE IS NO SUCH METHOD BROUGHT TO OUR NOTICE TO QUANTIFY THE LIABIL ITY OF THE 32 ITA 2412 TO 2416/05 & CO 7 TO 11/06 ASSESSEE IN THE PRESENT CASE. IN THE CASE OF LIFE INSURANCE THE PREMIUM IS COMPUTED ON ACTUARIAL BASIS ONLY FOR THE LIFE ASSURED WHOSE LONGEVITY CAN BE REASONABLY ESTIMATED . IN THE CASE OF ENCASHMENT OF LEAVE DESPITE THE CHANGE IN THE NUMBER OF EMPLOYEES REASONABLE NUMBER OF RETIREMEN TS EVERY YEAR CAN BE ESTIMATED AND HENCE THE PROVISION THEREOF IS NOT RENDERED THAT DIFFICULT. HOWEVER IN THE CA SE BEFORE US THE MEMBERSHIP IS EVER INCREASING AND IN WHICH YEAR HOW MANY CONTINGENCIES OF NON-AVAILABILITY OF ACCOMMODA TION CAN ARISE CAN BE ANYBODYS 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 CER TAIN ONLY HOW MANY SUCH EVENTS CAN OCCUR IS UNCERTAIN. A S A MATTER OF FACT THE SUPREME COURT HAS ALSO USED THE WORDS CONTINGENT LIABILITY FOR WARRANTY EXPENSE AND ALL OWED DEDUCTION IN THE CASE OF ROTORK CONTROLS INDIA P. L TD. V. CIT(314 ITR 62 AT 75). THEREFORE COMING BACK TO T HE POINT OF MAKING PROVISION EVEN IF THE ASSESSEE HAD CHOSE N TO PROVIDE FOR THE LIABILITY IN EVERY YEAR TO COMPLY W ITH THE MATCHING CONCEPT IT WOULD HAVE BEEN WHOLLY UNSCIEN TIFIC AND ARBITRARY. AT THIS JUNCTURE WHEN WE ARE MAKING TH E OBSERVATION THAT THE ASSESSEE HAS INCURRED A LIABIL ITY TO PROVIDE ACCOMMODATION IT WOULD BE APPROPRIATE TO D EAL WITH THE ARGUMENT OF THE DEPARTMENT IN CONNECTION WITH T HE AFFIDAVIT FILED BY THE ASSESSEE BEFORE THE SERVICE TAX AUTHORITIES. THE DEPARTMENT IS BANKING ON THE AVER MENT IN THE AFFIDAVIT TO THE EFFECT THAT ONCE THE AGREEMENT IS SIGNED THERE IS NO SERVICE LEFT TO BE RENDERED BY THE ASSE SSEE. THIS ARGUMENT HAS TO BE REJECTED. THE DEPARTMENT ITSELF ADMITS THAT THE ASSESSEE IS BOUND TO PROVIDE ACCOMMODATION FOR ONE WEEK IN A YEAR DURING THE TENURE OF THE MEMBERSHIP. 33 ITA 2412 TO 2416/05 & CO 7 TO 11/06 SECONDLY BY SAYING THAT NO SERVICE IS LEFT TO BE R ENDERED WHAT THE ASSESSEE MEANS TO SAY IS THAT THERE IS NO TAXABLE EVENT UNDER THE SERVICE TAX LAWS ONCE A PERSON BECO MES MEMBER. THEREFORE THE RELIANCE OF THE DEPARTMENT ON THE AFFIDAVIT HAS NO SUBSTANCE AT ALL. 29. WE AGAIN REVERT TO THE ASPECT OF LIABILITY. IN THIS CONNECTION THE JUDGMENT OF THE SUPREME COURT IN TH E CASE OF ROTORK CONTROLS INDIA PVT. LTD. V. CIT (SUPRA) I S QUITE USEFUL. OF COURSE WE ARE CONSCIOUS OF THE FACT T HAT THAT CASE PERTAINED TO PROVISION FOR WARRANTIES NONETHE LESS CERTAIN PRINCIPLES ENUNCIATED THEREIN ARE QUITE APT FOR THE CASE ON HAND AS WELL. IN THE SAID CASE THE ASSES SEE HAD MADE PROVISION FOR WARRANTIES. THE MADRAS HIGH COU RT IN THEIR JUDGMENT REPORTED IN 293 ITR 311 DENIED DEDUC TION OF THE PROVISION FOR WARRANTIES ON THE GROUND THAT THE LIABILITY WAS NOT CERTAIN. IN FACT AT PAGE 315 THE HIGH COUR T EXPRESSED THIS VIEW BY STATING THAT CONSIDERING THE NATURE OF THE LIABILITY WHICH IS YET TO CRYSTALLISE BUT LOAD ED WITH UNCERTAINTY OF THE EVENT TO CAUSE A LIABILITY THER E IS NO JUSTIFICATION TO ACCEPT THE PLEA OF THE ASSESSEE. ON THE OTHER HAND THE SUPREME COURT OBSERVED THAT LIABILITY IS DEFINED AS A PRESENT OBLIGATION ARISING FROM PAST EVENTS THE SETTLEMENT OF WHICH IS EXPECTED TO RESULT IN AN OUTFLOW FROM T HE ENTERPRISE OF RESOURCES EMBODYING ECONOMIC BENEFITS . IT WAS FURTHER OBSERVED THAT A PAST EVENT THAT LEADS TO A PRESENT OBLIGATION IS CALLED AS AN OBLIGATING EVENT. THE O BLIGATING EVENT IS AN EVENT THAT CREATES AN OBLIGATION WHICH RESULTS IN AN OUTFLOW OF RESOURCES. IT ALSO OBSERVED THAT FOR A LIABILITY TO QUALIFY FOR RECOGNITION THERE MUST BE NOT ONLY P RESENT OBLIGATION BUT ALSO THE PROBABILITY OF AN OUTFLOW OF RESOURCES TO SETTLE THAT OBLIGATION (UNDERLINE BY US). IF WE CONSIDER THE 34 ITA 2412 TO 2416/05 & CO 7 TO 11/06 FACTS IN THE PRESENT CASE THE PAST EVENT IS ADMITT ING A PERSON AS A MEMBER WITH A PROMISE TO FULFIL THE OBL IGATION OF PROVIDING HIM ACCOMMODATION FOR ONE WEEK EVERY YEAR FOR THE NEXT 33/25 YEARS. IT IS NOT AN ORDINARY OBLIG ATION. IN FACT IN OUR VIEW THE OBLIGATION IS HEAVIER THAN T HAT IN THE CASE OF SALE OF GOODS. IN THE CASE OF SALE OF GOOD S THE GOODS ARE ALREADY IN POSSESSION OF THE BUYER AND AR E BEING USED BY THE BUYER. ON THE OTHER HAND THE SALE OF TIMESHARE UNIT IS NOT AS TANGIBLE AS SALE OF GOODS BUT BECOME S TANGIBLE WHEN THE ASSESSEE FULFILS ITS PROMISE. LET US CONS IDER CERTAIN FACTORS WHICH MAY PREVENT THE ASSESSEE FROM KEEPING ITS PROMISE. MOST OF THE MEMBERS WOULD OPT FOR A HOLID AY DURING THE PEAK SEASON I.E. DURING VACATION IN SCHO OLS AND THIS CAN PUT A LOT OF PRESSURE ON THE ASSESSEE TO S ATISFY EACH AND EVERY MEMBER. IT WILL HAVE TO DISAPPOINT CERTA IN MEMBERS FOR NON-AVAILABILITY OF ACCOMMODATION AND T HIS MAY INVITE OUTFLOW OF RESOURCES. THERE MAY BE A DEMAND FOR A PARTICULAR RESORT BUT THE ASSESSEE MAY NOT BE ABLE TO PROVIDE IT IF THE SAME IS UNDER SOME MAJOR REPAIRS OR RENOV ATION. THESE TYPES OF CONTINGENCIES WILL ALWAYS ENTAIL OUT FLOW OF RESOURCES FOR THE ASSESSEE IN FUTURE. THEREFORE W E ARE OF THE VIEW THAT THERE IS EVERY POSSIBILITY OF AN OBLI GATING EVENT ARISING WHICH WILL RESULT IN AN OUTFLOW OF RESOURCE S. 30. A QUESTION MAY BE RAISED THAT IF THE OBLIGATIN G EVENT IS SURE TO ARISE THE ASSESSEE COULD HAVE MADE REASONA BLE PROVISION EVERY YEAR WHICH WOULD MEET THE MATCHING CONCEPT ALSO. LET US SEE HOW IT IS NOT POSSIBLE. IN THE C ASE OF ROTORK CONTROLS (SUPRA) THE SUPREME COURT HAS OBSERVED TH AT A PROVISION IS RECOGNISED WHEN: (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS P ROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE 35 ITA 2412 TO 2416/05 & CO 7 TO 11/06 OBLIGATION; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET NO PROVISION CAN BE RECOGNISED. IN THE PRESENT CASE WE HAVE ALREADY OBSERVED IN THE PRECEDING PARAGRAPHS THAT T HE ASSESSEE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT. THUS THE FIRST CONDITION IS SATISFIED. WE HAVE AL SO OBSERVED THAT OUTFLOW OF RESOURCES IS PROBABLE TO SETTLE THE OBLIGATION. THE SECOND CONDITION IS ALSO SATISFIED. HOWEVER C ONSIDERING THE NATURE OF ACTIVITY IT IS THE THIRD CONDITION W HICH IS DIFFICULT TO SATISFY. THE DEMAND FOR ACCOMMODATION BY THE ME MBERS IS ESSENTIALLY TOURISM ORIENTED. TOURISM IN TURN DEPENDS ON SEVERAL FACTORS. THEY MAY BE SOCIAL POLITICAL CL IMATIC AND SO ON. IF WEDDING SEASON IS IN FULL SWING TOURISM CA N GET AFFECTED. IF THERE IS SOME COMMOTION AROUND A PART ICULAR RESORT OR IF THE LAW AND ORDER SITUATION IS NOT CON DUCIVE TOURISM CAN BE AFFECTED. SUDDEN CHANGE IN WEATHER CAN ALSO AFFECT TOURISM. FURTHER AVAILABILITY OF RAIL OR A IR RESERVATION CAN ALSO AFFECT TOURISM. THE POSSIBILITY OF LEAVE TRAVEL CONCESSION (LTC) GETTING LAPSED CAN SEE SUDDEN SPUR T IN TOURISM. THESE ARE ONLY A FEW ILLUSTRATIONS WHICH CAN AFFECT THE DEMAND FOR ACCOMMODATION EITHER WAY. THERE MAY BE MANY POSSIBILITIES WHICH MAY NOT COME TO MIND BUT M AY PUT THE ASSESSEE INTO TREMENDOUS PRESSURE. ALL THESE F ACTORS ARE SUCH WHICH ARE TWINED WITH THE NORMAL HUMAN LIFE AN D HENCE ARE NOT ONLY CERTAIN TO OCCUR BUT ALSO MAKES IT DIF FICULT TO REASONABLY ESTIMATE THE PROBABLE OUTFLOW OF RESOURC ES. MOREOVER AS MENTIONED EARLIER MOST OF THE GRIEVAN CES ARE SETTLED BY CONSUMER FORUM AND IT CAN BE ANYBODYS G UESS AS TO WHAT DAMAGES THE FORUM WILL AWARD. SOME ORDERS O F THE CONSUMER FORUM AWARDING DAMAGES TO THE COMPLAINANTS HAVE BEEN PLACED ON RECORD. CONSIDERING THE DIFFIC ULTY IN 36 ITA 2412 TO 2416/05 & CO 7 TO 11/06 ESTIMATING REASONABLY THE OBLIGATION IN MONETARY TE RMS NO PROVISION CAN BE MADE. 31. WE HAVE HELD THAT THERE IS A DEFINITE LIABILITY CAST ON THE ASSESSEE TO FULFIL ITS PROMISE AND THEREFORE I T 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 RESUL T OF WHICH NO REASONABLE PROVISION FOR THE LIABILITY CAN BE MA DE. THEREFORE RECOGNISING THE ENTIRE RECEIPT AS INCOME IN THE YEAR OF RECEIPT CAN LEAD TO DISTORTION. SOMEWHAT S IMILAR THOUGH NOT EXACTLY IDENTICAL SITUATION WAS FACED B Y THE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVE STMENT CORPORATION LTD. V. CIT (225 ITR 802). IN THAT CAS E THE ASSESSEE HAD ISSUED DEBENTURES OF RS.1.5 CRORES AT A DISCOUNT OF 2% REDEEMABLE AFTER 12 YEARS. AT PAGE 8 13 OF THE REPORT THE COURT OBSERVED THAT ORDINARILY REV ENUE EXPENDITURE WHICH IS INCURRED WHOLLY AND EXCLUSIVEL Y FOR THE PURPOSE OF BUSINESS MUST BE ALLOWED IN ITS ENTIRETY IN THE YEAR IN WHICH IT INCURRED. IT CANNOT BE SPREAD OVE R A NUMBER OF YEARS EVEN IF THE ASSESSEE HAS WRITTEN IT OFF IN HIS BOOKS OVER A PERIOD OF YEARS. HOWEVER THE FACTS MAY JUS TIFY AN ASSESSEE WHO HAS INCURRED EXPENDITURE IN A PARTICUL AR YEAR TO SPREAD AND CLAIM IT OVER A PERIOD OF ENSUING YEARS. IN FACT ALLOWING THE ENTIRE EXPENDITURE IN ONE YEAR MIGHT G IVE A VERY DISTORTED PICTURE OF THE PROFITS OF A PARTICULAR YE AR. IT IS THIS DISTORTION WE HAVE TALKED ABOUT IN THE EARLIER PART OF THIS PARAGRAPH. THE ONLY DIFFERENCE IS THAT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION (SUPRA) THE DIST ORTION WAS SUPPOSED TO BE ON ACCOUNT OF EXPENDITURE IN THE PR ESENT CASE THE DISTORTION IS ON ACCOUNT OF THE ENTIRE INC OME BEING ACCOUNTED IN THE YEAR OF RECEIPT. EARLIER WE HAVE ALSO 37 ITA 2412 TO 2416/05 & CO 7 TO 11/06 DISCUSSED AS TO HOW DIFFICULT IT IS TO ESTIMATE THE LIABILITY WHICH IS LIKELY TO BE INCURRED IN FUTURE MORE SO I N THE ABSENCE OF ANY SCIENTIFIC BASIS OR HISTORICAL DATA. THEREFORE THE ONLY WAY TO MINIMISE THE DISTORTION IS TO SPREA D OVER A PART OF THE INCOME OVER THE ENSUING YEARS. AT THIS JUNCTURE WE MAY DEAL WITH ONE OF THE ARGUMENTS MADE ON BEHAL F OF THE ASSESSEE AND THE INTERVENER. IT WAS ARGUED THA T 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 LD. COUNSEL TAL KED ABOUT WAS VIS A VIS THE PRESENTATION OF PUBLISHED ACCOUNT S WHEREAS THE DISTORTION THE SUPREME COURT TALKED ABOUT AND W HICH WE ARE INCLINED TO FOLLOW IS VIS A VIS THE REAL TAXAB LE INCOME FOR A PARTICULAR YEAR. THEREFORE IN VIEW OF THE FOREG OING DISCUSSION WE ACCEPT THE PROPOSITION OF THE ASSESS EE THAT IT IS NOT JUSTIFIABLE TO TAX THE ENTIRE INCOME IN A SI NGLE YEAR AS IS THE CASE OF THE DEPARTMENT. 32. ACCORDINGLY TO ANSWER THE QUESTION POSED TO TH E SPECIAL BENCH THE ENTIRE AMOUNT OF TIMESHARE MEMBE RSHIP FEE RECEIVABLE BY THE ASSESSEE UP FRONT AT THE TIME OF ENROLMENT OF A MEMBER IS NOT THE INCOME CHARGEABLE TO TAX IN THE INITIAL YEAR ON ACCOUNT OF CONTRACTUAL OBLIG ATION THAT IS FASTENED TO THE RECEIPT TO PROVIDE SERVICES IN FUTU RE OVER THE TERM OF CONTRACT. 33. IN THE RESULT ALL THE APPEALS OF THE DEPARTMEN T ARE DISMISSED AND THE CROSS OBJECTIONS OF THE ASSESSEE ARE ALSO DISMISSED. 38 ITA 2412 TO 2416/05 & CO 7 TO 11/06 THE ORDER WAS PRONOUNCED IN THE COURT ON 26-5-2010. SD/- SD/- SD/- (HARI OM MARATHA) (N.BARATHVAJA SANKAR) (PRADEEP PARIKH) JUDICIAL MEMBER VICE-PRESIDENT VICE-PRESIDENT CHENNAI DATED THE 26 TH MAY 2010 MPO* COPY TO : APPELLANT/RESPONDENT/CIT/CIT(A)/DR