Upfront premium received for 30 years taxable in year of receipt :ITAT

By | January 28, 2016

IN THE ITAT BANGALORE BENCH ‘C’

New Mangalore Port Trust

v.

Assistant Commissioner of Income-tax, Circle 1 (1), Mangalore

VIJAY PAL RAO, JUDICIAL MEMBER
AND JASON P. BOAZ, ACCOUNTANT MEMBER

IT APPEAL NO. 1299 (BANG.) OF 2013
[ASSESSMENT YEAR 2009-10]

NOVEMBER  6, 2015

V. Srinivasan, CA for the Appellant. Smt. Chandana Ramachandran, CIT, DR for the Respondent.

ORDER

 

Vijay Pal Rao, Judicial Member – This appeal by the assessee is directed against the order dated 5/02/2012 of the CIT(A), Mysore, for the assessment year 2009-10.

2. The assessee is a local authority and derives income from providing port facilities at New Mangalore Port. For the assessment year under consideration, the assessee filed its return of income on 25/9/2009 returning a total income of Rs. 158,84,08,600/-. Scrutiny assessment was completed vide order dated 29/12/2011 whereby the Assessing Officer (AO) made the following additions/disallowances to the returned income.

[a] Prior Period expenses Rs. 4,47,45,000
[b] Upfront Premium paid by
[1] UPCL Rs. 8,70,00,000
[2] ABG Infralogistics Rs. 5,61,71,744
[3] Ambuja Cements Ltd. Rs. 9,99,69,073
[c] Disallowance u/s.14A Rs. 39,62,231
[d] Disallowance of provision of Accounting & Auditing Rs. 27,60,000
TOTAL Rs. 29,46,08,048

3. The assessee challenged the action of the AO in respect of the addition/disallowances made, before the CIT(A) but could not succeed as the CIT(A) has confirmed the additions made by the AO.

4. The assessee has filed the appeal before this Tribunal and raised the following grounds:

1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The learned CIT[A] is not justified in sustaining the disallowance of Rs. 4,47,45,000/- towards prior period expenses under the facts and in the circumstances of the appellant’s case.
3[A]. The learned CIT[A] is not justified in sustaining the disallowance of a sum of Rs. 8,70,000/- being the upfront premium paid by UPCL under the facts and in the circumstances of the appellant’s case.
3[B]. The learned CIT[A] is not justified in sustaining the disallowance of a sum of Rs. 5,61,71,744/- being the upfront premium paid by M/s. ABG Infralogistics Limited under the facts and in the circumstances of the appellant’s case.
3[C]. The learned CIT[A] is not justified in sustaining the disallowance of a sum of Rs. 9,99,69,073/- being the upfront premium paid by M/s. Ambuja Cements Ltd., under the facts and in the circumstances of the appellant’s case.
4. The learned CIT[A] is not justified in sustaining the disallowance of a sum of Rs. 39,62,231/-u/s. 14A of the Act under the facts and in the circumstances of the appellant’s case.
5. The learned CIT[A] is not justified in sustaining the disallowance of a sum of Rs. 27,60,000/- being the provision for Accounting and Auditing under the facts and in the circumstances of the appellant’s case.

5. Ground No. 1 is general in nature and does not require any specific adjudication.

6. Ground No. 2 is regarding disallowance of prior period expenses. The assessee claimed Rs. 4,47,44,564/- as prior period expenses in the schedule to the profit & loss account. The AO asked the assessee to give justification for claiming the earlier years’ expenditure in the current year in view of the fact that the assessee is following mercantile system of accounting. The AO noted that the assessee has not given any justification in this regard. Accordingly, the AO disallowed the said amount of Rs. 4,47,44,564/- by following the decision of the Hon’ble Bombay High Court in the case of Taparia Tools Ltd. v. Jt. CIT[2003] 260 ITR 102 as well as the judgment of the Hon’ble Supreme Court in the case of J.K. Industries Ltd. v. Union of India [2008] 297 ITR 176 . The CIT(A) has confirmed the action of the AO in disallowing prior period expenses.

7. Before us, learned AR of the assessee has referred to the details of the prior period expenses at pages 73 to 74 of the paper book and submitted that the details of the prior period expenses were furnished before the authorities below. He further contended that most of the prior-period expenses pertain to employees benefit arising on account of revision of pay of the employees which could not be anticipated in advance. Thus, the learned AR of the assessee has submitted that the expenses pertain to employees benefit due to revision of pay has been crystallized only during the year under consideration and therefore, the same is an allowable claim The learned AR of the assessee has further submitted that one more opportunity may be given to the assessee to furnish the better particulars regarding this issue and to show that the expenditure on account of revision of pay of the employees has been crystallized during the year under consideration.

On the other hand, learned departmental representative has submitted that that despite sufficient opportunity was given by the AO as well as the CIT(A), the assessee failed to prove that the expenditure pertains to the year under consideration. Therefore, the assessee has failed to discharge its onus to prove the claim of allowability of the said expenditure. He has relied upon the orders of the authorities below.

8. We have considered the rival submissions as well as the relevant material on record. From the details filed by the assessee, it appears that some of the expenditure pertains to the salary revision of the employees. The assessee has claimed that due to revision of salary, the liability on account of enhanced salary has been crystallized only during the year under consideration. Since the details of expenditure filed by the assessee do not throw much light on this fact that the expenditure pertaining to enhanced liability towards pay to the employees on account of revised salary were finalized and crystallized only during the year under consideration, accordingly, in the facts and circumstances of the case, as well as in the interest of justice, we remand this issue to the record of the AO with a direction to the assessee to furnish better particulars for examination of the AO and accordingly the claim of the assessee has to be decided as per law.

9. Ground No. 3 regarding ad hoc upfront premium received by the assessee under the concession agreement with three parties. The assessee carries on the business of providing port, berthing and docking facilities at New Mangalore Port. The assessee stated to have control and domain over vast tracks of land known as ‘designated port area’ at New Mangalore Port. Thus, the assessee provides various facilities for docking of ships, loading and unloading of container on the ships and warehousing within the designated port area. The assessee formulated a scheme of BOT Model under which the assessee permitted some of the companies to develop facilities on the land provided by the assessee. In terms of the scheme formulated on BOT basis, the assessee entered into concession agreement with three parties and received upfront premium as under:

(i) Udupi Power Corporation Ltd. … Rs. 8,70,00,000/-
(ii) ABG Infralogistics … Rs. 5,61,71,744/-
(iii) M/s.Ambuja Cements Ltd … Rs. 9,99,69,073/-

Thus the assessee received from the Concessionaires upfront lump sum premium for allowing these companies to develop the facilities and use the same for a period of 30 years. Apart from the aforesaid upfront premium, the commissionaire were also required to pay the assessee regular facilities charges/royalty for handling of cargo in the designated port area at the rate fixed/agreed upon by the parties. In the computation of income, the assessee offered 1/30th of upfront premium as income for the year under consideration and has shown the balance received as liability being in the nature of pre-paid income. The AO, after examination of the concession agreement noted that the upfront fee was payable on execution of the agreement and therefore, the said amount cannot be taken as income on proportionate basis as the agreement does not specify the quantum to be apportioned over a period of 30 years. Accordingly, the AO treated the entire amount of upfront premium received by the assessee from three companies/concessionaires as income for the year under consideration and added the same to the total income.

9.1 The assessee challenged the action of the AO before the CIT(A) and submitted that upfront premium is a consideration paid by the concessionaire is a license fee for the entire period of lease. Therefore, the logical inference is that upfront premium paid is for the use of the facility for a period of 30 years under the said agreement and only that part of the premium that relates to the year under consideration can be described as income of the year. It was also contended that the assessee is subject to audit by the Controller & Auditor General (C&AG). The C&AG had clearly indicated that upfront premium cannot be entirely recognized as income for the year in which the agreement was signed. Thus it was submitted that in accordance with the advice of the C&AG, the assessee has recognized 1/30th of the upfront premium as income. The assessee has also supported its claim by referring to the accounting standard 19 issued by the ICAI. The CIT(A) did not accept the contention of the assessee and held that upfront premium is a one-time amount received by the assessee without any thing to do for the period of lease. This is not a refundable amount even if the lease is cancelled for any reason. Thus, the CIT(A) has held that one-time payment received by the assessee is income in the year of receipt.

9.2 Before us, learned AR of the assessee submitted that the license fee/upfront premium was paid by the concessionaire for utilizing the facility for 30 years. Therefore, income on account of license fee for the year under consideration cannot be more than 1/30th of the entire fee amount. He has referred to the clauses of the concession agreement and submitted that the payment in question though received upfront, it was for the entire period of license of 30 years. The learned AR of the assessee has referred to the schedule to the P&LA account at pages 40 & 41 of the paper book as well as the notes on accounts at page 45 to 47 and 52 of the paper book and submitted that the assessee has recognized the income on accrual basis. It was further contended that the premium received for leasing out of land for a long term has been amortized over the term of the lease period as per the guidelines of accounting standard 19. Therefore, only proportionate amount has been accounted in the year under consideration. The learned AR of the assessee has referred to the note No. 17 to 19 of the notes to schedule 24 to the P&L Account and submitted that in the case of ABG Infralogistics, land has been allotted on long term basis for development of container freight station on the designated port area for a period of 30 years. Consideration was received as one-time upfront lease rental of Rs. 5.81 crores with nominal lease rental of Re. 1 per annum. The learned AR of the assessee has submitted that as per AS 19, lease rent received for 30 years as upfront premium has been amortized over the term of lease period. Similar treatment has been given in the case of M/s Ambuja Cements wherein the land has been allotted for a period of 30 years for setting up facilities for bulk consignment handling at the port on payment of upfront rent of Rs. 10.34 crores with a nominal rental of Re. 1 per annum. Thus, the learned AR of the assessee has submitted that that the entire lease rent received for a period of 30 years cannot be treated as the income of one year. He also made reference to the audit report of the C&AG and submitted that the C&AG has made a remark that upfront premium should have been recognised equally over a period of 30 years. The learned AR of the assessee has submitted that the ownership of land remains with the assessee and the same was to be handed over to the assessee on expiry or termination of lease. In support of his contention, he has referred to clause 10.1 of the agreement as per which the parties agreed for handing over of the land back to the assessee on expiry or termination of lease. The learned AR of the assessee has placed heavy reliance on the decision of the Chennai Special bench of this Tribunal in the case of Asstt. CIT/Dy. CIT v. Mahindra Holidays & Resorts (India) Ltd. [2010] 39 SOT 438 and submitted that the income must be recognized on the basis of matching concept of each year.

9.3 On the other hand, learned departmental representative has submitted that that there is no provision in the Income-tax Act to spread over the income in future period of time. The assessee has not shown the amount in question as advance and recognized the receipt as income. Therefore, income received by the assessee during the year without any corresponding obligation to be discharged by the assessee in the future years the entire income is assessable in the year under consideration. She has also relied upon the orders of the AO and the CIT(A).

9.4 We have considered the rival submissions as well as the relevant material on record. There is not dispute that the assessee has granted lease for 30 years in respect of the port land to three companies viz. UPCL, ABG Infralogistics and M/s Ambuja Cements Ltd., vide respective concession agreement. The assessee has received upfront premium from these three concessionaries at the time of execution of the agreements. We find that the transaction of leasing out the land to these companies for 30 years is completed by execution of the agreement and thereafter the assessee was not required to do or perform any act or obligation under the agreement. Thus, in other words, the assessee has received consideration for grant of license/lease to these three companies in lump sum apart from the annual license fee/royalty without any corresponding obligation to be discharged by the assessee. This upfront premium amount is admittedly non-refundable amount irrespective of the premature termination of the concession/lease agreement. The assessee has supported its claim by matching concept of accounting as well as accounting standard 19. However, when there is no corresponding liability or obligation to be discharged by the assessee after receipt of this amount as upfront, then this argument of the assessee of matching concept goes against the claim of the assessee. Even as per the matching concept of recognizing the income the amount received by the assessee is required to be considered as income of the current year when the assessee has completed and discharged all its obligation by executing the agreement and no further liability was to be discharged by the assessee for next 30 years under the concession agreement. The consideration received by the assessee during the year matches with the discharge of liability or obligation by execution of the agreement and handing over the land in question to the concessionaire for development of facility and utilization of the same. Once the assessee was no longer liable to render any service in future being a corresponding discharge of obligation or rendering of service consequently, there would be no question of accrual of income in future years. We further note that the assessee itself has recognized the entire upfront premium received as income for the year under consideration as per the P&L Account as well as schedule 15 to the P&L Account wherein the assessee has recognized Rs. 26,85,19,000/- as lease rental comprising the upfront premium received from three concessionaries. Therefore, when the assessee claims to have followed the accrual basis of accounting and recognizing the income on accrual basis then this very fact of recognizing the entire upfront premium as income in the books of account shows that the entire receipt accrued during the year under consideration. Though the C&AG has raised some objections in his Audit report in respect of recognizing the entire income as income of the year under consideration and recommended only proportionate amount of upfront premium to be considered as income of the year under consideration, however, the said remarks of the C&AG would not change the character or the incidence of accrual of the income. The learned AR of the assessee has heavily relied upon the decision of the Chennai Special bench of the Tribunal in the case of Mahindra Holidays & Resorts (India) Ltd. (supra) wherein it has been observed by the Special bench in paras 23 to 28 and 31 as under:

“23. We have duly considered the rival contentions and the material on record. Thousands of litres of ink have been consumed lavishly over the past more than hundred years in discussing the concept of accrual and yet there is no end to it, and rightly so as it indicates the ever changing dynamics of business and commerce. Hospitality business, though in existence since more than hundred years, it has come into limelight recently with several variants and sale of timeshare unit is one such variant with which we are concerned in the present group of appeals.

24. The dynamics of how time-share industry works is not difficult to grasp. The company will set up several resorts at tourist places, either on its own or take such resorts on lease or may enter into arrangements with other resort owners. The company will grant membership on payment of certain amount. On payment of the amount, the member acquires membership for a specified number of years. During the currency of the membership, the member gets a right to have a holiday for one week in a year at the place of his choice from amongst the places offered by the company. The types of membership may differ depending on the type of accommodation opted by the person. The company receives the membership fee either in lump sum or it may grant instalments to the prospective member. In addition to the membership fee, the company also charges AMC or annual subscription fees (ASF) or administrative charges. These charges generally are collected irrespective of the fact whether the member makes use of the resort or not. Further, if the member utilises the resort, he makes an additional payment towards utilities like electricity, water, air-conditioning, heater, etc. There are other incidental facilities also like exchange facilities, one-up exchange, RCI exchange etc. There are certain rules pertaining to cancellation of membership also along with the rules pertaining to quantification of refund. The assessee before us initially granted membership for 33 years which was later reduced to 25 years. The entire membership fee received by the assessee is treated as revenue receipt, but the entire amount collected is not recognized as revenue and offered for taxation in the year of its receipt. During the first three years of its operation, the assessee recognized 40 per cent of the revenue as income in the year of receipt and from 4th year onwards, it started recognizing 60 per cent of the receipt as income in the year of receipt. The balance amount was equally spread over the period of membership i.e., 25 or 33 years, as the case 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 recognized as income in the subsequent years. There is no basis for recognizing the income in the ratio of 40 : 60 and it is stated to be as per industry norms. The basis for the ratio of 60 : 40 is stated to be that with experience, the assessee has become wiser. The case of the Revenue is that having received the income in the first year itself, the same should be recognized as income in that year only. So far as maintenance of resorts and other utilities are concerned, they, according to the learned Departmental Representative, are being taken care of by the AMC/ASF etc. We proceed to resolve this dispute.

25. It is not in dispute that the assessee follows mercantile system of accounting. Sec. 5(1) of the Act defines the scope of total income in case of a resident and includes all income which—

(a) Is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) Accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) Accrues or arises to him outside India during such year.

As per s. 29 of the Act, the profits and gains of business or profession have to be computed in accordance with the provisions contained in ss. 30 to 43D of the Act which in nutshell means that it is the net income which is taxable and not the gross income. Net income has to be arrived at after allowing all deductions permissible under the Act. In the backdrop of these facts and statutory provisions, we have to examine whether the income received by the assessee has 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 (supra).

26. The assessee in that case (the Sassoons for short) were the managing agents for three companies. They were entitled to receive as their remuneration, a commission of certain per cent per annum on the annual net profits of the three companies. The Sassoons decided to transfer the managing agencies to three other companies along with all their rights and benefits under the managing agency agreement. The transfer took place on different dates during the accounting year. The accounts of the managed companies were made up at the end of the year and the commission payable was computed. The commission was paid over to the three new managing agents. The Sassoons 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 assessment stating that the agency commission received by them should be apportioned on a proportionate basis and the transferees should be made liable to pay tax only on the commission earned by them during the period that they had worked as managing agents of the respective companies. It was argued on behalf of the Sassoons that it was a condition precedent to the earning of the remuneration that they fulfilled the terms of their employment and completed the period for which the remuneration was payable to them and the service for the particular period was a condition precedent to their earning the remuneration for that period. Since the stated period of one year was not over, no remuneration was payable to the Sassoons till the end of the year and it did not become a debt due by the companies 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 deed of assignment, they were paid the whole of the commission, they had merely earned the commission for the period 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 could be referred back to the period during which the income was earned and accordingly whatever amount was earned by the Sassoons during the respective periods that they had acted as agents, had accrued to them during those periods. The Court by majority decision held that no income accrued to the Sassoons.

27. Now let us examine the principles laid down in the case of Sassoons and try to apply them to the facts of the present case. One of the important observations the Court made is at p. 52 ITR 26. It observed that the Sassoons had no doubt rendered services as managing agents of the companies for the broken periods. But unless and until they completed their performance, viz., the completion of the definite period of service of a year which was a condition precedent to their being entitled to receive the remuneration or commission stipulated thereunder no debt payable by the companies was created in their favour and they had no right to receive any payment from the companies. No remuneration or commission could therefore be said to have accrued to them at the dates of the respective transfers. In the present case, of course, the fees are payable on the execution of the contract between the company and the prospective member. Once a person agrees to become member the fees are immediately payable to the company. It becomes a debt payable by the person to the company. In that sense income has arisen to the company. However, the question is whether it has accrued to the company or not. In this connection, the Supreme Court has explained the meaning of the word ‘earned’ and we reproduce the relevant observation below (pp. 51 and 52 of 26 ITR) :

“The word ‘earned’ even though it does not appear in s. 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 the Supreme Court [vide CIT v. Ahmedbhai Umarbhai & Co. (1950) 18 ITR 472 (SC) and CIT v. K.R.M.T.T. Thiagaraja Chetty & Co. (1953) 24 ITR 525 (SC) at 533]. It has also been used by the Judicial Committee of the Privy Council in Commrs. 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 accrued to or earned by the assessee. They are :

(i) it is necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise, and

(ii) a debt must have come into existence and he must have acquired a right to receive the payment.

In the present case, a debt is created in favour of the assessee immediately on execution of the agreement. However, it cannot be said that the assessee has fully contributed to its accruing by rendering services. The assessee is bound to provide accommodation to the members for one week every year till the currency of the membership. Till the assessee fulfils its promise, the parenthood cannot be traced to it. In this connection, certain clauses in the membership rules need to be examined. The reservation for holiday can be done 90 days to 1 day before the commencement of holiday but the same is subject to availability. In other words, if the resort requested for is not available, the member would be deprived of the holiday. If the assessee confirms the reservation but is not able to provide the allotted or the alternate accommodation, assessee is liable to pay liquidated damages to the member. It is worth noting that the assessee is liable to pay liquidated damages only if it is not in a position to provide accommodation as per confirmed reservation. But it is not liable to pay any damages if it is not able to provide an accommodation on account of non-availability. Under such circumstances, the only recourse for the member is to approach the Consumer Forum which will term it as deficiency in services and direct the assessee to pay damages. The point we are trying to drive home is that the 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 attached with the accommodation. This is an important aspect of the matter.

28. It has been argued on behalf of the assessee that the main reason to spread the balance amount of membership fees over the tenure of membership is that it has to incur heavy expenditure for the upkeep and maintenance of its various resorts. However, we are not impressed with this argument. Separate charges are collected for maintenance and for use of utilities and therefore, the matching concept cannot be pressed into service so far as membership fee is concerned. No doubt, it will be the constant endeavour of the assessee to go on adding new resources which will be available to the existing members also. To that extent one can say that some portion of the membership fees will go to finance new properties. But membership fee is essentially 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 will try to procure alternate accommodation. This also will entail additional expenditure on the part of the assessee over and above paying liquidated damages to the assessee. Unlike the case in Calcutta Co. Ltd. (supra), the liability in this case is difficult not only to quantify but also to reasonably estimate it. The liability is undoubtedly there. However, no scientific basis has been brought to our 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 liability of the 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 retirements every year can be estimated and hence the provision thereof is not rendered that difficult. However, in the case before us, the membership is ever increasing and in which year how many contingencies of non-availability of accommodation can arise, can be anybody’s guess. At this juncture we may clarify the use of the word “contingencies”. It is not used in the sense that the event of non-availability of accommodation is wholly uncertain. The event is certain, only how many such events can occur is uncertain. As a matter of fact, the Supreme Court has also used the words “contingent liability” for warranty expense and allowed deduction in the case of Rotork Controls India (P) Ltd. v. CIT (2009) 223 CTR (SC) 425 : (2009) 23 DTR (SC) 79 : (2009) 314 ITR 62 (SC) at 75. Therefore, coming back to the point of making provision, even if the assessee had chosen to provide for the liability in every year to comply with the matching concept, it would have been wholly unscientific and arbitrary. At this juncture, when we are making the observation that the assessee has incurred a liability to provide accommodation, it would be appropriate to deal with the argument of the Department in connection with the affidavit filed by the assessee before the service-tax authorities. The Department is banking on the averment in the affidavit to the effect that once the agreement is signed, there is no service left to be rendered by the assessee. 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. Secondly, by saying that no service is left to be rendered, what the assessee means to say is that there is no taxable event under the service-tax laws once a person becomes member. Therefore, the reliance of the Department on the affidavit has no substance at all.

** ** **

31. We have held that there is a definite liability cast on the assessee to fulfil its promise and therefore, it cannot be said that the entire fee received by it has accrued as income. We have also considered the peculiar nature of the activity along with the complexity attached to it as a result of which no reasonable provision for the liability can be made. Therefore, recognizing the entire receipt as income in the year of receipt can lead to distortion. Somewhat similar, though not exactly identical, situation was faced by the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT (supra). In that case, the assessee had issued debentures of Rs. 1.5 crores at a discount of 2 per cent redeemable after 12 years. At p. 813 of the report, the Court observed that 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. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. It is this distortion we have talked about in the earlier part of this para. The only difference is that in the case of Madras Industrial Investment Corporation (supra), the distortion was supposed to be on account of expenditure, in the present case the distortion is on account of the entire income being accounted in the year of receipt. Earlier, we have also discussed as to how difficult it is to estimate the liability which is likely to be incurred in future, more so in the absence of any scientific basis or historical data. Therefore, the only way to minimise the distortion is to spread over a part of the income over the ensuing years. At this juncture, we may deal with one of the arguments made on behalf of the assessee and the intervener. It was argued that accounting for the whole of the income in one year would give a distorted view of the profits of the company which will be against the true and fair principle required for the annual accounts. Well, the distortion the learned counsel talked about was vis-a-vis the presentation of published accounts whereas the distortion the Supreme Court talked about and which we are inclined to follow, is vis-a-vis the real taxable income for a particular year. Therefore, in view of the foregoing discussion, we accept the proposition of the assessee that it is not justifiable to tax the entire income in a single year as is the case of the Department.”

9.5 Thus it is clear that the Special bench has analyzed the respective obligations of the parties and found that in the said case, assessee contributed to the accruing or arising of the income by rendering services or otherwise. It was also noted that in case of failure of the assessee to provide the allotted accommodation or the alternative accommodation, the assessee is liable to pay liquid damage to the members. On those peculiar facts of the said case, the Special bench concluded that there was a continuing liability on the part of the assessee not only to provide the accommodation but also to provide other incidental services attached with the accommodation. Thus, in the said case, when the assessee was under obligation to provide accommodation as well as other services incidental to the accommodation to its members, then the amount received in advance was held to be recognized as income over the period during which the assessee remained under obligation to provide the accommodation and other services to the members. By considering the peculiar facts, Special bench held that the entire fee received by the assessee cannot be said to be accrued as income in the year of receipt. In the case in hand, after receiving upfront premium, assessee was no longer required to provide any service or to perform any other act/obligation under the agreement for 30 years. Therefore, we are of the considered opinion that the judgment of the Special bench in the case of Mahindra Holidays & Resorts (India) Ltd. (supra) cannot be applied in the facts of the present case. In view of the above facts and circumstances of the case, we do not find any error or illegality in the orders of the authorities below in treating the entire upfront premium received by the assessee as income for the year under consideration.

10. Ground No. 4 is regarding disallowance u/s 14A. At the time of hearing, learned AR of the assessee stated that the assessee does not press ground No. 4 and the same may be dismissed as not pressed. The learned Departmental Representative has raised no objection if ground No. 4 is dismissed as prayed for by the assessee. Accordingly, ground No. 4 of the assessee’s appeal is dismissed being not pressed.

11. Ground No. 5 is regarding disallowance of Rs. 27,60,000/-on account of provision for accounting and auditing. The AO noted that in the P&L Account under Management and General Administration Expenses, the assessee has debited an amount of Rs. 301.16 lakhs including the expenses towards accounting and auditing. The AO asked the assessee to provide details of the expenditure likely to be met out of the above amount. The AO found that the assessee could not prove existence of liability of Rs. 27,60,000/- out of the total amount debited to the P&L Account and accordingly disallowed the said amount.

11.1 On appeal before the CIT(A), the assessee submitted that the accounts of the assessee are subject to audit by the C&AG and the expenditure incurred on accounting and auditing is reckoned having regard to the amount payable for such audit. A sum of Rs. 27,00,000/- is provision relating to C&AG audit and balance of Rs. 60,000/- is provision for accounting. Thus the assessee submitted that this provision has been spent in the subsequent year and the payment has been made. The CIT(A) did not agree with the contention of the assessee and confirmed the disallowance made by the AO.

11.2 Before us, learned AR of the assessee has submitted that auditing is always after the closing of the financial year. However, this expenditure pertains to the year under consideration. This is not a provision but the actual expenditure. Since audit is conducted post closure of the account and therefore, the assessee is showing this expenditure by making provision on this account. The learned AR of the assessee has submitted that that there is no contingency in respect of this expenditure as the expenditure is definite in nature and pertains to the year under consideration. He further contended that the assessee is following consistent practice of debiting the said expenditure and therefore, it cannot be disallowed for a particular year.

11.3 On the other hand, learned Departmental Representative has submitted that when the expenditure is not incurred till the end of the financial year, then the assessee cannot be treated as the expenditure accrued during the year under consideration. She has relied upon the orders of the authorities below.

11.4 We have considered the rival submissions as well as relevant material on record. There is no dispute that audit of the accounts by the C&AG is a definite requirement as well as a certain procedure of conducting the audit by the audit team. Therefore, there is no question of any contingency in respect of said expenditure except the fact that the audit has to be done only post closure of the accounts. If the assessee is following this practice consistently, then it is revenue neutral because every year this expenditure is required to be allowed. Accordingly, if the assessee is following this practice consistently then the said expenditure cannot be disallowed for a particular year. In the facts and circumstances of the case, this issue is set aside to the record of the AO with the direction to verify whether the assessee is following this practice of recognizing the expenditure of the audit fee pertaining to each year irrespective of the actual payment then, it should not be disallowed for the year under consideration.

12. Ground No. 6 is regarding levy of interest u/ss. 234B and 234C and 234D of the IT Act. The levy of interest is mandatory and consequential.

13. In the result, the appeal of the assessee is partly allowed.

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