Commissioner of Income Tax vs Pancard Clubs Ltd.

S.C. Dharmadhikari, J.—This Appeal challenges the order passed by the Income Tax Appellate Tribunal dated 16th March 2011. The Revenue states that the questions of law formulated at page 4 are substantial questions of law and which arise for determination and consideration in this Appeal. In Appeal No. 2255/11, the Assessment Year in question is 2005-06. An order was made under section 143(3) on 27th April 2007 by the Assessing Officer. The loss of Rs. 480,914,236/- was assessed. The assessee is engaged in running of hotels, resorts and clubs. It offers holiday schemes for card members who are entitled to utilise the room nights at the assessee''s hotels/resorts to the extent of the amounts paid as per the terms and conditions of the scheme. They are also entitled to surrender the unutilised room nights and receive back not only the deposits proportionate to the unutilised room nights, but also a premium thereon, on the expiry of the scheme period. The assessee adopted the practice of showing the advance amount of sale of room nights as liability in the balance sheet. It was to be accounted for as income only on actual utilisation of room nights whereas it claimed the provision of utilisation of room nights on pro-rata basis for expenses as well as the huge commission for procuring deposits for advance sale of room nights.

The Revenue found that the assessment order was erroneous insofar as it was prejudicial to the interest of the Revenue. Accordingly, the jurisdictional Commissioner exercised his powers under section 263 of the Income-tax Act, 1961 and directed the Assessing Officer to pass a fresh order in accordance with the directions issued by him. In compliance with the order dated 17th February 2009, the Assessing Officer was to pass the requisite order. However, the assessee aggrieved by the order of the Commissioner passed under section 263 of the Income-tax Act dated 17th February 2009 approached the Income Tax Appellate Tribunal. The Tribunal by the impugned order allowed the Appeal of the assessee as indicated therein and therefore, this Appeal by the Revenue.

Mr. Suresh Kumar, the learned counsel appearing in support of this Appeal submitted that the Appeal raises substantial questions of law. They would affect not only the present case but all such matters which are brought in by hotels and resorts. These hotels and resorts offer schemes to its members or the public at large. Merely because the advance amount collected is liable to be refunded in certain contingencies and circumstances, does not mean that it is not a receipt. It is a revenue receipt. Considering that the principal business of the assessee is to provide accommodation and other facilities to tourist members, then, a provision of the nature made cannot be said to be an allowable revenue expenditure. In such circumstances, this Appeal raises substantial questions of law and deserves to be admitted.

On the other hand, Mr. J.D. Mistry, learned Senior counsel appearing on behalf of the assessee submitted that on the questions which are termed as substantial questions of law, this Appeal cannot be entertained at all. The facts are not disputed by the Revenue. The facts as noted and undisputed disclose that the matter has been approached by the Tribunal in the right perspective. It has found that the advance sum collected from the members cannot be termed as a revenue receipt simply because the same cannot constitute an income straight away. It would become an income of the assessee only when the scheme is utilised by the members. If he has availed of the benefits of the scheme meaning thereby, has resided at the chosen resort or tourist destination/holiday, only then, the amount collected in advance can be accounted as income. So long as the scheme is in force, and the facility can be availed of any time during its tenure, does not mean that it is actually availed of. Hence, a provision has been made so as to refund the amount collected with a premium, that is, in the event the member cancels the booking or does not wish to utilise the benefits, but postpone it. He is entitled to refund of the advance amount or appropriate adjustments, then, the same cannot constitute a revenue receipt. This is a finding rendered and which is purely factual. There is no erroneous application of any settled legal principle to the present facts and circumstances. The findings of fact are consistent with the materials produced and therefore, cannot be termed as perverse. Consequently, the Appeal does not raise any substantial question of law and should be dismissed.

With the assistance of the counsel appearing for the parties, we have perused the memo of Appeal and all annexures thereto including the impugned order. The Tribunal decided the Appeal of the assessee. That Appeal raised several grounds.

We are concerned with the issue of advance sale of room nights and the provision of holiday scheme surrender value.

In that regard, the Tribunal noted the facts in paragraph Nos. 3 to 6. Pertinently, it noted the nature of the activities and the business of the assessee. The Tribunal noted the holiday scheme to card members which is at a discounted/special price on account of advance room nights marketed through its agents. The agents are entitled to pay commission on the offer price collected by them. The assessee had deducted tax on commission payment and paid it on 2nd September 2005. The Company charged membership entrance fee which is non refundable. That is to cover the initial administration cost. That is irrespective of the number of room nights purchased under the application. There is a scheme under which the member is entitled to utilise the room nights. The terms are that the utilisation can be made at any of the hotels/clubs owned by the assessee or its subsidiaries and also at affiliated destinations. The members can commence utilisation of their room nights entitlement after 60 days from the date of membership. The card members are entitled to surrender the room nights in case they do not utilise them. The members may surrender their unused entitlement of room nights in writing to the company and opt for surrender value. The actual surrender value shall be determined at the time of surrender of room nights and shall be paid on the expiry of membership. In lieu of surrender value, members may opt to buy or utilise the products and services of the company and its group companies. The products and services are then referred to by the Tribunal.

The Tribunal then referred to the order passed by the Commissioner of Income Tax. It considered the arguments of both sides and then, firstly, held that the Commissioner was justified in re-opening of the assessment. We do not go into this aspect because eventually the Tribunal considered the claim on merits. The Tribunal concluded that the accounting of advance sale of room nights must be determined having regard to the undisputed facts. The assessee had collected an advance and under promise to make available to the customers the rooms. The customer is entitled to surrender the room nights in case they are not utilised and opt for surrender value. When a customer opts for surrender value, he shall be paid in cash by the assessee, or in the alternative the customer may opt to buy or utilise the products and services of the company or group companies. The Tribunal referred to the chart and in relation to each Assessment Year. That gave a breakup of the advance amount collected. That chart indicated that a very negligible percentage of the customer utilised the room nights. More than 9996 of the customers surrendered the room nights which is not only the amount paid, but which is inclusive of a premium over and above of the collected value. Even if the refund is not made in its entirety, still that will not mean that the amount received is income. The Tribunal accepted the method adopted by the assessee. In holding so, the Tribunal referred to the judgment of this Court in the case of Taparia Tools Ltd. Vs. Joint Commissioner of Income Tax, . The Tribunal therefore, concluded that a capital receipt does not become the revenue receipt just because some expenditure is incurred on the same, and it is claimed by the assessee.

The Tribunal then referred to the judgment of the Hon''ble Supreme Court in the case of Siddheshwar Sahakari Sakhar Karkhana Ltd. Vs. Commissioner of Income Tax , Kolhapur and Others, . The concept of deposit or expression as such, would denote according to the Hon''ble Supreme Court that the amount received as such, was to be refunded. The right to demand the refund would accrue to the member/depositor. The right though contingent in nature, initially, inheres in the depositor from the beginning. It is in these circumstances and relying upon the principle laid down in this decision that the Supreme Court concluded that in view of the obligation on the assessee to refund the amount of advance received on sale of room nights that it cannot be treated as a trading receipt. Each of the judgments that have been referred to by the Tribunal indicate broadly that the provision made by the assessee in this case for the purposes of meeting the demand for refund cannot be said to be contrary to the settled accounting standards. If the assessee was required to refund the advance and which has been demonstrably refunded in more than 99% of the cases, then the receipt has been treated not as a capital receipt. In the lengthy judgment delivered by the Tribunal on both questions, and particularly its reasoning from paragraph Nos. 74 to 87, are essentially based on the facts and the nature and terms and conditions of the scheme. The finding of fact that the schemes oblige the assessee to refund not only the advance but also the surrendered value, then, the further conclusion that the assessee incurs a liability and no income accrues to the assessee on receipt of this advance, cannot be said to be perverse or vitiated by any error of law apparent on the face of record. In the light of the above, we find that considering the sweeping nature of the directions issued by the Commissioner in exercise of his powers under section 263 of the Income-tax Act, 1961, the Appeal to the Tribunal was competent and maintainable. The Tribunal has considered the matter from all angles, and while upholding the exercise undertaken by the commissioner, has on merits found that the Assessing Officer was not in any error. The interest of the Revenue are not prejudicially affected.

In these circumstances, the findings of fact do not raise any substantial question of law. We are in agreement with Mr. Mistry that the Appeal deserves to be dismissed. It is accordingly dismissed.

Barring the difference in the Assessment Year and some figures, the order of the Tribunal in the case of the very assessee is identical. The Tribunal disposed of both Appeals by the common order under challenge. For the reasons that have persuaded the order of the Tribunal in Appeal No. 2290 of 2011 even this Appeal fails as it does not raise any substantial question of law. Consequently, both the Appeals are dismissed. There will be no order as to costs.