Treasure Island Resorts Pvt. Ltd. Vs. Dy. Commissioner of Income-tax - Court Judgment

Excerpt:
1. these two appeals are filed by the assessee for the assessment year 1996-97. they are directed against two separate orders of the cit(a)-iv, hyderabad, dated 10th december, 1999 and 9th december, 2002.they were heard together and they are disposed off, by this consolidated order for the sake of convenience.2. the assessee-company runs a membership club. it has different categories of members from whom membership fees have been collected, and in return, the club provides services and facilities to its members. the club is situated at a resort, called 'treasure island resort', near gandipet.3. for the assessment year 1996-97. the assessee filed a return on 29.11.1996 declaring a loss of rs. 2,51,477. a survey was conducted on the premises of the assessee on 25.11.98 under section 133a,.....

Judgment:
1. These two appeals are filed by the assessee for the assessment year 1996-97. They are directed against two separate orders of the CIT(A)-IV, Hyderabad, dated 10th December, 1999 and 9th December, 2002.

They were heard together and they are disposed off, by this consolidated order for the sake of convenience.

2. The assessee-company runs a membership club. It has different categories of members from whom membership fees have been collected, and in return, the club provides services and facilities to its members. The club is situated at a resort, called 'Treasure Island Resort', near Gandipet.

3. For the assessment year 1996-97. the assessee filed a return on 29.11.1996 declaring a loss of Rs. 2,51,477. A survey was conducted on the premises of the assessee on 25.11.98 under Section 133A, which was converted into a search action under Section 132. The first assessment was completed vide order of the assessing officer dated 31.3.1999, which is the last date of the limitation period. The assessee questioned the validity of this assessment before the CIT(A) on the ground that it was time-barred. This appeal was disposed off, by the order of the CIT(A) dated 10th December, 1999, whereby he set aside the assessment, with directions to reframe the same after giving due opportunity of being heard to the assessee and after considering a certain note regarding membership fees filed before him. The first of these appeals, viz. ITA No. 136/Hyd/2000 is directed against the above order of the Commissioner(Appeals).

4. Subsequently, the assessing officer completed the assessment de-novo in pursuance of the above order of the Commissioner(Appeals), vide his assessment order dated 27.3.2002, and the Commissioner(Appeals) disposed off the appeal arising out of the said order of assessment, vide his order dated 9th December, 2002. The latter of these appeals, viz. ITA No. 244/Hyd/03, is directed against the said order of the Commissioner(Appeals) dated 9th December, 2002.

5. That is how, there are two appeals filed by the assessee for one assessment year before us.

6. Let us first consider the appeal ITA No. 136/Hyd/2000, in which effective grounds of the assessee read as under- 2. The learned commissioner of appeals failed to note the difference between Section 143(3) and the provisions of Section 144, therefore, the order is unsound and untenable and therefore to be quashed.

3. The very fact that the original assessment order is barred by limitation under Section 153 was not properly considered though it is patent is erroneous, unsound, dvoiding natural law of justice by the commissioner of appeals has to be quashed.

4. When the case is clearly barred limitation under Section 153 no issues regarding the assessment or its merits and demerits be stated by the learned commissioner of appeals in his order and violation of the same is unsound and untenable and therefore to squashed.

5. The appellate commissioner in his order directing the assessing officer to reframe the same de novo after giving opportunity to appellant is unsound, untenable and ultravires the Income Tax Law and has to be quashed." 7. It is mentioned by the assessing officer in his remand report before the Commissioner(Appeals) that the jurisdiction in this case initially rested with ITO, Ward-4(3) and, subsequently, it shifted to ACIT 4 (6), and later, after the search action on 25.11.1998 the jurisdiction vested in DCIT-4(1)-Inv. The jurisdiction vested in DCIT-4(1)-Inv. by virtue of the order under 3.127(1) of the Income-tax Act dated 30.12.98 passed by the Chief Commissioner. By this notification, the jurisdiction vested in the DCIT 4(1)-Inv. with effect from 1.1.1999. A copy of the said notification was endorsed by the office of the Chief Commissioner to the assessee through the assessing officer. It is not clear whether the assessing officer had in his turn, forwarded the copy of the said notification to the assessee as directed by the Chief Commissioner.

8. Before the Commissioner(Appeals), the assessee took various pleas in support of his contention that the assessment was invalid, and deserves to be quashed. The relevant portion of the statement of facts given before the Commissioner(Appeals) reads as under.

After the completion of such search and seizure operation the assessee was not informed about the transfer of the file from DCIT 4(6) to DCIT 4(1)INV. The assessee came to know about such change vide a notice issued to the assesses on 8.04.1999 dated 22.02.1999.

The assessment files were transferred and the department has not bothered to inform the assessee. Under Section 127 of the Income Tax Act, the assessee need not be informed as far as the files are transferred from one assessing authority to the other within the same city. However, natural justice and the assessment procedures demand that the assessee be informed about the change and be given an opportunity of being heard afresh even the matters that were already heard by the earlier assessing officer under Section 129 of the Income Tax Act. When a case is transferred under Section 127 there is a change in the income tax officer and though fresh notices need not be issued by the new assessing officer the assessee can claim the right to reopen the case under Section 129. The officer need not issue a fresh notice but he should inform the assessee of the change so that if the latter so desires, he can ask for a rehearing- Anantha naganna chetty v. CIT Hyderabad(1970)ITR The assessing officer has issued a notice under Sections 143(2) date 22.02.1999 which was served on the assessee on 8.04.1999 fixing a date of hearing on 12-04-1999. It is quite surprising that the date of hearing is 12-04-1999 and the assessment order is dated 31r3-1999. It is pertinent to note that the assessment order has preceded the date of hearing fixed.

The learned assessing officer is quite confused as to under which section of the Income Tax act the assessment is being completed, that is under Sections 143(3) or under Sections 144. As per the first sheet of the assessment order it is stated that the assessment is completed under Section 143(3) and as per point No. 2 of the assessment order the assessment is completed under Section 144 of the Income Tax Act, the assessing officer says that "I have no other alternative except to make a best judgment assessment under Section If the assessment is to be completed under Section 143(3) the assessing officer should have given a notice under Section 143(2) fixing a date of hearing and affording a reasonable opportunity to the assessee and this was never done as the assessee was not served with any notice till 8.04.1999. ......" The Commissioner(Appeals) in the impugned order did not deal with the contention of the assessee that it was not informed about the transfer of the file from, ACIT 4(6) to DCIT 4(1)-Inv. He however, gave a finding that the. assessment had been completed on 31.3.1999 as per the order-sheet entry in the file of the assessing officer and as per the entry in the Demand and Collection register maintained by the assessing officer. He gave a finding that the order was actually despatched on 9.4.1999, and so, considering the normal period taken for the despatch of the assessment, it could reasonably be presumed that the order was actually passed on 31.3.1999. He also gave a finding that it was not proved that the notice dated 12.2.1999 issued under Section 143(2) was actually served on the assessee prior to 31.3.1999 i.e. the date of completion of assessment. So, he was of the view that, even though the assessment had been completed before the limitation period, the principles of natural justice were not complied with, and so, he set aside the assessment with a direction to re-do the same. We reproduce hereinbelow the relevant observations of the Commissioner(Appeals) in this behalf- "4. I have considered the arguments from both sides. The basis for challenging the legality of the order of the assessing officer is the notice Under Section 143(2) dt.12.02.99. As per learned A.R. of the appellant, the aforesaid notice was served on the appellant on 08.4.99 and the notice showed date of hearing as 12.04.99. But the copy of the 143(2) notice as available in the record of the assessing officer shows that the case was initially fixed on 23.02.99. Another date was shown in the same notice as 'DH. 15.03.99'. It appears that the notice was actually despatched for service on 10.03.99. The date of 12.04.99 does not appear anywhere in the copy of the notice available in the record of the assessing officer. The charge from the side of the appellant that it was given a date of hearing on 12.04.99 is therefore not correct. There is also nothing in the order sheet of the assessing officer that he had telephonically contacted the learned A.R. of the appellant twice before 31.03.99. However, the assessing officer has also not been able to produce any evidence about the actual date of service of the notice dt.12.02.99 on the appellant. The question that arises in this regard is whether the non-service of the notice will make any difference to the validity of the assessment. The learned A.R,. had submitted that after search & seizure operation, the appellant heard from the assessing officer for the first time through the, notice Under Section 143(2) dt.12.02.99. In my considered view, the non-service will not invalidate the assessment order. First of all, the assessment order shows that the year under consideration is not materially affected by the adverse findings from the search & seizure operations. Secondly, as pointed out by the assessing officer, the appellant had already been given number of opportunities starting with the notice Under Section 143(2) dt.17.11.97. Thus, the appellant had got opportunities before completion of the assessment. However, Since the notice Under Section 143(2) dt.12.02.99 was the last notice of hearing, its non-service before the limitation date will leave question mark as to whether the principle of natural justice can be said to have been satisfied. But then again, even if it is presumed that non-service of the aforesaid notice amounted to violation of the principle of natural justice, that will be only a procedural lapse which can be corrected and the same will not be fatal to the validity of the assessment. In this connection, it will be relevant to refer to the decision of the Karnataka High Court in the case of Ashok & Co. 195 ITR(786) . In the aforesaid case, while deciding the validity of assessment order in the case of a firm, the hon'ble court had observed as under- "An order of assessment may be invalid, voidable or void.

Technically, all orders require to be set aside, as otherwise, the assessee always faces the threat of their enforcement. Cases do exist wherein, if the order is entirely void, its enforcement may be resisted colletarally also. But, in all those cases, uniformly, without exception, it cannot be said that the assessing authority lacks, competence to make a fresh order." I may also mention here in this regard that in my view there is no reason to doubt as to whether the assessment order was passed on 31.03.99 or not. There is order sheet entry dt.31.03.99 about passing of the assessment order and there is also entry in the Demand & Collection Register. The order was despatched on 09.04.99.

The time of nine days taken by the assessing officer after passing of the order is very reasonable for any Government Department. I am therefore convinced that the assessment order in this case was passed within the statutory limitation period allowed under the Income-tax Act, 1961. Coming to the merits of the addition, I find that the addition in respect of depreciation claim and expenses have been made by the assessing officer on the ground of non-compliance which allegation is not correct as the relevant books of accounts and documents were in the custody of the Department. Regarding addition on account of membership subscription, the learned A.R. had submitted a note on the accountancy, principle followed by appellant in this regard and the same requires consideration by the assessing officer. Therefore, considering the totality of the facts and circumstances of the case, I feel it will be just and fair to set aside the assessment and restore the same to the file of the assessing officer to reframe the same de novo after giving opportunity to the appellant." 9. Before us, the learned counsel for the assessee stressed that after the vesting of the jurisdiction in the DCIT 4(1)-Inv. consequent to the above-mentioned order of the Chief Commissioner dated 30.12.1998, the assessing officer apparently issued only one notice under Section 143(2) and as per this notice dated 12.2.1999, the case was posted for hearing on 12.4.1999, and the same was actually served on the assessee only on 8.4.1999. A copy of this notice filed by the assessee originally before the CIT(A) may be seen at page-5 of the Department's paper-book. In this notice, the date of hearing was originally mentioned as 15.3.1999, but was changed to 12.4.1999. It is the contention of the assessee that this notice was served on him only on 8.4.1999, as acknowledged by him on the copy of the notice. So, it is the contention of the learned counsel for the assessee that when the hearing date itself was mentioned as 12.4.1999, the assessment could not have been completed by the assessing officer on 31.3.1999, as alleged by the Revenue and as held by the CIT(A). He has further pointed out that even though the assessment had been completed under Section 144, as made out by the assessing officer, the requisite conditions for the invoking the provisions of Section 144 were not satisfied. He submitted that as, no notice was issued by the assessing officer after the jurisdiction vested in DCIT 4(1)-Inv., the assessing officer could not have legitimately invoked the provisions of Section 144 of the Act, and so, the assessment made under that Section is ab initio void, and requires to be quashed. So, it is pleaded that the CIT(A) grossly erred in setting aside the assessment for being re-made, whereas he should have quashed the order as invalid. It is further pleaded that the defect in the present case is not a curable one and so, the provisions of Section 292B are not of any assistance to the Revenue. For this proposition, the learned counsel for the assessee relied on the decisions of the Karnataka High Court in the case of Bedi & Company Pvt. Ltd. v. CIT(144 ITR 352) and of the Kerala High Court in the case of P.N. Sasikumar and Ors. v. Commissioner of I.T.(170 ITR 80).

10. The learned Departmental Representative filed three paper-books, which are common for both the appeals. In the third paper-book, he has filed an extract of order-sheet entries. He invited our attention to the order-sheet entries and mentioned that the first hearing notice in this case was given as early as on 26.11.1997. The case was subsequently heard on several occasions by the predecessor-assessing officer, viz. ACIT 4(6). The Departmental Paper-book includes at page-5 thereof, a copy of the letter dated 17.8.98 addressed by the authorized representative of the assessee, Shri Raghavachari & Co., Chartered Accountants, which reads as under- I came here to attend on behalf of our clients M/s.Trasure Island Resorts (P)Ltd. I am leaving for Bhimavaram. I wanted a short adjournment. Kindly adjourn the matter for two days. I shall come and attend on 19th. Kindly do the needful and oblige.Thanking you, There is another letter dated 22nd October, 1998 of the authorised representative for the assessee, copy of which may be seen at pages 6-7 of the Department's paper-book. In that letter, some information called for by the assessing officer was furnished, and this letter ends with a request for grant of further time to furnish the rest of the information. Similarly, there is another letter-dated 16th November, 1998, in which M/s. Raghavachari and Co. made a request for further time. There is a further letter dated 23.11.98 addressed by the assessing officer to the assessee, which may be seen at page 3 of the second paper-book of the Department. The said letter reads as under- Despite granting several opportunities the details called for have not yet been fully furnished. Even though it is understandable that all the vouchers cannot be produced in this office at once as has been submitted vide letter dated 22.10,1998, it is very surprising to note that till date books of accounts have not been furnished in this office. It is very difficult to imagine as to what is preventing the company from, producing the books of accounts. This kind of attitude will only lead me to conclude that the assessee has no intention of cooperating with the department and is avoiding furnishing the information called for. You are hereby directed to appear in this office on 26.11.1998 alongwith books of accounts and details mentioned as per summons enclosed, failing which appropriate action shall be initiated as per law.

11. The learned Departmental Representative pleaded that all the notices issued by the DC-4(6) and the correspondence between the said functionary and the authorized representative for the assessee have also to be taken into consideration, while deciding the issue of validity of the assessment made under Section 144 by the assessing officer, vide order dated 31.3.1999. In this context, he buttressed his argument by inviting our attention to the provisions of Section 129, which come into play when there is a change of incumbency, and it reads as under- "129. Whenever in respect of any proceeding under this Act an income-tax authority ceases to exercise jurisdiction and is succeeded by another who has and exercises jurisdiction, the income-tax authority so succeeding may continue the proceeding from the stage at which the proceeding was left by his predecessor; Provided that the assessee concerned may demand that before the proceeding is so continued the previous proceeding or any part thereof be reopened or that before any order of assessment is passed against him, he be reheard." In the light of the above provision, it is contended that the DC 4(1)Inv., who succeeded AC 4((6) with effect from 1.1.1999, could legitimately continue the proceedings from the stage at which it was left by his predecessor, and so, it is not a case where the assessment had been made without the issuance of any notice under Section 143(2) or Section 142(1). In this context, he also relied on the decision of the A.P. High, Court in the case of K. Venkata Ramana and Budha Appa Rao v. Commissioner of Income-tax(168 ITR 747), in which it was held, that when there is a change of incumbency of office during pendency of the assessment proceedings, rehearing is not necessary. He has also pointed out that, as per the clear findings of the CIT(A), which are not controverted, the assessment was completed on 31st March, 1999, and as per Section 153(1) of the Act, the limitation is saved if the assessment is made before the date of limitation, and it is not necessary for the order to be communicated to the assessee before the said date. For this proposition, he relied upon the decision of the Hon'ble A.P. High Court in the case of K.U. Srinivasa Rao v. CWT(152 ITR 128). In that case, it was held that an order is deemed to have been made on the date on which it purports to have been made, even though it is served later. He further contended that the date of hearing on the notice dated 12.2.99 must have been changed unauthorisedly and without the knowledge of the Assessing Officer from 15.3.1999 to 12.4.1999. He pointed out that on the office copy of this notice, dated 12.2.1999 which is with the assessing officer, the said date of hearing i.e. 15.3.1999 stood unaltered and it is only the copy bearing the acknowledgement of the receipt by the assessee that the said date stood changed to 12.4.1999. He further pleaded that even if the principles of natural justice have been violated, such violation by itself would not nullify an order. For this proposition, he relied on the decision of the Calcutta High Court in the case of Sewduttroy Rambuldev and Son v. CIT(204 ITR 580). It is stressed that as the CIT(A) has set aside the assessment for being redone, the defect, if any, in the original assessment on account of violation of any principles of natural justice, got cured in the subsequent assessment framed in pursuance of the order of the CIT(A), and as such the assessee could not have any legitimate grievance on that score.

12. In his reply, the learned counsel for the assessee maintained that the principles laid down by the Courts in the cases cited by the learned Departmental Representative, are applicable only in a case where the assessment has been made under Section 143(3) and not in a case like the present one where the assessment has been made under Section 144. He invited our attention to the first proviso to Section 144, in terms of which assessing officer was bound to give a specific opportunity to the assessee to show cause why the assessment should not be completed to the best of his judgment and it is claimed that in the present case no such opportunity was given and so the assessment is invalid.

13. We find that the contentions of the learned counsel for the assessee cannot be accepted. Whatever defects were there in the assessment, had been set right by thee CIT(A) by setting aside the assessment and restoring the matter to the file of the assessing officer for de-novo consideration, ensuring that proper opportunity is given to the assessee. The decision of the Hon'ble Calcutta High Court in the case of Sewduttroy Rambuldev and Sons(supra) relied on by the learned Departmental Representative supports the case of the Revenue.

Thee relevant portion of the head-note of the said decision reads as under- "......In revenue matters the violation of natural justice in the completion of an assessment will not lead to nullity of the entire proceeding. Such violation merely results in illegality or irregularity supervening the course of proceeding under the law but does not destroy the jurisdiction of the authority, if he had seisin at the initial stage when the proceeding arose and if the authority while acting had lawfully assumed jurisdiction to proceed to act.

Misdirection of the proceeding would merely vitiate the course of the proceeding but that supervening irregularity or illegality has to be set right by putting the proceeding back on its rails. When such error is curable, it is the duty of the court to cure it.

Where the Income-tax Officer commits an error in the course of completing the assessment proceeding after having duly assumed jurisdiction, it is the duty of the appellate authority to remove the particular defect or irregularity occurring in the course of the proceeding." 14. The predecessor assessing officer had legitimate jurisdiction over the case. This aspect of the matter was not questioned by the learned counsel for the assessee before us. The Chief Commissioner had passed the notification dated 30.12.99 vesting jurisdiction in DCIT- 4(1)(Inv.). Such notification was also endorsed to the assessing officer for being communicated to the assessee. There is no reason to assume that the said notification was not duly sent by the assessing officer to the assessee. Further, the order-sheet entries show that the DCIT 4(1) (Inv) had telephonic talk with the authorised representative for compliance with the terms of the notices issued under Sections 143(2) and 142(1) and the assessee did not question the authority of the DCIT 4(1) (Inv) at that stage. So, it has to be assumed that the vesting of the jurisdiction over the case in the DCIT 4(1) (Inv.) was to the knowledge of the assessee before the completion of the assessment. Further, the notification dated 30.12.1999 issued by the Chief Commissioner of Income-tax covers a number of other assessees of the same group and none of the assessees seem to have had any grievance of non-communication. Therefore, in the circumstances it has to be inferred that the DCIT 4 (1)) (Inv) also had seisin in and legitimate jurisdiction over the case. The predecessor Assessing Officer had given a number of opportunities to the assesses. Actually, it is the case of the learned Departmental Representative that the search action had been taken in this case because of non-compliance with the hearing notice by the assessee at that stage. Be that as it may, it is not the case of the assessee before us that opportunities were not given by the predecessor assessing officer. The only plea is that after the jurisdiction vested in the DCIT 4(1)(Inv), no hearing notice was served on the assessee. Even the Departmental Representative could not prove before us that the notice dated 12.2.99 was served on the assessee before 31st March 1999. In the circumstances, we have to assume that no notice had been served by the DCIT 4(1) (Inv) before completion of the assessment i.e. 31.3.1999. Even then, we cannot ignore the hearing (notices given by the predecessor assessing officer and the correspondence between the assessee and the predecessor assessing officer. In terms of Section 129 relied on by the learned Departmental Representative, those notices have also to be considered and the DCIT 4(1)(Inv) could continue the proceeding from the stage at which it was left by his predecessor. So this is a case where, at the most, an irregularity supervened after the jurisdiction vested in the DCIT 4(1) Inv. inasmuch as he did not give a notice of hearing to the assessee.

We are of the view that such supervening irregularity can be removed by the appellate authority by remitting the matter to the Assessing Officer for fresh consideration as done in the present case. It has to be remembered that, as already mentioned, this is not a case where the assessing officer did not have legitimate jurisdiction at any stage.

Both the predecessor and the concerned assessing officer did have legitimate jurisdiction and so any supervening irregularity can be rectified. Further, the distinction sought to be made by the learned counsel for the assessee between an assessment under Section 143(3) and the assessment under Section 144 does not seem to have any relevance.

It makes no difference so far as the powers of the Commissioner of Income-tax(Appeals) are concerned, whether the assessment is made under one section or the other. In either case, if the Commissioner(Appeals) finds that sufficient opportunity was not given to the assessee and that it is the only defect in the assessment order, he can save the assessment by remitting the matter to the file of the assessing officer with a direction to frame the assessment de novo after giving due opportunity of being heard to the assessee. That is exactly what the CIT(A) has done in the present case. This is a case where, at the most, principles of natural justice are violated and not a case where assessment has been either initiated or completed by an assessing officer who had no jurisdiction at all. So, we are of the view that the decision of the Calcutta High Court in the case of Sewduttroy Rambullav & Son v. CIT(supra) squarely applies to the facts of the case.

15. In the light of the above discussion, we have to uphold the impugned order of the CIT(A) . We do the same accordingly rejecting the contentions of the assessee in this appeal. Consequently, this appeal of the assessee is dismissed.

16. Let us turn to the other appeal, viz. ITA 244/Hyd/03, which is filed in the context of the fresh assessment made in pursuance of the order of the CIT(A) dated 10.12.1999, impugned in appeal, IOTA No.136/Hyd/02 dealt with hereinabove. In this appeal directed against the order of the CIT(A)-IV, Hyderabad, dated 9.12.2002, grounds of the assessee read as under- 1. The order of the Commissioner of Income-tax (Appeals) is devoid of any logic and is against the principles of natural justice due to the facts and circumstances of the case and is liable to be quashed.

2. The order of the learned assessing authority is illegal and void due to the facts and circumstances of the case and should have been quashed by the Honourable Commissioner of Income-tax.

3. The learned assessing authority has gravely erred in adding an amount of Rs. 63,61,600 to the income declared in the Profit & Loss Account an the return filed, even though the facts and circumstances are not justifying such an addition and which the Commissioner(Appeal) has upheld. 4. The learned assessing authority has gravely erred in adding an amount of Rs. 32,94,000/- pertaining to the year 1994-95 to the year 1995-96 and taxing it. The amount of Rs. 63,61,600 includes Rs. 32,94,000 which ought to have to be deleted.

5. The assessment is based on the addition made to the declared income, the subscriptions collected and thereby ignoring the accounting standards adopted in the treatment of the money collected from the members. The CIT(A) has failed to understand the accounting standards and hence his order is ought to be rejected.

For the above grounds among the other that may be permitted to be urged at the time of hearing, it is prayed that this Honourable authority may be pleased to quash the order passed by the assessing authority and pass such order or other orders in the interest of justice." 17. We have already extracted the directions given by the CIT(A) in his order dated 10.12.1999, while setting aside the original assessment made under Section 144 of the Act dated 31.3.1999. It may be- noticed that the CIT(A) mentioned that the assessee has submitted a note on the accounting principle followed by the assessee. In the impugned order, the assessing officer has given a full extract of the said note filed before the CIT(A) in the earlier proceedings. The said note reads as under- M/s.Treasure Island Resorts(P)Ltd. has commenced its business as a club to provide service to its members. It charges rates from members and non-members on account of various kinds of services it provides to both members and non-members.

Besides this it does excellent catering of both Chinese and continental foods. Apart from this it has two conference halls.

The fee for the usage of all these facilities is collected from members and non-members alike. However the members are charged lesser than the fees charged from non-members Further the non-members have to pay entry fee to enter the club apart from differential rates that are charged for the various facilities. The revenue on account of the various collection are treated in the accounts in consonance with the accounting standards in particulars to accounting standard 9 as under:- 2. Restaurant sales, collections from games, disco, rides and other events conducted from time to time in the routine course of business is taken to the Profit & Loss Account as and when it accrues and collected.

3. Membership Fee: The company has collected membership fee from the members only and it has afforded them special services and lesser charges than, the non-members . Membership Fee is. of four types.

1. Privileged membership holders enjoy the benefit of non-payment of monthly subscription, first time fee usage of the facilities on every visit, yearly 12 nights free stay at cottages. The service is for life.

2. Life Membership: No monthly subscription. The service is for life, reduced rates for services. Services for life.

4. Temporary membership: It affords all the facilities like life membership, but it is for a period of two years only.

The company has segregated the membership fee collection into two for Revenue recognition, longer duration membership is taken to revenue spread over a period of five years that is, 20% is taken to profit and loss account every year. The shorter duration membership fee collection is taken to income spread over the life of the membership. The company has only one shorter duration membership, that is, Temporary membership.

The decision to recogise revenue in the above fashion is taken in consonance with Accounting Standard(AS)9 -Revenue Recognition, as issued by the Institute of Chartered Accountants of India. The annexure to AS-9 relates to "SPECIAL CIRCUMSTANCEES OF REVENUE RECOGNITION FROM RENDERING OF SERVICES'. The relevant portion to Membership Fees reads as follows- "In the case of Revenue Recognition for membership fees, it must be noted that if membership fee permits only membership, the fee should be recognised when received. However, if the membership feel entitles the member to receive publications or services to be provided during the year, it should be recognized on a systematic and rational basis having regard to the timing and nature of all services provided" Based on the above accounting standard the company has taken to revenue 20% of the collection. This is on account of the reason that the membership entails the members to services provided during the year on preferential basis and free/concessional rates. The Accounting Standard stipulates that the revenue should be recognized on a systematic and rational basis having regard to the timing and nature of all services provided.

The company is charging payment from the permanent members and such total collection works out to Rs. 7,500 per member on an average.

The average membership, fee from the after discounts and the company has given discounts and several memberships as complimentary for almost all types of memberships offered by the company. Further the one time free usage in the case of privileged members and concessional rates charged for the others shall leave certain revenue gap, to cover this the membership fee collections are taken to revenue in the generally accepted accounting norms." 18. The assessing officer passed the impugned assessment order after considering the above contentions of the assessee. He has conserved that Accounting Standard-9 (AS-9) in terms of which the life membership fee collected from various categories of members has been spread over in different years is only recommendatory in nature. He also observed that the membership fee collected from all the members is not refundable and also that there is no guarantee that any member could avail the services of the club for more than one year, and so, he rejected the claim of the spread over of the life membership fee collected in terms of the AS-9, and brought to tax the entire I amount of Rs. 87,86,450 in the year under appeal. At this stage, it may also be mentioned that the said amount of Rs. 87,86,450 includes an amount of Rs. 32,94,000, which was collected during the financial year 1994-95, It is claimed in the grounds taken before us that the assessing officer should have at least excluded the said amount of Rs. 32,94,000, as the said amount was not collected during the financial year relevant for the assessment year 1996-97. The assessing officer however, referred to the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilisers Ltd.(227 ITR 128) and, on the basis of that decision, held that the provisions of Income-tax Act take precedence over the accounting standards and so, invoking the first proviso to Section 145, he brought to tax as already mentioned above, the entire amount of Rs. 87,86,450.

19. The CIT(A) upheld the order of the assessing officer, observing that the entire membership fee, which is shown in the Balance Sheet under the head 'advance subscription' has been utilised for the acquisition of fixed assets, on which depreciation was also claimed, and so, entire membership fee is correctly taxed in the year under appeal. He accordingly, upheld the order of the assessing officer, with the following remarks- "A perusal of the balance sheet indicates that the entire subscription collected by the appellant along with the borrowed funds is utilized for creation of the fixed assets in the resort.

The entire capital including the borrowed funds and the subscriptions totals to Rs. 96,65,764/-. It is clear that the entire subscription is utilised for creation for fixed assets for the use of the members. Further the appellant has claimed depreciation on the fixed assets which has been allowed by the AO to the extent of Rs. 23,25,217/-. The assets created by the appellant at the resort utilising the subscription of the members are available for the use of the members. The depreciation on the assets is also claimed by the appellant. The subscription feel received from the members utilized for investment in the assets is clearly the income assessable for the last. Year. Without considering the subscription as income, it is against the principles of accountancy to allow depreciation expenditure on the assets created by utilising the subscription. Since depreciation is allowed as an expenditure on the assets, the subscription received by the appellant utilized for the purpose of investment in the fixed assets is to be treated as income for this asst. year. Since the depreciation expenditure is allowed, the subscription is to be treated as an income for this asst. year.

The income and the expenditure being relatable activities, the computation of income would not be reasonable and judicious without considering the subscription of the year.

The Accounting standard AS9 is recommendatory in nature specifying the revenue recognition where the running of services is over al long period. For example, if the services are created over a period of time for the benefit of members, the income can be reasonably split to match with the creation of services. In the case as of the appellant, the entire subscription is utilized in investment in the fixed assets for the benefit of the members and the members are utilizing facilities and paying charges for the utilities. The charges collected from the members shown as revenue collection are as under:- The appellant company is running the resort and making the revenue collection - of Rs. 62,83,753/-as detailed above. This indicates that the assets are fully operational and the members are deriving a benefit from the use of the -assets. Hence the deferment of income based upon accounting standard AS9 is not relevant for the facts and circumstances of the appellant's case. Further, the accounting standard relied, upon by the appellant has no mandatory status. It is recommendatory for being adopted in relevant cases. In the appellant's case, the subscription is utilized for creation of the fixed assets which are used by the members by payment of relevant charges as evidenced by the details mentioned above. The deferment of income is not relevant for the facts and circumstances of the appellant's case. The subscription received by the appellant is assessable as income for this asst. year. The AO is correct as per law in assessing the subscription as the appellant's income for this asst. year. The assessment of the subscription is in consonance with the accountancy principles and fully supported by the legal provisions. The AO's action is upheld. The grounds of appeal fail and are rejected.

20. In the course of hearing before us, we required the learned counsel for the assessee to file before us, the bye-laws for all categories of members. In pursuance of our requirement in terms of Rule 29 of the Income Tax Appellate Tribunal Rules, 1963, the assessee has filed the general bye-laws for all categories of members, bye-laws for life members, bye-laws for permanent members, bye-laws for temporary members.

21. The assessing officer himself reproduced in his order bye-laws for the privileged members. We required the assessee to file before us the bye-laws for all the remaining categories of members, because we wanted to verify the contents of the above note filed before the CIT(A) in the earlier proceedings. Copies of the bye-laws for the other categories of members filed at our instance may be seen at pages 31 to36 of the assessee's paper-book.

22. The assessee has also filed before us a note on the services rendered to various categories of members. The said note reads as under- The amount collected for this membership is around Rs. 15,000 to Rs. 20,000 and the member will have access to the club all round the year. This membership is for life time. The following facilities are provided to this category of members free of charge.

i) 12 nights free stay in cottages in a calendar year for the life time.

ii) Swimming, Carroms, Chess, Ludo, Snake & Ladder games are free of charge. In addition, movies, Tambolas and sponsored musical programmes are conducted on weekly basis which are free of charge to the members.

iii) Horse and Camel riding -one round free for every member of the family.

iv) Certain facilities like Go-Karts, Dirt Bike wherein usage of petrol is involved, charges are payable per round.

Membership fee ranging between Rs. 10,000/- to Rs. 15,000/- is collected. This membership is for life. All the facilities of the privileged members are enjoyed and applicable to the Life Members excepting that no cottages are provided free of cost. Such members; are charged for the cottages depending on the availability at a discounted rate. Barring this difference, all the facilities of the privileged members are applicable to the Life Members.

Membership fee ranges between Rs. 5,000/- to Rs. 10,000/-. This is also for life. These members are eligible for the facilities of the category of Life Members excepting that this category of members pay monthly subscription of Rs. 125/- per member.

All the facilities of Permanent and Life Members are applicable to this category. The membership fee collected under this category is spread over a period of, two years as income." From the above, it may be observed that following membership fees are collected from different categories of members-(a) Privileged Members Rs. 15,000 to Rs. 20,000(b) Life Members Rs. 10,000 to Rs. 20,000(c) Permanent Members Rs. 5,000 to Rs. 10,000(d)Temporary. Members Rs. 2,000 to Rs. 3,000 The services rendered to the above categories of members are more or less similar. Privileged members get 12 nights free stay in cottages in a calendar year, and this privilege is enjoyed for lifetime. The only distinction between life members and privileged members is the additional facility in respect of enjoyment of cottages in a -calendar year for the privileged members, which is not given to life members.

The permanent members get all the facilities of a life member, and they are also excluded from the free enjoyment of cottages. Permanent members, however pay a monthly subscription of Rs. 125 per member, and this monthly subscription is not required to be paid by the Life Members and this is the only difference between the Life Members and Permanent Members. The temporary members enjoy all the facilities of the life member and permanent members. They are also excluded from the free enjoyment of cottages. Unlike the permanent members they do not pay the monthly subscription. The membership fee received from the privileged members, life members and permanent members is spread over by the - assessee over a period of five years for revenue recognition, whereas the membership fee collected from the temporary members is spread over only two years, as their membership is only for two years.

23. At our instance, the learned counsel for the assessee has filed before us, details of the number of members under each category. Those details are as under- Details of Paid Honorary Total Membership TOTAL 1539 1074 2613 ...." 24. At our instance, the learned counsel for the assessee has also filed before us, the details of the amounts collected from different categories of members. They are as under-Sl.

Details of 94-95 95-9-6 TotalNo. Membership1 PREVILEGED 6,88,200 7,93,000 14,81,2002 LIFE 22,76,400 43,19,750 65,96,1503 PERMANENT 3,29,400 3,57,500 6,86,9004 TEMPORARY ---------- 22,200 22,200 It is also explained that no membership fee is collected from the Honorary Members.

25. Learned counsel for the assessee mentioned before us that the assessing officer is not correct in holding that the Accounting Standard No. 9 is only recommendatory in nature. The Accounting Standard No. 9 has been mandatory from 1.4.1991. In support of this statement, he read before us, the relevant portion of the commentary on Companies Act by Shri A. Ramaiah(14thEddition 1998 at p.1082). An extract of the said commentary in relation to Section 227 is also filed before us, and relevant portion thereof reads as under- 1. It is hereby notified that the Council of the Institute, at its 144th meeting, held on June 7-9, 1990, has decided that the following Accounting Standards will become mandatory in respect of accounts for periods commencing on or after 1.4.1991.

2. The Companies Act, 1956, as well as many, other statuses require that the financial statements of an enterprise should give a true and fair view of its financial position and working results. This requirement is implicit even in the absence of a specific statutory provision to this effect. However, what constitutes 'true and fair' view has not been defined either in the Companies Act, 1956 or in any other statute. The pronouncements of the Institute seek to describe the accounting principles and the methods of applying these principles in the preparation and presentation of financial statements so that they give a true and fair view........." 26. Learned counsel for the assessee has filed before us a copy of the Accounting Standard No. 9, which may be seen at pages 26-30 of the assessee's paper-book. The relevant portion of the said Standard reads as under- "10. Revenue from sales or service transactions should be recognised when the requirements as to performance set out in paragraph 11 and 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, recognition should be postponed.

12. In a transaction involving the rendering of service, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainity exists regarding the amount of the consideration that will be derived from rendering of the service.

There is an Appendix to the above standard and the relevant portion thereof reads as under- "This appendix is illustrative only and does not form part of the accounting standard set forth in this Statement. The purpose of the appendix is to illustrate the application of the Standard to a number of commercial situations in an endeavour to assist in clarifying application of the Standard.

In cases where institution fees are other than incidental to the sale of a product, they should be recognized as revenue only when the equipment is installed and accepted by the customer.

Revenue should be recognised when the service is completed. For advertising agencies, media commissions will normally be recognised when the related advertisement or commercial appears before the public and the necessary intimation is received by the agency, as opposed to production commission, which will be recognized when the project is completed. Insurance agency commissions should be recognised on the effective commencement or renewal dates of the related policies.

A financial service may be rendered as a single act or may be provided over a period of time. Similarly, charges for such services may be made as a single amount or in stages over the period of the service or the life of the transaction to which it relates. Such charges may be settled in full when made, or added to a loan or other account and settled in stages. The recognition of such revenue should therefore have regard to: (a) whether the service has been provided "once and for all" or is on a "continuing" basis (c) when the payment for the service will be received. In general commissions charged for arranging or granting loan or other facilities should be recognised when a binding obligation has been entered into. Commitment, facility or loan management fees which relate to continuing obligations or services should normally be recognized over the life of the loan or facility having regard to the amount of the obligation! outstanding, the nature of the services provided and the timing of the costs relating threto.

Revenue from artistic performances, banquets and other special events should be recognized when the event takes place. When a subscription to a number of events is sold, the fee should be allocated to each event on a systematic and rational basis.

Revenue recognition from these sources will depend on the nature of the services being provided. Entrance fee received is generally capitalized. If the membership fee permits only membership and all other services or products are paid for separately, or if there is a separate annual subscription, the fee should be recognized when received. If the membership feel entitles the member to services or publications to be provided during the year, it should be recognized on a systematic and rational basis having regard to the timing and nature of all services provided.

27. It may be seen that item 6 of the above Appendix is relevant in the context of a Club. As we shall see presently, there seems to be some confusion about item-6 of the Appendix, but the general import of the said item is clear. It seems to estate that income has to be recognised on a systematic and rational basis having regard to the timing and nature of services provided. 28. The learned counsel for the assessee has invited our attention to Schedule-4 to the Balance Sheet as on 31.3.1996 of the assessee-club, which reads as under:- "Schedule-4 1995-96 1994-95Advance Subscriptions 87,86,450 32,94,000Less: Transferred to ----------- 6,59,850Current LiabilitiesLess: Transferred to 24,24,850 -------incomeBalance Carried Over 63,61,600 26,34,150 ----------- ----------- He has also invited our attention to Item D of the Notes forming part of accounts in Schedule 12, and the relevant portion reads as under- RECOGNITION: 1. A11 revenue is recognized on accrual system of accounting.

2. The subscriptions collected by the Company shall be taken to 3. The income on account of the subscriptions collected shall be spread over a period of five years excepting temporary membership, which is for a period of 2 years and shall be It may be observed that in the accounts and the notes forming part of the accounts, the membership fee collected has been described as subscriptions collected. He has also invited our attention to the Profit & Loss Account, which shows on the credit side, an amount of Rs. 87,08,603 as per the following details- Advance Subscription 24,24,850 Monthly subscription 1,60,326 Entrance & Disco 8,96,109 Restaurant 31,27,402 Swimming pool Cottage 12,84,656 Other Income 8,15,260 ---------- In the light of the above details, the learned counsel for the assessee mentioned that the assessee has recognised as revenue, the monthly subscriptions effected from the permanent members and all other charges which are separately collected. So far as life membership fee is concerned, it is shown under the head 'advance subscription' and only 20% thereof is recognized as revenue in each year, over a period of five years. In the case of temporary members, the period is reduced to two years, and their membership fee is recognised at 50% in each year.

29. In the light of the above, he pleaded that the Accounting Standards are to depict a fair and correct picture of the working results and the financial position of the assessee, and so, there was no reason for the assessing officer to have ignored the results shown by the assessee on the basis of the Accounting Standard No. 9.

30. He also invited our attention to Sub-sections 3A, 3B and 3C of Section 211 of the Companies Act and pointed out that with effect from 31.10.1998, it has been made statutorily mandatory that the Profit & Loss Account and the Balance Sheet of a company shall comply with the Accounting Standards. Even though this requirement came into effect from 31.10.1998, and is not applicable for the earlier years, it is pointed out that the Accounting Standards were made mandatory by the Institute of Chartered Accountants, as already mentioned, with effect from 1.4.1991. It is further claimed that the only objection of the assessing officer was that the Accounting Standard-9 is only recommendatory. He has not disputed that the assessee has followed the said Standard. It is also pointed out that the auditors have certified that the revenue recognition in the case of the assessee was based on Accounting Standard-9. In the circumstances, it is further claimed that in a situation where the assessee has followed the Accounting Standard which is made mandatory by the Institute of Chartered Accountants, the first proviso to Section 145 relied on by the assessing officer is hardly applicable. In terms of the said proviso, the assessing officer is empowered to compute the income upon such basis and in such manner as the assessing officer may deem fit, only when the accounts are correct and complete but the method employed by the assessee is such that in the opinion of the assessing officer, income cannot be properly deduced from the same. It is claimed that when the accounts of the assessee are based on mandatorily applicable Accounting Standard prescribed by the Institute of Chartered Accountants, it cannot be said that income cannot be deduced from the accounting method employed by the assessee. It is claimed that the reverse should be the case, in the sense that if the assessee is not following the relevant accounting standard, it may be claimed that income cannot be deduced correctly and it is pleaded that the assessee cannot be penalized when it has followed the applicable Accounting Standard.

31. The learned counsel for the assessee has filed before us a brochure issued by the assessee-club under the title "Spend another day in Paradise" and mentioned that the assessee has to provide various facilities like cottages, swimming pool, tennis lawns, etc., which require constant maintenance. The cottages are of thatched roof and so require periodical replacement. These facilities except cottages have to be provided to all categories of members free of charge or at reduced rates. It is mentioned that the assessing officer erred in holding that there is no guarantee that a member can avail of the facility for more than a year. In this context, he pointed out that the club is still running and the members are still enjoying the privileges and facilities. In support of the contention that the results shown on the basis of an Accounting Standard duly prescribed by the Institute of Chartered Accountants cannot be rejected, the learned counsel for the assessee has relied on the following decisions of the Tribunal- He also filed before us a copy and relied on decision of the Hyderabad Bench of the Tribunal dated 4.4.2002 in ITA No. 672/Hyd/01 in the case of Comp-U-Learn Tech(I)Ltd., Secunderabad for the assessment year 1998-99.

32. In the light of the above decisions, it is pleaded that the assessee has fairly disclosed the working results, and as there is a continuing liability on the part of the assessee to provide services either free of charge or at reduced rates to its members, it is unfair to regard the entire amount of Rs. 87,86,450 as the income of the year.

It is further pleaded that if the entire amount is treated as income of the year, there would be big loss in subsequent years when there would be substantial expenditure in the form of repairs and maintenance, without matching income. It is claimed that such a situation would depict distorted results of the assessee, with huge income in the year under appeal, and huge losses in the subsequent years, and it would be totally unfair to the assessee and would render serious injustice from revenue angle.

33. The learned Departmental Representative on the other hand, pleaded that, firstly, the bye-laws relating to the life, permanent and temporary members should not be admitted. It is mentioned that such bye-laws were not filed by the assessee before the assessing officer, and so, it should not be allowed to furnish them at this stage. He invited our attention to the deposition taken from Shri Prasad Reddy, Managing Director on 25.11.1998, i.e. the date of survey in the premises of the assessee, in which in reply to question No. 6, it was mentioned by the deponent there were no other rules, regulations or bye-laws. A copy of this deposition may be seen at pages 9 and 10 of the Department's paper-book, and relevant portion thereof reads as under- Please identify. How you are connected with Treasure Island Resorts P. Ltd. A. I am Ch. Baba Prasad Reddy, aged 41 years. Residing at above given address. I am the Managing Director of Treasure Island Resorts P.Ltd. I am in charge of the total management of this company including supervision of books of accounts as also the day to day affairs of the company. I have a Finance manager Mr. Nagaraj who looks after financial aspects and day to day entries in the books.

My wife Smt. Nivedeta looks after the kitchen and the F&B. Q.I am showing you the application forms, the 4 types of membership.

Please detail the membership offered and the benefits alongwith the subscription amounts and other members.

A. No. 1: Priveleged Membership: As his written in the bye laws enclosed to the application form the members falling this category are entitled to the mentioned prelileges as per the by laws for privileged membership. Alongwith the form an amount of Rs. 20,000 and in some cases 10 to 20,000 is collected as 'membership fee' in order to give the membership. This amount is a one time payment collected from the member in order to give the membership. This membership is for life and is not refundable to the member. No monthly membership fee is collected. The membership is for life.

When they use the restaurant, they are billed for the food, etc.

No. 2 LIFE 'MEMBERSHIP: We collect an amount of Rs. 5,000 to 10,000 per member, which is not refundable, to the member. This membership is given to the life members and no monthly subscription is collected from these members. However, they are charged for the use of different facilities as per the decided rates at resorts.

No. 3. PERMANENT MEMBERSHIP: The membership fee collected is Rs. 8,000 to Rs. 10,000. This is a one time fee. collected in order to allot the members and is not refundable. Monthly subscription of Rs. 125 is collected over and above the charges for use of other facilities. This membership is also for life.

No. 4 TEMPORARY MEEMBERSHIP: Is generally given few officers of Army temporarily for One year as on now we have 120 membership. No membership fee is collected from these members except for monthly subscription of Rs. 50 per member.

No. 5 HONORARY MEMBERSHIP: there are honourary members among the four card holders i.e. these are members from whom no fee is collected and monthly subscription is collected.

Q. Have you returned any amounts to any members out of the 'Membership fees' collected.

A. So far, we have not returned any fee collected. As per the bye-laws there is nothing written as refundable. However if some members are not happy we have an intention to return the membership fee.

Q. Does the income offered in the P&L Accounts filed with the I.T. Returns include membership fee.

A. The amount collected on account of any membership of different types in a year i.e. the membership fee collected is added to the membership fee of all the memberships of the earlier year's and 20% of the amount is offered as income for the year. The balance of 80% is shown as liability in the Balance Sheet. This is as per the policy of the company, decided by the Directors and resulutions have been passed in the Board meetings held. Wherein myself, my wife and Auditor is present.

Q. Please produce the minutes of the Board meetings held as also any other record maintained of meetings held by the Directors, if any.

A. There is no minutes books or any other book maintained for meetings held. The resulutions passed at the meetings held from the date of incorporation of company are filed in an Office File Ahoks-3 titled as Resulutions.

Q. Can you produce the by-laws/rules regulation for different memberships.

A.I have already detailed the rules and regulation for the answer to the question No. 2. There are no other written rules, regulations or bylaws.

A. We held a meeting in annual meeting to finalise accounts as on March 98 i.e. for the F.Y. April 97 to March 98 and thereafter we have handed over the books of accounts to the Auditor in the 1st week of October for finalisation. The audit work is going on and we are going to file return of income, by the end of this month.

Q. Can you show me the final accounts as on 31.3.1998 i.e. F.Y. relevant for asst. year 1998-99.

A. Everything is with the Auditors. And the final accounts may be in the computers.

In the light of the above deposition, it is pleaded that as the assessee had admitted that there were no bye-laws for the other categories of members, they should not be admitted at this stage.

34. Secondly, it is pleaded that nothing is provided free to the life, permanent and temporary members. It is pleaded that these categories of members are almost on par with non-members, who are also admitted into the club on the payment of entrance fee for each visit. Hence, the only difference between non-members and the other categories of members excluding the privileged members is that the said categories of members do not have to pay entrance fee on each visit. It is also pleaded that there is no limit on the number of members, who may be admitted and the membership fee collected from all the categories of members is not refundable. In the circumstances, it is pleaded that the membership feel collected from all categories of members is liable to tax. In this context, he also relied on the decision of the Hon'ble Patna High Court in the case of CIT v. United Club(161 ITR 853), in which entrance fee was held to be a revenue receipt. He submitted that as, at any rate, it is not proved that any services are provided free to life, permanent and temporary members, Accounting Standard No. 9 does not apply, and so, the assessing officer was justified in bringing to tax the membership fee Of Rs. 87,86,450. It is also pleaded that there is no concept of deferred revenue, expenditure in income-tax, and analogously revenue recognition in respect of receipts, also should not be deferred.

35. We are of the view that the assessee deserves to succeed. It requires to be remembered that the impugned assessment is made consequent to the directions of the Commissioner of Income Tax(Appeals) while setting aside the original assessment. Before the Commissioner(Appeals) in the first round, the assessee had filed detailed note indicating the services rendered to the various categories of members and the scale of membership fees collected. The assessing officer reproduced this note in the assessment order. The Commissioner of Income-tax(Appeals) had set aside the assessment with specific direction to examine the claim of the assessee in the light of the said note.

36. The assessee had filed audited accounts along with return of income and there was supporting note of the auditor regarding the applicability of the Accounting Standard No. 9. So, all along it has been the case of the assessee that the membership fee is spread over five years as the services are rendered on a continuing basis and such spread over is as per Accounting Standard No. 9. When that is the issue i.e. whether the services are rendered on a continuing basis or not, and whether the allocation of income done over five years or two years has been done on a rational basis in terms of Accounting Standard 9, the assessing officer has not brought any material on record either in the course of the first assessment or the second which can controvert the claim of the assessee that services were rendered on a continuing basis to various categories of members.

37. On the other hand, the assessing officer mentioned various other reasons for disallowing the claim of the assessee for the spread over of the membership fee as done by the assessee. He mentioned that the accounting standard is only recommendatory in nature. He also observed that the membership fee collected is not refundable. He further observed that there is no limit on the number of people who can be admitted as members. He observed, without any basis for it, that there is no guarantee that the members can get services for more than one year. To our mind, the reasons adduced by the assessing officer are either not germane to the assessee or at least not conclusive. Firstly, it is immaterial whether there is any limit o ceiling on the number of members who can be admitted. The question is whether the admitted members are eligible to receive services on a continuing basis as claimed by the assessee. Similarly, it is immaterial whether the membership fee is refundable or not. In the present case, the bye-laws are only silent about the refundable nature of the fees, and they do not say the fee is non-refundable. The applicability of Accounting Standard-9 does not depend on whether membership fee collected is refundable or not. It applies even when the amounts collected are non-refundable provided the other specified conditions are satisfied.

As already mentioned, there is no basis for the remark of the assessing officer that there is no guarantee that the members will get services beyond one year. We understand that the club is still in existence and the members continue to avail of the facilities. The claim of the assessee has to be examined on the assumption that the club will continue in business and not on the assumption that it will be wound up. Similarly, the remark of the assessing officer that Accounting Standard is only recommendatory in nature has no basis. It is pointed out by the learned counsel for the assessee that accounting standard has been made mandatory by the Institute of Chartered Accountants of India with effect from 1.4.1991 and no auditor certifying accounts of a company can afford to ignore it.

38. Further, the remark of the assessing officer that the AS-9 is only recommendatory implies admission on his part that the assessee is under an obligation to render services to its members on a continuing basis, and as such, the said Standard applies. His only reservation is that the said Accounting Standard is not mandatory and so its benefit cannot be extended to the assessee even though, otherwise it does apply to the situation. The assessing officer reproduced the bye-laws relating to the privileged members in the body of the assessment order, and so, at least so far as this class of members is concerned, the relevant papers in support of the claim of the assessee that it has to render services either free of cost or at reduced rates in subsequent years was available before the assessing officer. He did not make any exception even in the case of the privileged members in respect of whom the bye-laws were available with him. He made a remark that the members were not given any document containing the terms and conditions except identity cards, and so, he held that the Accounting Standard 9 did not apply. When the bye-laws are there, stipulating that the services are to be rendered as claimed by the assessee, it is immaterial whether the members were given any separate document containing the terms and conditions. The bye-laws themselves are the requisite documents incorporating the understanding between the assessee-club and its members. We do not see why any other documents are necessary. The question is whether there is any understanding between the assessee-club and its members in regard to the provision of services as claimed by the assessee-club, and it is immaterial whether the said understanding is reduced to writing or not. This is all the more so, when there are bye-laws incorporating such understanding. Even in the case of privileged members bye-laws in respect of whom were available before him, the assessing officer neither questioned the genuineness of the said bye-laws nor did he give any separate treatment to the membership fee collected from the privileged members. In the circumstances, it is evident that the assessing, officer did not question the claim of the assessee that it is under an obligation to render-services either free of cost or at reduced rates to the various categories of members, as indicated in its note filed before the Commissioner(Appeals) in the first round.

39. The assessing officer disallowed the claim of the assessee on altogether different considerations like that the accounting standard is only recommendatory and that the amounts are not refundable. The contention that the assessee is not under an obligation to render services free or at reduced rates to its various categories of members except the privileged members is raised for the first time before us by the learned Departmental Representative. He made an exception in the case of privileged members only because bye-laws relating to this class of members was available before the assessing officer. As already mentioned, the assessing officer did not give any specific treatment even to the membership fee collected from the privileged members nor did he examine any of the privileged members to throw doubt on the genuineness of the bye-laws relating to them. In these circumstances, we do not find any reason to accept the plea of the learned Departmental Representative that the assessee is not under an obligation to render services to various categories of its members on a continuing basis.

40. Even the Commissioner of Income-tax(Appeals) did not mention that the assessee was not under an obligation to render services either free or at reduced rate as claimed by it. He disallowed the claim of the assessee for spread over of its income for altogether a different reason. He mentioned that the membership fee collected was utilized for creation/acquisition of fixed assets by the assessee and the assessee has claimed depreciation thereon and so the spread over of the membership fee collected by the assessee is not permissible. We see no basis for this theory. There is nothing abnormal about utilization of the membership fee collected for the creation of assets, fixed or otherwise. Simply because the depreciation is claimed on assets acquired by utilization of membership fee, it does not follow that the entire membership fee has to be brought to tax in the same year ignoring the liability of the assessee to incur expenditure by way of provision of services to the members in the subsequent years. This is a totally unacceptable proposition.

41. Under the circumstances, neither the assessing officer nor the Commissioner of Income-tax (Appeals) disputed the claim of the assessee that the membership fee came saddled with a liability to provide services either free or at a reduced rate. We have required the assesses to file the bye-laws relating to the other categories of members in terms of Rule 29 of ITAT Rules only to verify in their light the contents of the above mentioned note filed by the assessee before the Commissioner of Income-tax(Appeals) in the first round detailing the services rendered to various categories of members. The learned counsel for the assessee explained before us that the bye-laws of other categories of members were not filed before the assessing officer because they were on the same line as the bye-laws relating to the privileged members which were filed before the assessing officer. In the light of this explanation, we reject the contention of the learned Departmental Representative that we should not consider the bye-laws.

There cannot be a "club with bye-laws only for one category of members like the privileged members and without any bye-laws for other category of members. The bye-laws have been appended to the application form and the application forms were filed for all the categories of members even though only the bye-laws for privileged members were filed before the Assessing Officer. At any rate, the services rendered to the various categories of members are detailed by the assessee in summary fashion in the note filed before the Commissioner of Income-tax(Appeals). There is no material adduced by the assessing officer or the Commissioner of Income-tax(Appeals) to dispute the contents of the said note. So, we have to conclude that the assessee is under an obligation to render the various services either free or at reduced rate on a continuing basis to its various categories of members. Except in the case of temporary members, such liability is permanent.

42. It has been explained before us that the assessee has to maintain livestocks like horses and camels, swimming pool, tennis lawns, cottages, etc. for the use of the members. The cottages are provided with thatched roofs to create an eco-friendly atmosphere. These facilities entail substantial expenditure for years together.

43. Whenever there is a receipt giving rise to a liability, a provision can be created against the receipt for the liability. This proposition is now well established in view of the decision of the Apex Court in the case of Calcutta Co.(37ITR 1) the relevant portion of the head-note of which reads as under: "The expression "profits or gains" in Section 10(1) of the Income-tax Act has to be understood in, its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom -whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date." When the membership fees in the present case are allocated over a number of years, in effect, it means that a provision is created to the extent of Rs. 63,63,200 in the first year against receipt of Rs. 86,86,250 and a part of the said provision is written back to the revenue in each of the subsequent four years. In short, the entire membership fee collected is recognised as revenue over a period of five years. In the case of temporary members whose period of membership is only two years, the spread over is restricted to two years. Such allocation is quite rational and in conformity with the Accounting Standard 9 as the liability to provide services subsists on a continuing basis almost indefinitely. As the entire amount is offered to tax though over a period of five years, it makes no difference whether the amount is refundable or not.

44. We also find that the reliance placed by the assessing officer on the decision or the Apex Court in Tuticorin Alkali Chemicals & Fertilisers Ltd. (217 ITR 173) is misplaced. Provisions of the Income-tax Act take precedence over accounting standard, as held in that case, only in a case of conflict between them. This does not appear to be a case where there is any conflict. It has been held in the case of Kevin Enterprises v. JCIT(supra) by the Ahmedabad Bench of the Tribunal and in the case of H.M. Constructions v. JCIT(supra) by the Bangalore Bench of the Tribunal that accounts cannot be rejected and book results cannot be disturbed when duly mandated accounting standard is followed by the assessee. The case of the assessee is also supported by the ratio of the decision of the Hyderabad Bench of the Tribunal in the case of Comp-U-Learn Tech(I)Ltd.(supra). In this case, it was held that the training I fee collected by the assessee institution for conducting computer classes cannot be taxed in one year and has to be spread over the period of the training classes.

Commenting on the scope of Section 145 read with Section 5 of the Income-tax Act, the learned Authors, Kangs & Palkhiwala observed as under- "Under Section 5 profits are chargeable when they accrue or arise or are received. The effect of this section is that the assessee's choice of the system of accounting determines whether profits are to be actually charged when they accrue or when they are received or at some other point of time." After considering the above remarks of the learned authors, the Hyderabad Bench of the Tribunal in the case of Meera & Ceiko Pumps P.Ltd.(ITA No. 652/Hyd/01) for the assessment year 1994-95, in its order dated 21.6.2002, observed in para 5.7 thereof that even when the method of accounting adopted is mercantile system, taxability of a receipt may be postponed when the receipt entails a liability to be met in future years. In this view of the matter, it has to be held that all the amounts received by the assessee as the membership fee do not accrue as income in the same year. In view of the continuing liability, allocation of income over different years is permissible.

45. We have also to reject the contention of the learned Departmental Representative that the provisions of Section 145 are attracted in this case. This is not a case where the accounts are incomplete or incorrect. When the duly mandated accounting standard is followed, it cannot be said that the income cannot be deduced properly in terms of the proviso to Section 145 of the Act. Actually, the reverse should be the position. If the mandated accounting standard is not followed, the Revenue may claim that the correct profits cannot be deduced.

46. Similarly, the plea taken by the learned Departmental Representative on the analogy of deferred revenue expenditure is not acceptable though it is smart. In the case of deferred revenue expenditure is incurred and the assessee may or may not get any benefit in future years. So, the entire expenditure is allowed in the year in which it is incurred though it is deferred in the books. Revenue of the type being considered here can be deferred as it is fastened with a liability which entails expenditure in future years. We accordingly reject this plea.

47. The learned Departmental Representative pleaded before us that entrance fee is a revenue receipt in the light of the decision of the Patna High Court in the case of United Club (supra) and so, the entire membership fee which is on par with such entrance fee has to be taxed in one year. This contention has to be rejected for more than one reason. Firstly, strictly speaking, there is no entrance fee as such in the present case. Secondly, the jurisdictional High Court has held in the case of Secunderabad Club(150 ITR 49) that the entrance fee is a capital receipt. Even as per accounting standard 9, entrance fee is normally capitalized. More basically, the issue in the present case is not whether the membership fee is capital receipt or revenue receipt.

The assessee has not disputed that it is a revenue receipt. The only claim of the assessee is that, even if it is a revenue receipt, it cannot be brought to tax in one year and it should be recognized on a rational basis or time basis in the light of accounting standard 9. We see no reason to reject this claim as there is continuing liability to render services either free or at a reduced rate.

48. If the entire membership fee collected is shown in the present assessment year, there would be substantial deficit in future years, when the assessee has to incur expenditure for the provision of various services to the members without matching receipts. This would give a totally distorted picture of the working results of the assessee. While substantial profits will be taxed in the year under appeal, there will be substantial losses in" subsequent years. The revenue may seek such result, but we see no reason to allow it.

49. In the view that we have taken of the matter, it is not necessary to consider the ground, of the assessee that the amount of Rs. 32,94,000 pertaining to the financial year 1994-95 should be excluded from the present assessment year. This is only an alternative plea of he assessee. We may however, mention that we find no merit in this plea. Admittedly, the business of the assessee commenced only on 1.4.1995 and the amounts received before commencement of business should be regarded as relating to the first financial year i.e.

1995-96. . As we are accepting the main claim of the assessee, the rejection of the alternative plea has no bearing on the result of this appeal.

50. Before we conclude, we may mention that there appears to be some incongruity in item 6 of the appendix to the accounting standard 9, which we have extracted hereinabove While it states that entrance fee is generally capitalised, it proceeds to state that when membership fee permits only membership and all other services are paid for separately, it should be recognized when received. If the membership fee permits only membership it should be on par with entrance fee and so there seems to be some contradiction between the two statements. But the general import of item 6 of the appendix and more particularly of the accounting standard 9 itself is clear. The import of item 6 has to be seen in the light of other illustrations given under other headings of the appendix like installation fees, advertising and insurance agency commission, financial service commissions, admission fees, tuition fees, etc. Reading them all together, the principle is that when service is provided on a continuing basis and the cost relating to the service falls in a different year, revenue should be recognized on a time basis. Going by this general import of item 6 in the appendix and the wording in the body of the accounting standard 9 itself, it is clear that the assessee conformed to the accounting standard 9 and as such, the book results deserve to be accepted.

51. In the light of the foregoing discussion, we are of the view that the assessing officer is not justified in bringing to tax the entire membership fee collected to tax in the year under appeal. We accordingly set aside the impugned orders of the Revenue authorities on this aspect and direct the assessing officer to modify the assessment accordingly.

52. In the result, assessee's appeal, ITA No. 136/Hyd/99 is dismissed, and appeal, ITA No. 244/Hyd/03 is allowed.