When income is deferred or spread out over a period of time under a contract or arrangement, will the taxability of such income be confined to a later year? This issue arises often, especially when businesses come up with ingenious schemes, as in the case of time share units for properties like holiday resorts at different locations.
An interesting case on this point arose before the Chennai Bench of the Income-tax Appellate Tribunal in the case of Sterling Holiday Resorts (India) Ltd v CIT. In this case, the company was engaged in the business of sale of time share units promoted by it at different locations. During the relevant assessment year, the assessee received a sum of Rs 26,54,31,714 from the customers to whom the assessee extended user-ship right in terms of a specific agreement entered into with each customer.
The assessee treated 45% of the receipt as revenue during the year under consideration. The balance 55% was treated as advance subscription towards customer facilities and shown as liabilities. This amount was offered as income in equal instalments over the number of years for which the usership right was extended to the customers.
The assessing officer held that 55%, i.e. Rs 14,59,87,443 was the income in the year under consideration. The commissioner of Income-Tax (appeals) confirmed the order of the assessing officer. Counsel for the assessee submitted that the 55% of the amount was received from the customers to meet the future commitments during the 99-year period. The assessee was required to provide benefit of usership to the customers.
The time share period was prescribed in the agreement as a period of 99 years commencing from the agreed date. The agreement also defined ?time share? as a right to stay in the apartments in the holiday resorts and enjoy the amenities during the holiday week, subject to the terms, conditions and covenants mentioned in the agreement.
The agreement stipulated that the assessee would make available the resort to the customers and provide the various amenities and facilities in the resort for a specified period each year during the next 99 years. Towards the cost of providing these amenities and facilities, the company collected a specific sum as advance subscription towards customer facilities mentioned in the agreement.
The profit and loss account of each year was credited with the amount received towards the cost of time share which was sold to the customer. The amount collected towards advance subscription on account of customer facilities was credited to a separate account. As the time share period was 99 years, 1/99 of this amount was credited to the profit and loss account and the profit and loss account was debited with the actual expenses incurred during each year on the provision of amenities and facilities.
The assessee?s argument was that the amount received was deferred income as certain obligations were attached with such receipts. The treatment given to such receipt was in accordance with the fundamental accounting concept for matching the revenue of each year with the expenses incurred to earn such revenue.
Reliance was placed on the decision of the apex court in Calcutta Co Ltd v CIT (37 ITR 1). In this case, the assessee bought land and sold them in plots fit for building purposes undertaking to develop them by laying out roads, providing a drainage system and installing lights, etc. When the plots were sold the purchaser paid only a portion of the purchase price and undertook to pay the balance in instalments.
The assessee undertook to carry out the development within six months but time was not of the essence of the contract. During the relevant accounting period the assessee actually received in cash only a sum of Rs 29,392 towards sale price of land, but in accordance with the mercantile system of accounts adopted by it, it credited in its accounts the sum of Rs 43,692 representing the full sale price of land.
At the same time, it also debited an estimated sum of Rs 24,809 as expenditure for the developments it had undertaken to carry out, even though no part of that amount was actually spent. The department disallowed the expenditure. On appeal, it was held that the undertaking to carry out the development within six months from the date of the deeds of sale was unconditional, the assessee was duty bound to carry out the same. The undertaking cast a liability on the assessee which accrued on the date of the deeds of sale, though that liability was to be discharged at a future date.
The Chennai Bench of the appellate tribunal held that the facts in the case of Sterling Holiday Resorts were different. In this case, no details were furnished by the assessee as to the expenditure actually incurred during the relevant period towards providing the customer facilities. The assessee was separately collecting amenity charges which were reflected as miscellaneous income.
According to the tribunal, the concept of deferred income is alien to the Income-tax Act. Income on its coming into existence attracts tax. The obligation to use the income in a particular manner does not remove it from the category of income, even if the obligation is part of the original contract giving rise to the income. The view was taken by the Supreme Court in the case of ED Sassoon and Co Ltd v CIT (26 ITR 27). It is amply clear that the income that is received or deemed to be received in the previous year is exigible to tax.
The computation of such income is to be made in accordance with the method of accounting regularly employed by the assessee. There is absolutely nothing in the Act to permit the assessee to treat part of the income as deferred income and to offer it for taxation as per its own sweet will.
Even the assessee failed to justify that 55% of the receipt was to meet certain obligations and it is to be spread over 99 years. This, in the opinion of the tribunal, was a subterfuge devised to hoodwink the Revenue. Thus, the tribunal upheld the order of the lower authorities taxing the balance 55% of the amount as the income of the year in which the time share agreement was entered into.
Needless to add, this is an issue which will be agitated in appeal before the high court because it involves a substantial question of law on the concept of deferred income. Ultimately, the apex court will be called upon to pronounce its judgment on this interesting aspect, especially on the question whether such an arrangement is a subterfuge to deprive the revenue of its dues.
The author is advocate, Supreme Court