Commissioner of Income Tax vs Club Resorts (P) Ltd.

P.P.S. Janarthana Raja, J.—The present appeals are filed u/s 260A of the IT Act, 1961 by the Revenue against the order passed in ITA

Nos. 136 and 137/Mad/1999 by the Tribunal, Madras, ''B'' Bench. On 22nd Oct., 2003, this Court admitted the appeals and formulated the

following substantial questions of law for decision in these cases:

Whether, in the facts and circumstances of the case, the Tribunal was right in holding that the expenses claimed by the assessee could be

allowed, even at the stage of development of the projects?

Whether, in the facts and circumstances of the case, the Tribunal was right in allowing business expenditure for a period prior to actual

commencement of the business?

The facts leading to the above questions of law are as under:

(i) The relevant assessment years are 1992-93 and 1994-95. The assessee-company was incorporated on 1st March, 1991. The assessee was

carrying on the business of promoting time share units at places of tourist interest and marketing such time share units. The assessee-company was

following a system of accounting in which all receipts were accumulated towards sale of time share cottages under current liabilities. All expenditure

on capital construction was carried as capital work-in-progress under current assets. As and when the cottages were ready for occupation, the

direct expenditure on its construction was taken as cost to the debit of the P&L a/c, and the sale price therefore as sales, to the credit of P&L a/c.

That part of the cottages retained by the assessee for use as in the hotel industry, was shown as an asset to the company and depreciation was

claimed thereon. During the assessment years, the assessee claimed loss. While computing the assessment, the AO took a view that the assessee

had not carried on any business activity and relied on Note No. 9 to the statement of account wherein it had been mentioned that no amount had

been accounted for sales, since the project was still under way. Hence he rejected the claim of loss.

(ii) Aggrieved by the order of the AO, the assessee filed an appeal to the CIT(A). The CIT(A) accepted the contention of the assessee and

allowed the appeal. Aggrieved by the same, the Revenue filed an appeal to the Tribunal. The Tribunal dismissed the appeal and confirmed the

order of the CIT(A). The learned Counsel for the Revenue submitted that the Tribunal was wrong in allowing the expenses claimed without taking

into account the fact that the assessee had not offered any receipts towards sales for the last two assessment years. Further the assessee had not

commenced his business based on his admission in the statement accompanying the return.

Heard the counsel. The assessee is not a construction company. The completion of the construction at the project site could not be an indicator

for the commencement of the business of the company, The assessee had not carried out the construction on its own excepting that it gives the

work to contractor to carry on the construction activity on the land it possessed and mere completion of construction could not be taken as

commencement of the assessee''s business, The time share resort business involves various stages of development. The first stage was setting up of

one or more operating offices from which the sales personnel were sent to solicit customers, which the assessee had already started. The second

stage was launching a massive publicity campaign, which the assessee had already been doing. In fact, it had already acquired land and started

construction also, which were the subsequent changes. So, both the authorities below had given a finding that the assessee had not commenced the

business, For purpose of development of the projects of construction, the assessee had to necessarily maintain regular staff members, on which it

had been incurring expenses. The office expenses that had been incurred were clearly of revenue in nature. Considering the reasons recorded by

the Tribunal and based on the valid materials and evidences, the same does not suffer from any legal infirmity.

In view of the foregoing conclusions, we find no error in the order of the Tribunal and the same requires no interference. Hence, we answer the

questions in favour of the assessee, against the Revenue. Accordingly, the above tax cases are dismissed, No costs.