Commissioner of Income Tax vs Mangal Tirth Estates Ltd.

Chitra Venkataraman, J.—These tax case appeal are preferred by the Revenue. Tax Case (Appeal) No. 3 of 2004 relates to the asst. yr.

1992-93; Tax Case (Appeal) No. 626 of 2004 relates to the asst. yr. 1993-94; Tax Case (Appeal) No. 904 of 2004 relates to the asst. yr.

1994-95 and Tax Case (Appeal) No. 2432 of 2006, relates to the asst. yr. 1996-97.

The issues raised in these tax cases are one and the same except the question relating to the deductibility of the entire expenditure incurred under

completed contract method of accounting. The following are questions of law raised in these tax case appeals:

Tax Case (Appeal) No. 3 of 2004:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the amenities charges paid for central air conditioning of

the shops sold should be treated only as an advance and not as a trading receipt?

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the receipt for allotment of car park should be treated

as a returnable deposit, when as per the sale deed, the ownership of the shop and the car park are inseparable?

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the entire expenditure incurred during the year should

be allowed as a deduction, although the assessee is following a ''completed contract method'' of accounting its income?

Tax Case (Appeal) No. 626 of 2004:

Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the amenity charges amounting to Rs.

39,08,725 was assessable as returned income of the assessee for the asst. yr. 1993-94?

Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the amount of Rs. 5,16,336 charged

towards car parking space was a trading receipt liable to tax for the asst. yr. 1993-94?

Tax Case (Appeal) No. 904 of 2004:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the amenities charges paid for central air conditioning of

the shops should be spread over a period of five years?

Whether in the facts and circumstances of the case, the charges collected for air conditioning the premises should be treated as part of the sale

price of the shops?

Tax Case (Appeal) No. 2432 of 2006:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the amenities charges paid for central air conditioning of

the shops sold should be treated only as an advance and not as a trading receipt?

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the receipt for allotment of car park should be treated

as a returnable deposit, when as per the sale deed, the ownership of the shop and the car park are inseparable?

The assessee herein is a company engaged in the business of construction and sale of multistoreyed office-cum-shopping complex, by name

Spencer Plaza, Chennai. In the returns filed, the assessee claimed that as per the development agreement, the assessee has to provide air

conditioning to the shops and to allot car park. Hence, these receipts regarding air conditioning was a deposit vide Clause 3 of the agreement. In

any event, considering the obligation to provide the facility, the entire amount could not be assessed in the year of receipt. As regards the receipt of

the car park, the assessee claimed the same as interest-free refundable ''deposit. Apart from this, the assessee also claimed deduction on

advertisement, sales promotion and legal charges, etc. The assessee claimed loss in its return. This was rejected by the assessing authority by

making addition on account of the amenity charges paid by the buyers for air conditioning the shops and for allotment of car park. The assessing

authority disallowed the claim on the entirety of expenditure on advertisement, sales promotion and legal charges on the ground that the assessee

followed the completed contract method of accounting. Hence, he held that only a portion of the expenditure relating to the space already

constructed during the year could be allowed. Thus the amortization done in the accounts over a period of 10 years was considered as against the

claim for deduction of the entire expenditure as per the Income Tax adjustment statement.

The assessee preferred an appeal before the CIT(A). The CIT(A) dismissed the appeals on all counts, taking the view that the amenities

charges paid for the air conditioning was not an advance but part of the consideration for the shops and hence, to be treated as trading receipts.

The CIT also held that the transfer deed clearly stated that the reserved car park space and the shop are inseparable and hence, the consideration

received on the car park could not be treated as advance. On the question of the claim for deferred revenue expenditure, the CIT upheld the AO''s

view that the assessee was not entitled to adopt one method of accounting of the company''s account and modify it for Income Tax purpose to suit

the convenience of the assessee. He held that the assessee could have only a proportion of that expenditure allowed in the year under construction

on the basis of completed contract method. This resulted in the assessee preferring a further appeal to be preferred before the Tribunal. The

Tribunal held that the amenity charges were not to be treated as trading receipt; so too, the receipts for the allotment of car park. On the issue of

deferred revenue expenditure on legal and advertisement charges, it allowed the claim in full. On the sales promotion charges, it remanded the

matter back to the AO to consider the claim to the extent law permitted. It held that the accounting policy and the system permitted the assessee to

distribute the expenditure over the period of six years. However, as the expenditure was incurred in one year, the claim had to be entertained. The

Tribunal allowed the appeals of the assessee.

Aggrieved by this, the Revenue has come on appeal before this Court u/s 260A of the IT Act, 1961.

Learned senior standing counsel appearing for the Revenue pointed out that the shopping complex provided all purchasers amenities such as

central air conditioning and hence, the amount received in advance for air conditioning is a revenue receipt and that the same cannot be

apportioned for five years. Learned Counsel submitted that this is part of the consideration on sale and construction; hence a trading receipt to be

taxed in entirety in the year of receipt and cannot be spread over the period of five years. As regards the deposit receipt on the allotment of car

park, she submitted that since the allotment of car park is inseparable from the purchase of the shop, the same could not be treated as refundable

deposit. As to the expenditure incurred on advertisement, legal and sales promotion, she submitted that the assessee had accounted for the income

on a completed contract basis. Reading the various clauses of the sale agreement on allotment of car park and the air conditioning facility in the sale

agreement and the consistent system of maintenance, learned Counsel submitted that the Tribunal misdirected itself in allowing the receipts to be

spread over a period of five years and in granting the deduction on the expenditure. As to the claim on the deduction on legal expenses,

advertisement expenses and sales promotion expenses, she submitted that consistent with the method of maintenance of accounts, the deductions

on legal expenses, advertisement expenses and sales promotion expenses have to be spread over. Since the receipts and costs are taken on the

basis of the completed contract, the expenses incurred cannot, in entirety, be attributed to the completed contract method.

Per contra, Mr. Arvind Datar, learned senior counsel appearing for the assessee pointed out that befitting the nature of the asset, the amount

received on the amenities provided for was spread over for a period of five years. In terms of the contract, the assessee had an obligation to

maintain the air conditioning system for a period of five years. He submitted that matching the character of the receipt with the obligation under the

agreement, the Tribunal has rightly held that the receipts have to be spread over to a period of five years for the purpose of Income Tax liability.

Referring to the matching principles as held by the Bombay High Court in Taparia Tools Ltd. Vs. Joint Commissioner of Income Tax, , he

submitted that the same theory extended to the case of car park too. He emphasised that as far as the allotment of car park space is concerned, it

is a refundable deposit and that whenever the owner sells his shop or the office space, the assessee has an obligation to refund the deposit amount

to the owner. He further, pointed out that the assessee has been following the mercantile system of accounting and that the assessee received the

amount from persons purchasing the shops with central air conditioning facility. The assessee has not provided air conditioning facility to the shops

during the relevant year and that it provided the same only on 29th Sept., 2002. Consequently, the amount should not be taxed in the year of

receipt. The High Court held that it should be taxed only on a spread over basis in tune with the terms of the agreement to provide the facility for a

period of five years. He pointed out that the distortions in the matter of arriving at the taxable income need to be avoided and that the true profit

and loss picture of the company for the purpose of assessment following the real income theory is possible only by applying the matching principles

concept. In the above circumstances, he submitted that there are no merits in the appeal to disturb the order of the Tribunal.

Heard the learned Counsel on either side and perused the records.

It is seen that the assessee started its construction activities on the project during the previous year relevant to the asst. yr. 1988-89. The

assessee follows the completed contract method of accounting as recommended by the Institute of Chartered Accountants for the recognition of

the revenue and allocation of related costs for the construction and development project. The consistency of following this method is reflected in

the note appended to the annual reports. It is admitted by the Revenue that the said method was accepted by them. The first phase of construction

was completed by the assessee during the accounting period relevant to the asst. yr. 1992-93. The assessee filed the return on the basis of the

Income Tax adjustment statement declaring loss. The ITO finalised the assessment and computed the profits and gains with reference to the

method of accounting regularly employed by the assessee. The ITO rejected the return based on the Income Tax adjustment statement, which did

not form part of the accounts of the assessee on the view that the AO was not in any manner bound by the adjustment statement. The AO pointed

out that the assessee had been systematically following the mercantile system of maintenance of accounts in a method whereby, revenue receipts

and related costs were recognised with respect to completed phase of construction and sold. He pointed out that the assessee recognised the

revenue only on the completed contract basis and costs and receipts are accumulated till the completion of the first phase of the project. During the

previous year relevant to the asst. yr. 1992-93, the assessee had completed the first phase of construction and prepared its P&L a/c.

The ITO pointed out that the entire shopping complex is a centrally air conditioned one. As such, all buyers, in general, have the facility without

any exception. He pointed out that the buyers of the office space did not enter into a separate amenity agreement and the sale consideration was

inclusive of any amenity charges. He held that only in the case of shops sale, the assessee artificially broke the sale consideration through a separate

agreement. In the face of the totallity of the circumstances, the attempt of the assessee to separate this receipt from the agreement and spread it

over a number of years by taking recourse to Clause 4 of the agreement was not sustainable. Read with Clause 5 the AO held that since the

receipt of the amenity charges was referable to the total consideration for the shop and relatable to the phase of construction completed during the

period relevant to the assessment year and sold, the receipt was taxable as trading receipt in the year for which the sale of the respective shop

space took place. The AO pointed out that the assessee had artificially broken the sale consideration to have the amenity charges payable as a

lump sum at the time of sale of the space itself. He pointed out that as per the agreement, the plant and machinery were not transferred and only the

use of the facilities was sold. Hence, the cost of the plant and machinery would be capital expenditure and the accrued liability for future years on

capital account.

A perusal of the order of the CIT(A) on this aspect shows that the CIT(A) rejected the plea on amenity charges and held that there was no

dispute that the entire building was centrally air conditioned. There was no case for differential treatment in respect of amenity charges pertaining to

office space and shop space. The CIT(A) upheld the view of the AO that the amenity charges are trading receipts linked to the sale of the space.

Considering the admitted fact that the entire building is centrally air conditioned, the CIT(A) held that the assessing authority was justified in

holding them as trading receipt linked to the sale of space. Referring to the decision of the Bombay High Court in Shree Nirmal Commercial Ltd. v.

CIT (1991) 96 CTR (Bom) 54, the CIT(A) held that the amenity charges are assessable as trading receipts.

A reading of the Tribunal''s order on this issue shows that it accepted the case of the assessee by stating that the CIT(A) went wrong in stating

that the entire building was centrally air conditioned and that according to the assessee, only the commercial space situated in the ground, first and

second floors were centrally air conditioned and not the office and other places. Consequently, the amenity charges should not have been assessed

as income in the year under consideration. It also pointed out that the assessee had not provided the facility to the shops during the relevant

assessment year and that the amount was received only from persons, who were willing to purchase the shops and this was specifically intended

for the commercial space situated in the ground, first and second floors. Thus the Tribunal upheld the claim of the assessee.

On the question of providing car park, the assessing authority held that the car park space merged with the right over the undivided share of

the land. The Revenue pointed out that, as a developer, the assessee acquired no right of ownership over the land or the superstructure. The

assessee rendered his services as a developer and was transferring the (sic) of the space to the buyer. There is no reference in the agreement as to

the assignment of ownership of the basement to the assessee. The possibility of the assessee refunding the deposit on the allottee or transferring the

same did not, in any way, stand in the way of the deposits treated as the receipts in the hands of the assessee. The ITO held that the receipts were

relatable only to the space constructed and sold during the year and hence revenue receipts assessable in the year. Consequently, he took the view

that the question of spreading over did not arise. He pointed out that the receipts were relatable to the space constructed and sold during the year

alone was considered for assessment. The assessee made an alternate plea that in the event of the AO holding that the basement did not belong to

the assessee, then the outlay would have to be allowed as a revenue expenditure, being a charge on the profits. This the assessee said was made

without prejudice to its claim for depreciation. The AO considered this and pointed out that all that the assessee had in the car park space was the

(sic) to occupy and use the basement. The space put under the ownership of the vendor or the assessee did not include the basement. He pointed

out that the assessee, on his own volition, had transferred it to his capital account and had intended to use it for its own purpose. The right to use

the basement was a capital asset but no depreciation was permissible on the right to use as distinguished from ownership of this portion to have the

benefit of depreciation. He also held that there is no charge over profit also.

As regards the car park, on the first appeal, the CIT(A) pointed out that the car park was transferred to various buyers after receiving

consideration. Referring to Schedule ''C of the transfer deed for sale of undivided share, the CIT(A) noted that what was transferred to the buyers

was an undivided share in the land and the apartment together with the reserved car park space, and hence were inseparable one, that one could

not be sold or disposed of without the other. The appellate authority pointed out that the agreement stipulated that so long as the office space was

reserved for the buyer and the same was transferred along with the right to occupy and use the car park, neither the principal buyer nor the

subsequent buyer would be required to surrender vacant possession of the car park space to the assessee. The appellate authority pointed out that

though the deposit was called refundable deposit, considering the nature of the business of the assessee, which is development and sale of

property, the consideration received for assigning the rights on car parking space to various buyers was a trading receipt in the course of the

appellant''s business. He pointed out that the sale of car park space was linked to the sale of undivided sale of the land Hence, he upheld the

assessment as trading receipt. On appeal by the assessee, the Tribunal, however, allowed the claim of the Assessee treating it as a refundable

amount and hence not taxable as income.

On the question of deferred revenue expenditure on advertisemen sales, promotion and legal charges, it is seen that as the accounts (sic)

maintained on completed contract basis, the same was amortized over period of ten years. However, in the Income Tax Adjustment Statemer

Account, the assessee claimed the entire expenditure as deduction. The AO took the view that the benefit of the expenditure would cover eve

those areas still under construction and considering the method (sic) accounting consistently employed, the AO rejected this plea for deduction in

full and held that the same was to be amortized.

On the question of deferred revenue expenses, the appellat authority pointed out that expenses incurred arose under the hea ''advertisement,

sales promotion and legal charges.'' The Assessee claimed entire expenditure as deduction u/s 37 of the IT Act, 1961. The assessing authority

pointed out that considering th completed contract method of working out the profits, only a proportio of the expenditure could be related to the

space already constructec The CIT(A) rejected the plea for entire expenditure to be allowed as deduction. Taking the view that the assessee had

regularly followed the completed contract method of accounting for recognition of revenue and recognised the allocation of the related cost to the

particular phase of construction and development project, the appellate authority pointed out that the assessing authority rightly calculated that the

profits and loss of business could be properly deduced with reference to the method of accounting adopted by the assessee. The assessee had

been consistent in its method of accounting that the receipts and cost were recognised with respect to only the phase of construction, which has

been completed and becomes capable of being so.

In the face of the admitted position that the revenue and the expenditure were relatable to the completed method of construction, the appellate

authority confirmed the assessment order. In the appeal before the Tribunal, on the question of deferred revenue expenditure claimed as deduction,

the Tribunal held that the claim of the assessee as regards the sales promotion expenses spread over to ten years could not be allowed as

deduction in full. The Tribunal directed the AO to consider the claim on sales promotion expenses and allow the deduction to the extent

permissible under law. As far as advertisement and legal charges are concerned, the question of spreading over did not arise and hence to be

allowed in full.

Before adverting to the contentions of the parties herein, we need to advert to the deeds under which advances for centralised air condition

and the deposits for car parking are received and the claim considered by the authorities. Learned Counsel for the respondent filed before us

copies of sample documents covering sale deed of an undivided portion of the land, builder''s agreement, air conditioning agreement, car park

agreement. On every sale of the shop/office space effected, the purchaser enters into a contract one with the owner viz., Spencer & Co. Ltd. for

transfer of undivided share of the land and the second with the developer, the assessee herein for construction as per the specification. Apart from

this, there is an agreement for providing air conditioning facility and an agreement for providing car park facility.

A perusal of the sample sale deed dt. 31st May, 2000 for the shop shows that Spencer & Co. sold undivided share of the land. Apart from

conveying the undivided share in the land, the deed contained various clauses pertaining to the enjoyment of common amenities, the rights of the

developer, allotment of the car park as well as the rights of the purchaser. Schedule ''C'' in the sale deed relates to the restrictions on the rights of

the purchasers. Clause ''e'' of Schedule ''C'' refers to the sale of undivided share in the land and the apartment referred to in Schedule ''B'' together

with reserved car park space shall always be considered as inseparable and one cannot be sold and disposed of without the other or the others.

Schedule ''D'' deals with the rights included in the transfer to the purchaser. Clause 12 of the agreement shows that terraces/basement/

atriums/unreserved car park space shall always remain under the control, ownership and use of the developer or their nominees. Schedule ''E''

relates to instances of expenses to be paid by the purchaser. These expenses are stated to be only ""instances"" without prejudice to the generality of

the term ""expenses and outgoings"". The instances stated referred to the cost of maintenance and upkeep of all common area including repairs and

replacement to the structural, sanitary, electrical, electronic or mechanical systems of the buildings. The schedule also states that for these

purposes, the purchaser has to enter into maintenance agreements with the agency specified by the developer. The deed also states that the

developer may, at his option, require the purchaser to deposit with the specified agency a security deposit of such sums as would yield a return

equivalent to the purchaser''s obligations under items (b) and (c) of Schedule ''E''. It further stipulates that in the event of the yield on the amount of

the deposit not being adequate to cover such charges, the purchaser shall pay the agency such excess amount upon being advised by the agency.

On transfer of the apartment, the purchaser is entitled either to transfer the security deposit standing to their credit to the transferee or to refund the

deposits standing to their credit subject to the condition that the transferee enters into a fresh maintenance agreement with the company and pay

such deposits as may be notified by the company.

A perusal of the copy of a typical builder''s agreement filed show that the builder agreed to get the conveyance of undivided share from

Spencer & Co. Ltd., on condition that the proposed owner would engage the assessee to build an apartment for shop/showroom/office space and

that the builder''s agreement is subject to diverse other conditions contained in the sale deed to be executed. Clause 21 specifically refers that the

proposed owner shall enter into such agreements for maintenance of Spencer Plaza and its appurtenances as stipulated by the builder covering

upkeep of all common areas, all kinds of repairs, maintenance of elevators, air conditioning system, standby generators, periodical colour wash of

all common areas, etc.

It is seen that in respect of sale of office space, the assessee entered into two contracts, one for the transfer of an undivided share and the

second for construction as per the specification. In respect of office space, the consideration received is inclusive of the provision of amenities and

they are treated as part of the revenue from the property development. As regards the sale of shop space, the assessee entered into three such

agreements.

A sample of the air conditioning agreement between the builder and purchaser shows that the builder shall install the necessary central air

conditioning plant and accessories at their cost to enable them to extend the air condition facilities.

The agreement entered into between the purchaser and the assessee herein reveals that as per Clause (1), the builder is to purchase and install

necessary central air conditioning plant and equipments and other accessories at their own cost in order to enable them to extend the central air

conditioning facility to the said apartment. The charges are fixed at Rs. 250 per sq. ft. of super built up area as deposit to the builder (Clause 3).

As per Clause 4, the builder is authorised to adjust 20 per cent of the deposit annually towards the central air conditioning amenities to be

provided from the date of installation of the plant for five years or appropriation of (sic)'' deposit or such percentage as may be required to be

adjusted. Even after the deposit is completely adjusted, the assessee has to provide the same facility to the owner at no additional capital cost.

Under Clause 4, it is stipulated that the replacement cost or repairs and maintenance are to be borne by the owners of the property. Clause 6

stipulates that the assessee has to enter into a maintenance agreement with the Plaza Maintenance and Service Ltd., for maintenance of the

equipment. Clause 2 dealing with the ownership of the plant on the builder states that the same is subject to Clause. 8. Clause 8 states that if the

owners of not less than 75 per cent of the total shopping and office area desire that air conditioning plant and service should be operated and

maintained by any person other than the builder, the builder is to forthwith transfer the ownership and control to the person nominated by such

owners without any consideration.

The sum and substance of this agreement is that the plant is installed by the builder at its cost to extend the facility to the owner. The ownership

of the plant, although is stated to rest on the assessee, yet it is subject to Clause. 8. This only shows that the ownership of the plant and equipment

rest with the assessee only on paper and that the effective ownership rest only with the apartment owner. This is inferred further by Clause. 5 which

states that even after the expiry of five years, adjusting the amount, the builder shall continue to provide the facility at no cost. In the face of the

clauses and Schedule ''E'' of the sale deed executed by the owner in favour of the purchaser of the shop, it is clear that the status of the assessee is

no more than that of a service provider and in reality with no ownership over the plant and machinery. The thrust of the agreement is that it casts an

obligation to provide the same as per the terms of the sale agreement. Through a separate agreement, the cost of providing for the machinery is

separately stated to claim the adjustment over a period of five years. The charges collected are the rate per square foot. In the background of the

various terms of the agreements, the view of the Tribunal cannot be upheld. We reject the plea of the assessee for a spread over on the receipts

relating to the amenities provided. The contract contemplates that the facility on air conditioning is not something exclusively given to the shops

alone.

As already seen, the assessee is in the business of construction and sale of built-up areas. Read in the context of the sale agreement and the

one with the developer, the execution of a separate agreement on air conditioning facility appears to be nothing but a device to suit the convenience

of the assessee. Admittedly, the entire office-cum-shopping complex is a centrally air conditioned one. The purchasers, without any exception, take

this facility and there is no option to stay out of this common facility. Although the construction might have been split into more than one contract,

as may be seen from the model agreement, what has been spoken to under the agreement is a part of the entire transaction of sale. Read in the

background of Clause 8 of the air conditioning agreement that the transfer would be without any consideration and the terms of the sale agreement

on the rights of the purchaser to common facilities, it stands to reason that what has been collected in the name of charges for the facility extended

is, in reality, recouping of the charges for the installation of the plant. As rightly pointed out by the AO and confirmed by the CIT(A) in the case of

sale of the office space, the sale consideration received is inclusive of the provision for amenities and are treated as part and parcel of the property

development. As such, going by the character of the receipt and having regard to the completed contract method to arrive at the P&L a/c, the

question of spreading over to five years in terms of the agreement providing air conditioning facility for five years does not merit any favourable

consideration from any angle. We do not agree with the reasoning of the Tribunal and the submission by the assessee. We approve the view of the

ITO to hold that the sum received is a revenue receipt and is relatable to the phase of the completed contract during the period relevant to the

assessment year and hence not entitled to the spread over of this receipt. The receipt is part of the sale consideration Hence, going by the various

terms of the agreement, we have no hesitation in accepting the submission of the learned Counsel for the Revenue to assess the trading receipt in

the year of receipt.

On the question of car park, under the terms of the sale agreement the purchaser is allotted a car park area of an extent commensurate witr the

undivided share given. This is a reserved car park exclusively for the owners. It is stated that in consideration of the purchaser acquiring ar,

undivided share in the land for the purpose of construction of a shop through the assessee/developer, the appellant/assessee was willing to allot the

car parking space. The car parking space shall be utilised only for keeping the vehicles and subject to the condition referred in the maintenance of

the Plaza. As rightly pointed out by the learned Counsel for the Revenue, under the agreement, as per Schedule ''C'', transfer of the eserved car

park space is inseparable with the transfer of undivided share. Clause (e) to Schedule C of the sale deed, touches on the rights of the owner as to

the car park: ""(e) to sell or dispose of the undivided share of the land conveyed herein only along with the apartment referred to in the Schedule

''B'' hereto and the reserved car park space if any. The undivided share in the land and the apartment referred to in the schedule together with the

reserved car park space shall always be considered as inseparable and one cannot be sold or disposed of without the other or others.

Clause 12 of the sale deed touches on what is given to the developer. This reads as follows:

The terraces/basement/atriums/unreserved car park space of the buildings in Spencer Plaza shall always remain under the control, ownership and

use of the developer or their nominees. The developer or their nominees shall be exclusively entitled to any income that may be derived from the

same. The purchaser shall have no right to object to such use of the terraces/basement/atriums/unreserved car park space on any grounds

whatsoever. The use of unreserved car park space shall be regulated by the developer or their nominees. The purchaser further agree not to object

to the use of common areas, amenities and lifts by the developer or its nominee/s for use of terraces/ basement/atriums/ unreserved car park.

A reading of the model car park agreement shows that owners are to deposit a sum of Rs. 35,000 interest free and that the owners are liable

to pay municipal tax and other public charges in respect of car park. Learned Counsel appearing for the assessee pointed out that where the owner

had surrendered the car park space so purchased, there is a reversal entry in the accounts resulting in the refund of the amount deposited.

Whatever might have been the reason which prompted the assessee to go for an agreement with the purchaser to deposit a certain sum with

the assessee, contrary to the contention of the assessee and read in the context of the sale agreement, subject to which alone the car park

agreement is entered into, the fact remains that the allotment of car park is a part and parcel of an agreement of the sale. The builder''s agreement is

subject to diverse other conditions of sale. The utilisation of the car park is part of the purchaser''s rights contemplated under the sale agreement.

The only right that the builder has in the car park is as per Clause 12 which is an unreserved car park. Hence, the nature of the receipt for allotment

of car park is car park agreement itself derives its strength only for the sale agreement and has no independent existence. It is a part of the sale

consideration and a trading receipt. There are no reasons to delineate the same from the overall cost charged from the purchaser. The right of the

assessee is related only to the extent of an unreserved car park to collect charges on the reserved car park. In the face of the sale agreement, the

said sum is liable to be assessed at the hands of the assessee as a trading receipt without any spreading over. Consequently, the order of the

Tribunal on this score cannot be accepted.

Learned senior counsel submitted that considering the stand of the Revenue in computing the profit and loss of the business, the Revenue is

bound to apply the matching principle to consider the claim of the expenditure incurred to be granted in full without amortization. It may be pointed

out that the assessee has been consistently following the completed contract theory for the purpose of arriving at its real income. Learned Counsel

appearing for the Revenue filed a copy of the accounting standards issued by the Institute of Chartered Accountants on accounting for construction

contract. This provides for costs to be accumulated in a construction contract to work out the profit and loss of the business. The Revenue of the

assessee is worked out on the basis of the completion of the part phase of construction. Admittedly, the assessee completed the first phase of

construction during this period. The AO held that the method of accounting adopted by the assessee was such that the profits and gains of the

assessee could be properly deduced by applying the completed contract method. It is not denied by the assessee that the adjustment statement on

the basis of which the claim is made by the assessee for the spread over, did not form part of the accounts. Hence, he ignored the statement to go

by the regular method by which the assessee maintained the accounts, namely, the mercantile accounting, and worked out the income as referable

to the completed phase of construction. The assessment order referred to the notes under the notes on accounts of the relevant period 1992-93 as

follows:

Income from property development is recognised in the year in which the building space is completed and is ready for occupation by the buyers;

(i) in respect of building space for which sale deed has been executed, irrespective of the receipt of entire consideration.

(ii) In respect of others, on receipt of full consideration.

It is seen from the order of the AO that the assessee amortized the expenses on advertisement, sales promotion and legal charges over a

period of ten years in its books of accounts, so that one-tenth of the expenses was debited to the profits of the year and the balance carried

forward for set off in the subsequent year. The claim for deduction against the receipt of the current year was made only on the basis of the Income

Tax adjustment statement. The AO held, since the benefit of the expenditure had relevance even in respect of the space still under construction,

only a proportion was taken as relatable to the year under consideration.

Learned senior counsel for the assessee insisted on the application of the matching principle and on the relevancy of the same in working out

the real income of the assessee, lest distortion would fall on the computation. It may be seen, no materials were placed either before the authorities

or before this Court to substantiate the contention that in adopting the completed contract method, the computation had resulted in an unrealistic

picture on the right profit and loss.

The finding of the authorities below, particularly the ITO, clearly shows that the assessee maintained the system of accounts on mercantile

basis, adopting the completed contract method. In this connection, while considering the claim of spread over of business expenditure, the decision

of the Supreme Court in M/s. Madras Industrial Investment Corporation Ltd. Vs. The Commissioner of Income Tax, Tamil Nadu-I, Madras,

needs to be noted. The decision in Madras Industrial Investment Corporation Ltd. v. CIT (supra) is related to a case of a company issuing

debentures at a discount. Taking note of the period of redemption of 12 years, the discount was divided over a period of 12 years and

accordingly, the assessee claimed deduction as expenditure incurred for the purpose of business, split over a period of 12 years. The apex Court

held that claiming deduction of a proportionate part of the expenditure during the relevant accounting period was in conformity with the accounting

practice of issuing a discount in the discount of debentures account which was written off over a period of debentures. The Supreme Court pointed

out that the assessee had the benefit of the money on the issuance of debentures to the business over the entire definite period. The apex Court

held that the liability was a continuing liability and hence, the liability was to be spread over for a period of 12 years. Touching on the deduction to

be given to business expenditure, the apex Court held that ""ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose

of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has

written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to

spread and claim it over a period of ensuing years.

The said decision of the apex Court was applied by the Bombay High Court in the decision reported in CIT v. Taparia Tools Ltd. (supra). It is

seen from the facts in the said decision that the assessee therein issued debentures redeemable after five years. As per the agreement, the upfront

payment of interest immediately on allotment was shown in its financial statement as deferred expenditure. The assessee, however, had the benefit

of the said sum to the business over the period of time. The Bombay High Court held that the liability, hence, was to be spread over a period of the

debentures. In so holding, it applied the decision of the apex Court and applied the matching principles by taking the view that in order to

determine the net income of the accounting year under the mercantile system of accounting, the Revenue and other incomes are matched with the

cost of resources consumed. It held ""Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be

allowed in its entirety in the year in which it is incurred."" However, in a given case like the present one, the facts may justify an AO to spread the

expenditure over the life of the debentures, because, allowing the entire expenditure in one year may give a distorted picture of the profits of a

particular year. The High Court held that it was a continuing benefit of the business over the entire period and hence, the liability was required to be

spread over the period of debentures.

The substance of the law laid down herein is that, in the context of the business expenditure incurred, the same have to be granted the

deduction in the very same year. Yet, considering the benefit that the company may have over the years on the receipt, the claim can be considered

either for deduction in the very same year or amortized over a period of years, subject to the ascertained length for which the assessee has the

benefit. The deferred revenue expenditure in the reported case was allowed amortization, since lump sum discount allowed upfront was in lieu of

commitment on year to year payment and hence was a benefit referable to the period of bond. Hence, the guiding fact is, ultimately, the facts of the

case must be looked at to decide on as to whether the expenditure has to be amortized or given a deduction in the same year.

Learned Counsel appearing for the assessee argued that if the trading receipts are to be assessed this year, the expenditure cannot be

amortized over the period of years. In the course of the argument, learned senior counsel for the assessee placed reliance on the decision of this

Court reported in Commissioner of Income Tax Vs. Brilliant Tutorials (P) Ltd., as to the necessity of application of the matching principles.

It must be noted that the assessment of the receipts as income and on the completed contract basis is referable to the facts as regards the

receipt forming part of the sale and development agreement and has no relevance to the issue on the assessment on the amortisation of the

expenditure. In the decision of the apex Court and that of the Bombay High Court, there was no doubt that the assessee derived a continued

benefit over the period of years. The benefit is given by way of a contractual obligation. We do not find any such facts to accept the plea of

matching concept as invoked by the assessee. However as already seen, considering the nature of business, the principle laid down by the apex

Court has relevance to the facts herein for the limited purpose of understanding that the revenue expenditure, normally, must be allowed in its

entirety in the year in which it is incurred, and spreading over is an exception conditioned by the facts prevailing in a particular case. Looking at the

facts herein, the expenditure on advertising cannot be dissected to point out any definite benefit referable to a specified part or the period of the

business activity, in the sense of its having relevance to the completed phase or the phase which is still under construction. Only when the benefit

can reasonably be attributed as having relevance to the later year, it is possible to go for amortization. Learned senior counsel for the Revenue

pointed out that even as per, the mercantile system of accounts maintained, the assessee has amortized the expenditure.

P It is no doubt true that consistent and regular method of maintenance of accounts must be given the prime weightage in ascertaining the profit

and loss of an assessee''s business. At the same time, as the apex Court held in the decision reported in Madras Industrial Investment Corporation

Ltd. v. CIT (supra), ill the matter of granting the expenses, the facts justifying the deducting of expenses in entirety or in a spread over manner

equally assumes relevance in the computation of the profit and loss.

The expenses amortized in the accounts consisted of legal expenses, advertisement expenses and sales promotion expenses. As far as legal

expenses are concerned, the kind of the legal expenses incurred demanding the amortization is not clearly spelt out. On the expenditure on sales

promotion and advertisement, given the nature of business of the assessee being one of construction and promotion of shopping complex, even

going by the completed contract method, it is difficult to say that it is a one-time affair. Admittedly, the assessee has completed one phase of the

project. The construction is of the whole complex. As such, taking note of the nature of business, it is not possible to say that the expenditure

incurred for sales promotion and advertisement would have relevance to one portion alone. In the circumstances, it is difficult to apportion a part of

this expenditure as relatable to the completed phase alone and to carry the balance to future years for adjustment. The facts peculiar to the facts of

an assessment with reference to the maintenance of accounts cannot be ignored. Hence, keeping in mind the nature of business and the relevancy

of expenditure and the character of the same, we uphold the order of the Tribunal insofar as legal expenses and advertisement are concerned. In

the circumstances, we hold that the assessee is entitled to have the deduction of the expenditure on advertisement and legal expenses in full in the

year in which it was incurred. On the question of sales promotion charges, the Tribunal remanded the matter back to the AO to consider the claim

to the extent law permitted. Taking note of the overall facts and the nature of business, we confirm the order of the Tribunal on this expenditure.

In the circumstances, the order of the Tribunal stands reversed as regards the charges collected on the air conditioning facility and the deposit

on car park, holding that they are revenue receipts assessable in the year of receipt; that the assessee is not entitled to spread over the same over a

period of five years. Accordingly, questions 1 and 2 in Tax Case No. 3 of 2004 and all the questions in Tax Case Nos. 626 of 2004, 904 of 2004

and 2432 of 2006 stand allowed in favour of the Revenue. However, on the third question raised in Tax Case No. 3 of 2004, on the question of

amortization of the expenses, the order of the Tribunal is confirmed; thereby the third question in Tax Case No. 3 of 2004 stands answered against

the Revenue. No costs.