IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 29.11.2007 Coram The Honourable Mr.JUSTICE K.RAVIRAJA PANDIAN and The Honourable Mrs.JUSTICE CHITRA VENKATARAMAN Tax Case (Appeal) Nos.3, 626 and 904 of 2004 and 2432 of 2006 Commissioner of Income Tax - III, Chennai. .. Appellant in all appeals versus Mangal Tirth Estates Ltd., 769 Mount Road, Chennai – 600 002. .. Respondent in all appeals T.C.(A) No.3 of 2004: APPEAL under Section 260A of the Income Tax Act against the order dated 12.6.2003 made in I.T.A.No.2037/Mds/94 on the file of the Income Tax Appellate Tribunal Madras 'C' Bench for the assessment year 1992-93. T.C.(A) No.626 of 2004: APPEAL under Section 260A of the Income Tax Act against the order dated 18.02.2004 made in I.T.A.No.28/Mds/97 on the file of the Income Tax Appellate Tribunal Madras 'A' Bench for the assessment year 1993- 94. T.C.(A) No.904 of 2004: APPEAL under Section 260A of the Income Tax Act against the order dated 03.06.2004 made in I.T.A.No.1989/Mds/97 on the file of the Income Tax Appellate Tribunal Madras 'C' Bench for the assessment year 1994-95. T.C.(A) No.2432 of 2006: APPEAL under Section 260A of the Income Tax Act against the order dated 17.02.2006 made in I.T.A.No.44/Mds/2002 on the file of the Income Tax Appellate Tribunal Madras 'A' Bench for the assessment year 1996-97. https://hcservices.ecourts.gov.in/hcservices/ TC.[A] No.3/2004: against the I.T.Appeal No.17/94-95 dated 29.7.94 on the file of the Commissioner of Income Tax [Appeals] I Madras against the order dated 2.3.1994 in GI/P.A.No.31.084 CO.0339/92-93 on the file of the Asst. Commissioner of Income Tax, Central Circle II[4], Madras 34. TC[A] No.626/2004: as against ITAWT/GT/Appeal No.117/96-97, dated 9.10.96 on the file of the Commissioner of Income Tax [Appeals] I, Madras for the assessment of the year 93-94 as against Order dated 28.3.96 in PAN/GIR.No.31084-CQ-03339 on the file of the Assistant Commissioner of Income Tax, Central Circle II[4] Madras for the assessment year 93-94. TC[A] No.904/2004 as against the Order dated 16.7.97 in Appeal NO.112/97-98 on the file of the Commissioner of Income Tax[appeal] I, Chennai against the order dated 24.03.97 in P.A.No.31.084 CQ 03339 on the file of the Asst. Commissioner of Income Tax, Central Circle III[2], Madras 34 for the assessment Year 94-95. TC[A].2432/2006 against the Order dated 9.11.2001 in ITA.No.217/2001-2002 on the file of the Commissioner of Income Tax [A] V, Chennai against the order dated 15.3.1999 in GIR.No.3100 M on the file of the Joint Commissioner of Income Tax, Spl. Range X, Chennai for the assessment of the year 96-97. For Appellant : Mrs.Pushya Sitaraman Sr. Standing Counsel For Respondent : Mr.Arvind Datar, S.C. For M/s. Subbaraya Aiyar Padmanabhan J U D G M E N T CHITRA VENKATARAMAN,J. These tax case (appeals) are preferred by the Revenue. T.C.(A) No.3 of 2004 relates to the assessment year 1992-93; T.C.(A) No.626 of 2004 relates to the assessment year 1993-94; T.C.(A) No.904 of 2004 relates to the assessment year 1994-95 and T.C.(A) No.2432 of 2006 relates to the assessment year 1996-97. 2. 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. https://hcservices.ecourts.gov.in/hcservices/ The following are questions of law raised in these tax case appeals: (T.C.(A)No.3 of 2004): "1. 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? 2. 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? 3. 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?" (T.C.(A)No.626 of 2004): 1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate 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 assessment year 1993-94? 2. Whether on the facts and in the circumstances of the case, the Income Tax Appellate 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 assessment year 1993-94? (T.C.(A)No.904 of 2004): 1. 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? 2. 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? (T.C.(A)No.2432 of 2006): 1. 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? 2. 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 https://hcservices.ecourts.gov.in/hcservices/ ownership of the shop and the car park are inseparable?" 3. The assessee herein is a company engaged in the business of construction and sale of multi-storeyed 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. 4. The assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) 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 Commissioner of Income Tax 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 Commissioner of Income Tax upheld the Assessing Officer'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 Assessing Officer to consider the claim to the extent law permitted. It held that the accounting policy and the system permitted the assessee to https://hcservices.ecourts.gov.in/hcservices/ 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. 5. Aggrieved by this, the Revenue has come on appeal before this Court under Section 260(A) of the Income Tax Act, 1961. 6. 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. 7. 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 260 ITR 102 at 107 (COMMISSIONER OF INCOME-TAX Vs. TAPARIA TOOLS LTD.), 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 https://hcservices.ecourts.gov.in/hcservices/ 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 29.9.2002. 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. 8. Heard the learned counsel on either side and perused the records. 9. It is seen that the assessee started its construction activities on the project during the previous year relevant to the assessment year 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 assessment year 1992-93. The assessee filed the return on the basis of the Income Tax Adjustment Statement declaring loss. The Income Tax Officer finalised the assessment and computed the profits and gains with reference to the method of accounting regularly employed by the assessee. The Income Tax Officer 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 Assessing Officer was not in any manner bound by the adjustment statement. The Assessing Officer 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 assessment year 1992-93, the assessee had completed the first phase of construction and prepared its Profit and Loss Account. https://hcservices.ecourts.gov.in/hcservices/ 10. The Income Tax Officer 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 over it over a number of years by taking recourse to Clause 4 of the agreement was not sustainable. Read with Clause 5, the Assessing Officer 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 Assessing Officer 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. 11. A perusal of the order of the Commissioner of Income Tax (Appeals) on this aspect shows that the Commissioner of Income Tax (Appeals) 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 Commissioner of Income Tax (Appeals) upheld the view of the Assessing Officer that the amenity charges are trading receipts linked to the sale of the space. 12. Considering the admitted fact that the entire building is centrally air conditioned, the Commissioner of Income Tax (Appeals) 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 reported in (1991) 96 CTR 54 (SHREE NIRMAL COMMERCIAL LTD. Vs. CIT), the Commissioner of Income Tax Appeals held that the amenity charges are assessable as trading receipts. 13. A reading of the Tribunal's order on this issue shows that it accepted the case of the assessee by stating that the Commissioner of Income Tax (Appeals) went wrong in stating that the entire building was centrally air conditioned and that according to the assessee, https://hcservices.ecourts.gov.in/hcservices/ 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. 14. 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 use 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 Income Tax Officer 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 Assessing Officer 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 Assessing Officer considered this and pointed out that all that the assessee had in the car park space was the right 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. 15. As regards the car park, on the first appeal, the Commissioner of Income Tax (Appeals) 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 Commissioner of Income Tax (Appeals) 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 https://hcservices.ecourts.gov.in/hcservices/ 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. 16. On the question of deferred revenue expenditure on advertisement, sales, promotion and legal charges, it is seen that as the accounts were maintained on completed contract basis, the same was amortized over a period of ten years. However, in the Income Tax Adjustment Statement Account, the assessee claimed the entire expenditure as deduction. The Assessing Officer took the view that the benefit of the expenditure would cover even those areas still under construction and considering the method of accounting consistently employed, the Assessing Officer rejected this plea for deduction in full and held that the same was to be amortized. 17. On the question of deferred revenue expenses, the appellate authority pointed out that expenses incurred arose under the head 'advertisement, sales promotion and legal charges.' The assessee claimed entire expenditure as deduction under Section 37 of the Income Tax Act, 1961. The assessing authority pointed out that considering the completed contract method of working out the profits, only a proportion of the expenditure could be related to the space already constructed. The Commissioner of Income Tax (Appeals) 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. https://hcservices.ecourts.gov.in/hcservices/ 18. 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 Assessing Officer to consider the claim on sales