SECTION 2(22)(e) DOES NOT APPLY TO COMMERCIAL TRANSACTIONS (TIME SHARE PURCHASE)
ISSUE
Whether outstanding payables by the assessee to its wholly-owned subsidiaries for the purchase of time share weeks, involving service tax and regular clearing of accounts, constitute “Deemed Dividend” under Section 2(22)(e) or are genuine commercial transactions.
FACTS
Business: The assessee is engaged in developing resorts and marketing time share vacation credits.
The Transaction: It had ongoing transactions with two wholly-owned subsidiaries involving the purchase of time share points/weeks and receipt of commission/fees.
The Dispute: The Assessing Officer (AO) treated the outstanding payables for the purchase of time share weeks as loans/advances and taxed them as deemed dividend under Section 2(22)(e).
Defense: The assessee argued that these were purely commercial transactions for the sale/purchase of time share inventory, backed by invoices including service tax, and accounts were settled by year-end.
DECISION
Commercial Nature: The Tribunal found that the transactions were strictly commercial in nature (sale of time share weeks) and essential for the business.
Not a Loan: Section 2(22)(e) targets loans and advances given for the benefit of shareholders, not trade advances or payments arising from ordinary business transactions.
Settlement: The fact that payments included service tax and accounts were cleared showed they were genuine trade payables.
Verdict: The addition under Section 2(22)(e) was deleted. [In Favour of Assessee]
COMMISSION PAID THROUGH BANK WITH TDS CANNOT BE DISALLOWED FOR NON-RESPONSE OF AGENTS
ISSUE
Whether commission expenditure paid to agents through banking channels after deducting TDS can be disallowed as “unexplained” merely because some agents (16 out of 27 tested) failed to respond to the AO’s notices under Section 133(6).
FACTS
Expenditure: The assessee claimed commission of Rs. 20.63 Crores paid to ~900 agents against revenue of Rs. 61.36 Crores.
Verification: The AO sent notices to 27 agents; 16 did not respond.
Disallowance: The AO disallowed Rs. 3.34 Crores (payments to the 16 non-respondents).
Evidence: The assessee provided agency contracts, ledgers, PANs, bank statements, and TDS certificates. Confirmations were also filed before the CIT(A).
DECISION
Burden Discharged: The assessee discharged its initial onus by proving the identity (PAN), genuineness (Bank/TDS), and necessity (Contracts) of the payments.
Non-Response Not Fatal: The failure of third parties to respond to notices is not a valid ground to penalize the assessee, especially when payments are routed through banks with TDS.
Verdict: The disallowance was deleted. [In Favour of Assessee]
III. REPOSSESSED TIME SHARE WEEKS CAPITALIZED AS “BUILDING” ELIGIBLE FOR DEPRECIATION
ISSUE
Whether the cost incurred to repossess/forfeit time share weeks (due to member defaults) can be capitalized as “Cost of Improvement” to the resort building and claimed for depreciation under Section 32, or whether it is an intangible right ineligible for building depreciation.
FACTS
The Asset: The assessee capitalized Rs. 22.28 Crores (Rs. 18.91 Cr for building) representing the value of 15,203 time share weeks repossessed from defaulting members.
AO’s View: The AO denied depreciation, arguing time share weeks are not “tangible assets” like buildings.
DECISION
Removal of Encumbrance: The Tribunal held that repossessing the rights effectively removed an encumbrance on the resort property (units).
Cost of Improvement: This expenditure restored the full rights of the units to the assessee, thereby improving the existing capital asset (Building).
Outcome: The capitalized amount was treated as part of the “Building” block, and depreciation was allowed.
Verdict: [In Favour of Assessee]
IV. AD HOC DISALLOWANCE OF FOREIGN TRAVEL EXPENSES
ISSUE
Whether an ad hoc disallowance of 25% on foreign travel expenses is sustainable when the assessee provides detailed evidence including names, designations, and business purposes for the trips.
DECISION
Evidence vs. Estimation: Since the assessee furnished complete details (dates, places, purpose, proofs) for the travel of sales/marketing personnel, a general ad hoc disallowance without specific findings is unwarranted.
Partial Confirmation: The disallowance was restricted only to the travel expenses of the Managing Director’s relative (personal nature).
Verdict: Ad hoc disallowance deleted. [In Favour of Assessee]
V. ASSESSMENT ON NON-EXISTENT ENTITY (CONVERTED TO LLP) IS VOID AB INITIO
ISSUE
Whether an assessment order passed in the name of the erstwhile Private Limited Company is valid if the company had already converted into an LLP and the AO was intimated of this fact with the registration certificate during the proceedings.
FACTS
The Conversion: The assessee-company converted into an LLP during the assessment proceedings.
Intimation: The AO was informed, and the Certificate of Registration was filed.
The Error: The AO passed the final order in the name of the erstwhile company.
DECISION
Jurisdictional Defect: Passing an order against a non-existent entity (a company that has ceased to exist upon conversion) is a fundamental jurisdictional defect that cannot be cured under Section 292B.
Outcome: The assessment order was declared void ab initio.
Verdict: [In Favour of Assessee]
KEY TAKEAWAYS
Entity Status: If your client converts (Company to LLP) or merges, immediately inform the Department. If they still pass the order in the old name, the entire tax demand may be quashed on this technicality alone (Case V).
Deemed Dividend Defense: Commercial transactions (trade advances) are the strongest defense against Section 2(22)(e). Always document the commercial nature (Case I).
IN THE ITAT MUMBAI BENCH ‘C’
Deputy Commissioner of Income-tax
v.
Prestige Holiday Resorts (P.) Ltd.
Pawan Singh, Judicial Member
and ARUN KHODPIA, Accountant Member
and ARUN KHODPIA, Accountant Member
IT Appeal Nos. 4161 and 4162 (MUM.) of 2025
C.Os Nos. 204 and 205 (Mum.) of 2025
[Assessment years 2015-16 and 2016-17]
C.Os Nos. 204 and 205 (Mum.) of 2025
[Assessment years 2015-16 and 2016-17]
OCTOBER 28, 2025
R.A. Dhyani, CIT-DR and Virabhadra Mahajan, Sr. DR for the Appellant. Dharmesh Shah and Ms. Mitali Parekh, CAs for the Respondent.
Order under section 254(1) of Income Tax Act
Pawan Singh, Judicial Member.- These two appeals by revenue and two cross objections therein by the assessee are directed against the orders of ld. CIT(A) / NFAC, both dated 27.03.2025 for A.Ys. 2015-16 and 2016-17. Certain facts in both the years are similar and the revenue as well as assessee in its CO, have raised certain common grounds of appeal in both the years, thus, with the consent of parties both the appeals and CO’s were clubbed, heard together and are decided by common order to avoid conflicting decision. For appreciation of facts appeal for assessment year (AY) 2015-16 is treated as lead case. The revenue in its appeal for AY 2015-16 has raised following grounds of appeal:
| (1) | Whether on facts and circumstances of the case, the CIT(A) erred is not considering routine commercial transaction ofpurchase oftime share weeks, entered into with its subsidiaries Regal Vacation Concepts Private Limited and Royal International Holiday Club (India) Private Limited as deemed dividend under section 2(22)(e) of the Act. |
| (2) | Whether on facts and circumstances ofthe case, the CIT(A) erred in allowing commission expenses amounting to Rs.3.43,69,243/- as the necessary documents to prove that the transaction was notgenuine and undertaken in normal course of business were not submitted by assessee during assessment proceedings. |
| (3) | The appellant craves the leave to add, amend, alter and/ or delete any of the grounds of appeal as above” |
| (4) | Whether on facts and circumstances of the case, CIT(A) right in allowing depreciation amounting to Rs. 94,57,623/-on the time share weeks capitalized during the year, by holding, inter alia, that the rights in time share weeks qualify as tangible asset and can be considered as building as per section 2(11) of the Act. |
2. In appeal for A.Y. 2016-17, the revenue has raised following grounds of appeal;
| (1) | Whether on facts and circumstances of the case CIT(A) right in allowing depreciation amounting to Rs 2,03,78,525/- on the time share weeks capitalized during the year, by holding, inter alias, that the rights in time share weeks qualify as tangible asset and can be considered as building as per set 2(11) of the Act?. |
| (2) | Whether on facts and circumstances of the case, the CIT(A) erred in not allowing commission expenses amounting to Rs. 3.43.69,243/- as the necessary documents to prove that the transaction was genuine and undertaken in normal course of business were not submitted by assessee during assessment proceedings. |
| (3) | Whether on facts and circumstance of the case and in law, the CIT(A) has erred in deleting the foreign travel expense without considering the fact that the expenses were made for the person who is not an employee of the company? |
3. The assessee on service of memorandum of appeal, filed by revenue filed its Cross Objections (C.O.) raising following identical grounds in both years appeal;
| (1) | On the facts and circumstances of the case, the ld AO has erred in filing appeal on 19 June 2025, which is beyond the time prescribed under section 253(3) of two months from the end of month in which the order sought to be appealed against is communicated. |
| (2) | On the facts and circumstances of the case, the ld AO has erred in not accepting the order passed by ld CIT(A) and by filing appeal against the order of CIT(A), which is based on the provisions of the law and binding CBDT Circulars hence, the appeal ought to be dismissed. |
| (3) | On the facts and circumstances of the case, the ld CIT(A) has erred in upholding the assessment proceedings conducted by the AO in the name of non-existent entity namely Prestige Holiday Resorts Private Limited, even though it was converted into Prestage Holiday Resorts LLP, w.e.f. 2 February 2017 and the same was duly communicated to the AO during course of assessment. |
4. Brief facts of the case as extracted from the orders of lower authorities are that the assessee is a company, engaged in the business of developing resort and marketing of time share vacation credits in their own resorts. The assessee filed its return of income for impugned assessment year declaring income at Rs.5.05 crores. Case was selected for scrutiny. During assessment, the Assessing Officer (AO), on perusal of schedules of fixed assets in the financial account of assessee noted that assessee made addition under the head, “Land & premises”. The assessee made detailed reporting in Note 10 of audited financials. The assessee made addition to the extent of Rs.3.37 crores and addition on account of office premises of Rs.19.72 crores. The Assessing Officer issued show cause notice to justify such addition. The assessee filed its reply dated 21/12/2018. The summary of reply of assessee is recorded at para 8.2 of assessment order. The assessee, in its reply stated that they are in the business of development of resorts / apartments and selling membership for the use of their members on the basis of time share vacation in the resorts. They are the legal owner of all the resort properties. Over the years, the time share weeks, assessee sold to various customers / members, permitting them to visit in the resorts / apartments during their membership period. The members were required to pay annual maintenance and management to maintain and upkeep the property. Such fees were directly payable to the management of assessee. On failure to pay such management fees, the assessee had right to revoke the membership. Over a period of 15 years, membership of various members was revoked and assessee acquired 15203-time share weeks, which is approximately 292 resorts apartments. These time share weeks pertained to re-possessed inventory. It was not feasible to resale such inventory as time share weeks, therefore, assessee decided and took a strategic decision to capitalise the same. The acquisition / revocation of requisition was in fact resulted in removal of encumbrances over the properties of assessee. The acquisition price was determined as outstanding management fees along with a mark-up of 10% of the cost towards the recovery efforts. The payment of outstanding charge was necessary to remove the encumbrance and to clear the title. The assessee also provided details of their various properties wherein they were providing vocational period to their members / customers. The assessee submitted that till 3/03/2015, the assessee re-possessed 15203 weeks and claimed 50% depreciation at 5.00%. The reply of assessee was not accepted by AO. The AO was of the view that assessee has not acquired any building premises during the year and entire addition under the head ‘office premises’ is nothing but purchase of time share weeks which has been capitalised by treating the same as addition to fixed asset. The assessee claimed depreciation of Rs.94,57,621/- on account of capitalisation of time share weeks into block of ‘building’. The AO, by referring to the definition of ‘block of building’ held that the amount which is capitalised, had the building if in fact is not a building, but is a time share week having no characteristics of building. The AO held that claiming depreciation under Income-tax Act, the assets should be classified into a particular block. The capitalisation of timeshare weeks is not an identifiable instrument. There is no scope for treating such right as ‘tangible asset’ and not qualified in the definition of ‘block of assets’ in section 2(11) of the Act. Thus, the AO disallowed the claim of depreciation of Rs.94,57,621/-.
5. The AO further noted that assessee has claimed to have purchased time share weeks from their subsidiary or group companies, viz. Regal Vacation Concepts Pvt Ltd (RVCPL); Royal International Holiday Club (India) Pvt Ltd (RIHCPL); Royal GoanBeach Resorts Pvt Ltd (RGBRPL); and International Vacation Ownership Pte Ltd. All such details are recorded at para 9.3 of assessment order. The AO issued notice under section 133(6) to all four subsidiary companies for seeking details with copy of ledger and financials of such companies. The AO recorded the details of such enquiries carried out by him. With regard to transaction with Regal Vacation Concepts Pvt Ltd, the AO recorded that purchase of time share weeks are on capital account transaction. With regard to Royal International Holiday Club (India) Pvt Ltd, the AO also recorded that the purchase of time share weeks are capital account transaction. It was further noted that assessee has shown consideration at Rs.1.87 crores to Royal International Holiday Club (India) Pvt Ltd, but as on 31/03/2015, a sum of Rs.1.98 crores is the total outstanding amount which was to be paid to them. The AO was of the view that it was not regular current account transaction as the purchase of time share weeks had not capitalised as ‘Land & Office premises’ for the first time in the books of assessee. The financial capability of the said concern to advance such a huge amount is nothing but an arrangement by which the assessee is utilising the advances / loan in the form of purchase of time share weeks. Such transaction is hit by provisions of section 2(22)(e) of the Act. On the basis of such adverse observation, the AO issued show cause notice dated 16/12/2018. Details of show cause notice is recorded at para 9.6 of assessment order. The assessee filed its reply. In the reply, the assessee objected about the treating the payment against transaction as deemed dividend. The assessee reiterated that they have undertaken various transactions with Regal Vacation Concepts Pvt Ltd in the normal course of business. The assessee furnished the details of transaction in the following manner:-
| Purchase of points | Rs 13,35,65,000/- |
| Purchase of time share | Rs 14,39,43,500/- |
| Commission received | Rs 2,71,21,365/- |
| Subscription fees received | Rs 1,96,02,000/- |
6. The assessee submitted that transactions are undertaken on year-to-year basis in the normal course of business. There are regular payments made and received in connection with said transactions. The closing balance of purchase of times share weeks from Regal Vacation Concepts Pvt Ltd in the books of assessee was of Rs.15.41 lakhs and it should not be considered as an advance or loan. The assessee also relied on various case laws to strengthen their submissions. The submission of assessee was not accepted by AO. The AO made an addition on account of deemed dividend of Rs.9.17 crores with regard to the transaction with Regal Vacation Concepts Pvt Ltd and Rs. 1.87 Crore to Royal International Holiday Club (India) Pvt Ltd with the following observations:
“9.9 Notice u/a. 133(6) of the Act were issued to RVCPL and RIHC, in response to which the details have been filed by RVCPL and RIHC. From the details filed by them it is seen that both these entities are 100% subsidiaries ofthe assessee company. Thus, these entities are covered by the provisions of section 2(22)(e) and any advance received by the assessee from them would be deemed as income of the assessee company as deemed dividerid to the extent of accumulated profits in the books of these entities.
9.10 The Information in Balance Sheet of RVCPL reveals that there is Share Capital of Rs. 100000/- and Reserves & Surplus in the form of accumulated profits is Rs. 9,17,41,215/- With this financials an amount of Rs. 15,41,89,163/- has been advanced to the assessee in the form of time share weeks for which the consideration amount is not yet received. The Information in Balance Sheet of RIHC reveals that there is Share Capital of Rs. 100000/- and Reserves & Surplus in the form of accumulated profits is Rs. 7,55,99,155/ With this financials an amount of Rs. 1,98,95,613/ has been advanced to the assessee in the form oftime share weeks for which the consideration amount is notyet received.
9.12 This is nothing but the loan or advance granted to the assessee company to take due benefits of the assets without making the payment. This facilitates the entire accumulated reserves being used by the shareholder who is the assessee in this case, without taking any dividend, which is the modus to be prohibited by virtue of section 2(22)(e) of the act. Purchase of time share weeks has been capitalised as Fixed assets under land and Office premises by taking the same from RVCPL and RIHC and the same has been advanced in kind by RVCPL and RIHC by showing as Receivable in their books.
9.13 From the perusal of the reply of the assessee, it is clear that even assessee admits that trade advances which are in the nature of commercial transactions would not fall within the ambit of the word ‘advance’. This is with the meaning that commercial transactions referred to as business transactions which are entered in the regular course of business activity and can be regarded as transaction which is not influenced solely due to someone holding the shares of the company. RVCPL and RIHC will never enter into a transaction of selling time share weeks worth Rs. 15.41 crs and Rs. 1.87 crs respectively without getting the money considering their networth. However, in the present case the assessee being 100% shareholder of the companies has been able to take the entire rights by showing as payable. This is in essence the advance or loan amount which has been received by the assessee in the form of consideration for time share weeks which has been shown as outstanding liability.
9.14 Considering the various nature of transactions entered into by the assessee company with RVCPL and RIHC, it is seen that there are certain transactions which can be regarded as commercial transactions in regular course of its business and finding the same as qualified commercial transactions, the same can be out of the ambit of deemed dividend. Butthe specific transaction of sale of time share weeks which has been capitalised as Fixed assets cannot qualify as commercial business transaction by the peculiar nature of the same and the materiality of transaction value making it distinct from the other transaction. In view of the above, I am of the opinion that the sums of Rs. 14,39,32,500/- payable to RVCPL and Rs. 1,87,37,700/-payable to RIHC should be treated as deemed dividend under section 2(22)(e) of the act and the same would be taxable in the hand of the assessee. However, since the accumulated profits of RVCPL are Rs. 9,17,41,215/- as on 31.03.2015, therefore the deemed dividend in the hands of the assessee is restricted to the extent of Rs. 9,17,41,215/- from RVCPL and Rs. 1.87,37,700/-from RIHC.”
7. The AO further noted that during the relevant financial year under, the assessee has debited commission expenses of Rs.20.63 crores. The total revenue shown by assessee in its books was at Rs.61.36 crores. The AO was of the view that commission expenses are about 33% of entire sales. The assessee has shown commission to 900 individuals ranging from Rs.75/- to Rs.1.23 crores. The AO issued notice under section 133(6) to 27 persons. Out of 27 persons, 18 parties have not responded. The aggregate commission’s payment to such 18 parties was of Rs.3.62 crores. The details of such parties are mentioned at para 11.3 of assessment order. The AO by referring the name of such persons, issued show cause notice as to why such amount should not be treated as unexplained expenditure. The assessee filed its reply. In the reply, the assessee furnished copy of agreement with various agents and also furnished bank statement to substantiate the payment of commission. The AO not accepted the explanation and evidences furnished by the assessee by taking view that 16 parties have not responded to his notice under section 133(6). The AO in para 11.5 of his order treated payment of commission to 16 parties aggregating to Rs.3.34 crores as unexplained. Thus, the AO while passing assessment order made disallowance of depreciation, addition on account of deemed dividend and partial disallowance of commissions expenditure.
8. Aggrieved by the additions in the assessment order, the assessee filed appeal before CIT(A). Before CIT(A), the assessee challenged the validity of assessment order by taking view that during assessment, the assessee company was converted into LLP with effect from 02/02/2017 and that such facts were brought to the notice of AO on 14/06/2018. However, the AO continued the assessment proceedings in the name of non-existing entity. The assessment order was also passed in the name of erstwhile company. Thus, the assessment order is invalid being void ab initio. To support their contention, the assessee relied on various case laws. The contention / objection of assessee was not accepted by Ld. CIT(A). The Ld. CIT(A) held that notice under section 143(2) was issued on 08/02/2016 in the name of erstwhile company, who has filed return of income. Moreover, assessee company complied with all the notices during assessment proceedings. Thus, the reliance on case law by assessee in Pr. CIT v. Maruti Suzuki India Ltd. ITR 613 (SC) has no application. The Ld. CIT(A) referred and relied on the decision of Hon’ble Apex Court in case of Pr. CIT v. Mahagun Realtors (P.) Ltd. ITR 194 (SC) dated 05/04/2022 wherein it was held that on the death of a corporate entity upon amalgamation per se, cannot invalidate the assessment order.
9. On the disallowance of depreciation on addition in the ‘block of assets’, the assessee reiterated its contention as submitted before the AO. The assessee stated that on 31/03/2015, the assessee had accumulated inventory of 15203-time share weeks, approximately 292 resort apartments. Keeping in view the size of this inventory, it was not feasible for the assessee to mark such a huge inventory as time share weeks on the management of assessee took a decision to capitalise in the financial year under consideration. As a result of acquisition of time share weeks, which resulted in removal of encumbrances over the resort property owned by assessee and had an enduring benefit to them, the cost was capitalised as a cost of resort property, i.e. in the land and building. Therefore, the inventory amounting to Rs.22.28 crores was allocated to ‘land & building’ on the basis of a fair valuation report. During the assessment, the assessee furnished complete details of capitalisation of time share weeks on claim of depreciation. The AO disallowed the depreciation on the ground that time share week cannot be regarded as ‘tangible assets’ and so, capitalisation of time share weeks is not an identifiable asset. Purchase of time share weeks is similar to occupational right which cannot be considered as ‘building’. The cost of construction of resort was written off by assessee during earlier years. In spite of considering the subject asset as ‘intangible asset’ in nature, the AO not allowed consequential depreciation on the said intangible assets.
10. The Ld.CIT(A), on considering the submission of the assessee allowed relief to the assessee by taking view that assessee is in the business of marketing of luxury resorts. It has built four resorts in Goa. The assessee introduced a unique project called “fractional ownership”. It is also known as time share vacation facilities. The assessee sold time share to its various members / clients. The members were eligible to use facilities of the resorts of the assessee. Time shares were sold directly to members through consultant and commission agents. To upkeep and maintenance of the resorts, the maintenance was entrusted to one associate group company, viz. Royal Goan Beach Resorts Pvt Ltd. The assessee, in earlier year credited the sale proceeds of time share in its accounts and charge of construction against such sale proceeds. The assessee-company has engaged its group companies for maintenance and was given responsibility of collecting maintenance and account and annual membership fees for receipt of accounts. Many of the members not utilised a whole week to stay at the resort, but only spent a part of the week. The time share weeks were also converted to time share point by splitting the week and such points were sold. The assessee also engaged three group companies, viz. Regal Vacation Concepts Pvt Ltd; Royal International Holiday Club (India) Pvt Ltd; and International Vacation Ownership Pte Ltd. Certain time share weeks and time share points were allotted to three group entities for marketing of such weeks and points as a product with identical terms and conditions to be sold by these three companies. The contract with these companies had a clause of forfeiture. In case of purchaser fails to make payment against annual membership charges and maintenance fees, the membership of such persons were forfeited. The legal ownership of resort buildings was with the assessee. The assessee retained the building at zero cost. In the balance-sheet of the company, the building or land were not reflected in earlier years, in spite of retaining legal ownership of the resort buildings. After certain period, the assessee realised that many of the members are failing to make payment of their annual membership charges. Such unrealised charges were in respect of 1721 members, who failed to clear their dues. The assessee started forfeiture of the time share and dues of group companies were reimbursed. Before forfeiture, it was shown as ‘trading asset’ in the balance-sheet of assessee-company. The total recovery of group companies which were engaged in the maintenance of selling of time share at the end of current financial year were of 15203 time share weeks, which were forfeited. The break-ups of such forfeited time share were also recorded. The total payment, therefore, for the forfeited units which were free from all encumbrance were of Rs.22.28 crores. Out of such amount, the assessee already shown forfeited balancesheet in preceding year upto 31/03/2014 for a sum of Rs.2.42 crores. The balance amount was paid to RGBR of Rs.1.61 crores, in the accounts of FY 2014-15. In the meantime, assessee made valuation of four resorts through registered valuer and on priority basis capitalisation of 292 forfeited units which were free from encumbrance was for a sum of Rs.22.28 crores. As per actual payment made to four group entities and capitalised the value at Rs.3.37 crores and the improvement towards land and Rs.18.91 crores as a cost of improvement towards building. Since the capitalisation was made at the end of the year, the assessee claimed depreciation on building @50% of 10% which is of Rs.94.57 lakhs. The AO objected on the ground that such time share cannot be treated as tangible asset and units are not identifiable. The Ld.CIT(A) noted that the claim of assessee is that of payment to the group companies; the assessee did not procure any new asset as the legal right of ownership over the resort was altogether with assessee company. By making payments to group companies, the designated 252 units in the properties were made free from encumbrance and capitalised the cost of improvement of the property, ownership of which was already with the assessee, though it was not reflected in the balance-sheet.
11. The Ld.CIT(A) held that the entire consideration paid by assessee company to its group companies for getting the identifiable units free from all encumbrances were to be treated as cost of improvement of the capital asset, which has to be incorporated in the balance-sheet as ‘depreciable asset’ and, therefore, assessee rightly claimed depreciation over the building block, which the assessee charged as the cost, as the cost of improvement, the depreciation is allowable on the cost of land apportioned by assessee company on the basis of valuation report of approved valuer. On the basis of aforesaid observation, the Ld.CIT(A) deleted the entire disallowance of depreciation.
12. On the addition/ disallowance of commission payment, the assessee submitted that commission was paid for procuring business. The assessee furnished ledger of entire payments of commission. The commissions was paid after deducting tax at source @ 10% under section 194H, wherein certain commission agent failed to give their PAN tax was deducted @ 20%. Out of 16 agents, who failed to reply during assessment, 7 of them confirmed receipt of commission payment after completion of assessment. The names of 8 other/remaining persons were also provided whose contract was terminated.
13. The ld CIT(A) deleted the addition by holding that commissions payments were made through banking channel and tax were deducted at source. Mere non-receipt of confirmation after a lapse of three years particularly when their agency agreement was discontinued, cannot be a reason for disallowance of such commission payment, there is no evidence that commission payment was received back by assessee or it was outside the books. The ld. CIT(A) also relied upon the decision of jurisdictional High Court in Pr. CIT, Mumbai v. Chawla Interbild Construction Co. (P.) Ltd. ITR 152 (Bombay)/ITA No. 1130 of 2015 wherein it was held that once adequate information is provided by assessee, disallowance could not be made even if some parties have not responded to the notice sent by AO. On the basis of aforesaid finding, the ld. CIT(A) deleted the commissions expenses of Rs. 3.43 crores.
14. On the additions of deemed dividend, the assessee furnished ledger of group companies upto 31st March 2017. It was submitted that the payments were made on account of sale of time share point. The assessee company were making payment for commercial transaction in regular course of business which cannot be considered as a deemed dividend. The time share weeks were held as a trading asset by RVCPL, which was purchased by the assessee company. The assessee had capitalised such purchases in its books of account. The treatment of such payment as deemed dividend was absolutely wrong. The assessee also relied CBDT Circular No. 19 of 2017 dated 12.06.2017, wherein it was stated that any advance which is in the nature of commercial transaction, would not fall within the ambit of word “advance” as per section 2(22)(e). The actual sale proceeds on purchase of time share week was not on account of in the nature of advance at all rather it is a commercial transaction.
15. The ld. CIT(A) on considering the submissions of assessee deleted the entire addition under section 2(22)(e) by taking view that in case of RVCPL, the assessee is regularly crediting the amount on account of sale of share points and making payment through tax. On 31st March the account of RVCPL was credited a sum of Rs. 16.17 crores for purchase of time share inventory from such company. Out of which Rs. 14.39 crores for actual purchase for revocation purchases and Rs. 1.77 crores for service tax for such revocation purchase. There was no logic in the finding of AO why such transaction should not be treated as a commercial transaction. The time share week were held as a trading asset by RVCPL, which were purchased by assessee-company. It was held that it is different issue altogether that the assessee has capitalised such purchase in its books of account. The ld. CIT(A) by referring CBDT Circular No. 19 of 2017, which states that any advance which are in the nature of commercial transaction would not fall within the ambit of section 2(22)(e). The ld. CIT(A) in respect of other associate company that is RIHCPL also noted that assessee also purchased time share weeks and credited Rs. 2.10 crores which includes Rs. 1.87 crores as actual consideration and Rs. 23.15 lakhs for service tax on such transaction. The assessee furnished ledger account of RVCPL as well as RIHCPL upto 31st March, 2017 wherein payments were made completely for purchase of time share week. On the basis of aforesaid findings, the ld. CIT(A) held that commercial transaction in regular course of business cannot be treated as deemed dividend and deleted the entire addition of Rs. 11.04 crores.
16. Aggrieved by the order of ld CIT(A) the revenue has filed present appeal in challenging the relief allowed to the assessee. On receipt of notice of appeal by revenue, the assessee has filed its Cross Objections in challenging the order of ld CIT(A) on the ground that the assessment order was passed against the non-existing entity.
17. We have heard the submission of learned Authorised Representative (Ld.AR) of the assessee and the learned Commissioner of Income Tax-Departmental representative (Ld. CIT-DR) as well as ld SR DR for the revenue. With the consent of both the representative, the ld AR of the assessee was allowed to begin with his submissions. In appeal for the AY-2015-16 by revenue, the ld.AR of the assessee submits that Ground No.1 relates to deleting the addition of deemed dividend. The ld AR of the assessee submits that during assessment the AO noted that assessee carried out certain transaction with the subsidiary which attract provision of section 2(22)(e) of the Act. The assessing officer was of the view that the assessee entered with transaction of its subsidiary namely Regal Vacation Concept Pvt. Ltd. (RVCPL) which is in the nature of purchase of timeshare points, receipt of collection commission, receipt of subscription fees for database and purchases of timeshare weeks. With it’s another subsidiary i.e. Royal International Holiday Club (India) Pvt. Ltd. (RIHCPL), the assessee entered into transactions for collection of commission, receipt of subscription fees for database and purchases of timeshare weeks. The AO was of view that transaction with Regal Vacation Concept Pvt. Ltd. (RVCPL) was not on account of regular transaction. The assessee has closing outstanding balance payable at Rs. 15.41 crore as on 31.03.2015, out of said balance of Rs. 14.39 crore is payable for purchase of time share weeks. With regard to transaction with Royal International Holiday Club (India) Pvt. Ltd. (RIHCPL), the assessee had a closing outstanding balance payable at Rs. 1.98 crore as on 31.03.2015. Out of the said balance of Rs. 1.87 crore is payable towards purchase of timeshare weeks on the basis of such observation AO was of the view these are not regular current account transaction, as the purchase of timeshare weeks have been capitalized as land and building for the first time in the books of the account for the year under consideration. The AO also of the view that financial capability of these subsidiaries to advance amount is nothing but an arrangement by which the assessee is enjoying the advance or loan in the form of purchase of time share weeks. The AO concluded that the provision of section 2(22)(e) is applicable in respect of said transaction of purchase of timeshare weeks with both the subsidiaries and treated it as deemed dividend. The AO was further of the view that Regal Vacation Concept Pvt. Ltd. merely had accumulated profit of Rs. 9.17 crore as on 31.03.2015, the amount of deemed dividend was restricted to that extend and balance payable by RIHC was of Rs. 1.87 crore thereby the AO made aggregate addition of Rs. 11.04 crore under section 2(22)(e) of the Act. The ld. CIT(A) considered the detailed submission filed by the assessee in explaining the nature of transactions and the various evidences filed before him. The ld. CIT(A) clearly held that transaction entered by assessee with its subsidiary did not fall in the ambit of section 2(22)(e) and invocation of the such provision was wrong. The ld.AR of the assessee submits that in term of agreement with the subsidiaries over the years, the assessee agreed to acquire timeshare points and timeshare weeks from the said subsidiaries. As per agreement the assessee was also entitled to commission and subscription fees for the database from these subsidiaries companies. All such transaction was part of regular business activities. The business arrangement between the assessee and subsidiary company. The account collected in respect of sale of timeshare point by these subsidiaries was offered as business income by them and payment made to the assessee was claimed as business expenses. Similarly, amount collected in respect of sale subscription fees, commission was offered as business income by the assessee and the payment made by these subsidiaries to the assessee was claimed and allowed as business expense in the books of subsidiaries. Once the AO has accepted the collection of commission and subscription fees for database as well as the transaction in the nature of purchase of timeshare points as the revenue transaction and part of the current account transaction is not covered under section 2(22)(e). The transaction in the nature of purchase of timeshare weeks could not have been distinguished and treated as capital account transactions representing deemed dividend in the hands of assessee. Ledger account of the subsidiaries as well as of assessee is clearly shows that all transaction which recorded under the same ledger which was grouped as part of the current liabilities in the books of the in the books of the assessee and as part of the current assets/trade receivables in the books of the subsidiaries. Such transaction partakes the character of current account transactions and was not liable to the rigor of section. 2(22)(e) of the Act. The ld AR of the assessee further submits that these timeshare weeks acquired by assessee are held as trading assets over the years and that these trading assets were capitalized only during the year as the assessee decided not to trade in these timeshare weeks and alternatively sell these weeks as units of real estate. Thus, by going the analogy adopted by the A.O. trading asset in the past in the respective years of acquisition, these timeshare weeks could not have been treated as transaction on capital account. Even the CBDT circular No. 19 of 2017 dated 12.06.2017 also clarified that trade advances in the nature of commercial transaction would not fall within the admit of provision of section 2(22)(e). To support his submission, the ld.AR of the assessee relied upon the following decision:
| • | Dy. CIT v. Ashok D. Jain [IT Appeal No. 4505 (Mum.) of 2013, dated 27-4-2018] |
| • | Chandrasekhar Maruti v. Asstt. CIT ITD 822 (Mumbai) |
| • | Ishwar Chand Jindal v. Asstt. CIT TTJ 436 (Delhi – Trib.) |
| • | CIT v. Amrik Singh (Punjab & Haryana) |
| • | CIT-I v. Amrik Singh (SC) |
| • | CIT v. Raj Kumar (Delhi) |
| • | CIT v. Atul Engineering Udyog (Allahabad) |
18. The Ld.AR for the assessee further submits that he would like to bring to the notice with outstanding amount shown in the books of assessee on 31.03.2015 were not only paid back as on 31.03.2017 but ledger account of both the subsidiaries became a debit balance and was reflected in the Sundry Debtors in the books of assessee. The ld.AR of the assessee thus, finally submits that he fully supports the order of Ld. CIT(A) on this ground with his aforesaid submissions.
19. Ground No. 2 relates to deleting the disallowances of commission expenses of Rs. 3.34 crore. The ld AR for the assessee pointed out that AO wrongly added Rs. 3.43 crore in assessment order, the actual figure is Rs. 3.34 crore. He further submits that during the assessment AO noted that assessee incurred commission expense of Rs. 20.63 crore as against the gross revenue of Rs. 46.26 crore from the sale of timeshare weeks, sale of time share points and sale commission earned. The AO was of the view that the commission expenses were on higher side. The assessing officer issued notice to 27 parties to whom commission was paid to the tune of Rs. 5.95 crore for seeking confirmation. In response to the notice under section 133(6), replies were received from certain parties. However, replies from 16 parties involving commission expenses of Rs. 3.34 crore were not received. The AO recorded that the assessee filed voluminous details in the form of agency contract, ledger account, invoices, PAN of the parties. The AO was of the view that notices were issued to the parties who have received commission income of more than Rs. 10,00,000/- and such parties ought to have replied to the notices. The assessing officer accordingly not accepted genuineness of the commission payment and disallowances payment of such 16 parties of Rs. 3.34 crore. The ld.AR of the assessee submits that before Ld. CIT(A) the assessee furnished complete evidence about such commission agents. Confirmation letters from the parties were also filed. The Ld. CIT(A) held that mere receipt of confirmation and replies from the parties against the notice issues after three years cannot be sole reason to disallow the expenditure. The Ld. CIT(A) followed the decision of Hon’ble Bombay High Court in the case of Chawala Interbild Construction Co. Pvt. Ltd.(supra) and deleted the addition. The sole ground of disallowance was not response to the notice under section 133(6), which cannot be the basis of disallowances of genuine expenses. Majority of parties were responded to the notice issued by AO. Seven parties filed their replies subsequent to the completion of the assessment proceedings. It was also explained to Ld. CIT(A) that the rest of agents were not in contact of the assessee as the contract got terminated and/or it was not possible for the assessee to get fresh confirmation from such parties. The commission payable to the agents was subjected to TDS which was paid to government account. No deficiency or discrepancy was point out by AO in the evidence furnished by the assessee. Similar commission was paid in earlier years and has been accepted in the assessment order passed under section 143(3). The Ld.AR of the assessee submits he fully supports the order of Ld. CIT(A). Ground No. 3 is general and needs no specific submissions.
20. Ground No. 4 relates to deleting the disallowance of depreciation amount of Rs. 94.57/- lakhs. The ld.AR of the assessee submits that the assessee is engaged in the business of development of resort apartment and selling various membership products for use of timeshare vacation facilities and the timeshare points to members, permitting them to stay in the resort during the membership period. As per such arrangement failure of maintenance fees renders revocation of the membership. Defaulting in regular payment is a regular feature by certain members. The terminated rights were acquired by assessee over the period and the assessee was having an accumulated inventory of 15,203 weeks corresponding to 292 resort apartments. The assessee could not deal with this investor in multiple ways thus, to maintain and operate this apartment as hotel units, who sale these apartment as real e-state and market this apartment as fractional ownership rights. Therefore, the assessee chooses to adopt last option of marketing this as apartment fractional ownership right. Hence converted this inventory this inventory of timeshare weeks into a fixed asset and claimed depreciation on these assets during the year treating it as building. The AO while passing the assessment order held that the timeshare weeks cannot be regarded as building for the purpose of section 32 of the Act. The AO also of the view that the rights of timeshare weeks cannot be regarded as tangible assets. It was further held cannot be considered as building under section 2(11) of the Act. Further cost of construction of the resort was already written off by the assessee in the earlier years against the income from sale of membership rights. Thus, the asset once written off cannot be recreated by merely capitalization of timeshare weeks. Thus, he disallowed depreciation claimed by the assessee. Before Ld. CIT(A), the assessee explained the facts and adduced relevant information and evidences to prove that the asset in the form of building was nothing but the cost of the timeshare weeks repossessed by the assessee during the year. The Ld. CIT(A), accepted the submissions of the assessee and deleted the said disallowance. Th ld.AR of the assessee submits that the assessee had constructed four resort properties situated in and around Goa namely Karma Royal Palms, Karma Royal Benaulim, Karma Royal Monterio and Karma Haathi Mahal.
21. These properties were constructed by the Assessee between 1996 to 2001. After completion of the construction of the said properties, the cost of construction was written off against the income earned by the Assessee in the form of membership rights issued to the members. The AO was of the view that as per the arrangement with members, these membership rights issued to various members upon conclusion of 80 years of tenure, would grant each of such members, a right to the share in the sale proceeds of the resort properties. Hence, the cost of construction ought to be written off against these membership fees. However, during the tenure of the membership, due to non-payment of the annual maintenance /management charges to the management company (which was in addition to one-time charges), these membership rights were forfeited and terminated. As already explained in the foregoing paras, since the right to terminate the membership of the members due to non-payment of the management fees was given to the management company, these membership rights in the form of timeshare weeks was lying and stood accumulated in the hands of the said management company. Since the said management company did not have expertise of reselling these membership rights, over the years, these timeshare weeks were repossessed by the Assessee on payment of the outstanding management charges in respect of the respective timeshare week at a markup of 10% of such outstanding membership charges paid by the Assessee. Accordingly, the said amount paid to the management company for the acquiring the timeshare weeks constituted cost of acquisition of these timeshare weeks in the hands of the assessee company.
22. The ld AR of the assessee submits that before the AO as well as before the Ld. CIT(A) submitted that when the membership rights were repossessed by the assessee company, apart from the legal ownership of the property, the assessee also re-acquired all the residuary rights which were earlier transferred at the time of granting the membership. It is therefore submitted that in terms of the accepted accounting principles as well as in view of the fact that the cost of construction was written off against the income earned and offered from issue of membership rights, the assessee had rightly reinstated the cost of constructions to the extent these membership rights were returned back and repossessed by them. The re-instatement of the of sales return wherein the entry of sales is reversed when the products sold at the time of sale is returned back in the year under consideration. Once the cost of construction in respect of the land and building of the resort properties is allowed as deduction against the issuance of membership rights in the respective years in the past, such cost of construction should be allowed to be recouped and reinstated when such membership rights are repossessed and reacquired by the assessee.
23. To support such contention that the cost of construction was written off and claimed as deduction during the years when the resort properties were constructed, the assessee relies upon the audited financial statements of the assessee for the year ending 31.03.1997 to the year ending 31.03.2001 which reflects that the substantial cost of construction was written off by the year ending 31.03.2001 and has shown all such entries in books of accounts. It was argued that these timeshare weeks so acquired by the Assessee in the year under consideration as well as in the earlier years and capitalized as part of the cost of building in the year under appeal, were subsequently sold in the form of fractional ownership of the apartments. This fractional ownership of the apartments has been offered to tax by the assessee as and by way of sale of depreciable asset and the income therefrom has been offered to tax. During these years, the assessee has offered income from capital gains on account of transfer of this fractional ownership of the resort apartments and offered the aggregate income of Rs. 170 crores. Such facts can be verified from the financial statements and the computation of income of the Assessee for the years from A.Y. 2018-19 to A.Y. 2023-24. These facts are also recorded and acknowledged by the Ld. CIT(A) at page 9 of his Order. The assessment proceedings in case of the assessee was also carried out for some of the years and the income from such capital gains stood accepted by the Ld. A.O. in the following orders:
| • | Order u/s. 143(3) r.w.s. 143(3A) and 143(3B) of the Act dated 17.03.2021 for A.Y. 2018-19. |
| • | Order u/s. 143(3) r.w.s. 144B of the Act dated 15.03.2024 for A.Y. 202223. |
| • | Order u/s. 143(3) r.w.s. 144B of the Act dated 10.03.2025 for A.Y. 202324. |
24. On the basis of the above submissions as well as the acceptance by AO of the cost of repossessed weeks allowed in the subsequent years against the sale of estate properties, it is submitted that the depreciation claimed by the Assessee was rightly allowed by the Ld. CIT(A) and that such disallowance by the AO was unjustified and unwarranted. The ld AR of the assessee prayed to dismissed the appeal of revenue on all three grounds.
25. On the other hand, the ld CIT-DR for revenue fairly submits that there is delay of 19 days in filing appeal before Tribunal. The delay is neither intentional nor deliberate but due the facts that the order passed by ld CIT(A) was not seen by AO immediately on ITBA portal. On coming to know about the impugned order, the AO obtained the approval/ authorization of higher authority, wherein little delay of 19 days occurred. The delay is not inordinate and the appellant/ revenue is not going to be benefitted by filing the appeal belatedly. The delay in filing appeal may be condoned. The ld AR of the assessee in the mean time intervene and would submits that he has no objection if the is delay in filing appeal is condoned.
26. Considering the submissions of both the parties on the issue of delay in filing the appeal, we find that the delay in filing appeal in not intentional or deliberate and is due to Bonafide reasons, hence, such delay is condoned. Now adverting the hear the plea of ld CIT-DR for the revenue on merits.
27. On ground no. 1 which relates to addition of deemed dividend under section 2(22)(e), the ld. CIT-DR for the revenue submits that during the relevant financial year, the assessee entered into transaction of purchase of time share weeks from RVCPL and RIHCPL there was understanding in the books of assessee. It was not on account of regular current account transaction as a purchase of time share weeks. The financial capability of both these concerns to advance such huge amount is nothing but an arrangement by which the assesse is utilizing their advance in the form of purchase of share week. Both the companies were 100% subsidiaries of assessee and thus, covered by the rigor of section 2(22)(e). Thus, the assessing officer rightly invoked the provision of section 2(22)(e).
28. In support of ground No. 2 which relates to deleting the commission expenses disallowance, the ld. CIT-DR submits that assessee claimed payment of commission to their sales agent. The total commission payments were about 33% of total sales. The AO issued notice only in respect of 27 parties. The AO reasonably disallowed the commission payment only in respect of agent who has not replied. The ld. CIT(A) deleted the addition by simply accepting the contention of assessee that non-receipt of confirmation cannot be received for disallowance of commission expenses. The CIT-DR prayed for restoring the order of assessing officer.
29. In support of ground no. 3 which relates to deleting the disallowance of depreciation. The ld. CIT-DR for the revenue submits that rights pertaining to time share weeks are not in the nature of building or tangible assets. The resorts ownership which is claimed by assesse not reflected in the books of account. The ld. CIT(A) allowed relief to the assessee by taking view that assesse introduced the concept of fractional ownership where time shares were sold to the members through a unit of weeks. The right to occupy could be purchased for a number of weeks for a period of 25 years on payment of certain fees. Agreement of sale of time share weeks had clause of forfeiture in case of purchaser failed to pay the annual maintenance fees. Legal ownership was retained by assessee at zero cost. However, over the years many members defaulted, thus, during relevant financial year decision was taken to forfeit the right of defaulting member and assesse made a pro rata capitalization of identified 292 forfeited units for a sum of Rs. 22,28,58,074/. On consideration of entire transaction paid to group companies for getting identifiable units free from a encumbrances, were to be treated as cost of improvement of the capital asset and accordingly allowed depreciation. The ld. CIT-DR submits that assessing officer held that ownership claimed by assesse is not reflected in the books of account and the time share weeks cannot considered as a building under section 2(11) of the Act, therefore, order of assessing officer may be restored.
30. We have considered the submissions of the both the parties and have gone through the orders of lower authorities carefully. We have also deliberated on various case laws relied by ld. AR of the assessee.
31. Ground no. 1 relates to deleting the addition under section 2(22)(e). The treatment and the basis of addition is discussed in para 5 and 6 of this order. As recorded above, before ld. CIT(A), the assessee vehemently agitated that assessee was having commercial transaction with its group companies and that any advance which is in the nature of commercial transactions would not fall within the rigor of section 2(22)(e). We find that ld. CIT(A) on transaction of fact held that assessee was having regular credit on account of sale of share points in case of RVCPL / group company. Similarly, the assessee was also having credit from associate company RIHCPL. Both the companies were paid consideration against the timeshare weeks on which service tax was paid and ultimately entire credit was cleared till the end of relevant financial year. We also find that ld. CIT(A) while allowing relief to the assessee relied upon CBDT Circular No. 19 of 2017, according to such circular any advance which are in the nature of commercial transaction will not form for invoking provisions of section 2(22)(e). On independent consideration of fact, we find that assessee was having commercial transaction with its both the group companies on account of sale of timeshare weeks. Thus, we affirmed the order of ld. CIT(A) with our additional observation. In the result, this ground of appeal is dismissed.
32. Ground No. 2 relates to deleting the commission expenses. The basis of making addition/partial disallowance of commission is recorded in para 7 of this order. We find that before ld. CIT(A), the assessee submitted that commission was paid to various commission agent for procuring business. The assessee furnished ledger of entire payment of commission. The assessee also claimed that commission was paid after deducting tax at source @ 10% wherein PAN was provided by the agents and @F 20% when the agents failed to provide their PAN. We find that assessing officer sent notice to 27 persons under section 133(6). Out of 27 persons, 16 parties have not responded. The ld. AO disallowed commission payment of such 16 parties. Before ld. CIT(A), the assessee submitted that 7 of the agent filed their confirmation after passing assessment order. The assessee also provided the name of 8 other persons and claimed that their contract was terminated. We find that ld. CIT(A) held mere non-confirmation after lapse of three years when the commission agreement was discontinued cannot be reasoned for disallowance. The ld. CIT(A) also gave his finding that there is no evidence that commission payment was received back or it was outside the books. We find that while allowing relief the ld. CIT(A) also relied on the decision of jurisdiction High Court in Chawla Interbild Construction Co. Pvt. Ltd. (supra) wherein it was held that once adequate information is provided by assessee disallowance could not be made even if some parties have not responded to the notice issued by ld. AO. On independent consideration of fact, we find that assessee is in the business of hotel and resort and payment of commission for inviting or soliciting client is a well-known feature in such business. Thus, we do not find any reason to interfere with the finding of ld. CIT(A). No contrary facts or law is brought to our notice to take a different view. Hence, the corresponding ground of appeal raised by revenue is dismissed. Ground No. 3 is general and needs no specific adjudication.
33. Ground no. 4 relates to allowing depreciation on time share weeks capitalized during the year. The basis of claiming depreciation by assessee is reflected by us in para 4 of this order. The AO disallowed the depreciation by taking view that time share week cannot be regarded as building for the purpose of section 32. The ld. AO was also of the view that timeshare weeks cannot be regarded as tangible asset. Such timeshare weeks are similar to occupation rights which cannot be considered as building under section 2(11) of the Act and that cost of construction of resort was already written off by assessee in earlier years against the income from sale of membership. As recorded above, before ld. CIT(A), the assessee filed written submission. The assessee apart from substantiating its claim for depreciation also stated that despite considering asset as intangible asset, the AO not allowed consequential depreciation on the said intangible asset.
34. We find that ld. CIT(A) allowed relief to the assessee by taking view that assessee is in the business of four luxury resort in Goa. The assessee introduced unique project for fractional ownership. Such unique concept was also known as time share vacation facilities which were sold to various members. To keep the maintenance of resort, the maintenance was interested to associated group companies. The assessee in earlier years credited sale proceeds of timeshare in accounts and charge of construction against such sale proceeds. Many of members not utilized whole week to said resort but only spent a part of week. Such timeshare weeks were converted into sometime share point. The assessee also engaged 3 group companies and allotted certain timeshare points to such group entities for marketing on identical term and condition. Contract with such companies who are also having forfeiture clause. In case purchaser failed to make the payment against membership and maintenance fees their membership were forfeited. The legal ownership of resort building was with assessee. The assessee retained the building at zero cost. In the balance sheet of assessee company, the building or the land were not reflected in earlier years despite retaining legal ownership of resort building. On coming to know that many members are failing to make payment of their annual maintenance and membership charges. Such unrealized charge was in respect of 1721 members who failed to clear their dues and on forfeiture of such timeshare; dues of group companies were reimbursed. The ld. CIT(A) on appreciation of fact also held that the assessee has shown forfeiture rights in their balance sheet as trading asset. The total recovery of Group Companies which was engaged in management and maintaining of selling of timeshare at the end of relevant financial year was of 15203 timeshare weeks which were forfeited. The assessee was having total payment for forfeiture which was free from al encumbrances were of Rs. 22.28 crores. The valuation of all 4 resorts through valuer on capitalization of 292 forfeited units which were from all encumbrances was for a sum of Rs. 22.28 crores. The assessee capitalized as per actual payment made to 4 group companies at Rs. 3.37 crores and improvement against land at Rs. 18.91 crores as a cost improvement trade building. Since capitalization was made at the end of year, the assessee claimed 1/2 of 10% which is of Rs. 94.57 lakhs. We also find The ld. CIT(A) also held that entire consideration paid by assessee to its group companies for getting the identifiable unit from all encumbrances were to be treated as cost of improvement of capital asset which has to be incorporated in the balance sheet as tangible asset and thus, the assessee was right in claiming depreciation over the building block. Before us, the ld. AR of the assessee vehemently argued that timeshare weeks so acquired by assessee in the relevant financial year were capitalized as a part of cost of building were subsequently sold in the form of fractional ownership of the apartments. The fractional ownership gains have been offered to tax. In subsequent years, the assessee offered from capital gain on transfer of such ownership of the resort apartment aggregating of Rs. 170 crores. To support such claim, the assessee furnished copy of financial statement and computation of income from A.Y. 2018-19 to 2023-24. We find that all such facts are duly acknowledged by ld. CIT(A) at page no. 9 of his order. The assessee also furnished the copy of assessment order passed under section 143(3) r.w.s. 143(3A) and 143(3B) or 144B for A.Y. 2018-19 from 2022-23 and 2023-24. No counter arguments were made before that the fractional ownership gains have been offered to tax in subsequent years. We also find that similar claims have been allowed in subsequent assessment years. Thus, on independent appreciation of facts, we do not find any reason to interfere with the finding of ld. CIT(A) which we affirmed with our additional observation. In the result, corresponding ground of appeal raised by revenue is dismissed.
35. In the result, the appeal of the revenue for AY 2015-16 is dismissed.
ITA No. 4162/Mum/2025 (2016-17)
36. Ground no. 1 relates to allowing depreciation on timeshare weeks capitalized during the year. We find that this ground of appeal is similar to the ground no. 4 in appeal for A.Y. 2015-16, which we have already dismissed. Thus, following the principal of consistency, this ground of appeal is also dismissed with similar observation.
37. Ground no. 2 relates to deleting the addition of commission expenses. WE find that this ground of appeal is similar to the ground no. 2 in appeal for A.Y. 2015-16 wherein we have affirmed the order of ld. CIT(A) and thereby rejected the similar ground of appeal. Thus, following the principle of consistency, this ground of appeal is also dismissed with similar observation.
38. Ground no. 3 relates to deleting the addition of foreign travel expenses. The ld. AR of the assessee submits that persons who had travelled were neither directors nor employers of the company and that the assessee has not been able to substantiate certain foreign travel expenses with supporting evidence. The AO disallowed Rs. 3,07,410/- incurred on the relative of John Spence, Managing Director of the assessee company. And for foreign travel expenses of Rs. 59.16 lakhs, the AO disallowed 25% that is Rs. 14,79,074/-by taking view that it was not incurred for the purpose of business. The AO further noted that foreign travel expenses of Managing Director, John Spence was of Rs. 57.12 lakhs and other Director Esparanca Patricio of Rs. 20.46 lakhs thus aggregating of Rs. 77.59 lakhs failed to test of business expediency. The AO also noted that John Spence, against the travelling expenses, the assessee claimed such expenditure, was group leader of the Karma Group and expenses incurred cannot be considered solely for the purpose of business. The AO disallowed 25% of aggregating expenses of Rs.77.59 lakhs thereby disallowed Rs. 19,39,900/-. Thus, the assessing officer aggregating amount of Rs. 37,26,384/- (3,07,410 + 14,79,074/- + 19,39,000/-). Before ld. CIT(A), the assessee filed all complete information justifying foreign travel expenses. The disallowances were based on adhoc basis. The genuine business expenses cannot be disallowed on adhoc basis. The ld. CIT(A) on considering such submission deleted the entire disallowance except the disallowance on the travel expenses in respect of relative of John Spence of Rs. 3,07,410/-. The ld. AR submits that assessee is in the business of hotel and resort. The assessee also engaged in the business of marketing and sales of timeshare of Karma Group resorts in India. In order to increase, business of inbound and outbound travel, various personnel of the assessee company have to travel for sales and marketing and the assessee has to invest heavily in sales and marketing functions. It is not always necessary that persons who are on the pay roll have to undertake travel for the purpose of business sometime hired personal or a consultancy agency are engaged for such business. When all necessary details were furnished there was no justification for making adhoc disallowance. The ld. AR of the assessee submits that he supports the order of ld. CIT(A). In support of his submission, the ld. AR also relied upon the decision in CIT v. Johnson And Johnson (P.) Ltd. [IT Appeal No. 2441 of 2013, dated 4-7-2016] passed by Bombay High Court wherein it was held that when expenditure is held for the purpose of business, no adhoc disallowance can be made for treating the same is non-business purpose.
39. On the other hand, ld. Sr. DR for the revenue submits that during assessment, the assessee failed to substantiate the fact that expenditure on foreign travel incurred on various persons was directly related to business of the assessee. The AO officer clearly held that certain persons were neither on the rolls of assessee rather was relative to the directors. The assessing officer reasonably disallowed only 25%.
40. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We find that assessing officer made disallowance of foreign travel expenses of Rs. 37,26,384/-. Such disallowances consist of 25% of expenses incurred in the foreign travel of Managing Director, John Spence Esparanca Patricio. The ld. AO also disallowed 25% of expenses incurred on other staff members or other persons by taking view that such expenses were not incurred for the purpose of business. We find that ld. CIT(A) allowed relief to the assessee by holding that adhoc disallowance is not tenable as has been held by Bombay High Court in Johnson & Johnson Pvt. Ltd. (supra). The assessee submitted details of foreign travel undertaking by various persons and furnished their name, designation, purpose, date & place of travel with amount. The assessee also furnished vouchers, tickets, booking confirmation. The ld. CIT(A) also noted that assessee has submitted the foreign travel expenses in respect of certain individual who are not on the pay roll of the assessee who were speakers, invitees, auditors, members and sales executives or collection executive and visited foreign countries for the purpose of business.
41. We find that ld. CIT(A) rightly held that if the expenditure is an allowable expenditure then either whole of the expenditure should be allowed as a deduction. The adhoc disallowance without any method or justification is not justified. In our independent consideration of fact, we find merit in the submission of ld. AR of the assessee that once the assessee furnished necessary details along with name of person, date of travel, place of travel, amount spent there was no justification for making adhoc disallowance hence we affirmed the order of ld. CIT(A). In the result, corresponding ground of appeal raised by revenue is dismissed.
42. In the result, appeal of the revenue for A.Y. 2016-17 is also dismissed.
C.O. No. 204-205/Mum/2025 (A.Y. 2015-16 & 2016-17)
43. The ld. AR of the assessee submits that assessee has raised legal ground in its C.O. against the validity of assessment order. In ground no. 1, the assessee has challenged the action of revenue in filing appeal beyond the time period of 2 months from the end of month in which order is passed. Since, he has made no objection on the plea of condonation of delay in appeal of revenue; therefore, said ground of appeal may be dismissed. Considering the submission of ld. AR of the assessee, ground no. 1 of the C.O. is dismissed.
44. Ground no. 2 & 3 relates to validity of assessment order passed against nonexisting entity. The assessing officer passed assessment order in the name of Prestige Holiday Resorts Pvt. Ltd., a non-existing entity. Prestige Holiday Resort Pvt. Ltd. was converted into Prestige Holiday Resorts LLP with effect from 02.02.2017 that is during the course of assessment proceeding. The return of income was filed by Prestige Holiday Resort Pvt. Ltd. (PHRPL) on 30.11.2015. The case was selected for scrutiny. During pendency, the assessee company converted into LLP. The assessee/cross-objector vide their letter dated 14.06.2018 filed on 19.06.2018, copy of which is filed at page no. 40 to 49 of paper book brought such fact in the notice of assessing officer. Despite bringing such fact in the notice of assessing officer, the assessing officer passed assessment order on 30.12.2018 for A.Y. 2015-16 as well as for A.Y. 2016-17 in the name of non-existing entity. The assessment order passed in the name of non-existing entity is invalid and void ab initio. The assessment order has been passed under PAN of erstwhile Private Limited Company without recognizing the fact that said company was converted into LLP and was offered / allotted different PAN, copy of such PAN is already placed on record. The issue of order passed in non-existing entity is now settled by Hon’ble Supreme Court in Maruti Suzuki India Ltd. (supra). The facts of the present case are identical to the facts of Maruti Suzuki India Ltd. In the said case, the ld. AO had issued notice as well as passed assessment order in the name of erstwhile entity namely Suzuki Powertrain India Ltd. Even though said entity was amalgamated with Maruti Suzuki Ltd. And such fact was informed to ld. AO during pendency of assessment proceeding. Similar view was taken by jurisdiction High Court in City Corporation Ltd. v. Asstt. CIT (Bombay). The ld. AR of the assessee also relied upon the decision of Gujarat High Court in the case of Vital Connections LLP v. National Faceless Assessment Centre (Gujarat) and Mumbai Tribunal in Dy. CIT v. Bhawna Computers (P.) Ltd. ITD 330/108 ITR(T) 351 (Mumbai – Trib.).
45. On the other hand, ld. CIT-DR for the revenue supported the order of ld. CIT(A). The ld. CIT-DR submits that assessee duly participated in the assessment proceedings. The return of income was filed by assessee company. Moreover, as after conversion of Private Limited Company into LLP all the rights and liabilities are vested with successor assessee. To support his submission, the ld. Sr DR of the revenue relied on the decision of Hon’ble Delhi High Court in Sky Light Hospitality LLP v. Asstt. CIT ITR 296 (Delhi) which has been approved by Hon’ble Apex Court in Sky Light Hospitality v. ACIT 405 ITR(St) 12 (SC) and Mahagun Realtors (P.) Ltd. (supra). The ld. CIT-DR for the revenue submits that in Mahagun Realtors (P.) Ltd. (supra) held that assessment order passed in amalgamated company was valid.
46. In rejoinder submission, the ld. AR of the assessee submits that case law relied by ld. DR in Sky Light Hospitality LLP (supra) is devoid of merit, for the reasons that said decision considered and distinguished by Hon’ble Supreme Court in case of Maruti Suzuki India Ltd (supra). The said decision has no application on the facts of the present case particularly after the decision of Supreme Court in Maruti Suzuki India Ltd. Moreover, the reference of provisions of section 292B is also not applicable in the facts of present case. So far as reliance on the decision in case of Mahagun Realtors (P) Ltd. (supra) is concerned, the said case is based on search and seizure action carried out on the premises of Mahagun Group. No intimation was given at the time of search and seizure action about amalgamation of two companies. The statement of managing director was also recorded wherein certain declaration was made in respect of certain income belonging to Mahagun Realtors. Subsequently, the said company was also filed return of income in the name of said non-existing company and not disclosed the fact of amalgamation and that Supreme Court noted that cross objection was filed for the first time before Tribunal and additional ground of appeal about nullity of assessment order that Mahagun Realtors (P) Ltd. was not in existence. Thus, the said decision is not applicable. Moreover, on identical set of fact, Mumbai Tribunal in ACIT v. Candor Renewable Energy (P.) Ltd. [IT Appeal No. 2560 & 2561 (Mum) of 2021, dated 19-10-2020] discuss the distinguishable fact of Mahagun Realtors Pvt. Ltd. (supra) and the principle laid down in Maruti Suzuki Ltd. was followed.
47. We have considered the rival submissions of the parties and have gone through the orders of ld CIT(A) carefully. We have also deliberated on various case laws relied by the parties.
48. We find that before assessing officer, the assessee filed an application vide letter dated 14.06.2018, copy of which is filed at page no. 38 of the paper book that assessee-company has been converted into LLP. Certificate of registration of convergent was also filed before assessing officer. We find that despite bringing such fact in the notice of assessing officer, the assessing officer passed the assessment order in the name of erstwhile assessee company. Before ld. CIT(A), the assessee raised specific ground of appeal that assessee company is converted into LLP and the assessment order passed in the name of erstwhile private limited company is void ab initio. The ld. CIT(A) on page of his order recorded relevant fact qua the objection raised by assessee appellant. The ld. CIT(A) held that objection/ground of appeal raised by assessee is not tenable as the assessee participated in the assessment proceedings. The ld. CIT(A) relied upon the decision of apex court in Mahagun Realtors Pvt. Ltd. (supra). The ld. CIT(A) finally concluded that at the best, the notice under section 156 can be treated as defective which is curable defect as assets and liabilities were taken over by LLP from the existing company. We find that facts in case of Mahagun Realtors Pvt. Ltd. (supra) are at variance. In the said case post amalgamation, no information was given to the assessing officer either during search action, even return was filed in the name of non-existing company and such facts were suppressed. Moreover, in case of assessee, the assessee right from the beginning has informed the assessing officer about subsequent development during the assessment proceedings. We further find that co-ordinate bench of Mumbai Tribunal while considering the similar objections as raised by ld. DR for the revenue and the observation of ld. CIT(A), was considered in ACIT v. Candor Renewable Energy and held that in Mahagun Realtors Pvt. Ltd., Hon’ble Apex Court has nowhere disagree with the principle laid down in Maruti Suzuki India Ltd. (supra) by taking following view:
“30. The aforesaid judgment of Hon’ble Supreme Court in the case of Mahagun Realtors Pvt. Ltd. (supra) in our humble opinion, nowhere disagrees with the principles laid down by the Hon’ble Apex Court in the case of Maruti Suzuki India Ltd. (supra) and Spice Entertainment Ltd. (supra) of Hon’ble Delhi High Court, for the reason that:-
| • | Firstly, the judgment in Mahagun nowhere disagrees with the principle in Maruti and Spice. In fact, in para 33, the Court categorically held that there is no doubt that MRPL amalgamated with MIPL and ceased to exist thereafter which is an established fact and not in contention. Further the Court held that the respondent has relied upon Spice and Maruti Suzuki (supra) whereas the facts of present case can be distinguished from the facts in Spice and Maruti Suzuki. |
| • | Secondly, the judgment by the Hon’ble Apex Court in Mahagun Realtors is rendered in peculiar facts and merely holds that the law declared in the case of Maruti Suzuki cannot be applied without looking into the overall facts, in particular the conduct of the assessee and the manner of framing of assessment. |
| • | Thirdly, the judgment raises a pertinent point that the business of the amalgamating entity survives even after merger, though the corporate entity may have come to an end. This point is merely to emphasize that the liability of the successor and therefore, it cannot be held that merely on account of non-existence of the predecessor, successor is not liable. |
| • | Fourthly, in para 43, the Court categorically held that the aforesaid discussion is “having regard to the facts of this case” and the said observation is in continuation of repeated observations that the decision in Spice and Maruti are distinguishable and, |
| • | Lastly, the Apex Court has decided the appeal on peculiars facts, without disagreeing with the decision in Maruti Suzuki India Ltd. and Spice Entertainment Ltd. 31. Thus, the decision of Hon’ble Apex Court in the case of Mahagun Realtors Pvt. Ltd. (supra) is not applicable on the facts of the assessee’s case albeit its facts are clearly covered by the judgment of Apex Court in the case Maruti Suzuki India Ltd. (supra). Here right from the day one, the AO was brought to the notice and as was brought on record before him that the erstwhile entity M/s Bhadrawati Ispat & Energy Ltd had already stood amalgamated with M/s Reliable Record Keepers Pvt. Ltd. w.e.f. AY 2015-16 only and still he continued with the proceedings u/s 153A in the name of non-existing entity. Thus the entire proceedings including notice u/s 153A and also statutory notice issued in the name of non-existing entity was void ab initio. Consequently, the entire proceeding was illegal. Even the assessment order though which has been captioned as “M/s Bhadrawati Ispat & Energy Ltd. (merged with M/s. Reliable Record Keepers Pvt. Ltd. which has now known as M/s. Candor Renewable Energy Private Limited” is in fact in the name of non-existing entity only. Therefore, the reasons and principles laid down by the Hon’ble Apex Court in the case of Maruti Suzuki India Ltd. (supra) is applicable and accordingly assessment orders passed by the AO are invalid and non est |
49. On considering the fact of present case, we find that decision rendered by Hon’ble Apex Court in Maruti Suzuki Ltd. (supra) is squarely applicable wherein it was held that where assessee company was amalgamated with another company and thereby lost its existence, assessment order passed subsequently in the name of said non-existing entity would be without jurisdiction and was to be set aside. The assessment order passed in the name of non-existing entity is a substantive illegality and not a procedural violation of nature adverted to section 292B. We also find that in the said case, the assessing officer was informed of amalgamated company having ceased to exist as a result of approved scheme of amalgamation, the jurisdictional notice were issued only in its name. Thus, in view of the aforesaid factual and legal discussion, we also find merit in ground no. 2 of cross-objection filed by assessee. In the result, ground no. 2 and 3 are allowed. Resultantly, the assessment order is held to be void ab initio. In the result, the cross-objection raised by assessee in both the appeals ae allowed.
50. In the result, CO filed by the assessee in both the years is also allowed.
51. In the final result, appeals of revenue for AY 2015-16 & 2016-17 are dismissed and CO filed by assessee in both the years is allowed.