Sterling Holiday Resorts Limited Vs DCIT (ITAT Mumbai)
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) dealt with cross appeals filed by the assessee and the revenue against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] dated 28.12.2023 for Assessment Year 2017-18. The assessee, engaged in providing timeshare services, declared a loss of ₹21.61 crore. The Assessing Officer (AO) made multiple additions and disallowances, some of which were partly confirmed by the CIT(A). Both sides appealed.
Issues Raised by the Assessee
- Addition of ₹3.89 crore as “out-of-book rent expense” (u/s 69C):
The AO treated the difference between rent recorded in the Profit & Loss Account (₹30.78 crore) and in the Tax Audit Report (₹26.08 crore) as unexplained expenditure. The CIT(A) upheld this, citing non-deduction of TDS on certain rent payments and lack of supporting details for others.
The ITAT held that Section 69C applies only where the source of expenditure is unexplained. In this case, rent payments were recorded in regular books, so the source was not in question. The Tribunal found that the AO and CIT(A) had not examined the reconciliation and supporting evidence submitted by the assessee. The matter was remanded to the AO to verify documentary proof and decide afresh. - Disallowance of salary expenses of ₹48.57 crore:
The AO disallowed the difference between salary figures in accounts and those furnished during assessment, treating it as “out-of-books”. The assessee argued that the difference pertained to employees below the TDS threshold, stipends, and other exempt categories. The CIT(A) upheld the disallowance citing lack of evidence.
The ITAT accepted the assessee’s plea that additional employee-wise records and Form-16s were now available. It remitted the matter to the AO to verify the reconciliations and evidence, with directions to grant an opportunity of hearing. - Addition of ₹84.42 lakh for cash deposit of Specified Bank Notes (SBN) during demonetisation:
The AO made the addition u/s 68, holding that the assessee was not permitted to accept SBNs. The CIT(A) agreed, finding only disclosure in financial statements without supporting evidence.
The ITAT observed that the addition was based purely on suspicion, without verification of books or cash records. Since the assessee furnished new evidence showing the cash was from regular resort operations, the Tribunal remanded the issue to the AO to verify the cash book and supporting documents. - Disallowance of ESOP expenses of ₹2.61 crore:
The AO disallowed the claim on a presumptive basis, citing earlier years’ additions. The CIT(A) confirmed the disallowance.
The ITAT noted that identical issues had been decided in favour of the assessee in its own cases for earlier years (A.Ys. 2011-12 to 2013-14 and 2018-19), where ESOP discounts were held as allowable business expenditure following judicial precedents (e.g., PVP Ventures, Biocon Ltd.). Since the AO made the addition without verifying the actual claim, the Tribunal deleted the disallowance outright.
Issues Raised by the Revenue
- Deletion of addition of ₹21.39 crore on account of difference in Capital Work-in-Progress (CWIP):
The AO treated the difference between closing CWIP for A.Y. 2016-17 and opening CWIP for A.Y. 2017-18 as undisclosed sales u/s 68. The assessee explained that the variation arose due to transition to Ind-AS and adjustment of stamp duty provision through reserves and surplus.
The CIT(A) accepted the explanation and deleted the addition. The ITAT upheld this finding, observing that the adjustment was a result of Ind-AS adoption, duly reflected in financial statements. The AO had not shown any evidence of unaccounted sales. Hence, Revenue’s ground was dismissed. - Addition of ₹58.31 crore towards “deferred income”:
The AO held that 40% of receipts should be recognized immediately, rejecting the concept of deferring income for future maintenance obligations. The CIT(A) deleted the addition, accepting the assessee’s accounting method.
The ITAT noted that identical issues had been consistently decided in favour of the assessee in earlier years (A.Ys. 2002-03, 2006-07, 2007-08, 2008-09, 2010-11, 2011-12 to 2013-14). It reiterated that the assessee’s practice of recognizing only a portion of timeshare membership fees as income in the year of sale and deferring the balance for the remaining membership period was a consistent and accepted accounting policy. The AO’s rejection, merely because earlier orders were not accepted by the Department, was not valid. Hence, CIT(A)’s order deleting the addition was upheld.
Final Outcome
| Issue | Outcome |
|---|---|
| Rent difference (₹3.89 crore) | Matter remanded to AO for verification |
| Salary disallowance (₹48.57 crore) | Matter remanded to AO for verification |
| Cash deposit of SBN (₹84.42 lakh) | Matter remanded to AO for verification |
| ESOP expenses (₹2.61 crore) | Disallowance deleted |
| CWIP difference (₹21.39 crore) | CIT(A)’s deletion upheld |
| Deferred income (₹58.31 crore) | CIT(A)’s deletion upheld |
Key Takeaways
- Section 69C cannot be invoked where expenditure is recorded in the books and its source is explained.
- Disallowance of salary and rent expenses must be based on verified evidence, not assumptions.
- Additions under Section 68 for SBN deposits require examination of cash records, not mere suspicion.
- ESOP expenses are allowable business expenditure if properly accounted for under SEBI and judicially approved principles.
- Consistent accounting treatment for deferral of timeshare income, accepted in earlier years, cannot be arbitrarily disturbed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
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