2020 (5) TMI 361 - AT - Income Tax

Tax Tribunal Rules Golf Course as Plant & Machinery, Membership Fees Taxable on Accrual

The Tribunal allowed the assessee's appeals for Assessment Years 2013-14, 2014-15, and 2016-17. It held that the golf course qualifies as 'plant and ... Classification of golf course as plant and machinery - Depreciation on land improvements versus land - Depreciation on plant and machinery - Accrual/mercantile system of accounting - Taxability of membership fees in the year to which they pertain - Refundable security deposit treated as capital receiptClassification of golf course as plant and machinery - Depreciation on plant and machinery - Depreciation on land improvements versus land - Depreciation on cost of developing the golf course on land is allowable treating the golf course as plant and machinery. - HELD THAT: - The Tribunal, following the coordinate-bench precedent in the assessee's earlier years and on identical facts, held that a developed golf course functions as a tool of the business and is analogous to a plant for the purpose of the business. The tribunal rejected the AO's view that improvements merely enhance land value and thus are non-depreciable, and accepted the view that the golf course creates a service facility that produces revenue and therefore qualifies for depreciation as plant and machinery. Having found no change in facts or circumstances, the tribunal directed the AO to grant depreciation on the cost of developing the golf course accordingly for the assessment years under appeal. [Paras 7, 12, 15]Grounds allowing depreciation on the golf course as plant and machinery are allowed and the AO is directed to grant depreciation for the relevant assessment years.Accrual/mercantile system of accounting - Taxability of membership fees in the year to which they pertain - Refundable security deposit treated as capital receipt - Addition on account of security deposit and membership fees is to be deleted: refundable security deposits are capital receipts and not taxable in the year of receipt; membership fees are taxable in the year to which they pertain under accrual accounting and, if offered to tax in the relevant subsequent years, the addition is liable to be deleted. - HELD THAT: - Relying on the coordinate-bench analysis, the tribunal held that the assessee follows the mercantile/accrual system; membership fees received in advance are chargeable in the year to which they pertain and, where such fees have been offered in the relevant subsequent years on accrual basis, they should not be taxed in the year of receipt. Further, where the security deposit is refundable under the terms of membership it constitutes a deposit (capital receipt) and not income; the tribunal respectfully followed the Gujarat High Court precedent referenced by the coordinate bench and directed deletion of the addition relating to refundable security deposits, while directing the AO to verify the years in which any membership fee income has actually been offered. [Paras 10, 16]Addition made on account of security deposit and membership fees is deleted to the extent indicated; AO to verify and tax membership fees in the year(s) to which they pertain if not already offered.Final Conclusion: All three appeals for Assessment Years 2013-14, 2014-15 and 2016-17 are allowed: the AO is directed to allow depreciation on the cost of the golf course treating it as plant and machinery, and to delete the addition made in respect of refundable security deposits and membership fees in accordance with the tribunal's directions regarding accrual treatment and verification by the AO. Issues Involved:1. Depreciation on golf course as 'plant and machinery.'2. Taxability of security deposit and membership fees as capital or revenue receipt.Issue-wise Detailed Analysis:1. Depreciation on Golf Course as 'Plant and Machinery':The assessee, a company engaged in various businesses including the operation of a golf course, claimed depreciation on the golf course at 15%, categorizing it as 'plant and machinery.' The Assessing Officer (AO) denied this claim, arguing that the golf course, being an improvement on land, should be considered as part of the land itself, which is non-depreciable. The Commissioner of Income Tax (Appeals) [CIT(A)] partially agreed with the AO, reclassifying the golf course as a 'building' and allowing depreciation accordingly.The assessee appealed, and the Tribunal referenced its own decision in the assessee’s previous cases (Assessment Years 2005-06 to 2011-12), where it had been held that the golf course qualifies as 'plant and machinery.' The Tribunal noted that the golf course functions as a business tool and generates revenue, akin to a plant. It also referenced judicial precedents, including the Supreme Court's decision allowing depreciation on a pond for an aquaculture company and the Gujarat High Court's ruling that mineral oil wells constitute a plant. Therefore, the Tribunal concluded that the golf course should be considered 'plant and machinery,' allowing the depreciation claim at 15%.2. Taxability of Security Deposit and Membership Fees:The assessee received security deposits and membership fees from its members, which it claimed as capital receipts. The AO and CIT(A) treated these amounts as revenue receipts, taxable in the year of receipt. The Tribunal reviewed the issue, referencing its decision in the assessee’s earlier cases (Assessment Year 2005-06), where it had ruled that membership fees should be taxed in the year they accrue, not when received, following the mercantile system of accounting.The Tribunal highlighted that the membership fees, though received in advance, were for services to be rendered in subsequent years and should be taxed accordingly. It directed the AO to verify if the income had been offered in subsequent years and delete the addition if confirmed. Regarding the refundable security deposits, the Tribunal cited the Gujarat High Court's decision in *Principal Commissioner of Income Tax vs. Gulmohar Green Golf and Country Club Ltd.*, which treated such deposits as capital receipts, not taxable as income. Following this precedent, the Tribunal directed the AO to delete the addition related to refundable security deposits.Conclusion for Each Assessment Year:- Assessment Year 2013-14: The Tribunal allowed the appeal, directing the AO to grant depreciation on the golf course as 'plant and machinery' and to delete the addition of security deposits and membership fees.- Assessment Year 2014-15: The Tribunal allowed the appeal, applying the same reasoning for depreciation on the golf course as in the previous year.- Assessment Year 2016-17: The Tribunal allowed the appeal, again directing the AO to grant depreciation on the golf course and to delete the addition of security deposits and membership fees.Final Order:All three appeals of the assessee were allowed, with the Tribunal pronouncing the order in the open court on 14/05/2020.