2024 (8) TMI 868 - AT - Income Tax

Membership fee revenue recognition on deferred basis allowed, Section 14A disallowance rejected, TDS Section 194H exemption confirmed

The ITAT Delhi allowed the assessee's appeal regarding membership fee taxation, accepting the methodology of recognizing revenue on a deferred basis for ... Accrual of income - Receipt of membership fee - AR argued that the ‘membership fees’ received has been offered to tax as and when the customers have been offered after completion of provision of services like beauty treatment and restaurant - amounts are received in advance and the Revenue cannot expect to offer all the advances received to tax - HELD THAT:- Generally any membership fee comprises either of amount, the member pays which is non-refundable or it is an advance paid by the member in lieu of the services being provided. It consists of a non-refundable portion of an upfront payment and an amount paid for availing discount for the services offered which are accounted and taxed on deferred basis. Normally, the revenue related to these arrangements should be recognized on a straight line basis unless there is evidence that the revenue is earned any different pattern. In this case, the assessee is providing beauty & health packages and there is an input cost which is variable from year to year whereas the members desirous of availing the services pay the amount in advance. The entire amount has been offered to tax. The working of the amounts offered for taxation given by the assessee has not been disputed by the Revenue authorities in the years before us and also accepted the methodology in the A.Y. 2012-13 and A.Y. 2013-14. Hence, keeping in view the entire facts and circumstances peculiar to the instant case, the appeal of the assessee is hereby allowed. Disallowance u/s 14A - no exempt income earned - HELD THAT:- Both the parties fairly submitted that the assessee has not earned any exempt income. Now, it is a settled matter that no disallowance is called for in the absence of any exempt income u/s 14A resulting in deletion of disallowance. Interest paid to NOIDA on plot installment - expenditure incurred on account of interest and acquisition of the capital asset is not allowable as per the proviso to Section 36(1)(iii) - CIT(A) affirmed the decision of the AO holding that interest cost should be added to the cost of land allotted by the NOIDA and hence the same cannot be held to be business expenditure - HELD THAT:- The expenditure incurred on account of interest and acquisition of the capital asset is not allowable as per the proviso to Section 36(1)(iii). Disallowance being 5% of expenses on business promotion, travelling, telephone expenses - HELD THAT:-We hold that no ad-hoc disallowance is permissible without bringing any rationale for such disallowance. TDS u/s 194H - Non-deduction of TDS on transaction charges levied by the bank on credit card transactions - HELD THAT:- Notification No. 56/2012 - CBDT facilitates payment without TDS of credit/debit card commission on transaction between the merchant establishment and acquirer banks. The notification obviates the uncertainty about the applicability of specific TDS provisions on payments mentioned above and consequent litigation. Hon'ble Delhi High Court in JDS Apparels Pvt. Ltd. [2014 (11) TMI 732 - DELHI HIGH COURT] held that commission to bank on payments received from customers who had made purchases through credit cards is not liable to TDS u/s 194H of the Act. Thus, we hold that no disallowance on credit card transactions for default of TDS is called for. Issues Involved:1. Legality of assessment under section 143(3).2. Addition on account of membership fee.3. Change of accounting method and its implications.4. Disallowance under section 14A.5. Disallowance of business promotion expenses.6. Treatment of interest paid to NOIDA Authority.7. Disallowance of miscellaneous expenses.8. Classification of interest credited by bank.9. Depreciation on software.10. Non-deduction of TDS on transaction charges.Issue-wise Detailed Analysis:1. Legality of Assessment under Section 143(3):The assessee challenged the legality of the assessment under section 143(3) as bad in law and sought annulment. This issue was raised in multiple appeals (ITA Nos. 5109/Del/2012, 6228/Del/2013, and 326/Del/2015).2. Addition on Account of Membership Fee:The core dispute was the treatment of membership fees received by the assessee. The assessee argued that the fees should be recognized on an accrual basis over the membership period, as per the mercantile system and Accounting Standard 1. The Assessing Officer (AO) and CIT(A) held that the entire fee received was income for the year of receipt, as it was non-refundable and the assessee had a vested right over the amount.The Tribunal observed that the assessee consistently followed the accrual method and apportioned the fees over the membership period. The Tribunal noted that the Revenue accepted this method in subsequent years (A.Y. 2012-13 and 2013-14). Therefore, the Tribunal allowed the appeal of the assessee, recognizing the fees on an accrual basis.3. Change of Accounting Method:The assessee argued that the change from cash to accrual basis for membership fees was bona fide and in compliance with section 145(2) of the Income Tax Act and section 209 of the Companies Act. The Tribunal upheld the assessee's method, noting consistency and adherence to accounting standards.4. Disallowance under Section 14A:The assessee challenged the disallowance under section 14A, arguing no exempt income was earned. The Tribunal agreed, citing settled law that no disallowance is warranted in the absence of exempt income, and deleted the disallowance.5. Disallowance of Business Promotion Expenses:The AO disallowed a portion of business promotion expenses, claiming they were shared with another group company. The Tribunal found no basis for the disallowance and held that such expenses were incurred wholly and exclusively for business purposes. The disallowance was deleted.6. Treatment of Interest Paid to NOIDA Authority:The AO and CIT(A) treated interest paid to NOIDA as capital expenditure. The Tribunal upheld this treatment, citing the proviso to section 36(1)(iii) of the Income Tax Act, which disallows interest on funds used for acquiring a capital asset.7. Disallowance of Miscellaneous Expenses:The AO disallowed a portion of miscellaneous expenses. The Tribunal found no rationale for the ad-hoc disallowance and deleted it.8. Classification of Interest Credited by Bank:The assessee contested the classification of bank interest as 'income from other sources' instead of 'income from business.' The Tribunal upheld the AO's classification, finding no error in treating it as income from other sources.9. Depreciation on Software:The assessee claimed depreciation on Microsoft Navision software at 60%, treating it as a tangible asset. The Tribunal noted that the assessee had only acquired the right to use the software and upheld the AO's disallowance of depreciation at the claimed rate.10. Non-deduction of TDS on Transaction Charges:The Revenue appealed against the CIT(A)'s deletion of disallowance for non-deduction of TDS on bank transaction charges. The Tribunal referred to CBDT Notification No. 56/2012 and the Delhi High Court judgment in JDS Apparels Pvt. Ltd., which exempted such charges from TDS. The Tribunal upheld the CIT(A)'s decision, deleting the disallowance.Conclusion:The Tribunal allowed the appeals of the assessee on most issues, particularly the recognition of membership fees on an accrual basis and disallowance under section 14A. The Revenue's appeal was partly allowed, affirming the treatment of interest paid to NOIDA and classification of bank interest. The Tribunal's order emphasized adherence to accounting standards and consistency in the assessee's accounting practices.