TaxTMI 
TaxTMI 
TaxTMI 
2016 (12) TMI 1559
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....of receipt of membership fees treating the same as Capital Receipt?" Tax Appeal No.609/2016 [2.1] Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned Income Tax Appellate Tribunal, Ahmedabad in ITA No.2054/Ahd/2011 for the AY 200809 by which the learned Tribunal has dismissed the said appeal preferred by the Revenue, the Revenue has preferred the present Tax Appeal raising the following substantial question of law. "Whether, the Income Tax Appellate Tribunal has substantially erred in law and on facts, in deleting the addition, of Rs. 1,75,15,680/made on account of receipt of membership fees treating the same as Capital Receipt?" Tax Appeal No.741/2016 [2.2] Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned Income Tax Appellate Tribunal, Ahmedabad in ITA No.3301/Ahd/2015 for the AY 201112 by which the learned Tribunal has dismissed the said appeal preferred by the Revenue, the Revenue has preferred the present Tax Appeal raising the following substantial question of law. "Whether, the Income Tax Appellate Tribunal has substantially erred in law and on facts, in deleting the addition, of ....
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....see filed return of income on 29.09.2008 for AY 200809 declaring total income of Rs. 1630/. That the said return of income was processed under Section 143(1) of the Income Tax Act, 1995 (hereinafter referred to as "Act"). The case was selected for scrutiny and the notice under Section 143(2) of the Act was duly issued and served upon the assessee. On verification of the return of income and other details furnished, the Assessing Officer noticed the business of club activities carried out by the assessee and also the main object of the assessee company. On further scrutiny of the accounts it was noticed by the Assessing Officer that the assessee has enrolled members on payment of security deposit as entrance fee. It was noticed by the AO that the said security deposit though was refundable to the members after 25 years, however without interest. It was noticed by the AO that company had only a mere share capital of Rs. 5,10,000/only and whatever amount collected as security deposits from the members as entrance fees was utilized for construction and providing other facilities at the club. The AO noticed that the assessee has not kept apart the security deposit obtained from the memb....
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.... The Club members will have no rights as member of the company unless they hold share(s) in the Company. The Club members shall not have the management rights and accordingly, would not be entitled to receive notices of general meetings and attending or voting at the general meetings. (b) (i) the Noninterest bearing refundable Security Deposit by way of entrance fee and Annual Subscription fee shall be collected from different classes of club members as may be decided by the Board of Directors of the company or a committee appointed by the Board of Directors for the purpose. (ii) The Noninterest bearing refundable Security Deposit shall be refunded as per the law, to the member, or to his legal heir or nominee after 25 years from the date of enrollment as Club Member. On a plain reading the above Articles, it will be seen that the members who are interested to join as members of the Club are required to pay Security Deposit as entrance fees and the members are also required to pay Annual Subscription fee and other charges for the amenities availed by the members as collected from different classes of club members as may be decided by the Company from time to time. Hence, i....
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....d refundable after 25 years. The funds so received have been utilized for creating the facilities in which, as discussed above, the deposit payer has no interest or share. Hence, if at all, the depositor is eligible to claim refund of "current value" of the deposit after 25 years that is to say if he has advanced an amount of Rs. 100/now, and he will receive this amount i.e. 'Rs.100/' after 25 years, at current prevailing interest rate of 12%, the current value of Rs. 100/paid to him after 25 years will be only Rs. 5/. Therefore, while he has paid a deposit of Rs. 100/at present value, he will be refunded only Rs. 5/at present value. Hence, in respect of all your deposits received during the year, it is proposed to treat the deposits accepted during the year as current year receipts after reducing the current value of "refundable component". 6. It is further noticed from the Memorandum of Association and Articles of Association of the Company that accepting of deposits from the Public is not an object of the company. In your case you have accepted the deposits from public prior to enrollment as members and as per the provisions of Companies Act, 1956 only those companies who hav....
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....ead it over the life of membership. That the learned CIT(A) confirmed the addition of Rs. 1,87,66,800/treating it as an income, however the learned CIT(A) opined that the noninterest bearing security deposits refundable after 25 years received by the assessee from its all category members is not assessable as income only for the year under consideration and as the security deposits are considered as membership for the entire 25 years, the membership will be taxable equally for the entire period of 25 years and therefore, the learned CIT(A) considered 1/25th of the security deposit as income in the year of assessment and therefore, addition was restricted to Rs. 12,51,120/only. [4.3] Feeling aggrieved and dissatisfied with the order passed by the learned CIT(A), both the Revenue as well as the assessee preferred respective appeals before the learned Income Tax Appeal Tribunal, Ahmedabad (hereinafter referred to as "Tribunal"). The learned Tribunal relying upon the decision of the Hon'ble Supreme Court in the case of S.S. Sakhar Karkhana Ltd. vs. CIT, Kolhapur reported in (2004) 270 ITR 1 (SC) and the decision of the Division Bench of this Court in the case of Unique Mercantile Serv....
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.... from the members, as stated hereinabove, has been utilized for construction and providing other facilities at the club. It is submitted that therefore in the facts and circumstances of the case, the learned Tribunal has materially erred in relying upon and following the decision of the Hon'ble Supreme Court in the case of S.S. Sakhar Karkhana Ltd. (Supra). While making above submissions, Shri Bhatt, learned Counsel appearing on behalf of the Revenue has heavily relied upon the decision of the Hon'ble Supreme Court in the case of Income Tax Commissioner, Lucknow vs. Bazpur Coop. Sugar Factory Ltd. reported in 1988 (172) ITR 321 and the decision of the Division Bench of this Court in the case of Unique Mercantile Services Pvt. Ltd. (Supra). [7.0] All these Tax Appeals are vehemently opposed by Shri S.N. Soparkar, learned Counsel appearing on behalf of the Assessee. Relying upon the decision of the Hon'ble Supreme Court in the case of S.S. Sakhar Karkhana Ltd. (Supra) in which the Hon'ble Supreme Court did consider the earlier decision in the case of Bazpur Coop. Sugar Factory Ltd. (Supra) and after considering the said decision the Hon'ble Supreme Court set aside the order passed ....
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....wer the question in favour of the assessee and against the Revenue. [8.0] Heard the learned Counsel appearing for respective parties at length. [8.1] The short but interesting question of law which arise for determination of this Court is whether the receipt of membership fees, which is refundable after a period of 25 years but without interest, is required to be treated as income / revenue in the hands of the assessee or the same is to be treated as Capital Receipt? [8.2] While considering the aforesaid question Article of Association of the assessee and the relevant Rules, Regulations and Byelaws of the assessee with respect to the club members and security deposit are required to be referred to which are as under: Article of Association 2.(a) The Board of Directors of the company may enroll various categories of Club members on payment of such Noninterest bearing refundable security deposit as may be decided from time to time, to avail the club facilities provided by the Club. The Club members will have no rights as member of the company unless they hold share(s) in the Company. The Club members shall not have the management rights and accordingly, would not be entitled to....
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....arlier than the period of 25 years, the person shall cease to be a club member automatically." [8.3] Considering the Articles of Association and the relevant Rules, Regulations and ByeLaws of the assessee, the security deposit collected by the assessee at the time of enrollment of the club members is refundable after a period of 25 years and/or on happening of the eventuality in Rule / Bye Law No.2 i.e. if a club member dies or institutional member is dissolved or wind up as the case may be. In other cases the security deposit shall be refunded to the member on expiry of 25 years and the said period may be extended by maximum period of 15 years at the discretion of the club member to avail club facilities for the extended period. It is also true that the said security deposit shall be noninterest bearing refundable security deposit. In light of the above the question posed for consideration of this Court is required to be considered i.e. whether such refundable security deposit shall be considered as revenue / income as sought to be contended on behalf of the revenue or Capital Receipt as contended on behalf of the assessee. [8.4] It is the case on behalf of the Revenue that as ....
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....t needs to be clarified that the line of inquiry, in order to determine the true nature and character of the receipts, does not stop at ascertaining the mere fact whether the realization was in the course of trading operations. The moment it is found that certain amounts were deducted by the assessee out of the price payable to its members who supplied the raw material, the conclusion does not necessarily follow that all such realizations get impressed with the character of revenue receipts, giving rise to taxable income in the hands of the assessee. It is not any and every receipt linked to the trading activity that acquires the quality of revenue receipt. The Tribunal or the Court should go further and delve into the true nature, character and purpose of the realizations. If the amounts are meant to be held as deposits liable to be returned to the depositor at a specified point of time or on the happening of specified contingencies which are by no means uncertain or is otherwise treated as members' money the depository having no unfettered dominion over the said funds, then, it is difficult to characterize them as the income of the assessee. The realization of monies from the....
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....enuded of its character of 'deposit' for that reason alone. 31. First, discussion needs to be focused on the first feature, namely, conversion of deposit into shares. The Tribunal rightly pointed out and it is not disputed before us that such conversion is as good as refund. Such conversion into additional shares is, however, postponed till the events of repayment of loans towards capital expenditure and the repayment of Government share capital happen. In other words, till such time, the member/depositor has no immediate right to demand the payment. Nevertheless, the obligation to repay stood annexed to the deposited amount at the time it was received by the assessee subject of course to the occurrence of the contingency specified in the byelaw itself. It cannot be said, as has been said by the High Court, that "under the byelaws, no event or contingency has been contemplated" under which the members could demand the repayment of the deposit. Nor can it be said that even after the happening of the event specified in the byelaws, the right to demand repayment becomes illusory in view of the discretion reserved to the Board of Directors of the Society. In this context,....
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.... refund of the deposited amount to the member in case of cessation of membership or to his legal heirs in case of death, are important indicators against the treatment of the deposited amount as the money belonging to the Society. In the case before the Hon'ble Supreme Court it was also found that the deposited amount is not kept aside and even the same is used by the society for repayment of the loan and it was found that time of repayment is indefinite, however it was refundable on the occurrence of the contingencies specified in the byelaws. To the aforesaid the Hon'ble Supreme Court has held that same dose not denude the amount of its "character of deposit" carrying with it the obligation to repay and therefore, the Hon'ble Supreme Court did not accept the case of the Revenue that it may be treated as revenue income. In the aforesaid decision the Hon'ble Supreme Court distinguished the decision of the Hon'ble Supreme Court in the case of Bazpur Coop Sugar Factory Ltd. (Supra). In para 26, the Hon'ble Supreme Court distinguished the decision of the Hon'ble Supreme Court in the case of Bazpur Coop Sugar Factory Ltd. (Supra) by observing in para 26 as under: "26. To what extent....