TaxTMI 
TaxTMI 
2026 (5) TMI 183
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....contract period i.e., 25/33 years since the balance is set apart for the expected expenditure to maintain the time share facilities till the tenure of the contract period. 2. The return filed by the Assessee for the Assessment Year 2003- 2004 was processed under Section 143(1) and selected for scrutiny. The Assessing Officer issued notice under Section 143(2) to the assessee and explanation sought. The assessee relying on the judgment of the Hon'ble Supreme Court rendered in M/s.Calcutta Company Ltd -vs- Commissioner of Income Tax reported in (1959) 37 ITR 1, justified the deferred income concept and contended that gross receipts should not be taxed. However, distinguishing the facts of the case cited, the assessing officer passed assessment order under Section 143(3) of the Income Tax Act on 22.03.2006 by concluding that the amounts received by the assessee towards the timeshare subscription from the customers and shown as advance in the balance sheet is to be treated as taxable income of the assessee for that year in entirety. 3. It is also appropriate to mention at this juncture, in the assessment order, the Assessing Officer had also made reference about the similar order....
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....sessment years 1998-99 to 2002-03. We also find that the CIT (A) had relied on his own order for the earlier years and for the impugned assessment year as well. On Revenue's Appeal it was held by this Tribunal that the entire amount of time share membership fee receivable by the assessee at the time of enrolment of a member could not be charged to tax in the initial year and it had to be spread over in the ensuring years. Nothing was brought on record by the Id.D.R to take a different view for the impugned assessment year. Hence, we find no merit in the appeal of the Revenue. It is, therefore, dismissed." 6. The Revenue appeal under Section 260A of the Income Tax Act, is before this Court for consideration. This Court has admitted the appeal for deciding the following substantial questions of law:- 1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the part of the time share membership fee receivable from the members upfront at the time of enrolment could be deferred, in the absence of any such provision in the Income Tax Act to defer revenue, especially when there was a contractual obligation fasten....
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....ecurring service costs but constitutes consideration for the vesting of membership rights. ii) The assessee's method of accounting, insofar as deferring a portion of the membership fee for future obligations while simultaneously claiming 100% of marketing and administrative expenditure in the very same year, results in distortion and misleading computation of business profits. Such a method fails to reflect the true and correct income as mandated under Section 145 of Income Tax Act. iii). Relying on the judgment of the Hon'ble Supreme Court in E.D.Sassoon & Co. Ltd vs. Commissioner of Income Tax reported in (1954) 26 ITR 27(SC), the learned Senior Standing Counsel for the Department submitted that the 'right to use' the resort facility is the asset sold. The said right gets vested with the member soon after the member gets himself enrolled on payment of membership fees. The consideration received thereof represents income that has accrued in praesenti. Hence, the assessee is liable to be taxed in the year of execution of the membership agreement. iv). Tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its d....
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....on'ble Supreme Court permitted the matching of future expenditure against the current receipts. Contrarily, in the case of time sharing, there is no definite, unconditional or irrevocable obligation on the part of the assessee. The incurring of expenditure is contingent upon multiple factors including the member electing to avail the services of the assessee. (viii) In addition to the judgments mentioned above, the following judgments were also referred by the Learned Senior Counsel for the Revenue to strengthen his submissions:- (i). Commissioner of Income Tax vs. United Club reported in [1986] 161 ITR 853 (Pat). (ii). Commissioner of Income Tax vs. Beldih Club reported in [1986] 161 ITR 861 (Pat). (iii) Commissioner of Income-Tax, U.P-II vs. Bazpur Co-operative Sugar Factory Ltd reported in [1988] 172 ITR 321 (SC). (iv) Commissioner of Income-Tax vs. British Paints India Ltd reported in [1991] 188 ITR 44 (SC). (v) Commissioner of Income-Tax vs. Southern Cables and Engineering Works reported in [2007] 289 ITR 167 (Ker). 8. Submission on behalf of the assessee-M/s.MH & RIL. i) In response to the above submission made....
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....td and the judgements of Delhi High Court in Commissioner of Income Tax vs. Dinesh Kumar Goel, reported in [2011] 331 ITR 10 (Delhi), Commissioner of Income Tax-III vs. Shyam Telelink Ltd reported in [2019] 410 ITR 31 (Delhi), confirmed by the Hon'ble Supreme Court in Principal Commissioner of Income Tax vs. Sistema Shyam Teleservices Ltd reported in (2019 (108) Taxmann.com 333 (SC) and the judgment of High Court of Gujarat in Commissioner of Income Tax vs. Winner Business Link (P) Ltd reported in [2015] 230 Taxman 399 (Gujarat) confirmed by the Hon'ble Supreme Court vide order dated 03.10.2016 were also referred and relied. 9. Heard the submission and examined the contentions carefully. To answer the substantial questions of law, first it is necessary to examine the terms of Time-share agreement (TSA) and then Membership Rules. The Clauses in the Membership Rules, which is relevant for consideration are extracted below:- ENJOYMENT OF CLUB MAHINDRA HOLIDAYS UNLIMITED: 3.1 The Member is entitled to enjoy any Week every year within the allotted Season in the specified Apartment in any of the notified Mahindra Resorts or Mahindra Associate Resorts during the Membersh....
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....ed 7 days. iii) If the Member enjoys a Holiday in any year under this facility, he / she / it cannot request for Holiday in the same Mahindra Resorts / Mahindra Associate Resorts in the same year or next year under this facility. iv) Request for Holiday can be only in the allotted season or lower season. v) The Member cannot avail Holiday Multiplier facility mentioned in Clause 4.1 (c). In case, MHRIL does not confirm Holiday as mentioned herein before, MHRIL shall provide alternate accommodation with or without kitchenette in any of the opted destinations during any of the periods requested for by the Member. In case MHRIL provides alternate accommodation without Kitchenette, MHRIL shall compensate the Member by providing standard complimentary break-fast every day during the period of Holiday. In case of default to provide alternate accommodation, MHRIL shall pay liquidated damages equivalent to 100% of the rent/tariff applicable for the first Holiday Period and the first Holiday destination requested for by the Member. 10. Thus from the above clause, it is obvious that the membership fees is collected for the assured occupation of the resor....
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....rnate accommodation and in the event of default in providing alternate accommodation, MHRIL shall pay liquidated damages equivalent to 100% of the rent/tariff that may be charged by MHRIL to other persons for staying in the allotted Apartment in the allotted destination during the period for which the Confirmation Voucher is issued. 7.2 The liquidated damages shall be paid by MHRIL to the Member within 30 days of such default. 7.3. Notwithstanding anything stated hereinabove, MHRIL shall not incur any liability to the Member if it is not in a position to fulfil its obligations by reason of any war, civil commotion, force majeure, act of God or any other notification from any Court of Law or Government." Thus, the clauses referred above makes it very clear that the fees collected from the members is coupled with obligations which spread over till the end of the agreement period. It is not mere an entrance fees to the resort but it is also right to occupy over a period extending beyond the year of payment. 11. The Clauses of agreement cast responsibility and liability on the assessee Company to provide accommodation facilities to its members. For the facilitie....
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....g receipts or to avoid future recurring payments of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the trader's pocket. Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income tax laws do not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in praesenti and a liability de futuro which, for the time being, is only contingent. The former is deductible but not the latter. The case which illustrates this distinction is Peter Merchant Ltd. v. Stedeford [(1948) 30 TC 496]. No doubt, that case was decided under the system of income tax laws prevalent in England, but the distinction is real. What a prudent trader sets apart to meet a liability, not actually present but only contingent, cannot bear the character of expense till the liability becomes real." (ii) Metal Box Company of India Ltd vs. Their Workmen reported in 1968 SCC OnLine SC 83, wherein....
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....o, the entire membership fee which is on par with such entrance fee has to be taxed in one year. This contention has to be rejected for more than one reason. Firstly, strictly speaking, there is no entrance fee as such in the present case. Secondly, the jurisdictional High Court has held in the case of Secunderabad Club(150 ITR 49) that the entrance fee is a capital receipt. Even as per accounting standard 9, entrance fee is normally capitalized. More basically, the issue in the present case is not whether the membership fee is capital receipt or revenue receipt. The assessee has not disputed that it is a revenue receipt. The only claim of the assessee is that, even if it is a revenue receipt, it cannot be brought to tax in one year and it should be recognized on a rational basis or time basis in the light of accounting standard 9. We see no reason to reject this claim as there is continuing liability to render services either free or at a reduced rate. 48. If the entire membership fee collected is shown in the present assessment year, there would be substantial deficit in future years, when the assessee has to incur expenditure for the provision of various services to the....
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....ught to be filed against the judgment and order of the Learned Tribunal dated 30.07.2007 in relation to the assessment year 2002- 2003, on the following substantial question of law: Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the entire membership fee collected in the year under consideration cannot be taxed in that year and has to be deferred to future years? We have heard the learned counsel for the appellant and gone through the impugned judgment and order. The learned Tribunal has decided the matter following earlier decision of the Tribunal in the assessee's own case in ITA Nos. 1189 and 1190/Hyd/04 for the assessment years 1997-1998 and 2001-2002. It is not the case of the Revenue that the orders passed earlier were appealed on the same have been reversed. In view of the consistent findings of the learned Tribunal, which are accepted by the parties, we do not see any reason to interfere with the impugned judgment and order. Consequently, we dismissed the appeal. No order as to costs." (v) In Godhra Electricity Co. Ltd vs. Commissioner of Income Tax, Gujarat-II, Ahmedabad rep....
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.... "22. The question whether there was real accrual of income to the assessee company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee company in respect of the enhanced charges for supply of electricity which were added by the Income Tax Officer while passing the assessment orders in respect of the assessment years under consideration. The Appellate Assistant Commissioner was right in deleting the said addition made by the Income Tax Officer and the Tribunal had rightly held that the claim at the increased rates as made by the assessee company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the Income Tax Officer did not represent the income which had really accrued to the assessee company during the relevant previous years. The High Court, in our opinion, was in error in upsetting the said view of the Tribunal. 23. In the result, the appeals are a....
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....ention. The idea of spending in the sense of "paying out or away" money is the primary meaning. Expenditure is what is paid out or away, something that is gone irretrievably. In the case of Calcutta Co. Ltd. v. CIT [(1959) 37 ITR 1: AIR 1959 SC 1165] decided in the same month, the assessee bought lands and sold them in plots for building purposes. The assessee undertook to develop the plots by laying out roads, providing drainage system, installing lights etc. When the plots were sold the purchasers paid only a portion of the purchase price and undertook to pay the balance in instalments. The assessee undertook to carry out the development of these plots. In the relevant accounting year, the assessee who followed the mercantile system of accounting, actually received in cash only a sum of Rs.29,392 towards the sale price of lands; but it credited in its accounts the sum of Rs.43,692 representing the full sale price of lands and at the same time it also debited an estimated sum of Rs.24,809 as expenditure for the development it had undertaken to carry out even though that amount was not actually spent. The Department disallowed this expenditure. Upholding the claim of the assessee t....
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....only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognised as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation." 13. Back to the Metal Box Company of India cited supra, again which has laid down the few principles for deduction on estimated liability and in the light of the introduction of Section 43CB of the Act 2017, we are of the opinion that the appeal is a futile exercise by the revenue to retest a settled proposition of law. 14. To put in nutshell, in Metal Box Company of India case cited supra, the principles postulated are:- (i) For an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid; (ii) Just as receipts....
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....nd was subject to the respondent-assessee providing basic telecom service as promised, failing which the unutilized amount was required to be refunded to the pre-paid subscribers. 10. The respondent-assessee states that they have been following the principles of revenue recognition as per accounting standards. Paragraph 7 of the accounting standards stipulates: "7. Rendering of services. 7.1 Revenue from service transactions is usually recognised as the service is performed, either by the proportionate completion method or by the completed service contract method. (i) Proportionate completion method- Performance consists of the execution of more than one act. The Revenue is recognised proportionately by reference to the performance of each act. The revenue recognised under this method would be determined on the basis of contract value, associated costs, number of acts or other suitable basis. For practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue is recognised on a straight line basis over the specific period unless there is evidence that some other method better repr....
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....ppeals). The Appellate Authority allowed the assessee appeal and directed the Assessing Officer to follow the method of accounting regularly adopted by the assessee. The order of the Appellate Authority was challenged by the Revenue before the Tribunal. The said appeal was dismissed by the Tribunal confirmed the order of the Appellate Authority. Thereafter, when this matter came up for consideration before the Gujarat High Court in Commissioner of Income Tax vs. Winner Business Link (P) Ltd reported in [2015] 230 Taxman 399 (Gujarat), one of the substantial questions of law framed was:- Whether the Appellate Tribunal was right in law and on facts in accepting the method of accounting followed by the assessee ignoring the fact that during the regular assessment proceedings for A.Y.1997-98, the method of accounting followed by the assessee was rejected by the Assessing Officer? 19. The High Court of Gujarat answered the above question of law as below:- "The amount received by way of membership fees was required to be considered as an advance and thereafter as and when the business commenced the amount of liability was required to be taxed over a period of time pr....