TaxTMI 
TaxTMI 
2026 (5) TMI 233
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....itted and the balance 40% equally spread over the tenure of membership. The Assessing Officer, after examining various clauses of the membership agreement taxed the entire membership fee received as income of that year. He concluded that no extra expenses would be incurred in the subsequent years for providing facilities to customer, in view of the fact that as per the Time-share agreement, the assessee collect charges for upkeep and maintenance of the resorts and equipments separately as annual charges each year. He also observed that the assessee has claimed entire expenses incurred during the year but had deferred a portion of the income received which is against the concept of matching principle. According to Assessing Officer, loss which is neither suffered nor incurred in the accounting year is not deductible against the actual receipts of the year. 3. Being aggrieved, like the assessment orders of the earlier years, this assessment order was also tested before the Commissioner of Income Tax (Appeals). The Appellate Authority, namely the Commissioner of Income Tax (Appeals) vide order dated 25.08.2011, following his earlier order passed for the Assessment Year 2006-07, dis....
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....ither upfront or in instalments, for the purpose of providing accommodation and resort facilities to the members for a specific period. 8. The contention of the Department is that the entire receipt towards membership fees is liable to be taxed on the same year and there is nothing in the Act to permit the assessee to treat part of the income as deferred income and not to offer it for taxation. 9. On the contrary, the case of the assessee is that considerable portion of the receipt from the customers is set apart for providing agreed facilities over a period of 25 or 33 years, as the case may be. The members have agreed to pay annual maintenance charges for the maintenance of the resort but it does not mean that maintenance of the resort alone would be sufficient for the fulfilment of the obligation towards members. 10. To answer the questions of law, it is necessary first to examine the clauses of the agreement. Hence, 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 specifi....
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....ll not be overlapping. ii) Each of the periods requested for by the Member shall not exceed 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. Thus from the above claus....
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....day after issuance of confirmation voucher in the allotted Mahindra Resorts / Mahindra Associate Resorts, MHRIL shall provide alternate 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." 11. 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 for a week every year over a period extending beyond the year of payment. ....
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....ts. The money may be expended on grounds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading 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 future 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 charact....
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....us that entrance fee is a revenue receipt in the light of the decision of the Patna High Court in the case of United Club (supra) and so, 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, ther....
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....ated 10th July 2013, the High Court dismissed appeal of the Revenue, making the following observation: This appeal is sought 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 ap....
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....me Court had also given its explanation on real accrual of income and income accrued for the purpose of book-keeping as below: "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....
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....Court said (p. 78) that "expenditure" is equal to "expense" and "expense" is money laid out by calculation and intention. 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 ....
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....t. The obligating event is an event that creates an obligation which results in an outflow of resources. It is 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." 14. 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. 15. 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 ....
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....ppropriated by the respondent-assessee is substantially correct. At the same time, the payment was an advance and 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 recognise....
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....ted as receipt of thirty years. The Assessee Company preferred appeal before the Commissioner of Income-Tax (Appeals). 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? 20. 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 thereafte....