CIT-LTU Vs Mahindra Holidays and Resorts (India) Ltd. (Madras High Court)
Conclusion: Time-share membership fees received upfront were not fully taxable under the Income Tax Act in the same year as it was intrinsically linked with continuing contractual obligations to provide accommodation and related facilities throughout the membership period and it can be spread over the contract period because services are given for many years.
Held: Assessee-company was engaged in the business of time-share hospitality services, collected membership fees from customers for granting holiday accommodation rights over a long-term period of 25/33 years. Assessee recognised only a portion of the membership fee as income in the year of receipt and deferred the balance over the tenure of the membership contract on the basis that substantial future obligations relating to accommodation and resort facilities were yet to be performed. AO rejected the deferred revenue model and held that the entire non-refundable membership fee accrued as income in the year of receipt itself under the mercantile system of accounting. According to the Revenue, the Income-tax Act did not recognise the concept of “deferred income”, and assessee’s future obligations were merely contingent liabilities, particularly since annual maintenance charges and utility charges were separately collected from members. Assessee, on the other hand, contended that the membership fee was intrinsically linked with continuing and enforceable contractual obligations extending throughout the membership tenure, including assured accommodation rights, exchange facilities, reservation obligations and liability for damages in case of default. Assessee further submitted that the liability undertaken was definite and accrued upon execution of the membership agreement and therefore the income attributable to future performance obligations could legitimately be spread over the contract period. High Court upheld the orders of the Commissioner (Appeals) and the Tribunal in favour of the assessee and held that the membership fee could not be taxed entirely in the year of receipt merely because assessee followed the mercantile system of accounting. The Court observed that the contractual obligations undertaken by assessee were real, continuing and enforceable, and the corresponding liability was accrued and not contingent in nature. Applying the matching principle and the doctrine of real income, the Court held that the deferred income method adopted by the assessee correctly reflected the true profits of the business and was consistent with accepted commercial accounting principles as well as judicial precedents.
M/s.Mahindra Holidays & Resorts (India) Ltd., (MH&RIL in short) is engaged in business of time-share business. The time-share members are enrolled on payment of membership fees either in full upfront or in 12/24/36 monthly instalments. The members are allowed to occupy and to use the resort facilities for specific period each year over a period of 25 years or 33 years as per the terms of the contract. In the returns filed for assessment year 20032004, MH&RIL declared 60% of the money received from its members as revenue for the year of collection and the balance 40% as income deferred to be spread over to the remaining years of the 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.
