Sterling Holiday Resorts (India) Ltd. Vs ACIT (Madras High Court)
The Madras High Court allowed the appeals filed by Sterling Holiday Resorts (India) Ltd. relating to assessment years 1997-98 to 2001-02 concerning taxation of deferred income arising from time-share membership fees. The assessee, engaged in the time-share business, collected membership fees for 99-year agreements and treated 45% of the consideration as current income while deferring 55% as “advance subscription towards customer facilities” to meet future obligations relating to amenities and services promised to members. The Assessing Officer rejected this treatment and held that the entire membership fee received was taxable in the year of receipt.
The Commissioner of Income Tax (Appeals) deleted the additions, but the ITAT reversed the appellate orders following its earlier decision for AY 2001-02. The Tribunal held that the concept of deferred income was alien to the Income Tax Act and that the assessee could not defer taxation merely because future obligations existed. It also observed that obligations to spend income in a particular manner did not alter its character as taxable income in the year of receipt.
Before the High Court, the assessee contended that it had continuing obligations under the time-share agreements to maintain resorts and provide facilities to members over 99 years. The assessee argued that revenue recognition based on matching principles and proportionate completion method was consistent with accepted accounting standards. Reliance was placed on decisions including Calcutta Company Ltd., Madras Industrial Investment Corporation Ltd., Treasure Island Resorts Pvt. Ltd., Winner Business Link Pvt. Ltd., and Mahindra Holidays and Resorts India Ltd.
