CIT Vs Sterling Holiday Resorts (India) Ltd. (Madras High Court)
Summary: The Madras High Court dismissed the Revenue’s Tax Case Appeal concerning the taxability of deferred time-share membership fees received by M/s Sterling Holiday Resorts (India) Ltd. for Assessment Year 2002-03. The assessee was engaged in running timeshare resorts at various places in India.
For the previous year 2001-02, the assessee treated 45% of the receipts from sale of time shares as income of the current year and deferred the remaining 55% for spreading over the remaining years of the contract period, setting apart the deferred amount as provision for future expenditure. The Assessing Officer, applying the mercantile system of accounting, held that the entire income had accrued in the year of receipt and disallowed the deduction. The Commissioner of Income Tax (Appeals) confirmed the disallowance.
On appeal, the ITAT considered the decision of the Special Bench of the ITAT, Madras, reported in [131 TTJ 1], and the decision in M/s Mahindra Holidays and Resorts India Ltd., ITA No.1613/Mds/2011 dated 25.05.2012, on identical facts, and allowed the assessee’s appeal. The Tribunal held, in substance, that the entire time-share membership fee received upfront at the time of enrolment was not income chargeable to tax in the initial year because the receipts were subject to contractual obligations requiring the assessee to provide services in future over the term of the contract. The decision referred to in the judgment is available as Mahindra Holidays and Resorts India Ltd..
The High Court noted that the assessee had treated 45% of the time-share receipts as current-year income and deferred 55% to the remaining contract period. The Court observed that the earlier controversy concerning deferred income and future expenditure involved whether the future expenditure was contingent or certain. In the time-share business, the Tribunal’s earlier view had favoured the Revenue until the decision of the Special Bench in Mahindra Holidays and Resorts India Ltd..
The Special Bench, after considering the terms of the time-share agreement and the assessee’s rules, concluded that the provision for future expenditure was not contingent but certain. The annual maintenance charges and utility charges collected from members were independent of, and unconnected with, the facilities and amenities promised as part of the members’ right to occupy. Although a debt was created immediately upon execution of the agreement, the assessee had not fully contributed to the accrual of income by rendering all the services. The assessee remained bound to provide accommodation to members for approximately one week every year during the currency of the membership. Accordingly, the entire fee could not be treated as income accrued in the year of receipt without spreading it over the years during which the contractual liability continued.
The High Court further considered the treatment of an identical issue by the ITAT Hyderabad in the Treasure Island case. The Tribunal there had reasoned, inter alia, that the assessee’s claim was not that the membership fee was a capital receipt, but that even though it was a revenue receipt, it could not be brought to tax entirely in one year where there was a continuing liability to render services. It also observed that taxing the entire membership fee in the year of receipt, while expenditure had to be incurred in subsequent years for providing services to members, would produce a distorted picture of the assessee’s working results. The Tribunal referred to Accounting Standard 9 and concluded that where services were provided on a continuing basis and related costs fell in different years, revenue should be recognized on a time basis.
The order in the Treasure Island matter was challenged before the Andhra Pradesh High Court in Commissioner of Income Tax-II, Hyderabad vs. M/s Treasure Island Pvt Ltd., I.T.T.A. No.241 of 2012, dated 10 July 2013. The High Court dismissed the Revenue’s appeal, noting that the Tribunal had followed its earlier decision in the assessee’s own case and that those earlier orders had not been shown to have been reversed.
The Madras High Court also referred to the Gujarat High Court decision in Commissioner of Income-Tax v. Winner Business Link (P) Ltd., reported in [2015] 55 Taxmann.com 468 (Gujarat), which followed the Andhra Pradesh High Court’s decision in Treasure Island and the Delhi High Court decision in CIT Vs. Dinesh Kumar Goel. The Gujarat High Court held that accepting the Revenue’s contention would result in a distorted picture of the working results of the assessee. The judgment in Winner Business Link was challenged before the Supreme Court, which, according to the supplied judgment, dismissed the Revenue’s appeal on 03.10.2016 and thereby upheld the Gujarat High Court decision.
The Madras High Court held that the decisions in Treasure Island, Dinesh Kumar Goel and Winner Business Link supported the ITAT’s approach. The Court considered the ITAT’s order and reasoning to be the most appropriate and legally sustainable view and stated that the view had received the approval of the Supreme Court in Winner Business Link.
Accordingly, the Court dismissed the Revenue’s appeal and answered the substantial questions of law in the affirmative, in favour of the assessee. Tax Case (Appeal) No.648 of 2013 was dismissed, with no order as to costs. The judgment was pronounced on 28.04.2026 by Dr. Justice G. Jayachandran and Mr. Justice Shamim Ahmed.
Cases Discussed
- M/s. Mahindra Holidays and Resorts India Ltd., ITA No.1613/Mds/2011 — followed as an identical-facts decision concerning deferral of time-share membership receipts and the contractual obligation to provide services over the membership period.
- Commissioner of Income Tax-II, Hyderabad vs. M/s. Treasure Island Pvt Ltd., I.T.T.A. No.241 of 2012 — considered as an Andhra Pradesh High Court decision dismissing the Revenue’s appeal against the ITAT’s treatment of membership fees as deferred over the period of continuing service obligations.
- CIT Vs. Dinesh Kumar Goel, [2011] 197 Taxman 375 (Delhi) — referred to as a Delhi High Court decision concerning recognition of receipts where services were to be rendered over subsequent years.
- Commissioner of Income-Tax v. Winner Business Link (P) Ltd., [2015] 55 Taxmann.com 468 (Gujarat) — considered for its view that taxing the entire membership fee in the year of receipt would result in a distorted picture of the assessee’s working results; the supplied judgment records that the Supreme Court dismissed the Revenue’s appeal on 03.10.2016.
- United Club — referred to in the quoted ITAT Hyderabad reasoning concerning the Revenue’s contention that entrance fee was a revenue receipt.
- Secunderabad Club, 150 ITR 49 — referred to in the quoted ITAT Hyderabad reasoning for the proposition concerning the character of entrance fee.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
The appellant is the assessee running timeshare resorts at various places in India. The fees collected for membership for the previous year 2001-2002, in the return of income for Assessment Year 2002-2003, deferred at the rate of 55% setting apart as provision for future expenditure. The Assessing Officer held that as per the mercantile system of accounting, the entire income accrued to be taxed as income of the current year and disallowed the deduction. The CIT(A) also confirmed the said disallowance.
2. On further appeal by the assessee to the Tribunal, ITAT considering the judgment of the Special Bench of ITAT, Madras, reported in [131 TTJ 1] and the decision in the case of M/s.Mahindra Holidays and Resorts India Ltd., in ITA No:1613/Mds/2011 dated 25.05.2012, on an identical facts, allowed the appeals by the assessee.
3. The Tribunal, in sum ans substance, held that the entire amount of timeshare membership fee receivable by the assessee upfront at the time of enrolment of a member is not the income chargeable to tax in the initial year on account of contractual obligation, that is fastened to the receipts to provide services in future over the term of contract.
4. As against the order of the ITAT in ITA No:471/2012 (for Assessment Year 2002-2003) the appeal by the revenue is before us for consideration. It is necessary to record at this juncture that the rest of the appeals by the revenue for the other assessment years were dismissed on account of low tax liability applying the CBDT circulars.
5. At the time of admission of this appeal, the following Substantial Question of Law was framed for consideration:-
(1) Whether on fact and circumstances of the case, the Tribunal right in holding that the commissioner of Income Tax (Appeals) has erred in confirming the addition made by the assessing officer towards deferred income?
(2) Whether on facts and circumstances of the case, the Tribunal was right in holding that the 55% receipt from the sale of time shares in the resorts of the assessee is not the income of the assessee in the year of receipt?
6. In recapitulation of the facts, the assessee M/s.Sterling Holiday Resorts (India) Ltd., is a company engaged in hospitality service, treated 45% of the receipts from time shares sale in its holiday resorts as income of the current year and deferred 55% of the receipt to be spread over to the remaining years of the contract period. The accounting method adopted by the assessee was not accepted by the Assessing officer as well as the appellate authority. This was obviously due to conflicting views on deferred income matching the expected future expenditure. Wherever, the provision made for future expenditure which is contingent in nature, the deduction was disallowed. When it was established that the future expenditure is certain, the concept of matching principle was permitted. In so far as time share business, till the decision of the Special Bench of ITAT, Madras in Mahindra Holiday Resort Ltd ([131 TTJ 1 (SB)], the view of the Tribunal was in favour of the Revenue.
7. However, the Special Bench, after considering the terms of timeshare Agreement and the Rules of the assessee company, came to a conclusion that the provision for future expenditure is not contingent but certain, irrespective of the other factors. The annual maintenance charges and the utility charges collected from the members is independent and unconnected to the facility and amenities promised to be provided for the members which are part of the right to occupy. In the case of timeshare, a debt is created on the assessee immediately on execution of the agreement. However, it cannot be said that the assessee has fully contributed to its accruing by rendering services. The assessee is bound to provide accommodation to the members for a period of one week or so every year till the currency of the membership. Till the assessee fulfils its promise, the parenthood cannot be traced to it. When there is definite liability cast on the assessee to fulfil the promise, it cannot be said that the entire fee received by the assessee is income accrued in the year of receipt, without spreading over to the years till the liability under the contract in force.
8. Following the decision of the Special Bench, which has considered the judgments touching on the issue. The ITAT has allowed the appeal of the assessee. Same is impugned in this appeal by the revenue.
9. When identical issue came up before the ITAT Hyderabad in Treasure Island case, the tribunal held as below:
“47. The learned Departmental Representative pleaded before 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, there would be substantial deficit in future years, when the assessee has to incur expenditure for the provision of various services to the members without matching receipts. This would give a totally distorted picture of the working results of the assessee. While substantial profits will be taxed in the year under appeal, there will be substantial losses in” subsequent years. The revenue may seek such result, but we see no reason to allow it.
(Emphasis added)
……
50. Before we conclude, we may mention that there appears to be some incongruity in item 6 of the appendix to the accounting standard 9, which we have extracted hereinabove While it states that entrance fee is generally capitalised, it proceeds to state that when membership fee permits only membership and all other services are paid for separately, it should be recognized when received. If the membership fee permits only membership it should be on par with entrance fee and so there seems to be some contradiction between the two statements. But the general import of item 6 of the appendix and more particularly of the accounting standard 9 itself is clear. The import of item 6 has to be seen in the light of other illustrations given under other headings of the appendix like installation fees, advertising and insurance agency commission, financial service commissions, admission fees, tuition fees, etc. Reading them all together, the principle is that when service is provided on a continuing basis and the cost relating to the service falls in a different year, revenue should be recognized on a time basis. Going by this general import of item 6 in the appendix and the wording in the body of the accounting standard 9 itself, it is clear that the assessee conformed to the accounting standard 9 and as such, the book results deserve to be accepted.
51. In the light of the foregoing discussion, we are of the view that the assessing officer is not justified in bringing to tax the entire membership fee collected to tax in the year under appeal. We accordingly set aside the impugned orders of the Revenue authorities on this aspect and direct the assessing officer to modify the assessment accordingly.”
10. The order of the ITAT was challenged before the Andhra Pradesh High Court. On appeal by the Revenue, in Commissioner of Income Tax-II, Hyderabad vs. M/s.Treasure Island Pvt Ltd., I.T.T.A.No.241 of 2012, dated 10th July 2013, the High Court dismissed their 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 suggested 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?
11. 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 and 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.”
11. Likewise, when an identical issue came up for consideration before the Gujarat High Court in Commissioner of Income-Tax v. Winner Business Link (P) Ltd reported in [2015] 55 Taxmann.com 468 (Gujarat), the Gujarat High Court following the judgment of the Andhra Pradesh High Court in Commissioner of Income-Tax, Hyderabad vs. Treasure Island (P) Ltd and the judgment of the Delhi High Court in Commissioner of Income Tax v. Dinesh Kumar Goel [2011] 197 Taxman 375 (Delhi), held that if the contention of the Revenue is accepted, it would be distorted picture of the working results of the assessee. The judgment of the Gujarat High Court in Winner Business Link (P) Ltd case was challenged before the Hon’ble Supreme Court by the Revenue. The Hon’ble Supreme Court on 03.10.2016 dismissed the appeal filed by the Revenue, upholding the decision of the Gujarat High Court in Commissioner of Income-Tax vs. Winner Business Link (P) Ltd.
12. Thus, the decision of the Andhra Pradesh High Court rendered in Treasure Island (P) Ltd., the decision of Delhi High Court in Commissioner of Income Tax vs. Dinesh Kumar Goel and the decision of Gujarat High Court in Commissioner of Income-Tax v. Winner Business Link (P) Ltd., have become the law of land. Hence, in our considered view, the ITAT order and reasoning thereat is the most appropriate and legally sustainable. The said view has received the seal of approval by the Hon’ble Supreme Court in Commissioner of Income-Tax v. Winner Business Link (P) Ltd. Therefore, the appeal filed by the Revenue is dismissed and the substantial questions of law are held in affirmative, in favour of the assessee.
13. As a result, the Tax Case (Appeal) No.648 of 2013 stands dismissed.
There shall be no order as to costs.
