Timeshare Membership fee taxable over the term of contract

Special Bench Tribunal Ruling: Entire amount of timeshare membership fee receivable by the assessee up-front should not be taxed at the time of enrollment of a member in the initial year on account of contractual obligation that is fastened to the receipt to provide services in future over the term of contract (ACIT Vs. Mahindra Holidays & Resorts (India) Pvt. Ltd.)

Facts:

Mahindra Holidays & Resorts (India) Pvt. Ltd. (the assessee/ company) is in the business of selling timeshare units in its various resorts. The assessment completed under section 143(3) of the Income tax Act (Act) was reopened under section 147 of the Act. It was noticed by the Assessing Officer (AO) that the relevant balance sheet showed an amount under the heading “Deferred income – advance towards members facilities– see note 1 (vi)(a)”. This figure represented the amount collected from timeshare members but not recognized as revenue for the current year.

The assessee had considered only 40% of the membership fees collected as income in the year of collection and the balance 60% was treated as deferred income, which was to be spread over the next 33 years (tenure of membership) during which the assessee is expected to provide timeshare facilities to the members. This method of accounting had been followed consistently by the assessee up to first 3 years of its operation and later on instead of 40%, it started recognizing 60% as revenue in the year of collection and balance 40% was to be deferred over a period of membership.

As the assessee had not offered remaining 60%/40% of membership fees as income in the year of collection of membership fees, the AO had reason to believe that the remaining income had escaped assessment in the year of collection of fees.

Please become a Premium member. If you are already a Premium member, login here to access the full content.