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.
The assessee explained that the consideration for future obligations received in the initial stages is towards transfer facility from one resort to another, split, accumulation and advancing facility, domestic and international exchange, transmission, up-gradation etc. Therefore, entire fees cannot be taxable in the year of collection.
The AO observed that the assessee is following mercantile system of accounting and hence, income has to be accounted for on accrual basis. He was of the view that the receipt was undisputedly income as the assessee itself had shown it as deferred income. However, the Act does not recognize the concept of deferred income and hence, the assessee’ s explanation cannot be accepted. The AO was not convinced about the future costs to be incurred by the assessee. He also pointed out from the agreement that the assessee was not under any contractual or other obligation to provide the facilities as all the requests for holiday were subject to availability. Considering all these aspects, the AO added the remaining 60% membership fees, which was shown by the assessee as advance subscription.
On appeal, the Commissioner of Income tax [CIT (A)] observed that the assessee has to construct holiday resorts and provide timeshare facilities over a period of time. Further, the annual subscription fee collected meets only the maintenance of the resorts. The utility charges collected are as per actual consumption of things like electricity, water etc. It does not cover major renovation and repairs. The CIT (A) also took note of the fact that over a period of 24 years, the assessee has to incur about 171% of the original investment for major renovation and replacement of assets. Accordingly, he upheld the contentions of the assessee and deleted the addition after relying upon the judgements in the case of Calcutta Co. Ltd. Vs. CIT (37 ITR 1) (SC), Treasure Island Resorts Pvt. Ltd. (90 ITD 814)(Hyd) and T.K. International Ltd. (91 ITD 481) (Cut).
On appeal to the Tribunal, the Honorable President constituted a Special Bench to hear and decide the matter.
Question before the Special Bench of Income tax Appellate Tribunal:
“Whether the entire amount of the time-share membership fee receivable by the assessee upfront at the time of enrollment of a member is the income chargeable to tax in the initial year when there is a contractual obligation fastened to the receipt to provide the services in future over the term of the contract?”
Contention of the Revenue:
