TMI Blog2016 (12) TMI 1559X X X X Extracts X X X X X X X X Extracts X X X X ..... urt ). Considering the fact that the security deposit recovered from the members at the time of their enrollment as a club member is refundable on occurrence of the contingencies mentioned in the Rules, Regulations and ByeLaws, same is required to be treated as a deposit and therefore, the same is required to be considered as capital receipts. We confirm the impugned judgment and order passed by the learned Tribunal. - Decided in favour of assessee - Tax Appeal No. 608, 609, 741, 744 of 2016 - - - Dated:- 16-11-2016 - M. R. Shah And B. N. Karia, JJ. Mr Manish Bhatt, Sr. Advocate With Mrs Mauna M Bhatt, Advocate for the Appellant Mr SN Soparkar, Sr. Advocate With Mr Bs Soparkar, Caveator for the Opponent JUDGMENT ( Per : Honourable Mr. Justice M. R. Shah ) [1.0] As common question of law and facts arise in this group of appeals, they are disposed of by this common judgment and order. Tax Appeal No.608/2016 [2.0] Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned Income Tax Appellate Tribunal, Ahmedabad in ITA No.2337/Ahd/2011 for the AY 200809 by which the learned Tribunal has dismissed the said appeal prefer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No.3302/Ahd/2015 for the AY 201213 by which the learned Tribunal has dismissed the said appeal preferred by the Revenue, the Revenue has preferred the present Tax Appeal raising the following substantial question of law. Whether, the Income Tax Appellate Tribunal has substantially erred in law and on facts, in deleting the addition, of ₹ 1,95,78,000/made on account of receipt of membership fees treating the same as Capital Receipt? Tax Appeal No.744/2016 [2.5] Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned Income Tax Appellate Tribunal, Ahmedabad in ITA No.3671/Ahd/2015 for the AY 201213 by which the learned Tribunal has dismissed the said appeal preferred by the Revenue, the Revenue has preferred the present Tax Appeal raising the following substantial question of law. Whether, the Income Tax Appellate Tribunal has substantially erred in law and on facts, in deleting the addition, of ₹ 1,95,78,000/made on account of receipt of membership fees treating the same as Capital Receipt? [3.0] For the sake of convenience, Tax Appeal No.608/2016 is treated as a lead matter. At the outset it is required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total such deposits collected by the assessee from the members till date comes to ₹ 14,54,01,000/. From the discussion the undersigned had with you, it is transpired that for joining as member of the Club you have not charged any membership fees but taken security deposit which is refundable after 25 years without interest. On an analysis of the Balancesheet, it will be seen that the share capital available with the company is only ₹ 5,10,000/only. However, the Club has constructed immovable properties and prepared the golf turf to the extent of ₹ 9 crores and made investments of ₹ 4.20 Crores. From the above it is clear that the assessee has not kept apart the security deposits obtained from the Members but appropriated the deposits obtained from the members for the construction activities of the club and investment purposes. It is further noticed that you have not shown the deposits received from the Members under the head Liabilities in your accounts and as such it was clearly an income receipt arising in the course of your normal business activities. 3. As per the Articles of Association of the Company, the enrollment of members are governed by A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y rendering services or otherwise, and (ii) a debt must have come into existence and he must have acquired a right to receive the payment. In the instant case, a debt was created in favour of the assessee immediately on enrollment of a person as member. Once the member is enrolled, the assessee Club was bound to provide facilities to the members. In the present case, considering the observation made above, the assessee has fulfilled the first two conditions and as such the security deposit obtained by the Club/assessee from the members as entrance fees is nothing but membership fees which required to be treated as revenue receipt. Further, the money collected in the form of security deposit by the assessee Club becomes its exclusive asset. Over and above the members are liable to pay Annual Subscription fees and other charges for the amenities availed at the Club on actual basis. In essence, a person becoming member after paying the security deposit as entrance fees has a right to avail all the facilities available at the Club and also have a right to transfer the membership to any person. Therefore, I am of the view that you have obtained membership fees from the members in the gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be finalized as proposed above, which please note. [4.1] In response to the showcause notice the assessee approached the Additional Commissioner of Income Tax, RangeIV, Ahmedabad vide application under Section 144A of the Act. Therefore, the matter was referred to the Additional CIT by the assessee under Section 144A of the Act for issuance of directions for framing the assessment. Accordingly, the Additional Commissioner of Income Tax, RangeIV, Ahmedabad issued directions vide his letter dated 22.12.2010. That after considering the directions issued by the Additional Commissioner of Income Tax, RangeIV, Ahmedabad vide letter dated 22.12.2010, the AO held that 60% of the security deposit received by the assessee during the year under assessment be considered as income for the year under assessment. The learned AO observed that the total security deposits collected by the assessee during the year comes to ₹ 3,12,78,000/; 60% of which comes to ₹ 1,87,66,800/. Therefore, the AO made an addition of ₹ 1,87,66,800/to the return income of the assessee for the year under consideration. [4.2] Feeling aggrieved and dissatisfied with the addition of ₹ 1,87,66, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [5.0] Shri Manish R. Bhatt, learned Counsel has appeared on behalf of the Revenue and Shri S.N. Soparkar, learned Counsel has appeared on behalf of the assessee, who has appeared on caveat. [6.0] Shri Bhatt, learned Counsel appearing on behalf of the Revenue has vehemently submitted that in the facts and circumstances of the case the learned Tribunal has materially erred in directing to delete the addition of ₹ 1,75,15,680/made by the AO on account of receipt of membership fees. [6.1] It is submitted that the learned Tribunal has materially erred in relying upon the decision of the Hon ble Supreme Court in the case of S.S. Sakhar Karkhana Ltd. (Supra). It is vehemently submitted by Shri Bhatt, learned Counsel appearing on behalf of the Revenue that in the present case the security deposit is though refundable after 25 years, the same shall be refunded without any interest. Therefore, the said security deposit will be interest free and considering the fact that the assessee had utilized the said security deposits from the members, for construction and providing other facilities at the club, the learned Tribunal ought not to have treated it as a Capital Receipt and oug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned Counsel for the Revenue is concerned, it is vehemently submitted by Shri Soparkar, learned Counsel appearing on behalf of the assessee that the said decision shall not be applicable to the facts of the case on hand. It is submitted that in the case before the Division Bench, it was a question of fees spread over and collected during the span of 15 years and infact the same was nonrefundable and the issue before the Division Bench was that fees received during such years can be considered in the first year in which it was received and/or the same was required to be spread over upto 15 years. It is submitted that therefore in the facts and circumstances of the case, decision of the Division Bench in the case of Unique Mercantile Services Pvt. Ltd. (Supra) shall not be applicable to the facts of the case on hand more particularly when there was no question before the Division Bench as to whether such refundable security deposit shall be treated as an income or not. [7.2] It is further submitted by Shri Soparkar, learned Counsel appearing on behalf of the assessee that in the present case not only the security deposit is refundable after 25 years, the interest earned by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on payment of security deposit to avail the facilities provided by the club. The Club members will have no rights as member of the Company unless they hold some shares in the Company. The Club members shall not have the management rights and accordingly would not be entitled to receive notices of general meetings, attending or voting at general meetings, nor be entitled to contest the election for directorship of the Company. 2. Security Deposit: (1) A Refundable Noninterest bearing Security Deposit shall be collected from different classes of club members as may be decided by the Board of Directors of the Company from time to time. (2) No interest will be paid on security deposit collected from club members as mentioned in sub clause (1) above. (3) Security deposit shall be refunded if a club member is dissolved or wind up as the case may be. In other cases, the security deposit shall be refunded to the member on expiry of 25 years and this period may be extended by a maximum period of 15 years (for 5, 10 or 15 years) at the discretion of the Club member to avail club facilities for the extended period. The security Deposit would not be refunded if the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onrefundable interest security deposit and merely because the same is not kept apart and merely because the same is used by the assessee for some other purpose, the same does not denude the amount of its character of deposit carrying with it the obligation to repay. In support of their above submissions learned Counsel appearing on behalf of the assessee has heavily relied upon the decision of the Hon ble Supreme Court in the case of S.S. Sakhar Karkhana Ltd. (Supra). [8.5] In the case of S.S. Sakhar Karkhana Ltd. (Supra), the Hon ble Supreme Court had an occasion to consider its earlier decision in the case of Bazpur Coop Sugar Factory Ltd. (Supra). After considering the decision of the Hon ble Supreme Court in the case of Bazpur Coop Sugar Factory Ltd. (Supra), the Hon ble Supreme Court has observed in paras 21, 22, 24, 28, 30, 31, 32 as under: 21. The Court reiterated the principle that it is the true nature and quality of the receipt and not the head under which it is entered in the account books as would prove decisive and that it makes no difference that the disputed amounts have been referred to as deposits and proceeded to consider the crucial issue in that ligh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which it is entered in the account books a principle which is reiterated in a catena of decisions. The Court then went on to conclude that the receipts by way of deductions from the purchase price were not in the nature of deposits. In this context, the reasoning of the Bench may be noticed. The essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfillment of certain conditions. Under the amended (sic unamended) bylaw, the amounts deducted from the price and credited to the said fund were first liable to be used in adjusting the losses of the respondentsociety in the working year; thereafter in the repayment of initial loan from the Industrial Finance Corporation of India and then for redeeming the Government share and only in the event of any balance being left, it was liable to be converted to share capital. The primary purpose for which the deposits were liable to be used were not to issue shares to the members from whose amounts the deductions were made but for the discharging of liabilities of the respondentsociety. In these circumstances, the receipts constituted by these deductions were reall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e loans of the description mentioned in the byelaws which were outstanding on the date the deposit was made are repaid, in our view, the Board of Directors is bound to convert the deposit amount into shares. The discretion is always coupled with a duty; the discretion cannot be used to circumvent the obligation cast under the law or contract governing the parties. In our view, it would be appropriate to read the expression 'may' as 'shall'. On the occurrence of the specified event, namely, the repayment of the loans referred to in the byelaw and the Government share capital, the member/depositor can clutch at a legally enforceable right to demand repayment, may be, in the form of conversion into additional shares. 32. In our view, the retention of the deposited money with the Society in order to utilize the same for repayment of term loans etc., does not denude the amount of its character of 'deposit' carrying with it the obligation to repay. Nor is it necessary, as the High Court was inclined to think, that the separate identity of the deposited amounts should be kept up. The absence of the right to secure repayment on demand is again not inconsistent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to accumulate and be utilized for repayment of IFCI loan and for redeeming the Government's share contribution. In the process of such adjustment, the entire amount collected from the members and credited to the fund may be dissipated or consumed, whereas in the instant case, the amount collected as deposit remains intact, though it could be utilized from time to time for meeting certain liabilities of capital nature. However, there is one qualification in this behalf. If the society has not incurred any loss and it remains a profitmaking concern, the situation will be very similar in both the cases. The amounts will then be utilized for repayment of longterm loans due to the financial institutions and the Government's share capital and after such process of repayment is complete, the disputed amounts could be made available to the grower members in the form of increased shares. Yet, in Bazpur case, at the time the sums were received from the growermember and remitted to the loss equalization fund, there was no knowing whether the 'deposit' would remain intact at all. The claim of the member to the deposited amount at that stage was too tenuous and slippery to earn ..... X X X X Extracts X X X X X X X X Extracts X X X X
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