2015 (11) TMI 1512 - AT - Income Tax

Addition on account of membership fee income - whether so called security deposit was inextricably linked to grant of membership? - Held that - In the present case the assessee-club had received refundable non-interest bearing security deposit would remain liability for the assessee-club. Member by giving security deposit entitles himself for the concessional rate services provided by the assessee-club. The assessee would entitle for spreading over the non-refundable fee on accrual basis undisputedly the one time security deposit is refundable. The Hon ble Supreme Court in the case of Siddheshwar Sahakari Sakhar Karkhana Ltd. (2004 (9) TMI 6 - SUPREME Court ) has held that these deposits are akin to transaction of loan. They are clearly liable to be excluded from taxable income. Therefore respectfully following the judgement of the Hon ble Apex Court in the case of Siddheshwar Sahakari Sakhar Karkhana Ltd. we are of the considered view that the security deposits as received by the assessee-club cannot be subjected to tax - Decided in favour of assessee

Summary

Issues:
1. Addition of membership fee income
2. Disallowance under section 14A of the Income Tax Act
3. Treatment of security deposits as income
4. Set off of carried forward depreciation and short term capital loss
5. Initiation of interest under sections 234B/234C/234D
6. Initiation of penalty under section 271(1)(c)

Analysis:

Issue 1: Addition of membership fee income
The Revenue appealed against the deletion of an addition of membership fee income. The Revenue argued that security deposits linked to membership should be taxed. However, the Assessee contended that refundable deposits do not constitute income. The Tribunal agreed with the Assessee, citing the Supreme Court's ruling that such deposits are akin to loans and should be excluded from taxable income. Therefore, the Tribunal rejected the Revenue's appeal.

Issue 2: Disallowance under section 14A
The Assessee's appeal challenged the disallowance of a specific amount under section 14A of the Income Tax Act. The Tribunal upheld the disallowance, stating that the administrative expenses in the relevant year necessitated the application of Rule 8D. Consequently, the Tribunal rejected the Assessee's appeal on this issue.

Issue 3: Treatment of security deposits as income
Both the Revenue and Assessee cross-appealed on the treatment of security deposits as income. The Tribunal ruled that refundable security deposits should not be subjected to income tax, following the principles established by the Supreme Court and the High Court. As a result, the Tribunal allowed the Assessee's appeal on this issue.

Issue 4: Set off of carried forward depreciation and short term capital loss
The Assessee raised concerns about the non-allowance of set off of carried forward depreciation and short term capital loss. The Tribunal remitted this issue back to the Assessing Officer for a fresh decision based on a rectification application filed by the Assessee.

Issue 5: Initiation of interest under sections 234B/234C/234D
The Assessee contested the initiation of interest under sections 234B/234C/234D. The Tribunal considered this issue consequential and held it accordingly.

Issue 6: Initiation of penalty under section 271(1)(c)
The Assessee objected to the initiation of penalty proceedings under section 271(1)(c). The Tribunal dismissed this issue as premature.

In conclusion, the Tribunal dismissed the Revenue's appeal, partially allowed the Assessee's appeal for statistical purposes, and issued the order on November 30, 2015, in Ahmedabad.