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2015 (1) TMI 525 - HC - Income TaxRevision of orders prejudicial to revenue - correctness of the method of accounting of the assessee company for recording the receipt by way of membership fee and the expenses by way of commission and insurance premium - Held that - Do not find any infirmity in the order passed by the Tribunal as Tribunal has rightly considered that the method of accounting should be such from which the correct profit of each year can be deducted and that as per the method adopted by the Revenue, the profit in the year in which the card is issued would be more resulting in loss/less profit in the year in which the services will be rendered by the assesseee. We are of the opinion that when the services are rendered partially, revenue is to be shown proportionate to the degree of completion of the service and therefore the assessee was justified in spreading over the amount of membership fee and expenses. Therefore, the Tribunal is justified in setting aside the order of the CIT passed under Section 263 of the Act. - Decided in favour of the assessee.
Issues Involved:
1. Justification of the Appellate Tribunal in setting aside the order of the CIT passed under Section 263 of the Income Tax Act, 1961. 2. Correctness of the method of accounting followed by the assessee for recording membership fees and related expenses. Detailed Analysis: 1. Justification of the Appellate Tribunal in Setting Aside the Order of the CIT Passed Under Section 263 of the Income Tax Act, 1961: The revenue challenged the Tribunal's decision to set aside the CIT's order under Section 263, which had found the Assessing Officer's acceptance of the assessee's accounting method to be erroneous and prejudicial to the interests of revenue. The Tribunal, however, determined that the Assessing Officer's acceptance of the assessee's accounting method was neither erroneous nor prejudicial to the revenue's interests. The Tribunal's decision was based on the principle that the method of accounting adopted by the assessee was in accordance with the recognized accounting standards and provided a true and fair view of the profits for each assessment year. 2. Correctness of the Method of Accounting Followed by the Assessee for Recording Membership Fees and Related Expenses: The primary issue was whether the membership fees received by the assessee, which were non-refundable and related to membership periods ranging from one to fifteen years, should be recognized entirely in the year of receipt or spread over the membership period. The assessee followed a method where the membership fees were apportioned over the period of membership, aligning with the accrual basis of accounting as defined in Accounting Standard-1 notified by the Central Government. The Tribunal supported the assessee's method, noting that it complied with the accrual principle, which requires revenues and costs to be recognized in the financial statements of the periods to which they relate. The Tribunal observed that recognizing the entire membership fee in the year of receipt, as argued by the revenue, would result in a distorted picture of the assessee's financial results, with high profits in the initial year and potential losses in subsequent years when the related services are provided. The Tribunal's reliance on the decision of the Hyderabad Bench in the case of Treasure Island Resorts (P) Ltd vs. DCIT, which had similar facts, was deemed appropriate. The Tribunal concluded that the method of accounting followed by the assessee was proper and correct, as it provided a true reflection of the income and expenses over the relevant periods. Supporting Judgments: The judgment referenced several higher court decisions supporting the Tribunal's view: - Taparia Tools Ltd. vs. Jt. CIT: The Bombay High Court emphasized the importance of matching revenues with expenses on an accrual basis to determine the true income of an accounting year. - Rakesh Shantilal Mardia vs. Deputy Commissioner of Income-tax: The Supreme Court reiterated the necessity of following the matching principle to ascertain real income. - Delhi High Court's Decision: It was highlighted that income should be recognized when it accrues, not merely when received, and the right to receive income must be linked to the rendering of services. - Snesh Resort Pvt. Ltd vs. Dy. CIT: This Gujarat High Court decision supported the view that membership fees should be considered as advance and recognized as income proportionately over the period services are rendered. Conclusion: The High Court affirmed the Tribunal's decision, holding that the method of accounting adopted by the assessee, which spread the membership fees and related expenses over the membership period, was appropriate and in accordance with the accrual principle. The Tribunal was justified in setting aside the CIT's order under Section 263 of the Income Tax Act. The appeals were dismissed, and the Tribunal's order was confirmed, favoring the assessee.
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