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2015 (1) TMI 829 - HC - Income TaxMethod of accounting - 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 - Revision u/s 263 set aside by Tribunal - Held that - No infirmity in the order passed by the Tribunal as it 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. 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. Whether the Appellate Tribunal was justified in deleting the addition made by the Assessing Officer invoking the provisions of Section 145(3) of the Act, towards membership fees. 2. Whether the method of accounting followed by the assessee was acceptable. 3. Whether the Tribunal was correct in quashing the order u/s 263 of the I.T. Act passed by the CIT. Issue-wise Detailed Analysis: 1. Justification of Deleting Addition under Section 145(3): The core issue revolves around the correctness of the method of accounting for membership fees and related expenses. The assessee, engaged in providing discount cards with varying membership periods, followed an accrual basis of accounting. The Assessing Officer (AO) rejected this method, arguing that the entire membership fee should be recognized in the year of receipt, invoking Section 145(3). However, the Tribunal upheld the method used by the assessee, which spread the membership fee over the membership period, aligning with Accounting Standard-1. The Tribunal's decision was based on the principle that revenue and costs should be matched and recognized in the financial statements of the periods to which they relate. 2. Acceptance of the Assessee's Method of Accounting: The Tribunal found the assessee's method of accounting to be in compliance with the accrual principle as defined in Accounting Standard-1. The assessee recorded revenue and expenses in the financial period to which they relate, ensuring a true and fair view of profits for each year. The Tribunal emphasized that recognizing the entire membership fee in the year of receipt would distort the financial results, showing a loss in subsequent years when related expenses are incurred. The Tribunal relied on the decision of the ITAT Hyderabad Bench in the case of Treasure Island Resorts (P) Ltd vs. DCIT, which had similar facts and upheld the method of spreading revenue and expenses over the membership period. 3. Quashing the Order under Section 263 by CIT: The Tribunal quashed the CIT's order under Section 263, which had deemed the AO's acceptance of the assessee's accounting method as erroneous and prejudicial to the interests of revenue. The Tribunal concluded that the AO's acceptance of the assessee's method was justified and not erroneous. The Tribunal's decision was supported by various judicial precedents, including the Bombay High Court's decision in Taparia Tools Ltd. vs. Jt. CIT, which emphasized the importance of matching revenue with expenses on an accrual basis to determine true profits. The Tribunal also referenced the Supreme Court's decision in Rakesh Shantilal Mardia vs. Deputy Commissioner of Income-tax, which reinforced the matching principle. Conclusion: The High Court upheld the Tribunal's decision, confirming that the method of accounting followed by the assessee was appropriate and in compliance with the accrual principle. The Tribunal's decision to delete the addition made by the AO under Section 145(3) and to quash the CIT's order under Section 263 was found to be correct. The appeals were dismissed, affirming that the assessee's method of spreading membership fees and related expenses over the membership period provided a true and fair view of profits for each year.
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