2015 (11) TMI 1890 - AT - Income Tax

Characterization of receipts - Membership contribution received from its new members for life time in lieu of offering effluent disposal facility - AO taxed the entire sum in the impugned assessment year of receipt by following his line of action adopted in assessment year 2001-02 2004-05 to 2008-09 thereby rejecting assessee s accounting treatment treating the same as a capital receipt on the ground that it was yet to perform its part of obligation - HELD THAT - It emanates from the case file that a co-ordinate bench of a tribunal in similar cross appeals 2015 (7) TMI 932 - ITAT AHMEDABAD for assessment year 2008-09 decided on 24-07-2015 remits back the issue of assessment of assessee s above stated capital receipt contribution back to the assessing authority for reworking as per earlier order in assessment year 2001-02. It further observes that the receipts received during the relevant accounting period are to be spread over for a period of five years instead of assessing the same in one assessment year. The second issue of enhancement stands decided against assessee. We follow suit in these facts and want of distinction being pointed out in the above stated decision. The assessee s first ground accordingly is remitted back to Assessing Officer. Second substantive ground fail .

Summary

Issues Involved:
1. Taxability of the membership contribution received by the assessee.
2. Correctness of the enhancement made in lower appellate proceedings.
3. Appropriateness of the spreading over exercise for the membership contribution.

Detailed Analysis:

1. Taxability of the Membership Contribution Received by the Assessee:

The assessee-company, engaged in the conveyance of industrial effluent and maintenance of channels, received a membership contribution of Rs. 2,09,76,612/- from its new members. The Assessing Officer (AO) taxed the entire sum in the year of receipt, following the precedent set in earlier assessment years (2001-02, 2004-05 to 2008-09). The AO rejected the assessee's treatment of the contribution as a capital receipt, arguing that the assessee was yet to perform its obligation, thus it was adjusted against the brought forward sum, resulting in an addition of Rs. 39 lacs.

The CIT(A) upheld the AO's decision, stating that the contributions were revenue receipts, not capital receipts, as they were non-refundable and received in the course of normal business activities. The CIT(A) noted that the ITAT had previously ruled that such contributions were revenue receipts, taxable on a deferred basis over five years. However, since the assessee had stopped offering these contributions as income from the financial year 2007-08, the CIT(A) justified taxing the entire amount in the year of receipt.

2. Correctness of the Enhancement Made in Lower Appellate Proceedings:

The CIT(A) issued a show cause notice for enhancing the assessment for AY 2009-10 by Rs. 17,25,648/-, representing the deferred amount from FY 2004-05 to FY 2006-07. The assessee argued that these contributions were capital receipts and should not be taxed as income. The assessee referenced the ITAT's decision in earlier years, which supported the deferral of such contributions over five years.

Despite the assessee's arguments, the CIT(A) maintained that the one-time contributions were revenue receipts, taxable on a deferred basis. The CIT(A) found no justification for the assessee's failure to include the deferred portions from earlier years in the taxable income for AY 2009-10. Consequently, the CIT(A) directed an enhancement of Rs. 17,25,648/- and initiated penalty proceedings for furnishing inaccurate particulars of income.

3. Appropriateness of the Spreading Over Exercise for the Membership Contribution:

The ITAT reviewed the case and found that a co-ordinate bench had previously remitted a similar issue back to the assessing authority for reworking, as per the order in assessment year 2001-02. The ITAT observed that the receipts should be spread over five years instead of being assessed in a single year. Accordingly, the ITAT remitted the issue of assessing the capital receipt contribution back to the AO for reworking. The second issue of enhancement was decided against the assessee.

Conclusion:

The ITAT concluded by partly allowing the assessee's appeal (ITA 1420/Ahd/2012) for statistical purposes, remitting the first issue back to the AO, and dismissing the Revenue's cross appeal (ITA 1493/Ahd/2012). The order was pronounced in the open court on 30-11-2015.