2018 (8) TMI 1644 - AT - Income Tax

Disallowance on account of members security deposit - according to the AO is membership fees collected from its members and is to be treated as income for the relevant year - Held that - We find that on this issue we do not require any extra efforts to examine the case of the assessee in order to come to the conclusion that money received from the members are in the nature of loan, which are to be refunded to the members back after 25 years, and not in the nature of income as observed by the AO. The Tribunal in the assessee s own case, for earlier years on similar issue has allowed claim of the assessee, which was affirmed by the Hon ble jurisdictional High Court in further appeal 2016 (12) TMI 1559 - GUJARAT HIGH COURT . Therefore, this issue is almost settled.- Decided in favour of assessee

Issues Involved:
1. Whether the security deposits collected from members by the assessee-club should be treated as income or as capital receipts.

Issue-wise Detailed Analysis:

1. Treatment of Security Deposits as Income or Capital Receipts:
The Revenue appealed against the order of the CIT(A) which deleted the disallowance of ? 3,12,30,000/-, contending that these security deposits should be treated as income for the relevant year. The assessee, a company engaged in club activities, filed a return declaring a total loss. During scrutiny, the AO noticed that the assessee enrolled members on payment of security deposits as an entrance fee, refundable after 25 years without interest. These deposits were utilized for construction and amenities rather than being kept separately as security deposits. The AO treated 60% of these deposits as revenue income, amounting to ? 3,12,30,000/-. The CIT(A), however, following earlier ITAT decisions in the assessee's favor for previous years, deleted this addition. The Revenue challenged this deletion, arguing that the security deposits were effectively membership fees and should be treated as income.

Arguments and Findings:
The ld.DR supported the AO's view, arguing that the security deposits were intended to minimize income and avoid tax, as they were not shown as liabilities in the balance sheet and were used for construction. The assessee's counsel countered that the CIT(A) correctly allowed the claim, consistent with earlier ITAT and High Court decisions which held that such deposits are refundable and do not constitute income.

Tribunal's Analysis:
The Tribunal reviewed the records and previous orders, noting that similar issues in earlier years were resolved in favor of the assessee and upheld by the High Court. The Tribunal reiterated that the security deposits, refundable after 25 years, are in the nature of loans and not income. The Tribunal referenced the High Court's detailed observations which distinguished between refundable deposits and revenue receipts, emphasizing that the obligation to repay these deposits maintains their character as capital receipts.

High Court's Observations:
The High Court considered the Articles of Association and the club's bye-laws, concluding that the refundable security deposits do not bear the character of income. The High Court distinguished this case from others where deposits were considered income, emphasizing the obligation to repay and the specific contingencies under which the deposits would be refunded. The High Court upheld that the use of deposits for construction does not change their nature as refundable deposits.

Conclusion:
The Tribunal, following the High Court's judgment and the principle of consistency, confirmed the CIT(A)'s order and dismissed the Revenue's appeal. The Tribunal emphasized that the security deposits are capital receipts and not taxable income.

Result:
The appeal of the Revenue was dismissed, and the CIT(A)'s order was confirmed, treating the security deposits as capital receipts and not income. The decision was pronounced on 27th August 2018.

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