2003 (8) TMI 188 - AT - Income Tax

Issue Of Notice - membership club - Applicability of Accounting Standard 9 (AS-9) for revenue recognition - Taxability of membership fees - HELD THAT - We have also to reject the contention of the learned Departmental Representative that the provisions of section 145 are attracted in this case. This is not a case where the accounts are incomplete or incorrect. When the duly mandated accounting standard is followed, it cannot be said that the income cannot be deduced properly in terms of the proviso to section 145 of the Act. Actually, the reverse should be the position. If the mandated accounting standard is not followed, the revenue may claim that the correct profits cannot be deduced. If the entire membership fee collected is shown in the present assessment year, there would be substantial deficit in future years, when the assessee has to incur expenditure for the provision of various services to the members without matching receipts. This would give a totally distorted picture of the working results of the assessee. While substantial profits will be taxed in the year under appeal, there will be substantial losses in subsequent years. The revenue may seek such result, but we see no reason to allow it. Thus, it is not necessary to consider the ground of the assessee that the amount of Rs. 32,94,000 pertaining to the financial year 1994-95 should be excluded from the present assessment year. This is only an alternative plea of the assessee. We may however, mention that we find no merit in this plea. Admittedly, the business of the assessee commenced only on 1 -4-995 and the amounts received before commencement of business should be regarded as relating to the first financial year, i.e., 1995-96. As we are accepting the main claim of the assessee, the rejection of the alternative plea has no bearing on the result of this appeal. If the membership fee permits only membership it should be on par with entrance fee and so there seems to be some contradiction between the two statements. But the general import of item 6 of the appendix and more particularly of the accounting standard 9 itself is clear. The import of item 6 has to be seen in the light of other illustrations given under other headings of the appendix like installation fees, advertising and insurance agency commission, financial service commissions, admission fees, tuition fees, etc. Reading them all together, the principle is that when service is provided on a continuing basis and the cost relating to the service falls in a different year, revenue should be recognized on a time basis. Going by this general import of item 6 in the appendix and the wording in the body of the accounting standard 9 itself, it is clear that the assessee conformed to the accounting standard 9 and as such, the book results deserve to be accepted. Thus, we are of the view that the Assessing Officer is not justified in bringing to tax the entire membership fee collected to tax in the year under appeal. We accordingly set aside the impugned orders of the Revenue authorities on this aspect and direct the Assessing Officer to modify the assessment accordingly. In the result, assessee's appeal, ITA No. 136/Hyd/99 is dismissed, and appeal, ITA No. 244/Hyd./03 is allowed.

Summary

Issues Involved:
1. Validity of the original assessment order.
2. Applicability of Accounting Standard 9 (AS-9) for revenue recognition.
3. Taxability of membership fees collected by the assessee.

Summary:

Issue 1: Validity of the Original Assessment Order
The assessee challenged the validity of the original assessment order on the grounds that it was time-barred u/s 153 and that the principles of natural justice were violated. The CIT(A) set aside the assessment, directing the Assessing Officer to reframe it after giving due opportunity to the assessee. The Tribunal upheld the CIT(A)'s decision, noting that any procedural lapses could be corrected and did not invalidate the assessment order. The Tribunal emphasized that the assessment was completed within the statutory limitation period and that the principles of natural justice were not fully complied with, thus justifying the remand for fresh consideration.

Issue 2: Applicability of Accounting Standard 9 (AS-9) for Revenue Recognition
The assessee argued that the membership fees should be recognized over a period of time in accordance with AS-9, which mandates revenue recognition on a systematic and rational basis. The Tribunal noted that AS-9 had been made mandatory by the Institute of Chartered Accountants of India from 1-4-1991. The Tribunal found that the assessee had followed AS-9 and that the membership fees were spread over five years for longer-duration memberships and two years for temporary memberships. The Tribunal rejected the Assessing Officer's view that AS-9 was only recommendatory and held that the assessee's method of revenue recognition was in line with AS-9.

Issue 3: Taxability of Membership Fees Collected by the Assessee
The Assessing Officer had brought the entire membership fee collected to tax in the year of receipt, arguing that the fees were non-refundable and that there was no guarantee of service provision beyond one year. The Tribunal rejected this view, noting that the assessee was under a continuing obligation to provide services to its members either free or at reduced rates. The Tribunal held that the entire membership fee could not be taxed in one year as it would lead to distorted financial results, with substantial profits in the year of receipt and losses in subsequent years. The Tribunal directed the Assessing Officer to accept the assessee's method of spreading the membership fees over the relevant periods in accordance with AS-9.

Conclusion:
The Tribunal dismissed the appeal regarding the validity of the original assessment order, upholding the CIT(A)'s decision to remand the case for fresh consideration. However, the Tribunal allowed the appeal concerning the taxability of membership fees, directing the Assessing Officer to recognize the fees over the relevant periods in line with AS-9.