2015 (8) TMI 231 - HC - Income Tax

Accrual of income - Receipt on account of membership fees - giving the services of the water park to its members - commencement of commercial activities - Held that - Tribunal has committed an error in passing the impugned order so far as considering the membership fees as income when the assessee had not resumed giving the services of the water park to its members. Under such circumstances, the amount received by way of membership fees was required to be considered as an advance and thereafter as and when the business commenced the amount of liability was required to be taxed over a period of time proportionately. The amount of membership fees would be considered as income from the year the business of the assessee commenced. See Commissioner of Income-tax vs. Bilahari Investment P. Ltd reported in 2008 (2) TMI 23 - SUPREME COURT and in the Commissioner of Income Tax vs. Excel Industries Ltd & Mafatlal Industries P. Ltd reported in 2013 (10) TMI 324 - SUPREME COURT . - Decided against the revenue and in favour of the assessee.

Summary

Issues:
1. Interpretation of membership fees as income before commencement of commercial activities.

Analysis:
The appellant challenged the order passed by the Income Tax Appellate Tribunal regarding the treatment of membership fees as income for the assessment year 1997-98. The appellant argued that the membership fees were collected as an advance for providing services over time, not as immediate income. The Tribunal upheld the assessment, considering the membership fees as a revenue receipt to be included in the profit and loss account. The appellant cited legal precedents to support their argument, emphasizing that income accrues when there is a corresponding liability from the other party to pay the amount due. The Tribunal's decision was based on the non-refundable nature of the membership fees.

The Tribunal's order was challenged on the grounds that the membership fees should not be treated as income since the business had not yet resumed operations. The appellant contended that the fees should be considered as an advance until services were actually provided, and any liability should be taxed proportionately when the business commenced. Citing legal precedents, the appellant argued that income accrual must be real, not hypothetical, and must be accompanied by a corresponding liability. The Court agreed with the appellant's arguments and held that the Tribunal erred in treating the membership fees as income before the business operations started. The Court ruled in favor of the appellant, quashing the Tribunal's order regarding the treatment of membership fees as revenue receipt.

In conclusion, the Court's decision clarified that membership fees collected before the commencement of business activities should be considered as an advance rather than immediate income. The judgment emphasized the importance of real income accrual and corresponding liabilities in determining the taxability of revenue. The legal analysis highlighted the need for a pragmatic approach by the Assessing Officer and the importance of considering the realistic probability of income realization. The Court's ruling favored the appellant's argument, setting aside the Tribunal's order and providing a detailed explanation for the decision.