2016 (11) TMI 1054 - AT - Income Tax

Non-refundable entrance fee received by the assessee in the instant case based on factual matrix of the case is chargeable to tax as revenue receipts in the hand of the assessee . Advance Membership fee - Held that - Reasonable and fair estimate under these circumstances has to be made based on reasonable scientific method keeping in view business matrix and model of the assessee after study of the by-laws, rules and regulations governing the assessees club , memorandum and articles of association, terms and conditions for the grant of membership , terms and conditions under which advance membership fee was received by the assessee, conditions for refund of membership fee, empirical experiences and a scientific working , which need to be carried out keeping in view peculiar business model and matrix of the assessee and also with respect of the assessees club. We are , therefore, inclined to set aside and restore the matter to the file of the AO for de-novo determination of the issue on merits in accordance with law to work out spread/rollover of advance membership fee collected for a period of 25 years spread over period of time based on reasonable scientific method keeping in view business matrix and model of the assessee worked out after study of the above parameters as cited by us and also of any other relevant parameter having impact and bearing on computation of correct income of the assessee chargeable to tax.

Summary

Issues Involved:
1. Taxability of non-refundable entrance fees received by the assessee.
2. Taxability of advance membership fees received by the assessee.
3. Admissibility of additional evidence by the CIT(A) under Rule 46A of the Income Tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Taxability of Non-Refundable Entrance Fees:
The assessee, a company running a family club, received non-refundable entrance fees from its members. The Assessing Officer (AO) treated these fees as revenue receipts and included them in the taxable income. The assessee argued that the entrance fees were capital receipts, relying on the decision in CIT v. WIAA Club Limited, where part of the entrance fee was treated as capital receipt and part as revenue receipt. The CIT(A) held that non-refundable one-time entrance fees were capital receipts and not taxable. However, the Tribunal, after analyzing various judicial precedents, including decisions from the Hon’ble Supreme Court and High Courts, concluded that the non-refundable entrance fees had a close nexus to the specific services performed by the club for its members. Therefore, these fees were considered revenue receipts and were taxable.

2. Taxability of Advance Membership Fees:
The assessee received advance membership fees for a period of 25 years. The AO taxed the entire amount in the year of receipt, while the CIT(A) directed that only 60% of the advance membership fees should be taxed in the year of receipt, based on the decision of the Special Bench of the Chennai Tribunal in Mahindra Holidays and Resorts Limited. The Tribunal agreed with the CIT(A) that the entire amount should not be taxed in the year of receipt due to the matching principle of revenue and expenditure. However, the Tribunal set aside the matter to the AO for a de-novo determination of the issue, directing the AO to work out a reasonable scientific method for spreading the advance membership fees over the period of 25 years, considering the peculiar business model and matrix of the assessee.

3. Admissibility of Additional Evidence:
The Revenue contended that the CIT(A) had erred in accepting additional evidence during the appellate proceedings, thereby violating Rule 46A of the Income Tax Rules, 1962. The Tribunal did not specifically address this issue in detail but focused on the substantive issues of taxability of entrance and advance membership fees.

Conclusion:
The Tribunal partly allowed the appeals of both the assessee and the Revenue. It held that the non-refundable entrance fees were taxable as revenue receipts. For the advance membership fees, the matter was remanded to the AO for fresh determination based on a reasonable and scientific method to spread the fees over the period of 25 years. The Tribunal's decision applied mutatis mutandis to the appeals for the assessment years 2004-05 to 2007-08.