9911796707
TMI Blog2015 (1) TMI 829X X X X Extracts X X X X X X X X Extracts X X X X ..... ing over the amount of membership fee and expenses. Tribunal is justified in setting aside the order of the CIT passed under Section 263 of the Act. - Decided in favour of the assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... f membership varies between one to thirty years. It is the case of the assessee that the payment of the membership is nontransferable. The accounts of the assessee had been prepared on accrual basis and accordingly it had apportioned the membership fees received from the members enrolled in a particular accounting year over the entire period of their membership. 2.1 The Assessing Officer concluded that the method of accounting followed by the assesee was not correct as the amount of total membership fees had accrued in the accounting year in which the members were enrolled and the liability for the expenses relating thereto by way of commission and insurance premium had been incurred in that very year. The Assessing Officer therefore invoked the provisions of Section 145(3) and rejected the method of accounting of the assessee and taxed the pre-received membership fees less pre-paid commission and insurance premium. The assessee preferred an appeal before the CIT(A) and the CIT(A) allowed the assessee's appeals and directed the Assessing Officer to follow the method of accounting regularly followed by the assessee. The revenue therefore challenged the orders passed by CIT(A) b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee company for recording the receipt by way of membership fee and the expenses by way of commission and insurance premium. The assessee company is following mercantile system of accounting but the dispute is when the assessee has issued the facility card for a number of years, whether the membership fee received for number of years accrues in the year in which the card is issued or whether it should be spread over to the number of years for which the card is issued. 5.1 In this regard it shall be relevant to peruse the Notification No. S.O. 69(E) dated 25.01.1996 wherein the Central Government has notified Accounting Standard-1, more particularly, the expression 'accrual' which has been defined as under: "(b) "Actual" refers to the assumption that revenues and costs are accrued, that is, recognized ad they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate;" 5.2 The assessee has accordingly recorded the revenue as well as expenditure in the financial statement of period to which they relate. We find that the Tribunal has rightly observed as under in para 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 has observed that in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed. Under the Mercantile System of Accounting, this Matching is required to be done on accrual basis. Under this Matching concept, revenue and income earned during an Accounting Period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual outflow of cash. It has been further held that the Income Tax Act makes no provision with regard to valuation. It charges for payment of tax, the income which is to be computed in the manner provided by the Act and that it is the duty of the Assessing Officer to deduce a proper taxable income. It is held that the Assessing Officer is required to compute the income in accordance with the method of accounting regularly employed by the assessee and if the system adopted by the assessee does not result in ascertainment of proper profits then, it is the duty of the assessing officer to make appropriate adjustments and deduce true profits. 6.1 The Apex Court in the case of Rakesh Shantilal Mardia vs. Deputy Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the Tribunal as well as the decisions relied upon by learned advocate for the assessee, we are of the opinion that the 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. We therefore answer the questions raised in the negative i.e. against the revenue and in favour of the assessee." 7. In view of the aforesaid discussion, we do not find any infirmity in the order passed by the Tribunal. The Tribunal has rightly considered that the method of accounting should be such from which the correct profit of each year can be deducted and that as per the method adopted by the Revenue, the profit in the year in which the card is issued would be more resulting in loss/less ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
