Income Tax Appellate Tribunal - Mumbai
Ito 9(1)(1), Mumbai vs Aakash Lavlesh Leisure P.Ltd, Mumbai on 14 June, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL " SMC" BENCH, MUMBAI
BEFORE SRI MAHAVIR SINGH, JM
ITA No.1685/Mum/2017
(A.Y:2012-13)
Income Tax Officer 9(1)(1) Aakash Lavlesh Leisure P.
R. No. 205, 2 n d Floor, Aayakar Ltd.
Bhavan, M.K. RD Juhu Millenium Club, Plot
Mumbai-400020 Vs. No. A,1 Gulmohar Rd, JVPD
Scheme
Mumbai-400 049
P AN No. AAACL6655R
Appellant .. Respondent
Revenue by .. Shri Purushottam Kumar, DR
Assessee by .. Shri KR Laxminarayan, AR
Date of hearing .. 25-05-2017
Date of pronouncement .. 14-06-2017
ORDER
PER MAHAVIR SINGH, JM:
This appeal by the Revenue is arising out of the order of CIT(A)-20, Mumbai, in appeal No. CIT(A)-20/ITO-12(1)(1)/IT-283/2015-16 dated 02- 12-2016. The Assessment was framed by ITO ward 12(1)-1, Mumbai for the A.Y. 2012-13 vide order dated 30-03-2015 under section 143(3) of the Income Tax Act, 1961 (hereinafter 'the Act').
2. The only issue in this appeal of Revenue is against the order of CIT(A) directing the AO to treat 60% of advance membership fee received as income instead of entire advance membership as income treated by AO. For this Revenue has raised following two grounds: -
"1. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to treat 60% of advance membership fees received every year as income instead of treating the entire advance membership as income for the ITA No.1685/Mum/2017 Aakash Lavlesh Lei su re P. Ltd ( A.Y:2012-13) year under consideration?"
2. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in treating non-refundable one-time entrance fee as capital receipt instead of treating the same as revenue receipt?"
3. At the outset, the learned Counsel for the assessee filed copy of Tribunal's order for earlier years in assessee's own case for AY 2004-05 to 2008-09 wherein exactly same issue of club entry fee has been set aside by the Tribunal to the file of the AO in ITA No. 7905/Mum/2011 for the AY 2008-09 dated 26-09-2016 which reads as under: -
"We have gone through the entire background of the case and also delved upon the various important case laws on the issue in hand, we have observed that the assessee is not governed by the doctrine of mutuality which is settled and undisputed position between the rival parties in the instant case. The assessee is a company and shareholders in their capacity as shareholders are distinct from members of the club who are entitled to avail the facilities and amenities offered by the club and hence complete identity between shareholders of the company and members of the club is lacking. The surplus of the assessee company being private limited company is distributable as dividend to shareholders. Nothing contrary to the afore stated propositions are on record Page 2 of 15 ITA No.1685/Mum/2017 Aakash Lavlesh Lei su re P. Ltd ( A.Y:2012-13) brought by the assessee to rebut the said propositions The assessee has recovered club membership enrollment fund at the time of admitting members which comprises of non- refundable deposits of entrance fee at the time of admission of members which constitute 20% of the total club membership enrollment fund collected from an member at the time of admission , as well refundable deposits at the time of admission of member which constitute bulk being 80% of the club membership enrollment fund. The assessee is also receiving membership fee from its members, annual charges and also charges for various facilities and amenities provided to its members such as food, beverages, swimming pool etc. . The said refundable deposit received by the assessee at the time of admission being bulk amount i.e. 80% of club membership enrollment fund is treated as capital receipts by the Revenue and brought to tax, while non-refundable entrance fees constituting 20% of club membership enrollment fund paid by the members on being admitted to the membership of the club in our considered view in the instant case based on factual matrix of the case has close proximity and nexus to the specific services performed by the assessees' club to its members which are being made available by the assessee club to members only on obtaining of membership of the club and is covered by the provisions of Section 28(i) and 28(iii) of the Act and is a Page 3 of 15 ITA No.1685/Mum/2017 Aakash Lavlesh Lei su re P. Ltd ( A.Y:2012-13) revenue receipt in the hands of the assessee exigible to tax, while refundable deposit constituting bulk of payment being 80% of club membership enrollment fund appears to have close nexus with payment made for obtaining club membership in the instant case. It is not important that services rendered or performed are trivial or immaterial so long specific services are being performed by the assessee to its members being made available on becoming member of the club which are only available to the members of the club on being admitted as member of the club. In our considered view, the Hon'ble Bombay High Court in the case of WIAA Club Limited (supra) has correctly segregated the life membership fee into two segments i.e. one towards capital receipts being paid for obtaining membership of the club which has no proximity to services being performed to its members and is merely a price paid for obtaining membership of the club which is capital receipts not exigible to tax, and secondly for the consolidated annual subscription included in the life membership fees which is revenue receipt which is exigible to tax being charged for making available services by the club which are only available to members of the club on obtaining membership of the club. In the instant case , there are two components of the amount paid by the members at the time of seeking admission for becoming member of the club being club membership enrollment fund, Page 4 of 15 ITA No.1685/Mum/2017 Aakash Lavlesh Lei su re P. Ltd ( A.Y:2012-13) one is a refundable deposits which , in our considered view, has close proximity to payment being made for obtaining the membership of the club and being capital receipts is not exigible to tax, and second component is towards non- refundable one time entrance fee paid by the members on being admitted to membership which has close nexus and proximity with the payments being made for services being performed by the assessee to its members being made available to members immediately on obtaining the membership of the club and also the assessee being a trading company whereby profits are distributable to shareholders where there is a lack of identity between shareholders of the company and members of the club and doctrine of mutuality is not invoked , hence , the non-refundable entrance fee is revenue receipts which is exigible to tax. The membership fee, annual charges and payments for availing services are undoubtedly revenue receipts in the hands of the assessee as they are related to the services being performed or made available by the assessee after the members are admitted to the club. The ratio of law laid down by Hon'ble Supreme Court in the case of Delhi Stock Exchange Association Limited v. CIT(supra) clearly held that the admission fee paid by the member at the time of entering as member of association is exigible to tax wherein it was held that in case of trading association and profits being divisible as Page 5 of 15 ITA No.1685/Mum/2017 Aakash Lavlesh Lei su re P. Ltd ( A.Y:2012-13) dividend amongst shareholders the same is trading receipts exigible to tax relying on decision of Kings Bench of the High Court in the case of Liverpool Corn Trade Association v. Monks(1962) 2 KB 110, wherein it was held by the Hon'ble Apex court as under: -
"It is wholly immaterial in the circumstances of the present case to take into consideration as to how the appellant treated the amounts in question. It is not how an assessee treats any monies received but what is the nature of the receipts which is decisive of its being taxable. These amounts were received by the appellant as membership admission fees and as admission fees paid by the members on account of authorised assistants. As far as the latter payment is concerned that would fall within the decision of this court in Commissioner of Incometax v. Calcutta Stock Exchange Association Ltd. [1959] 36 ITR 222 and therefore is taxable income. The former, i.e., members' admission fees, has to be decided in accordance with the nature of the business of the appellant company, its memorandum and articles of association and the rules made for the conduct of business. The appellant company was an association which carried on a trade and its profits were divisible as dividend Page 6 of 15 ITA No.1685/Mum/2017 Aakash Lavlesh Lei su re P. Ltd ( A.Y:2012-13) amongst the shareholders. The object with which the company was formed was to promote and regulate the business in shares, stocks and securities etc., and to establish and conduct the business of a stock exchange in Delhi and to facilitate the transaction of such business. The business was more like that in Liverpool Corn Trade Association v. Monks [1926] 2 KB 110. In that case an association was formed with the object of promoting the interest of corn trade with a share capital upon which the association was empowered to declare a dividend. The association provided a corn exchange market, newsroom and facilities for carrying on business and membership was confined to persons engaged in the corn trade and every member was required to be a shareholder and had to pay an entrance fee. The association also charged the members and every person making use of facilities a subscription which varied according to the use made by them. The bulk of the receipts of the association was derived from entrance fees and subscriptions. It was, therefore, contended that the association did not carry on a trade and that it was a mutual association and entrance fees and subscriptions should be disregarded in computing assessment of the assessable Page 7 of 15 ITA No.1685/Mum/2017 Aakash Lavlesh Lei su re P. Ltd ( A.Y:2012-13) profits. It was held that it was not a mutual association whose transactions were incapable of producing a profit; that it carried on a trade and the entrance fee paid by members ought to be included in the association's receipts for purposes of computing the profit. Rowlatt, J., said at page 121:
"I do not see why that amount is not a profit. The company has a capital upon which dividends may be earned, and the company has assets which can be used for the purpose of obtaining payments from its members for the advantages of such use, and one is tempted to ask why a profit is not so made exactly on the same footing as a profit is made by a railway company who issues a travelling ticket at a price to one of its own shareholders, or at any rate as much a profit as a profit made by a company from a dealing with its own shareholders in a line of business which is restricted to the shareholders."
In Commissioner of Income-tax v. Royal Western India Turf Club Ltd. [1953] 24 ITR 551. this court rejected the Page 8 of 15 ITA No.1685/Mum/2017 Aakash Lavlesh Lei su re P. Ltd ( A.Y:2012-13) applicability of the principle of mutuality because there was no mutual dealing between members inter se. There was no putting up a common fund for discharging a common obligation undertaken by the contributors for their mutual benefit and for this reason the case decided by the House of Lords in Styles v. New York Life Insurance Company [1889] 2 Tax Cas.
460 was held not applicable.
In Commissioner of Income-tax v. Royal Western India Turf Club Ltd. [1953] 24 ITR 551 . this court rejected the applicability of the principle of mutuality because there was no mutual dealing between members inter se. There was no putting up a common fund for discharging a common obligation undertaken by the contributors for their mutual benefit and for this reason the case decided by the House of Lords in Styles v. New York Life Insurance Company [1889] 2 Tax Cas.
460 was held not applicable."
lacking. It is the nature of the business of the company and the profits and the distribution thereof which are the determining factors and in this case it has not been shown that the appellant's business was in any way different from that which was carried on in the case Page 9 of 15 ITA No.1685/Mum/2017 Aakash Lavlesh Lei su re P. Ltd ( A.Y:2012-13) reported as Liverpool Corn Trade Association v. Monks [1962] 2 KB 110 . In our opinion the judgment of the High Court is right and the appeals are therefore dismissed with costs. One hearing fee."
4. Keeping in view our detailed discussions and reasoning in preceding paras' as also the case laws discussed viz. Hon'ble Bombay High Court decision in the case of Native Share and Stock Brokers Association(supra), decision of Hon'ble Supreme Court in the case of Calcutta Stock Exchange Association Limited(supra), decision of Hon'ble Supreme Court in the case of Delhi Stock Exchange Association Limited, decision of Hon'ble Patna High Court in the case of United Clubs(supra) , decision of Hon'ble Bombay High Court in the case of Shree Nirmal Commercial Limited(supra) which was later reiterated in Full Bench decision of Hon'ble Bombay High Court in the case of Shree Nirmal Commercial Limited (supra) and which was recently affirmed by Hon'ble Supreme Court in the decision of G.S. Homes and Hotels Private Limited(supra) which also supports' our decision that non-refundable entrance fee of Rs.31,34,037/- 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 .We order accordingly. (b) Advance Membership fee- The assessee received Rs.4,18,96,537/- as advance membership fee for 25 years from its members. The assessee is also receiving annual charges from its Page 10 of 15 ITA No.1685/Mum/2017 Aakash Lavlesh Lei su re P. Ltd ( A.Y:2012-13) members and also charges are collected from members additionally for use of various amenities/facilities by its members such as food , beverages, swimming pool etc.. There is no dispute between the rival parties that the said amount of advance membership fee received by the assessee is exigible to tax but the dispute is with respect to the year of taxability i.e. whether the same is chargeable to tax in the year of receipt or is to be spread over number of years. The AO brought to tax 100% of the receipt of advance membership fee as income in the year of receipt itself, while the learned CIT(A) relying on decision of Special Bench of the Chennai Tribunal in the case of Mahendra Holidays and Resorts Limited (2010) 39 SOT 438(Chennai)(SB) has held that 60% of the advance membership fee received shall be brought to tax in the year of receipt as the assessee has to maintain the facilities in subsequent years for which it would be required to incur expenditure without matching contribution from members based on concept of matching principles' of revenue and expenditure and also considering that 70% of the facilities are completed by the end of the previous year as admitted by the assessee . We are agreeable that assessee having received advance membership fee for 25 years , concept of matching principles are to be applied while computing income under the Act and the entire amount of revenue received by the assessee cannot be brought to tax in the year of receipt itself as the assessee will be required to render services and maintain facilities in subsequent years for which expenditure will have to be necessarily incurred as per Page 11 of 15 ITA No.1685/Mum/2017 Aakash Lavlesh Lei su re P. Ltd ( A.Y:2012-13) contractual obligations of the assessee with its members and hence rollover of revenue has to be undertaken which is required to be based on peculiar facts and circumstances of the case keeping in view factual matrix of the case to arrive at reasonable and fair apportionment, otherwise there will be huge income reported in the initial years when members are enrolled by the assessee while in subsequent years when the assesses stop enrolling members, there will be huge losses reported by the assessee as then the assessee will be required to maintain facilities in subsequent years for which expenditure will have to be necessarily incurred with no matching inflows from members as the membership fee is collected in advance and the assessee being bound by contractual obligations undertaken while collecting membership fee will have to maintain the facilities and incur necessary expenditure without matching revenue been received from the members of the club. It is equally true that the assessee is also collecting annual charges w.e.f. 01-01-2005 from members apart from membership fee and also collecting charges for usage of various services such as swimming coaching, squash coaching food, beverages ,banquet, gym and health club, commission etc. by the members which are separately collected by the assessee from its members based on actual usage of such facilities/amenities which will also enable the assessee to have regular stream of revenue in the years to come to enable it to incur expenditure for maintaining the facilities/amenities in the years to come. But, this is also undisputed position between the rival parties Page 12 of 15 ITA No.1685/Mum/2017 Aakash Lavlesh Lei su re P. Ltd ( A.Y:2012-13) that the advance membership fee is collected by the assessee from its members for a period of 25 years in advance. The learned CIT(A) had based on decision of Special Bench of Chennai Tribunal in the case of Mahendra Holidays and Resorts India Limited(supra) has brought to tax 60% of advance membership fee collected for 25 years in the year of receipt. It is also true that some members may leave the club after a brief stay despite paying membership fee for 25 years and some may continue for a long period of time. The Hyderabad Tribunal in the case of Treasure Island Resorts Private Limited v. DCIT (2004)84 TTJ 820(Hyd. Trib.) wherein the Tribunal accepted assessee's method of recognizing revenue on spread over basis keeping in view that the scheme did not provided for refundability. The Tribunal relying on the earlier decision in the case of Meera and Ceiko Pump Private Limited [IT Appeal No. 652 (Hyd.) of 2001 dated 21-6-2002 for the assessment year 1994-95] held that under mercantile system of accounting, receipt entailing a continuing liability of rendering services in future years can be spread over years. This proposition is supported by the Hon'ble Supreme Court decision in the case of Madras Industrial Investment Corporation Limited v. CIT , (1997) 225 ITR 802(SC) . In our considered view, a 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 Page 13 of 15 ITA No.1685/Mum/2017 Aakash Lavlesh Lei su re P. Ltd ( A.Y:2012-13) 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. Our decision is in consonance with the recent decision of the Hon'ble Supreme Court in the case of Seagram Distilleries Private Limited (now Pernod Ricard India Limited) v. CIT-III,(2016) -TIOL-117-SC-IT rendered on 11-07- 2016. The assessee is directed to appear before the AO and produce all necessary and relevant evidences and explanations to enable the AO to arrive at correct computation of income of the assessee as per our directions. Needless to say that proper and adequate opportunity of hearing shall be granted by the AO to the assessee in accordance with the principles of natural justice in accordance with law. We order accordingly."
Page 14 of 15 ITA No.1685/Mum/2017Aakash Lavlesh Lei su re P. Ltd ( A.Y:2012-13)
5. The learned Sr. DR has also not objected to remitting of this back to the file of the AO to decide as per the directions of the Tribunal in earlier years. Respectfully, following the same, I also set aside the issue to the file of the AO to decide in term of the directions of the Tribunal as quoted above.
6. In the result, the appeal of Revenue is allowed for statistical purposes.
Order pronounced in the open court on 14-06-2017.
Sd/-
(MAHAVIR SINGH) JUDICIAL MEMBER Mumbai, Dated: 14-06-2017 Sudip Sarkar /Sr.PS Copy of the Order forwarded to:
1. The Appellant
2. The Respondent.
3. The CIT (A), Mumbai.
4. CIT
5. DR, ITAT, Mumbai
6. Guard file. //True Copy// BY ORDER, Assistant Registrar ITAT, MUMBAI Page 15 of 15