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2014 DIGILAW 1113 (GUJ)

SNESH RESORT PVT. LTD. v. DY. C. I. T.

2014-11-18

K.J.THAKER, K.S.JHAVERI

body2014
Judgment K.S. Jhaveri, J. 1. Being aggrieved and dissatisfied with the impugned order dated 15.12.2003 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench in M.A. No. ITA No. 1270/Ahd/2001 for the assessment year 1997-98, the assessee has preferred the present tax appeal. 2. This appeal was admitted by this Court on 21.12.2004 for consideration of the following substantial question of law: “(1) Whether in the facts and under the circumstances of the case, the ITAT was right in holding that even though the appellant has not commenced its commercial activities, the receipt on account of membership fees is income earned by the appellant?” 2. The assessee filed its return of income for the assessment year 1997-98 as nil. The Assessment Officer vide his order u/s. 143(3) of the Act dated 24.03.2000 assessed the total income of the appellant as Rs. 4,90,500/-. The assessee challenged the said assessment order by filing appeal before CIT(A) and CIT(A) vide order dated 09.02.2001 partly allowed the appeal. The assessee as well as the revenue challenged the said order before the Tribunal partly allowed the appeal of the assessee and dismissed the appeal filed by the revenue. The Tribunal upheld the order of CIT(A) and held that membership fee is a revenue receipt and that such income has to be brought in profit and loss account of the company. Being aggrieved by the said observation, the assessee is before this Court challenging the same. 3. Mr. Saurabh N. Soparkar, learned Senior Counsel appearing with Mr. B.S. Soparkar for Ms. Swati Soparkar, learned advocate for the assessee-appellant submitted that both the authorities below have erred in holding that membership fees is required to be treated as revenue receipt. He submitted that the amount collected as membership fees was not an income of the assessee but the same was collected as receipt or advance for giving services to members over a period of time. He submitted that the amount received by way of such membership fees could have been taxed over a period of time when the amount was actually spent over the services of the members. 3.1 Mr. He submitted that the amount received by way of such membership fees could have been taxed over a period of time when the amount was actually spent over the services of the members. 3.1 Mr. Soparkar, in support of his submissions has relied upon the case of Commissioner of Income-tax vs. Bilahari Investment P. Ltd reported in [2008] 299 ITR 1(SC) and in the case of Commissioner of Income Tax vs. Excel Industries Ltd & Mafatlal Industries P. Ltd reported in [2013] 358 ITR 295 (SC). 4. Mr. Parikh, learned advocate appearing for the revenue supported the impugned order and submitted that the Tribunal has rightly considered the membership fees as income. He submitted that the present appeal lacks merits and therefore deserves to be dismissed. He submitted that if the say of the assessee is accepted then for the relevant year, the assessee shall be liable to be taxed for the proportionate amount. 5. We have heard learned advocates for both the sides and perused the orders passed by the Tribunal. It is pertinent to note that the assessee-company which was established with the object of providing recreation facilities to its members by way of water park had taken membership fees from the members accordingly. The assessee however did not resume the water park till the end of the year. The Assessing Officer treated this amount as revenue receipt. The CIT(A) confirmed the said entry. 6. The Tribunal has observed in para 9 of the impugned order as under:- “9. We have heard the parties and considered the rival submissions. Looking to the facts and circumstances of the case, we are of the view that the assessee has received the money by way of membership fees and assessee has not started or commenced his business. The AO has treated this amount as revenue receipt. We find that this amount is non-refundable and, therefore, in our view the CIT(A) is justified in holding that the membership fees is nothing but a revenue receipt and such income has to be brought in profit and loss account of the company. Therefore, our interference is not required with the order of the CIT(A). We find that this amount is non-refundable and, therefore, in our view the CIT(A) is justified in holding that the membership fees is nothing but a revenue receipt and such income has to be brought in profit and loss account of the company. Therefore, our interference is not required with the order of the CIT(A). Hence, the appeal is dismissed on this ground.” 7.1 The Apex Court in the case of Excel Industries Ltd (supra) has observed as under:- “This Court further held, and in our opinion more importantly, that income accrues when there “arises a corresponding liability of the other party from whom the income becomes due to pay that amount.” It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. 8. In so far as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is therefore not the income of the assessee. 9. In Godhra Electricity Co. Ltd. v. Commissioner of Income Tax, [1997] 225 ITR 746 (SC) this Court reiterated the view taken in Shoorji Vallabhdas and Morvi Industries. Godhra Electricity is rather instructive. In that case, it was noted that the High Court held that the assessee would be obliged to pay tax when the profit became actually due and that income could not be said to have accrued when it is based on a mere claim not backed by any legal or contractual right to receive the amount at a subsequent date. The High Court however held on the facts of the case that the assessee had a legal right to recover the consumption charge in dispute at the enhanced rate from the consumers. 10. The High Court however held on the facts of the case that the assessee had a legal right to recover the consumption charge in dispute at the enhanced rate from the consumers. 10. This Court did not accept the view taken by the High Court on facts. Reference was made in this context to Commissioner of Income Tax v. Birla Gwalior (P.) Ltd., [1973] 89 ITR 266 (SC) wherein it was held, after referring to Morvi Industries that real accrual of income and not a hypothetical accrual of income ought to be taken into consideration. For a similar conclusion, reference was made to Poona Electric Supply Co. Ltd. v. Commissioner of Income Tax, [1965] 57 ITR 521 (SC) wherein it was held that income tax is a tax on real income. 11. Finally a reference was made to State Bank of Travancore v. Commissioner of Income Tax, [1986] 158 ITR 102 (SC) wherein the majority view was that accrual of income must be real, taking into account the actuality of the situation; whether the accrual had taken place or not must, in appropriate cases, be judged on the principles of real income theory. The majority opinion went on to say: “What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made ‘no income’” 12. This Court then considered the facts of the case and came to the conclusion (in Godhra Electricity) that no real income had accrued to the assessee in respect of the enhanced charges for a variety of reasons. One of the reasons so considered was a letter addressed by the Under Secretary to the Government of Gujarat, to the assessee whereby the assessee was ‘advised’ to maintain status quo in respect of enhanced charges for at least six months. This Court took the view that though the letter had no legal binding effect but “one has to look at things from a practical point of view.” (See R.B. Jodha Mal Kuthiala v. Commissioner of Income Tax, [1971] 82 ITR 570 (SC)). This Court took the view that though the letter had no legal binding effect but “one has to look at things from a practical point of view.” (See R.B. Jodha Mal Kuthiala v. Commissioner of Income Tax, [1971] 82 ITR 570 (SC)). This Court took the view that the probability or improbability of realisation has to be considered in a realistic manner and it was held that there was no real accrual of income to the assessee in respect of the disputed enhanced charges for supply of electricity. The decision of the High Court was, accordingly, set aside. 13. Applying the three tests laid down by various decisions of this Court, namely, whether the income accrued to the assessee is real or hypothetical; whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made; and the probability or improbability of realisation of the benefits by the assessee considered from a realistic and practical point of view (the assessee may not have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and Section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic. 14. Secondly, as noted by the Tribunal, a consistent view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason for us to take a different view unless there are very convincing reasons, none of which have been pointed out by the learned counsel for the Revenue.” [Emphasis Supplied] 15. Similarly in the case of Bilahari Investment P. Ltd (supra) the Apex Court has held that since from the various statements produced, the entire exercise arising out of the change of method from the completed contract method to deferred revenue expenditure was revenue neutral, the completed contract method was not required to be substituted by the percentage of completion method. 16. 16. Considering the aforesaid observations 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. 17. In the premises aforesaid, appeal is allowed. The impugned order passed by the Tribunal is quashed and set aside to the extent that it considers the membership fees as revenue receipt in the year though business had not commenced. Order accordingly.