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

Facts

The assessee, Snesh Resort Pvt. Ltd., filed its return of income for assessment year 1997-98 as nil. The Assessing Officer assessed total income at Rs. 4,90,500/-. The CIT(A) partly allowed the assessee's appeal. Both the assessee and revenue appealed to the Income Tax Appellate Tribunal (ITAT). The ITAT partly allowed the assessee's appeal and dismissed the revenue's appeal, upholding the CIT(A)'s order. The ITAT held that membership fees received by the assessee, even before commencing commercial activities (operating a water park), constituted revenue receipt and should be brought into the profit and loss account. The assessee is aggrieved by this finding and has filed the present tax appeal before the High Court.

Held

The High Court held that the Tribunal committed an error in treating membership fees as revenue receipt when the assessee had not commenced its business of providing water park services. The Court reasoned that under such circumstances, the membership fees should be considered as an advance. The income should be taxed over a period of time proportionately, commencing from the year the business actually commenced. The Court answered the substantial question of law in the negative, i.e., against the revenue and in favour of the assessee. The impugned order of the Tribunal was quashed and set aside to the extent it considered membership fees as revenue receipt in the year business had not commenced. The appeal was allowed.

Key Issues

1. Whether, in the facts and circumstances, the ITAT was correct in holding that membership fees are income earned by the appellant, even though the appellant had not commenced its commercial activities? (Question of law) Assessee's Contention: The membership fees were not income but an advance collected for future services. These fees should be taxed over time as services are rendered. The assessee relied on Commissioner of Income-tax vs. Bilahari Investment P. Ltd. and Commissioner of Income Tax vs. Excel Industries Ltd & Mafatlal Industries P. Ltd. Revenue's Contention: The Tribunal rightly considered the membership fees as income. The appeal lacks merit and should be dismissed. If the assessee's argument were accepted, it would only be liable for a proportionate amount for the relevant year.