ADDL CIT 9(1), MUMBAI vs. AAKASH LAVLESH LEISURE P.LTD, MUMBAI

3. Without prejudice to the above, the learned CIT(A) erred in not taking into account the fact that as per the terms of contract with members, appellant is required to provide them continuous club services for the period of membership of 25 years and therefore advance membership fee should be taxed equally each year spread over the period of 25 years.

4. The learned CIT(A) erred in not applying the ratio of the Supreme Court’s judgment in the case of Madras Industrial Investment Corporation Ltd. , 225 ITR 802(SC) allowing similar spread over.

The grounds of appeal raised by the Revenue in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) in read as under:-

“ 1.On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in treating 60% of the advance membership fees received every year as income instead of treating the entire advance membership fees as income for the year under consideration.

ITA 7905 & 8140/Mum/2011 5 & & 5337-5339/Mum/2012

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in treating non refundable one time entrance fee as capital receipt of treating the same as revenue receipt.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in accepting additional evidences during the appellate proceedings thereby violating Rule 46A of the I.T. Rules. 4. The appellate prays that the order of the CIT(A) on the grounds be set aside and that of the Assessing Officer be restored.”

The AO observed that the assessee is following a self proclaimed method of accounting whereby membership entrance fee will be treated as receipt in the year when the club becomes fully functional which is an endless process as additions, alterations and modifications keeps on going in the years to come, while the fact is that the club is operational since a number of years. It was observed that the assessee has also shown income from operations which inter alia included income from banquet, squash coaching, swimming coaching , tennis coaching , commission, guest entrance fees, Gym and health club, subscription income etc. .Thus , it was observed by the AO that the club is operational with its various facilities being functional. The assessee was asked why the club entrance fees should not be treated as income of the assessee as club is fully operational.

The assessee in reply submitted that the assessee was required to give certain facilities to the members in respect of Club Millennium Juhu on enrolment which are as under:

1. Restaurant, Coffee Shop and Bar ITA 7905 & 8140/Mum/2011 7 & & 5337-5339/Mum/2012

Club Member’s Enrolment Fund:

The amount included under head Club Enrolment Fund in the Balance Sheet consists of Entrance Fees and refundable deposits, received on application from members. The assessee submitted that the amount received from the members as non-refundable entrance fee will be transferred to the Member’s Entrance fees account and will be adjusted as income proportionately during the tenure of Membership from the year the club will become fully functional and the members are provided all the facilities agreed upon at the time of ITA 7905 & 8140/Mum/2011 8 & & 5337-5339/Mum/2012 enrollment. The refundable deposits will be included under the head Current Liabilities as Member’s Deposit form the year in which the club become fully functional. The assessee submitted that the aforesaid accounting treatment is followed in terms of Para 12 read with Appendix Para B-6 of the accounting standard AS-9 on Revenue Recognition issued by the ICAI.

The AO rejected the contentions of the assessee and observed that the perusal of the Profit and Loss Account reveals that the assessee has already shown income from coaching of squash, income from banquet, commission on banquet sales, commission on coffee shop sales, commission on liquor sales, commission on restaurant sales etc. and hence there is not an iota of truth in the submissions of the assessee and the club is fully functional with almost all of its facilities available to the members and the assessee should have shown the entrance fees as income for the year under consideration.

It was also observed by the AO from the perusal of the Profit and Loss Account under various heads to conclude that substantial expenses have been incurred and claimed by the assessee which are revenue in nature laid out for day to day running activities to offset the afore-stated income from various activities as set out in preceding para which the assessee was contending that these activities have not yet started by the assessee.

The AO also observed that the assessee club is functional where in all the facilities as enlisted at the time of enrollment, are functional except table tennis court which is miniscule /insignificant vis-à-vis services/facilities which are functional. The assessee is also collecting utility charges, facility charges as well annual subscription from its members which also proves that facilities are functional , otherwise the members will not pay the said charges if the club is not functional. The assessee has entered into an agreement with M/s Grand Cuisine Private Limited on 23/03/2007 whereby the food and ITA 7905 & 8140/Mum/2011 9 & & 5337-5339/Mum/2012 beverage operations of the Restaurant and Bar have been handed over to M/s Grand Cuisine Private Limited on commission basis. Thus, contention of the assessee that the club is not fully functional was rejected by the AO and hence the club is treated to be functional which would result in taxability of the entrance fees during the year under consideration.

As the club was fully functional as held by the AO, the assessee was asked to show cause why the membership receipts should not be taxed as income for the year under consideration as the club is operational.

The assessee in reply submitted that the assessee is a company constructing and operating an executive grade club with modern facilities . The assessee is enrolling members who alone will be entitled to entry in the club. The assessee submitted that broadly term of membership provides that a person desirous of becoming member is required to pay certain amount by way of entrance fees , of which certain part i.e. 4/5th part is refundable without interest after say 15 to 20 years while 1/5th part is non refundable. At the end of period, thus, the deposit will be refundable without any interest. In addition the members are obliged to pay regular membership fees to the assessee on annual basis. The assessee submitted that it started levying annual charges w.e.f. 01-01-2005. The club project is still in construction stage as at 31-03-2008 and club is yet to become functional. Since the club is under construction the members effectively have no right at all. The members presently have limited use of part facilities and hedging against the possible risk of enhancement in the entrance fees. Beyond that members have no right in the management, construction and administration of the club or the assessee company.

It was submitted that the entrance fees portion of membership fees paid at the time of enrollment is capital receipt and not liable to tax. Entrance fees is ITA 7905 & 8140/Mum/2011 10 & & 5337-5339/Mum/2012 precondition to membership. It is not price paid for enjoying membership but is a price paid for obtaining the membership. It was submitted that it is different from life membership which can be regarded as one time receipt in substitution of recurring receipts. Thus, it was submitted that entrance fees is capital receipt which is supported by the decision of Hon’ble Bombay High Court in the case of CIT v. WIAA Club Limited (1979) 136 ITR 569( Bom.) which view is supported by Accounting Standard AS-9 issued by ICAI was the contention of the assessee before the AO.

Without prejudice, it was submitted that even if the said entrance fees is regarded as revenue receipts, the same cannot be treated as income until the promise of completion of the project with the provision of all facilities agreed upon is made available to the members, and the assessee cannot appropriate it as its own money. Thus, it was submitted that in case of failure on the part of the assessee to complete its part of the contract or on abandoning of the contract , the assessee will be obliged to return the said entrance fees. Further, without prejudice, it was submitted that even if the entrance fee is treated as revenue receipts, the same shall be required to be spread over the number of years of membership right covered by the contract/tenure of membership. The assessee relied upon decision of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation v. CIT (1997) 225 ITR 802(SC) wherein Hon’ble Supreme Court held that a revenue item which contractually binds the parties over a long period should be considered as accruing over the life of the contract and cannot be appropriated in any one individual year.

Advance Membership Fees: It was submitted by the assessee that the assessee has introduced new scheme, whereby the assessee is collecting pre-agreed sum as advance membership fees in terms of agreement executed with the member. The ITA 7905 & 8140/Mum/2011 11 & & 5337-5339/Mum/2012 assessee submitted that as per terms of the said agreement, the member is required to pay certain sum as advance membership fees which shall be apportioned in equal installment over the agreed term of the Membership commencing from agreed date. The specimen copy of agreement dated 16-01- 2008 executed with one member was placed on record before the AO. In the said agreement it was mentioned that certain facilities like (a) swimming pool, (b) baby swimming pool , (c) open Jacuzzi, (d) squash courts, (e) jogging facility, (f) tennis court , (g)open ground for holding functions (h) health club , Gymnasium are presently available to members . In addition the assessee shall provide further facilities like (a) coffee shop (b) open air restaurant (c) multi cuisine restaurant (d) bar room and subsequently card room, table tennis room, billiards room facilities which are nearing completion shall be opened in due course. The clause 3 in the agreement provided that the membership shall be for a period of twenty five years commencing from the date of inauguration of coffee shop, restaurant bar. It was provided in the agreement that the advance membership fee will be paid in advance by the members towards the enjoyment of facilities provided by the Club and / or to be provided from time to time and shall be appropriated by the assessee on time basis over the tenure of membership. The clause 4 of the agreement provided for refund of the said advance membership fees. Thus, it was submitted that there is a contractual obligation on the assessee to appropriate the said advance membership fees over the tenure of membership and same cannot be brought to tax in its entirety in the year of receipt. Thus, it was submitted that the advance membership fees is received in advance by the assessee and shall be offered for taxation as income over the tenure of the membership commencing from the agreed date. Thus, it was submitted that as per contractual terms, the said advance membership fee has not accrued to the assessee as income and in case if the assessee is not able to provide the agreed services or fails to complete the project or the project is wound up, the assessee shall be liable to refund the said advance membership fees as ITA 7905 & 8140/Mum/2011 12 & ITA no. 5316 & 5337-5339/Mum/2012 provided in the agreement of the assessee with the members. It was also submitted that having regard to implicit provisions of Contract Act there is an implied warranty on the part of the assessee to refund the amount if the assessee is not able to provide promised services. The assessee relied on decision of 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).

Relying on AS-9 issued by ICAI, the assessee submitted that the membership fee should be recognized on a systematic and rational basis having regard to the timing and nature of services provided. Without prejudice, it was submitted that if full collection of advance membership fee is treated as income of the instant assessment year , then deduction should be allowed with respect to the present value of expenditure likely to be incurred on members, which proposition is supported by decision of Hon’ble Supreme Court in the case of Calcutta Company Limited v. CIT (1959) 37 ITR 1(SC) and other decisions. This proposition it was submitted as supported by para 19 of Accounting Standard 18 issued by ICAI, which is called matching concept whereby there is matching of revenue and expenses .

ITA 7905 & 8140/Mum/2011 13 & & 5337-5339/Mum/2012 It was also submitted by the assessee that the Revenue had examined and accepted the method of accounting followed by the assessee in the earlier years while framing assessments u/s. 143(3) of the Act and entrance fees and advance membership fees had not been taxed in all the earlier assessment years.

The AO considered the submissions of the assessee and held the same to be untenable due to following reasons: a) It was observed by the AO that the assessee has received entrance fees and refundable deposits. The assessee has stated that the club has started levying annual subscription from 01-01-2005 and the club is still under construction. The perusal of accounting policies attached to the audited financial statements reveal that the assessee has received one time non refundable entrance fee from nominal members which is treated as income by the assessee and transferred to the profit and loss account. The assessee has three types of membership schemes viz. The CMJ membership, CMJ(nominal) membership and CMJ(Advance membership) . The assessee was treating non refundable entrance fee under nominal membership scheme as income while the entrance fee received under the two other types of membership schemes had not been shown as income, while the services /facilities which are being availed by the members of all the three types of schemes are same and hence on the same analogy the entrance fee received with respect to all the three schemes should have been offered for taxation by the assessee. b) The AO held that the assessee’s contention that the entrance fee is a capital receipt is not tenable. The assessee has relied on AS-9 para 12 read with Appendix B-6. The perusal of the AS-9 shows that for ITA 7905 & 8140/Mum/2011 14 & & 5337-5339/Mum/2012 the entrance and membership fees , the revenue recognition is broadly divided into two parts: i) If the membership entrance fees permits only membership and all other services/facilities are paid for separately , or if there is a separate annual subscription then the membership entrance fees should be recognized as income when it is received. ii) If the membership entrance fees entitles the member to services/facilities during a period of time then the membership entrance fees should be recognized as income on a systematic and rational basis (i.e. the membership fees should be divided over the period of membership and treated as income accordingly)

It was held by the AO that the assessee is following the former method whereby the assessee is charging annual subscription as well separate charges for various facilities like squash, tennis, swimming , use of party lawns etc. . Hence it was held by the AO that the assessee company as per accounting standard relied upon by the assessee should declare as income the entire membership entrance fees received by the assessee in the year of receipt. The AO distinguished the case relied upon by the assessee decided by Hon’ble Bombay High Court in the case of CIT v. WIAA Club Limited (1982) 136 ITR 0569(Bom.) and held that in this case entrance fees was paid by the members to the tax-payer which was a larger amount and thereafter the life members were not required to pay any annual subscription and they were relieved of their recurring liability to pay annual subscription year after year . The Hon’ble Court held that in case of life members , part of the entrance fee is a compounded payment in lieu of the recurring payments to be made ITA 7905 & 8140/Mum/2011 15 & & 5337-5339/Mum/2012 annually in the nature of annual subscriptions. Thus, it was held by the Hon’ble Court that in respect of assessment years 1963-64 and 1964-65 , out of the amounts received by the tax-payer on account of entrance fee from life members , Rs. 500 should be treated as capital receipts and the balance Rs. 2000 should be treated as the income of the tax-payer. Thus, it was held by the AO that the assessee’s case is different as the members pay entrance fees as well as annual subscription and facility charges and hence ratio of the case law relied upon by the assessee is not applicable in the instant case.

The AO also held that as per AS-9 , the entrance fee has to be recognized as income in the year of receipt. The AO also distinguished the case relied upon by the assessee in the case of Madras Industrial Investment Corporation v. CIT (1997) 225 ITR 802(SC) as the said case law dealt with expenditure incurred by the tax-payer by way of discount paid to the persons who had subscribed to the debentures issued. The AO observed that the said decision is with respect to expenditure which is to be spread over a number of years and the facts in the instant case are totally different , the ratio of decision of the Hon’ble Supreme Court in the said case is not applicable to the instant case. Thus, it was held that as per AS-9, the entrance fees is to be taxed in the year of receipt.

The AO also held that as per AS-9 adopted by the assessee , the advance membership fee is to be brought to tax in the year of receipt. The assessee cannot treat the advance membership fees on a different footing than the other membership schemes for taxation purposes. The assessee company is collecting annual charges as well as utility/facility charges separately from its members irrespective of the scheme under which they have taken membership. Thus, as per AO by following AS-9 issued by ICAI, the assessee has to offer for tax advance membership fee received during the year in the year of receipt. The assessee relied on decision of Hyderabad Tribunal in the ITA 7905 & 8140/Mum/2011 16 & & 5337-5339/Mum/2012 case of Traesure Island Resorts Private Limited v. DCIT (2004) 84 TTJ 820(Hyd. Trib.) which the AO distinguished that in the said case the life members and privileged members were not required to pay any monthly or annual subscription to the tax-payer and facilities availed by them were free and hence based on facts, the entrance fees was directed to be spread over a period of five years and two years, while in the case of the assessee, the members have to pay separate annual charges and facilities charges and hence the entrance fee is taxable in the year of receipt as per AS-9, para 12 appendix B-6. With respect to the contention of the assessee that if full collection is treated as income, the deduction should be allowed in respect of present value of expenditure likely to be incurred on a member. It was held by the AO that since the assessee is charging annual subscription and utilities/facilities charges for the various services offered by the Club and hence the expenditure which is likely to be incurred on a member is being separately collected by the assessee in the form of annual subscription and utilities/facilities charges for each year. Thus, it was held that question of appropriating the advance membership fees over the tenure of membership does not arise. The AO observed that in case the assessee is required to refund the advance membership fee as per the terms of agreement, the assessee can always claim the same as an expenditure in the year in which the advance membership fees is refunded as the same had already been taxed as income in the year of receipt.

The AO also held that merely because a particular view has been taken in the earlier years cannot bind the AO in subsequent year as the facts may change from year to year. The assessee has entered into an agreement with M/s Grand Cuisines Private Limited on 23-03-2007 whereby the food and beverages operations of the restaurant and bar have been handed over to the ITA 7905 & 8140/Mum/2011 17 & & 5337-5339/Mum/2012 said company on commission basis. Thus, in this year the club was functional and hence the assessee’s contention that entrance fees and advance membership fees are not taxable is not tenable.

Thus, the AO held that the club is fully functional and the assessee is trying to postpone its tax liability indefinitely by showing the club as non functional. The assessee has deferred the income which was chargeable to tax and postponed taxability of income. The AO held that membership entrance fees received by the assessee in the year under consideration , has to be taxed in this assessment year. The assessee having received Rs.4,50,90,574/- as membership entrance fees which is inclusive of advance membership fees received of Rs. 4,18,93,567/-. The AO held that advance membership fee is also of the same nature as the regular entrance fees i.e. allowing member a right to enter in the club and use its various services/facilities by paying the appropriate annual fees and services charges and hence the advance membership fee received by the assessee during the previous year relevant to the instant assessment year is also taxable in the instant assessment year. The AO relied on decision of Hon’ble Patna High Court in the case of CIT v. United Club (1986) 161 ITR 853(Pat. HC) wherein Hon’ble Patna High Court has held that the entrance fee received by the tax-payer club at the time of entrance of the new member is a receipt of revenue nature and is chargeable to tax in the hands of the club. Similarly, reliance was also placed by the AO on the decision of Hon’ble Supreme Court in the case of CIT v. Calcutta Stock Exchange Association Limited (1959) 36 ITR 222(SC) wherein Hon’ble Supreme Court held that the entrance fee received from members is taxable. The AO also relied on the decision of Hon’ble Supreme Court in the case of Delhi Stock Exchange Association Limited v. CIT (1961) 41 ITR 495(SC) wherein Hon’ble Supreme Court held that members entrance fee is taxable as income of the tax-payer association.

ITA 7905 & 8140/Mum/2011 18 & & 5337-5339/Mum/2012 Thus, the AO vide assessment order dated 23-12-2010 passed u/s 143(3) of the Act held that members entrance fee of Rs. 4,50,90,574/- received by the assessee is taxable as income of the assessee for the instant assessment year.

5.Before the learned CIT(A), the assessee contended that the entrance fee is a capital receipt as held in the case of CIT v. WIAA Club (1982)136 ITR 569(Bom.) , CIT v. Diners Business Services Private Limited (2003) 263 ITR 1(Bom.) and ACIT v. Karnavati Club (2010-004-ITR(Trib.) 174 Ahm.). The assessee also submitted that advance membership fee received is fee collected from members in advance for a period of 25 years and the same cannot be treated as income in the very first year as the assessee is mandated to provide services to members for the entire tenure of 25 years. The assessee relied upon decision of Special Bench of the Tribunal in the case of Mahindra Holidays and Resorts Limited (2010) 39 SOT 438(Chennai)(SB) and decision of Hon’ble Supreme Court in the case of Madras Industrial Investment v.CIT (1997) 225 ITR 802(SC) to submit that advance membership fee be spread over 25 years and only 1/25 portion be brought to tax during the impugned assessment year.

It was observed by the learned CIT(A) that from perusal of the facts of the case and the decision of Hon’ble Bombay High Court in the case of CIT v. WIAA Club (1982) 136 ITR 569(Bom.) , CIT v. Diners Business Services Private Limited (2003) 263 ITR 1(Bom.) and ACIT v. Karnavati Club (2010- 004-ITR(Trib.) 174 Ahm.) held that non refundable one time entrance fee which is charged for the enrolment from members of Rs.31,34,037/- be treated as capital receipt and shall not form part of total income vide appellate order dated 28.10.2011 passed by learned CIT(A).

ITA 7905 & 8140/Mum/2011 19 & & 5337-5339/Mum/2012 With respect to advance membership fee of Rs.4,18,96,537/- which was collected in the first year for a tenure extending up-to 25 years , it was noticed by learned CIT(A) that the advance membership fees is essentially a payment for brand image , for the capital works and future maintenance of the utilities. The learned CIT(A) observed that the assessee’s club started operation from assessment year 2003-04 as operational income was disclosed from that year. It was also observed that all the facilities were not created/functional from assessment year 2003-04 and capital work in progress was continuing and that as on 31-03-2008 , the capital work in progress stood at Rs.22.85 crores , and as on 31-03-2011 it was Rs. 7.69 crores . The learned CIT(A) observed that the assessee admitted before him that 70% of the planned utilities were completed by 31-03-2008. The learned CIT(A) held that the assessee is required to render continuous services for the entire period of 25 years and that taxing the entire receipt as income in the first year of collection would be against the matching principle of accountancy. The learned CIT(A) keeping in view the decision of Special Bench of the Tribunal in the case of Mahindra Holidays and Resorts Limited (Supra) and also keeping in view that 70% of planned facilities were completed and that the assessee is required to maintain these facilities without further matching contribution from the enrolled member , directed that the AO may tax 60% of the advance membership fee i.e. Rs.2,51,37,922/- (0.6 X 4,18,96,537/-) received every year vide appellate order dated 28.10.2011 passed by learned CIT(A).

6.Aggrieved by the appellate order dated 28.10.2011 passed by learned CIT(A), the Assessee as well as Revenue filed cross appeals with the Tribunal raising grounds of appeal as set out above in preceding para’s of this order, wherein the assessee is in nutshell aggrieved by the orders of learned CIT(A) upholding taxability of 60% of advance membership fee in the instant ITA 7905 & 8140/Mum/2011 20 & & 5337-5339/Mum/2012 assessment year despite the club being not fully functional in the instant assessment year as contended by the assessee and without prejudice bringing to tax advance membership fee to the extent of 60% in the year of receipt instead of spreading the same over a period of 25 years during which period the services are to be provided to the members by the assessee , and the Revenue is aggrieved by the orders of learned CIT(A) holding entrance fee to be capital receipt not exigible to tax and also holding that advance membership fee is taxable only to the extent of 60% in the year of receipt instead of holding that 100% of advance membership fee is taxable in the year of receipt and also revenue is aggrieved with the admission of certain additional evidences by learned CIT(A) without complying with Rule 46A of the Income Tax Rules, 1962. We are taking these issue’s raised by the assessee and the Revenue together and disposing all of them together vide this common order as the issues are inter-woven and connected closely with each other.

7.Before the Tribunal, learned counsel for the assessee reiterated its submissions as were made before the authorities below which are not repeated for the sake of brevity . The learned counsel for the assessee relied upon the following case laws: a) CIT v. Diners Business Services Private Limited 263 ITR 1(Bom.) b) CIT v. W.I.A.A Club Limited 136 ITR 569(Bom.) c) ACIT v. Karnavati Club Limited 4 ITR Trib. 174-Ahd. Trib d) ACIT v. Mahindra Holidays and Resorts India Limited 59 SOT 438 (Chennai –SB) e) CIT v. Aspee Distributors Association (1994) 209 ITR 294(Bom.)

The learned DR on the other hand supported the orders of the AO and relied on decision of Hon’ble Patna High Court in the case of CIT v. United Club ITA 7905 & 8140/Mum/2011 21 & & 5337-5339/Mum/2012

(1986) 161 ITR 853(Pat. HC) and Hon’ble Supreme Court decisions in the case of CIT v. Calcutta Stock Exchange Association Limited (1959) 36 ITR 222(SC) and Delhi Stock Exchange Association Limited (1961) 41 ITR 495(SC) and others.

8.We have considered the rival contentions and perused the material on record including the case laws relied upon by both the parties. It is important to briefly discuss the entire background of the case first before proceeding to decide the issues.

We have observed that the assessee is a Private Limited Company and is a company limited by shares, registered with