ACIT vs. Mahindra Holidays & Resorts (ITAT Chennai Special Bench)

Timeshare membership fee is taxable only over the term of contract

The assessee, a time-share company having resorts at tourist places granted membership for a period of 33/25 years on payment of certain amount. During the currency of the membership, the member had the right to holiday for one week in a year at the place of his choice from amongst the resorts of the assessee. The membership fee was received either in lump sum or in installments to the prospective member. In addition to the membership fee, the member was liable to pay maintenance charges or subscription fees irrespective of whether he made use of the resort or not. If the resort was utilized, additional payment towards utilities like electricity, water, etc was payable. Though the assessee was following the mercantile system of accounting and treated the membership fee as revenue receipt, only 40% of the amount received was offered for taxation in the year of receipt. The balance was equally spread over the period of membership of 25 or 33 years on the ground that it was relatable to the services to be offered to the members. The AO took the view that as per the accrual system of accounting, the entire receipt had to be assessed as income in the year of receipt. The CIT (A) upheld the stand of the assessee. On appeal by the department, the matter was referred to the Special Bench. HELD by the Special Bench:

(i) In E.D. Sassoon & Co. Ltd. v. CIT 26 ITR 27, the Supreme Court held that two conditions are necessary for income to have “accrued to” or “earned by” an assessee viz. (i) the assessee has contributed to its accruing or arising by rendering services or otherwise, and (ii) a debt has come into existence and he must have acquired a right to receive the payment. In the present case, though a debt is created in favour of the assessee immediately on execution of the agreement, it cannot be said that the assessee has fully contributed to its accruing by rendering services because the assessee has a continuing obligation to provide accommodation to the members for one week every year till the currency of the membership. Till the assessee fulfils its promise, income has not accrued to it;

(ii) The argument of the assessee that the balance amount of membership fees has to be spread over the tenure of membership on the ground that heavy expenditure for the upkeep and maintenance of the resorts has to be incurred is not acceptable because separate charges are collected for maintenance and use of utilities and therefore the matching concept cannot be pressed into service with regard to the membership fee. The principles laid down in Calcutta Co. Ltd 37 ITR 1 (SC) and Rotork Controls India 314 ITR 62 are not applicable because though there is a liability, it is difficult not only to quantify but also to reasonably estimate it on a scientific basis. If the assessee had chosen to provide for the liability every year to comply with the matching concept, it would have been wholly unscientific and arbitrary;

(iii) Recognizing the entire receipt as income in the year of receipt can lead to distortion. Following the principles laid down in Madras Industrial Investment Corporation 225 ITR 802 (SC), where it was held that allowing the entire expenditure in one year might give a distorted picture of the profits of a particular year, recognizing the entire receipt in one year can also lead to distortion;

(iv) Consequently, the entire amount of timeshare membership fee receivable by the assessee up front at the time of enrollment of a member is not chargeable to tax in the initial year on account of contractual obligation that is fastened to the receipt to provide services in future over the term of contract.