Answer : Non refundable membership fee has to be apportioned and taxed during period of membership.
The assessee company is engaged in the business of providing facility cards to the members on payment of prescribed fees which is called membership fees which is a one-time fee and is non-refundable. The period of membership varies between one to fifteen years. It is the case of the assessee that the payment of the membership is non-transferable. The accounts of the assessee had been prepared on accrual basis and accordingly it had apportioned the membership fees received from the members enrolled in a particular accounting year over the entire period of their membership.
HIGH COURT OF GUJARAT
Commissioner of Income-tax
Unique Mercantile Service (P.) Ltd.
TAX APPEAL NOS. 1471 TO 1473 & 1475 TO 1478 OF 2005
DECEMBER 18, 2014
Section 28(i) of the Income-tax Act, 1961 – Business income – Year in which chargeable (Membership fee) – Assessment years 1989-90 to 2001-02 – Assessee-company engaged in business of providing facility cards to members on payment of one-time fee, apportioned membership fee over entire period of their membership – Assessing Officer rejected claim of spreading over of membership fee and brought to tax entire receipt in year in which cards were issued – Whether where services were rendered partially, revenue earning was to be proportionate to degree of completion of service – Held, yes – Whether, therefore, assessee was justified in spreading over amount of membership fee and expenses – Held, yes [Para 7][In favour of assessee]
FACTS OF THE CASE :-
■ The assessee-company was engaged in the business of providing facility cards to members on payment of prescribed fees which was called membership fees which was a one-time fee and was non-refundable. The accounts of the assessee had been prepared on accrual basis and accordingly it had apportioned the membership fees received from the members enrolled in a particular accounting year over the entire period of their membership.
■ The Assessing Officer rejected the method of accounting followed by the assessee and he considered the receipt in the year in which the cards were issued and similarly the deduction for expenditure was also allowed in the year in which they are paid irrespective of the number of years for which insurance cover was taken.
■ On appeal, the Commissioner (Appeals) set aside the order of the Assessing Officer.
■ On revenue’s appeal, the Tribunal upheld the order of the Commissioner (Appeals).
■ On appeal:
■ The Tribunal has rightly considered that the method of accounting should be such from which the correct profit of each year can be deducted and that as per the method adopted by the revenue, the profit in the year in which the card is issued would be more resulting in loss/less profit in the year in which the services will be rendered by the assessee. When the services are rendered partially, revenue is to be shown proportionate to the degree of completion of the service and therefore the assessee was justified in spreading over the amount of membership fee and expenses. [Para 7]
■ Therefore, the Tribunal is justified in setting aside the order of the Commissioner passed under section 263. Accordingly, answer the question of law raised in the present appeals in the affirmative, i.e., in favour of the assessee and against the revenue. The impugned order passed by the Tribunal is hereby confirmed. Appeals are dismissed accordingly. [Para 8]