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TMI Blog2015 (7) TMI 932X X X X Extracts X X X X X X X X Extracts X X X X ..... capital contribution from the members received by the assessee is to be treated as revenue receipt in the hands of the assessee and the total amount received by the assessee during the year is to be taxed in this year. The ld.CIT(A) has erred in allowing the assessee to spread the alleged capital contribution received over a period of 5 years beginning from the year in which such contribution were received initially. In this way, the CIT(A) has ignored the provisions of section 4(1), section 5(1)(a), section 5(1)(b) and section 9(1)(i) of the Income Tax Act, 1961. 3. Brief facts of the case that the assessee is a company. It is engaged in the business of conveyance of industrial effluent and maintenance of channel. It has filed its return of income electronically on 27.9.2008 declaring an income of Rs. 2,60,660/-. The assessee has constructed channel which is 15 kilo-meters in length. It ends upto the gulf of Cambay. There are about 300 industrial members, to whom the assessee company provides channel for effluent disposal of member industries. The assessee has received contribution from the members which were shown by the assessee as revenue receipt in the first year. But it reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company is entirely set up for enabling member industries to discharge their effluents in the Gulf of Cambay. On the basis of quantity of annual effluent emission, a member pays capital contribution to the assessee company which is treated by the assessee company as Revenue receipt but is deferred for being taxed over a period of five years and thus offering for tax only 1/5th thereof and rest 4/5th in ensuing four years. The Revenue intends to tax the entire receipt in the year of receipt on the ground that concept of deferring revenue receipt is alien to Income-tax Act and sections 4,5 & 9 do not provide for such deferment. However, the Special Bench of the Tribunal, Chennai in ACIT vs. Mahindra Holidays & Resorts (India) Ltd. (supra) has considered the issue in great length. In that case admission share membership fees was receivable from the new members at the time of their entry or enrolment. The assessee company had offered 40% of such receipts in three initial years and 60% in remaining years out of the life time of membership. General membership was for 33 years but in that case it was reduced to 25 years and therefore, 60% of membership fees was sought to be offe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon. Supreme Court in the case of Rotork Controls India (P) Ltd. vs. CIT 314 ITR 62 (SC) wherein it is observed that liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. It was further observed that a past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It also observed that for a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. From this observation of Apex Court it was observed that there is a definite liability cast on the assessee to fulfill its promise i.e. to continue to provide facilities to members and, therefore, it cannot be said that entire fee received from the new enrolled members had accrued as income in the year of receipt. Finally the Special Bench observed as under :- "31. We have held that there is a definite liability cast on the assessee to fulfill its promise and therefore, it cannot be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to follow, is vis-à-vis the real taxable income for a particular year. Therefore, in view of the foregoing discussion, we accept the proposition of the assessee that it is not justifiable to tax the entire income in a single year as is the case of the Department." Thus the above judgment clearly lays down a principle that where fees is received by an assessee for rendering services in future then entire such fees cannot be taxed in the year of receipt because the assessee had not performed its part of obligation in the year of receipt. It has to be performed in ensuing year and incur expenditure for such performance. Therefore, entire receipt of membership fees cannot be taxed in one year. 11. When we apply the above principle to the facts of the present case, we notice that what the assessee has received is termed as capital contribution by the members but it is a revenue receipt in the hands of assessee. Quid pro quo is giving a right to the members to use the effluent discharge channel according to the capacity purchased by them. Thus by this one time payment the members are made eligible to utilize the present capital set up of the assessee company as well as further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NT will have to pay M&R/ Capital/ Other charges as per committed effluent quantity, within stipulated time limit. (20) The PARTICIPANT shall be bound to pay M&R/ Other charges calculated on its committed effluent quantity and in the event of high (more than committed) discharge, participant will have to pay M&R/ Other charges as per actual discharge within stipulated time limit, and the rates as applicable." Thus a clear right is given by the assessee company to the members to utilize its capital facilities for a period of 99 years for discharge of agreed quantities of effluent. In other words, assessee company has to perform its part of obligation for next 99 years and to keep the capital set up intact and allow the use thereof by the members. This is akin to hiring the capital structure of the assessee company for the next 99 years by making one time hiring charges. Since the assessee company has to ensure use of capital structure by the members during the term of agreement, it is bound to discharge its obligation in future. Thus one time membership fee is not in fact in return for any obligation or services rendered by the assessee in one year. It is a receipt in advance for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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