TMI Blog2016 (11) TMI 1054X X X X Extracts X X X X X X X X Extracts X X X X ..... he issue on merits in accordance with law to work out spread/rollover of advance membership fee collected for a period of 25 years spread over period of time based on reasonable scientific method keeping in view business matrix and model of the assessee worked out after study of the above parameters as cited by us and also of any other relevant parameter having impact and bearing on computation of correct income of the assessee chargeable to tax. - I .T.A. No.7905/Mum/2011, I .T.A. No.8140/Mum/2011, I .T.A. No.5316/Mum/2012, I .T.A. No.5337/Mum/2012, I .T.A. No.5338/Mum/2012, I .T.A. No.5339/Mum/2012 - - - Dated:- 26-9-2016 - SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER For The Assessee : Mr. K R Laxminarayanan For The Revenue : Sh A Ramachandran ORDER PER RAMIT KOCHAR, Accountant Member These bunch of six appeals out of which one appeal is filed by the assessee for the assessment year 2008-09 , while five appeals are filed by the Revenue relates to the assessment years 2004-05 to 2008-09 involving common issue s and are hence disposed of by this common order for the sake of convenience. 2. First we shall take up cross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejudice it is prayed that the advance Membership fee of ₹ 4,18,96,537/- may be taxed equally each year by spreading over the period of membership of 25 years. 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 ITA no. 8140/Mum/2011 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. 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. 3. The brief facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 2. Swimming Pool 3. Tennis Court 4. Health Club 5. Squash Court 6. Card Room 7. Activity Room 8. Table Tennis Court Out of the above facilities still the following facilities as on 31-03-2008 are yet to be provided to Members, since the assessee is still in the process of taking various permissions from the authorities: 1. Restaurant, Coffee Shop and Bar 2. Squash Court 3. Card Room ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 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 membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbership 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 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 facili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act held that members entrance fee of ₹ 4,50,90,574/- received by the assessee is taxable as income of the assessee for the instant assessment year. 4. Aggrieved by the assessment order dated 23-12-2010 passed by the AO u/s. 143(3) of the Act, the assessee filed first appeal with the learned CIT(A). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year while the authorities below have elaborately discussed in their orders the operations being carried on by the assessee w.r.t. to functionality of the club during the impugned assessment year, while it is also admitted by the assessee before the learned CIT(A) that 70% of the club functions were in operations during the impugned assessment year. The contention of the assessee that in case if it is not able to complete all the committed activities to the members, it may be required to refund all fees etc. collected from members cannot be accepted as the principles of going concern are to be applied while computing income of the assessee rather than on the hypothesis that the entity would be wound up, except where compelling situation so warrant based on cogent reasons and evidences on record to adopt a different course. The assessee company is collecting Club membership enrollment fund at the time of admission of members which composes of two parts , one refundable deposits which constitute 80% of club membership enrollment fund and secondly non-refundable entrance fee which constitute 20% of club membership enrollment fund. We are concerned in this appeal with only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation and control of transactions in securities , so that it becomes what is referred to in the Act as a Recognized Stock Exchange . Being a mutual association not formed for the purpose of making profits it does not pay income-tax unless its activities come within Section 10(6) of Income Tax Act,1922 (Act of 1922) which reads as follows:- A trade, professional or similar association performing specific services for its members for remuneration definitely related to those services shall be deemed for the purpose of this section to carry on business in respect of those services , and the profits and gains therefrom shall be liable to tax accordingly. The issue in this appeal before the Hon ble Bombay High Court was with respect to taxability of sum of ₹ 1,22,600/- representing 1226 fees or subscription of ₹ 100 each paid in respect of the authorization by the Association of 1226 clerks or remisiers belonging to some 475 firms which admit them to certain privileges or rights in the exchange building which otherwise they could not enjoy under the rules of association . The short question before the Hon ble Bombay High Court was whether the Association is perfor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice that it is clear that the scheme taken as a whole is based on institution of the authorized clerks and their work for the members who employ them. For that the Association has to render services and these are clearly specific services rendered by the Association for its members who desire to employ authorized clerks. The Association has undertaken certain obligations by the rules towards its members in accepting these fees. By the rules the Board and the Secretary have to perform certain duties as prescribed by the rules in respect of authorized clerks and it is futile to contend that they amount merely to facilities and do not constitute performance of services by the Association. It was held that it is true that several of the services to be rendered may be helpful to the other members for their business. Taken as a whole it was held that as a performance of services by the Association for the benefit, of morn bets who pay the remuneration. Secondly , It was also held that on the payment of ₹ 100/- the authorized clerks comes into existence and all the services which the Association has thereafter to render are in respect of the authorized clerks in respect of whom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bers tickets. The bylaws also provided that member shall give notice in writing to the association of the termination of the employment of the authorized assistant and on such termination such authorized assistant shall have no right to transact business in the name and on behalf of the member and right of the assistant to use the rooms of the association shall cease. The respondent-Calcutta Stock Exchange Association Limited during the accounting year 1944-45(assessment year 1945-46) received from its members the sum of ₹ 60,750/- as entrance fees and the sum of ₹ 15687/- as subscription in respect of authorized assistant, both the payments being received from members of the association in respect of their authorized assistants. The company also received ₹ 16000/- as fees from members for putting the names of companies on quotation list. The Hon ble Apex court observed that it is manifest that unless the respondent company is brought within the terms of subsection (6) of section 10 of Act of 1922, the three items of income coming into hands of the association, would not be chargeable to tax. The sub-section(6) of Section 10 of Act of 1922 is reproduced hereund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 16000/- represented the fees received from members for allowing their application for enlisting the name of companies not already on quotation list, so that shares and stocks of these companies may be placed on stock market. This fees has not to be paid by company concerned directly but by the member who initiates the proposal and , apparently , finds it worthwhile to pay that prescribed fee to the association. Apparently, such a member is interested in placing the stocks of that company on the market. Thus, it was observed by Hon ble Apex Court that the sum of money is definitely related to the specific services performed by the association , namely, to permit transactions in respect of the shares of the company concerned , which services would not be otherwise available to the members as a body or to the individual member or members interested in that company. The Hon ble Apex court held that each one of three sources of income to the association accrues to it on account of its performing these specific services in accordance with its rules and by-laws. It was held that each one of the three distinct sources of revenue to the association is specifically attributable to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the club, thus showing an annual excess of receipts over expenditure of the club as a whole. It was held by Hamilton, J. (as he then was), that the club carried on a concern or business in respect of which it received remuneration which was assessable to income-tax. He pointed out that the receipts from nonmembers went to augment the funds of the club, and the revenue thus received was applied for the purposes of the club-towards its general expenditure. The case was taken up to the Court of Appeal, and the decision of that court is reported in the same volume at page 198. The Court of Appeal affirmed the decision and dismissed the appeal. The judgment of the King's Bench Division in Liverpool Corn Trade Association Limited v. Monks [1926] 10 Tax Cas 442, was based on facts which are similar to the facts of the present case. In that case, the Liverpool Corn Trade Association Limited was an incorporated body under the Companies Act, with the object, inter alia, of protecting the interests of the corn trade, and of providing a clearing house, a market, an exchange, and arbitration and other facilities to the trade. Membership of the association was confined to persons eng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndered was trivial. Thus, the Hon ble Supreme Court held in the case of Calcutta Stock Exchange Association Limited(supra) that the nature of the service which the association performed in respect of the assistants, the payment of the admission /entrance fee was definitely related to that service. It was held that the case fell within section 10(6) of the Act of 1922 and is exigible to tax . (c).The Hon ble Supreme Court judgment in the case of Delhi Stock Exchange Association Limited v. CIT (1961) 41 ITR 495(SC). The facts of the case are that the appellant company in this case was incorporated in the year 1947 with an objects, inter-alia, to acquire going concern activities, functions and business of the Delhi Stock Share Exchange Limited and the Delhi Stock and Share Brokers Association Limited and to promote and regulate the business of exchange of stocks and shares , debentures and debenture stocks government securities , bonds and equities of any description and with a view thereto, to establish and conduct stock exchange in Delhi and/or elsewhere. The rules were made by the appellant company for the conduct of business of sale and purchase of shares in the exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shareholders. The object with which the company was formed was to promote and regulate the business in shares, stocks and securities etc., and to establish and conduct the business of a stock exchange in Delhi and to facilitate the transaction of such business. It was observed by Hon ble Supreme Court that the business was more like that in Liverpool Corn Trade Association v. Monks [1926] 2 KB 110 and observed as under:- In that case an association was formed with the object of promoting the interest of corn trade with a share capital upon which the association was empowered to declare a dividend. The association provided a corn exchange market, newsroom and facilities for carrying on business and membership was confined to persons engaged in the corn trade and every member was required to be a shareholder and had to pay an entrance fee. The association also charged the members and every person making use of facilities a subscription which varied according to the use made by them. The bulk of the receipts of the association was derived from entrance fees and subscriptions. It was, therefore, contended that the association did not carry on a trade and that it was a mutual ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was made for the election of members by the board of directors and rules 9 and 10 laid down the procedure for the election of these members. The entrance fees were payable by the trading members elected under the rules and bye-laws of the association, who alone with their associates, could transact business in stocks and shares in the association. Therefore, the body of trading members who paid the entrance fees, and the shareholders among whom the profits were distributed were not identical and thus the element of mutuality was lacking. It is the nature of the business of the company and the profits and the distribution thereof which are the determining factors and in this case it has not been shown that the appellant's business was in any way different from that which was carried on in the case reported as Liverpool Corn Trade Association v. Monks [1962] 2 KB 110 . Thus, the Hon ble Supreme Court approved the judgment of Hon ble High Court and held that the membership admission fee paid by the members for their own admission as well admission of their authorised assistants is exigible to tax under the Act of 1922. (d) The next judgment is CIT v. W.I.A.A. Club Limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are facilities for accommodation in the club's residential room on a daily, weekly or monthly basis available to all members; sport facilities are also provided for playing tennis, badminton, billiards; members can avail of the facility of the card room and the swimming pool. These are some of the facilities provided by the club. The tax-payer club received ₹ 2500 as entrance fees from life member, while entrance fee from ordinary member was ₹ 500.The Revenue split the entrance fee received from life members into two part whereby ₹ 500 was treated as entrance fee while ₹ 2000 was treated as consolidated annual subscription. The Court observed as under: Coming to the main question, in order to arrive at a proper decision of the question referred to us we are required to consider the real nature of the payment which is made by a life member on account of entrance fees. In order to decide whether the entrance fees paid by a life member should be treated as income in the hands of the assessee or as being in the nature of a capital receipt, neither the nomenclature used by the assessee nor the manner in which the receipt has been treated by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f we compare the rights and privileges of the life members and the ordinary members, there is hardly any substantial difference between the two, and, as already pointed out, the only substantial difference between the two classes of members is that there is no liability to pay annual subscription in the case of life members. If the rights and privileges which are enjoyed by the life members and the ordinary members are the same and if for the purposes of enjoying these rights and privileges the ordinary member has to pay not only an entrance fee but also an annual subscription, it is obvious that when the articles of association of the assessee-club required the life members to pay a larger amount which was described as entrance fees, it was intended to commute the amount of annual subscription which a member would otherwise be required to pay. The amount which is paid by life members and is styled as entrance fees has, in our view, obviously two elements in it. A part of the amount paid partakes of the nature of entrance fees which is a fee paid to the club with a view to acquire the right to avail of the services and the facilities made available to the club on annual subscriptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n than what was received by the club by way of a consolidated payment. Such uncertainties are, however, inherent in the nature of the fee that is fixed in such a case. The possible length of the period during which a life member would take advantage of the facilities of the club can never be predicted with any certainty. Finalisation of such fees is found to have an element of arbitrariness in their determination. What amount should be fixed by way of entrance fees for life members was a matter squarely within the discretion of the assessee. Just as, in a given case, a person might take advantage of the facilities of the club for a long period it may also be that, in a given case, a life member may cease to take advantage of the facilities of the club only after a very brief period. The crucial question is whether it was intended that the services which had to be availed of by ordinary members on the payment of an annual subscription could be availed of by life members without any charge or was such charge intended to be recovered in a lump sum at the beginning itself. We are thus mainly concerned with the character of the payment and if the character is such that a part of it is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re made by the same person by virtue of any recurring liability. Entrance fee is paid by a member only once and it is this payment which has to be considered whether it is in the nature of income or a capital receipt. If we look at the articles of association of the assessee-club, it is clear that in order to avail of the rights of a member and the facilities and the services provided by the assessee-club, it is not enough for a person merely to pay the annual subscription. As a matter of fact a person cannot exercise the rights and privileges of a member merely by volunteering to pay the annual subscription. What a member has to acquire first is the right of membership of the club. A person has first to get elected as a life or ordinary member, as the case may be, in the manner provided in the articles of association. It is only after a person is elected that he is required to pay the subscription and entrance fee within fourteen days of notice of his election under article 31. The acquisition of right as an ordinary member is done by the payment of the entrance fee of ₹ 500 in the relevant assessment years. In lieu of this payment of the entrance fee, a member does not get ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... putation of such profits. Rowlatt J. made the following observations on which Mr. Joshi relied (p. 453): But in a case of this kind, where there is a share capital, with a chance of dividends, a chance of a right to dividends if declared, upon the share capital, and to one side of that a dealing with people who happen to be the owners of the share capital, affording benefits to those people one by one individually, for which they pay money by way of subscriptions and by way of entrance fees as a sort of overriding subscription, if I may use that word, which opens the door to subscriptions, there is no reason at all for saying that you are to neglect the incorporation, or that you can regard otherwise than as profits the difference which is obtained by dealings between that corporation and people who happen to be its members. According to Mr. Joshi, Rowlatt J. has described the entrance fee as a sort of overriding subscription and, therefore, according to him, the entrance fee must be treated on the same footing as subscription. Since subscription was a part of the income of the assessee, the overriding subscription also, according to Mr. Joshi, must be treated similarly. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce fees paid by a life member will have to be treated as a capital receipt in the hands of the assessee and ₹ 2,000 as income of the assessee. **** **** Accordingly, the question referred to us is answered as follows: In respect of the assessment years 1963-64 and 1964-65, out of the amounts received on account of entrance fee from life members, ₹ 500 should be treated as a capital receipt and the balance of ₹ 2,000 should be treated as the income of the assessee. In case an ordinary member becomes a life member on payment of ₹ 2,000, the entire amount of ₹ 2,000 should be treated as the income of the assessee. ***** ****. (d) The next judgment is of Hon ble Patna High Court in the case of CIT v. United Clubs (1986) 161 ITR 853(Patna HC). The statement of the case was submitted by ITAT u/s. 256(1) of the Act of 1961 referring the following question of law for the opinion of the Court : Whether, on the facts and in the circumstances of the case, the entrance fee received by the club at the time of entrance of the new members is a receipt of revenue nature and is chargeable to tax in the hands of the club? The relevant facts of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubscribers. Payments are also made to the association by members and others for services rendered through the clearing house, etc. The association has power to declare a dividend out of its profits but has not done so since the year 1906. The association having been assessed to income-tax under Schedule D on the excess of its receipts over its expenditure, appealed to the Special Commissioner, contending, inter alia, (i) that it did not carry on a trade, etc., the profits of which were assessable under Case I of Schedule D, and (ii) that so far as concern's transactions with its members, the association was a mutual one and that any surplus arising from such transactions was not a profit assessable to income-tax. The Special Commissioner, however, confirmed the assessment. In those circumstances it was held that any profit arising from the association's transactions with members was assessable to income-tax as the part of the profits of its business under Case I of Schedule D and that the entrance fees and subscriptions received from the members must be included in the computation of such profits. Thus, it is evident that in view of this decision the entrance fees and subsc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived from the members as entrance fees were held to be taxable as held by Hon ble Apex Court. The Revenue also relied on the case of Delhi Stock Exchange Association Ltd. v. C1T [1961] 41 ITR 495(SC). This is also a decision of their Lordships of the Hon ble Supreme Court. In this case, the appellant-company was formed with the object of promoting and regulating the business in shares, stocks and securities and of establishing and conducting the business of a stock exchange. Its capital was ₹ 5 lakhs divided into 250 shares of ₹ 2,000 each on which dividends could be earned. The company charged fees for the admission of members and their authorized assistants. Trading members had to be elected and pay entrance fees and they alone with their authorized assistants, could transact business in stocks and shares in the company. The question was whether the admission fees received by the company from the members and the authorized assistants were taxable in the hands of the company. In those circumstances, it was held by their Lordships of the Supreme Court that it was not how the assessee treated any monies received, but what was the nature of the receipts in the questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s membership admission fees and as admission fees paid by the members on account of authorized assistants and the matter relating to the members' admission fees had to be decided in accordance with the nature of the business of the appellant-company, its memorandum and articles of association and the rules made for the conduct of business. It was observed by Hon ble Apex Court that it is not in dispute that the income of the assessee before the Court is taxable and is not exempt on the ground of mutuality. It was held that this clearly means that the assessee-club is carrying on business and in view of this decision the members' entrance fee is taxable as income of the assessee. The assessee on the other hand relied on the decision of PangalNayak Bank Limited v. CIT (1964) 52 ITR 915(Mys.) which is decision of Hon ble Mysore High Court. In this case the articles of association of a banking company contained a provision that no person shall be considered as a shareholder until he has paid the prescribed entrance fee and premium, if any, fixed per share. The company resolved to issue new shares and collected a sum of ₹ 10,000 as entrance fee at the rate of 8 annas pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ription and entrance fee within fourteen days of notice of the election. It has also been held in this decision that the acquisition of right as an ordinary member is done by the payment of the entrance fee of ₹ 500 in the relevant assessment year, and in lieu of this payment of the entrance fee a member does not get any return in the form of any services or amenities, and all that he gets is a right to avail of the amenities or facilities provided by the club on a payment of the annual subscription. This right can be exercised by him as long as the membership is not determined. The Hon ble Bombay High Court held that this receipt of ₹ 500 received by the club is a return for vesting a right of membership in the member and, therefore, the entrance fee would clearly be in the nature of a capital receipt in the hands of the assessee. It was held by Hon ble Patna High Court that the Hon ble Bombay High Court has referred Liverpool Corn Trade Association Ltd.'s case (supra) but no reference was made to the Hon ble Supreme Court cases in Calcutta Stock Exchange Association Ltd.'s case (supra) and Delhi Stock Exchange Association Ltd.'s case (supra) and so it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pancy rights by sale of shares and the purpose for which the compensation was charged, the whole transaction, it appears to us, is in reality of sale of floor space by the assessee-company to its shareholders. The assessee-company had kept with itself only the right of the management of property as a whole, the compensation being charged by way of reimbursement of the expenses which were likely to be incurred. It was observed by Hon ble Bomaby High court that that is why there was a provision in the agreement for increase of compensation from time to time. Notwithstanding the description of these amounts in the books of the assessee and its records as 'deposits', the Hon ble Bombay High Court was of the view that the Tribunal was right in holding that these deposits were in essence the consideration paid by the shareholder for allotment of the floor space. The Hon ble Bombay High Court held that the AAC and the Tribunal were, therefore, right in taking the view that this was in the nature of sale proceeds for sale of floor space area and legitimately ought to be treated as trading receipts. The said decision in 193 ITR 694 was later reiterated by the Full Bench decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... performed by it to its members. The Tribunal has commented that the taxpayer-association does not render any specific services to its members. In view of this fact, as found by the Tribunal, it cannot be said that the membership fees are relatable to any specific services which are rendered by the taxpayer-association to its members. In the premises, the question is answered as follows: The membership fees received by the taxpayer-association were not related to any specific services rendered by it to its members. The taxpayer-association was merely a trade association. Hence, the membership fees were not taxable under section 28(iii) as held by Hon ble Bombay High Court. The question referred to the Hon ble High Court of Bombay was, accordingly, answered in favour of the assessee and against the revenue. Thus, the above case is distinguishable and not applicable for deciding the issue in present appeal as to exigibility of entrance fee received by the assessee as the assessee in the instant case is a trading company whose income under the provisions of the Act is exigible to tax which is an admitted position and also the assessee has not invoked principles of mutuality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue receipts. The Hon ble Bombay High court vide judgment delivered on 31-01-1979, thereafter , in WIAA Club Limited(supra) took a view that entrance fee received by the club is not exigible to tax as the same is paid for obtaining membership and is a capital receipt. The judgments of Hon ble Bombay High Court in the case of Native Share and Stock Brokers Association (supra) and decisions of Hon ble Supreme Court in the case of CIT v. Calcutta Stock Exchange Association Limited(supra) and decision of Hon ble Supreme Court in the case of Delhi Stock Exchange Association Limited v. CIT(supra) were not brought to the notice of Hon ble Bombay High Court in the case of WIAA Club Limited(supra) while Hon ble Bombay High Court took note of decision of Kings Bench Division of the High Court in the case of Liverpool Corn Trade Association Limited v. Monks (1926) 10 TC 442(KB) , and the Hon ble Bombay High Court distinguished the said judgment on the grounds that the main question in the said case was to determine whether the association in question was a mutual association or a trading company and the question was whether the profits obtained as a result of dealing between the corporatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of G S Homes and Hotels Private Limited v. DCIT in civil appeal no 7379-7380 of 2016 vide judgment dated 09-08-2016. We have gone through the entire background of the case and also delved upon the various important case laws on the issue in hand, we have observed that the assessee is not governed by the doctrine of mutuality which is settled and undisputed position between the rival parties in the instant case. The assessee is a company and shareholders in their capacity as shareholders are distinct from members of the club who are entitled to avail the facilities and amenities offered by the club and hence complete identity between shareholders of the company and members of the club is lacking. The surplus of the assessee company being private limited company is distributable as dividend to shareholders . Nothing contrary to the aforestated propositions are on record brought by the assessee to rebut the said propositions The assessee has recovered club membership enrollment fund at the time of admitting members which comprises of non-refundable deposits of entrance fee at the time of admission of members which constitute 20% of the total club membership enrollment f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stant case , there are two components of the amount paid by the members at the time of seeking admission for becoming member of the club being club membership enrollment fund, one is a refundable deposits which , in our considered view, has close proximity to payment being made for obtaining the membership of the club and being capital receipts is not exigible to tax, and second component is towards non-refundable one time entrance fee paid by the members on being admitted to membership which has close nexus and proximity with the payments being made for services being performed by the assessee to its members being made available to members immediately on obtaining the membership of the club and also the assessee being a trading company whereby profits are distributable to shareholders where there is a lack of identity between shareholders of the company and members of the club and doctrine of mutuality is not invoked , hence , the non-refundable entrance fee is revenue receipts which is exigible to tax. The membership fee, annual charges and payments for availing services are undoubtedly revenue receipts in the hands of the assessee as they are related to the services being perfor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be a shareholder and had to pay an entrance fee. The association also charged the members and every person making use of facilities a subscription which varied according to the use made by them. The bulk of the receipts of the association was derived from entrance fees and subscriptions. It was, therefore, contended that the association did not carry on a trade and that it was a mutual association and entrance fees and subscriptions should be disregarded in computing assessment of the assessable profits. It was held that it was not a mutual association whose transactions were incapable of producing a profit; that it carried on a trade and the entrance fee paid by members ought to be included in the association's receipts for purposes of computing the profit. Rowlatt, J., said at page 121: I do not see why that amount is not a profit. The company has a capital upon which dividends may be earned, and the company has assets which can be used for the purpose of obtaining payments from its members for the advantages of such use, and one is tempted to ask why a profit is not so made exactly on the same footing as a profit is made by a railway company who issues a travelling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inion the judgment of the High Court is right and the appeals are therefore dismissed with costs. One hearing fee. Keeping in view our detailed discussions and reasoning in preceding paras as also the case laws discussed viz. Hon ble Bombay High Court decision in the case of Native Share and Stock Brokers Association(supra), decision of Hon ble Supreme Court in the case of Calcutta Stock Exchange Association Limited(supra), decision of Hon ble Supreme Court in the case of Delhi Stock Exchange Association Limited, decision of Hon ble Patna High Court in the case of United Clubs(supra) , decision of Hon ble Bombay High Court in the case of Shree Nirmal Commercial Limited(supra) which was later reiterated in Full Bench decision of Hon ble Bombay High Court in the case of Shree Nirmal Commercial Limited (supra) and which was recently affirmed by Hon ble Supreme Court in the decision of G.S. Homes and Hotels Private Limited(supra) which also supports our decision that non-refundable entrance fee of ₹ 31,34,037/- received by the assessee in the instant case based on factual matrix of the case is chargeable to tax as revenue receipts in the hand of the assessee .We order accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facilities in subsequent years for which expenditure will have to be necessarily incurred with no matching inflows from members as the membership fee is collected in advance and the assessee being bound by contractual obligations undertaken while collecting membership fee will have to maintain the facilities and incur necessary expenditure without matching revenue been received from the members of the club. It is equally true that the assessee is also collecting annual charges w.e.f. 01-01-2005 from members apart from membership fee and also collecting charges for usage of various services such as swimming coaching, squash coaching food, beverages ,banquet, gym and health club, commission etc. by the members which are separately collected by the assessee from its members based on actual usage of such facilities/amenities which will also enable the assessee to have regular stream of revenue in the years to come to enable it to incur expenditure for maintaining the facilities/amenities in the years to come. But, this is also undisputed position between the rival parties that the advance membership fee is collected by the assessee from its members for a period of 25 years in advance. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee chargeable to tax. Our decision is in consonance with the recent decision of the Hon ble Supreme Court in the case of Seagram Distilleries Private Limited(now Pernod Ricard India Limited) v. CIT-III,(2016) TIOL-117-SC-IT rendered on 11-07-2016. The assessee is directed to appear before the AO and produce all necessary and relevant evidences and explanations to enable the AO to arrive at correct computation of income of the assessee as per our directions. Needless to say that proper and adequate opportunity of hearing shall be granted by the AO to the assessee in accordance with the principles of natural justice in accordance with law. We order accordingly. 9. In the result, appeal filed by the assessee in ITA No. 7905/Mum/2011 and appeal filed by the Revenue in ITA no.8140/Mum/2011 for the assessment year 2008-09 are partly allowed as indicated above. 10.Our decision in ITA no. 7905/Mum/2011 and ITA no. 8140/Mum/2011 for the assessment year 2008-09 shall apply mutatis mutandis to the appeals for assessment years 2004-05 to 2007-08 as applicable. 11. Thus, the Revenue appeals in ITA no. 5316/Mum/2012 for assessment year 2004-05 is allowed while Revenue appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X
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