By TIOL News Service

AHEMDABAD, JUNE 15, 2017: THE ISSUE BEFORE THE COURT IS - Whether the membership fee received for number of years was required to be considered as an advance, and thereafter as and when the business commenced, the amount of liability was required to be taxed over a period of time proportionately. YES is the verdict.

Facts of the case:

The issue in the present apeal pertains to spreading over of the receipt of membership fee across a span of the membership duration on accrual basis. The AO was of the opinion that the amount having been received by the assessee in the year under consideration, the assessee had to surrender to the Tax in the said year itself. On appeal, the CIT(A) as well as the Tribunal reversed the decision of AO relying on earlier year considerations.

On appeal, the HC held that,

++ it is seen that the Division Bench of this Court in Tax Appeal No.1159 of 2016 and connected appeals has considered the similar question and decided the same against the revenue by observing that: "....The main dispute in all these appeals is with regard to the correctness of the method of accounting of the assessee company for recording the receipt by way of membership fee and the expenses by way of commission and insurance premium. The assessee company is following mercantile system of accounting but the dispute is when the assessee has issued the facility card for a number of years, whether the membership fee received for number of years accrues in the year in which the card is issued or whether it should be spread over to the number of years for which the card is issued....Under such circumstances, the amount received by way of membership fees was required to be considered as an advance and thereafter as and when the business commenced the amount of liability was required to be taxed over a period of time proportionately. The amount of membership fees would be considered as income from the year the business of the assessee commenced. 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 assesseee. We are of the opinion that 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...." In the result, the question is answered in favour of Assessee.

(See 2017-TIOL-1106-HC-AHM-IT)