Upfront time-share membership fees coupled with long-term obligations are taxable over the contract period.
Issue
Whether the entire upfront time-share membership fee received by an assessee is taxable in the year of receipt, or if a portion of it can be deferred and recognized over the membership tenure due to continuing contractual obligations.
Facts
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The Assessee: The assessee-company operates a time-share business where it enrolls members for a designated tenure of 25 to 33 years.
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The Transaction: Members paid their membership fees either upfront or in installments, granting them the right to occupy and use resort facilities for a specified number of days each year.
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Accounting Treatment: The assessee recognized 60% of the membership fee as income in the year of receipt and deferred the remaining 40% over the life of the contract.
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Additional Charges: Annual Maintenance Charges and utility charges were collected separately from members as they occurred.
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Revenue’s Action: The Assessing Officer rejected this accounting method and brought the entire 100% of the membership fee to tax in the year of receipt.
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Appellate History: Both the Commissioner (Appeals) and the Income Tax Appellate Tribunal accepted the deferred method of accounting followed by the assessee.
Decision
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Continuing Obligations Exist: The court held that the collected membership fees were coupled with continuing contractual obligations that extended until the end of the 25/33-year agreement period.
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More Than Entry Fees: The receipts were not merely one-time entrance fees; they constituted structural consideration for assured accommodation and allied facilities over a multi-decade tenure.
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Deferment Justified: Because the performance of the service spans decades, deferring 40% of the fee over the contract period was legally and textually justified under proper matching principles.
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Ruling: The court ruled that the entire receipt could not be taxed in the year of receipt, finalizing the decision in favor of the assessee.
Key Takeaways
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Matching Principle Applicability: Income recognition must match the timeline of the corresponding service obligations. When a company takes an upfront payment for services to be rendered over 25 to 33 years, taxing the entire amount on day one distorts true financial reality.
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Nature of the Fee Governs Taxability: If a fee is tied to an ongoing duty to provide infrastructure, maintenance, or room availability over time, it accrues over that timeline rather than at the exact moment the contract is signed.
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Judicial Acceptance of Hybrid Recognition: Splitting upfront receipts into immediate income (for initial acquisition costs) and deferred income (for long-term performance obligations) is a valid, legally sustainable accounting methodology.
| 1. | Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the part of the time share membership fee receivable from the members upfront at the time of enrolment could be deferred, in the absence of any such provision in the Income Tax Act to defer revenue, especially when there was a contractual obligation fastened to the receipt to provide the services over the entire period of contract? |
| 2. | Whether on the facts and circumstances of the case the Income Tax Appellate Tribunal was right in holding that Income from membership fee could be deferred to future years on the assumption that some unquantified future liabilities existed? |
| 3. | Whether on the facts and circumstances of the case the Income Tax Appellate Tribunal was right in not deciding the basis on which the said receipts referred to in the preceding questions should be treated as deferred income? |
| 4 | Whether on the facts and circumstances of the case the Income Tax Appellate Tribunal was right in holding that the membership fee income received by the assessee could be deferred, when the assessee collected annual maintenance charges and utility charges separately for every year from each member over the entire period of the contract, to cover the expenditure incurred over the period of the time share agreement? |
| (i) | The prime contention made on behalf of the Revenue is that, under the mercantile system of accounting, the upfront membership fees for timeshare units constitute a trading receipt which is fully taxable in the year of receipt. The Income Tax Act does not recognise ‘deferred income’ as a category of receipt. Once a non-refundable debt is created, the same is exigible to tax under Section 5 of the Income Tax Act. In this case, the assessee received the non-refundable membership fees on execution of agreement promising to provide right of occupancy and to enjoy the resort facilities for a specified days in a year and for specific period of years. Therefore, the doctrine of accrual has to be applied regardless of when the service is performed. The ‘parenthood’ of the income is completed on the performance of the assessee the definitive act of granting the right of occupancy. As per the terms of the contract, the upfront amount is collected as a non-refundable ‘entrance fee’ for the grant of ‘longterm right to use’ of the resort facilities. For the actual operational, maintenance and utility expenses such as electricity, water, housekeeping, routine housekeeping, AMC and other utility charges are collected from the members separately. This segregation conclusively establishes that the upfront fee is not meant to meet recurring service costs but constitutes consideration for the vesting of membership rights. |
| (ii) | The assessee’s method of accounting, insofar as deferring a portion of the membership fee for future obligations while simultaneously claiming 100% of marketing and administrative expenditure in the very same year, results in distortion and misleading computation of business profits. Such a method fails to reflect the true and correct income as mandated under Section 145 of Income Tax Act. |
| (iv)Tax | is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. The deferral of revenue recognised in certain transactions under Accounting Standard (AS-9) cannot override or dilute the charging provisions of the Income Tax Act. Section 4 and 5 of the Income Tax Act gives primacy to the statute over the general accounting principles. The assessee cannot rely upon AS-9 to postpone the incidence of taxation of the non-refundable membership fee, when the statutory charging provisions mandate taxation of income at the point of accrual or receipt. In support of this argument, the Learned Counsel relies on Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT 227 ITR 172 (SC). |
| (v) | The assessee claim to defer income to cover future services costs for 25 or 33 years as the case may be, is essentially a provision for a contingent liability. The deferral is not sought against an ascertained present liability. For an hypothetical future costs which may or may not arise, deferred income concept will not apply. Under Section 37 of the Income Tax Act, provisions made towards contingent liability are not allowable deductions. |
| (vii) | To emphasis that the portion of the receipt of the year deducted as deferred income to meet the future obligation is only a provision for contingent liability, the Counsel for the Revenue illustrates that the assessee’s obligation to provide accommodation to the member will arise only if the member opted for accommodation. If he never exercises that option, no expenditure will arise to the assessee. In such circumstances, the matching principle approved in Calcutta Company Ltd (supra) and relied by the assessee will not apply, since in Calcatta Company Ltd. (cited supra), the assessee had undertaken to a definite, unconditional and irrevocable obligation to construct roads, drains and other infrastructure as an integral part of the sale of the plots. Therefore, the Hon’ble Supreme Court permitted the matching of future expenditure against the current receipts. Contrarily, in the case of time sharing, there is no definite, unconditional or irrevocable obligation on the part of the assessee. The incurring of expenditure is contingent upon multiple factors including the member electing to avail the services of the assessee. |
| (viii) | In addition to the judgments mentioned above, the following judgments were also referred by the Learned Senior Counsel for the Revenue to strengthen his submissions:- |
| (i) | CIT v. United Club (Patna)/[1986] 161 ITR 853 (Patna). |
| (ii) | CIT v. Beldih club [1986] 186 ITR 861161 ITR 861 (Pat). |
| (iii) | CIT v. Bazpur Co-operative Sugar Factory Ltd. 172 ITR 321 (SC)/[1988] 172 ITR 321 (SC). |
| (iv)CIT | v. British Paints India Ltd 188 ITR 44 / 188 ITR 44 (SC). |
| (v) | CIT v. Southern Cables and Engineering Works (Kerala)/[2007] 289 ITR 167 (Kerala). |
| (i) | In response to the above submission made on behalf of the Revenue, the Learned Senior Counsel for the assessee submitted that, the contentions of the revenue bristles with fundamental flaw in understanding and appreciating the terms of the time share agreement. It is incorrect to say that the membership fee is non-refundable. It is also equally incorrect to say, since for maintenance and other facility utilised by the member on his occupation of the resort, the members are charged separately by way of AMC and Utility fee, the membership fee is for the right to use the resort facilities and no other obligation tagged on the assessee, to apply the matching principle. In fact, the portion of the receipt from the member is kept apart to meet out the liability undertaken by the assessee, which is to be meet whether the member opt for occupy the resort or not. The said liability is certain, irrevocable and any breach will attract legal consequences. The relevant portions of the terms of the agreement read to sustain the above submissions. |
| (ii) | As far as the accounting method adopted by the assessee, it is submitted that, law permits matching principle even when the assessee follow mercantile system. Therefore, what actually received or spend is not relevant, what attributable to income alone is relevant. In the instant case, based on trade practice, a portion of the receipt been kept apart as deferred income to match the expenditures for the subsequent years till the end of the agreement period. In the light of AS-9, ICDS clause 6 and Section 43CB which came into effect from 01.04.2017 recognising the straight line method of income computation read with Section 145(2) of the Income Tax Act, it is fallacious to argue that the concept of deferred income is unknown to Income Tax Act. |
| (iii) | The Learned Senior Counsel for the assessee referring the dictum of the Hon’ble Supreme Court laid in Madras Industrial Investment Corpn. Ltd. v. CIT / 225 ITR 802 / 225 ITR 802 (SC)andRotork Controls India (P.) Ltd. v. CIT 314 ITR 62 (SC) submitted that the concept of ‘deferred income/expenditure’ as well as provision for future expenses legally recognised through the judicial pronouncements. To further persuade, the judgment of High Court of Andhra Pradesh in Treasure Island Pvt Ltd (Supra)and the judgements of Delhi High Court in CIT v. Dinesh Kumar Goel 331 ITR 10 (Delhi),CIT v. Shyam Telelink Ltd. 410 ITR 31 (Delhi) confirmed by the Hon’ble Supreme Court in Pr. CIT v. Sistema Shyam Teleservices Ltd (SC) and the judgment of High Court of Gujarat in CIT v. Winner Business Link (P.) Ltd. (Gujarat) confirmed by the Hon’ble Supreme Court vide order dated 03.10.2016 were also referred and relied. |
(i) . The periods requested for by the Member shall not be overlapping.
(ii) Each of the periods requested for by the Member shall not exceed 7 days.
(iii) If the Member enjoys a Holiday in any year under this facility, he / she / it cannot request for Holiday in the same Mahindra Resorts / Mahindra Associate Resorts in the same year or next year under this facility.
(iv) Request for Holiday can be only in the allotted season or lower season.
(v) The Member cannot avail Holiday Multiplier facility mentioned in Clause 4.1 (c).
| (i) | Indian Molasses Co. (P.) Ltd. (supra): |
“19. From these cases, there are deducible certain principles of a fundamental character. The first is that capital expenditure cannot be attributed to revenue and vice versa. Secondly, it is equally clear that a payment in a lump sum does not necessarily make the payment a capital one. It may still possess revenue character in the same way as a series of payments. Thirdly, if there is a lump sum payment but there is no possibility of a recurrence, it is probably of a capital nature, though this is by no means a decisive test. Fourthly, if the payment of a lump sum closes the liability to make repeated and periodic payments in the future, it may generally be regarded as a payment of a revenue character Anglo-Persian Oil Co. Ltd. v. Dale [(1932) 1 KB 124: (1931) 16 TC 253] and lastly, if the ownership of the money whether in point of fact or by a resulting trust be still in the taxpayer, then there is acquisition of a capital asset and not an expenditure of a revenue character.
20. Side by side with these principles, there are others which are also fundamental. The income tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the trader’s pocket. Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income tax laws do not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in praesenti and a liability de futuro which, for the time being, is only contingent. The former is deductible but not the latter. The case which illustrates this distinction is Peter Merchant Ltd. v. Stedeford [(1948) 30 TC 496]. No doubt, that case was decided under the system of income tax laws prevalent in England, but the distinction is real. What a prudent trader sets apart to meet a liability, not actually present but only contingent, cannot bear the character of expense till the liability becomes real.”
| (ii) | Metal Box Company of India Ltd v. Their Workmen reported in Metal Box Company of India Ltd v. Their Workmen (SC)/1968 SCC OnLine SC 83, wherein it held as below: |
“.The distinction between a provision and a reserve is in commercial accountancy fairly well known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the P. & L. account and the balance-sheet. On the other hand, reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown in the balance-sheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor’s interest (see Spicer and Pegler’s Bookkeeping and Accounts, 15th edition, page 42). An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balancesheet is a reserve but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision.”
| (iii)Tuticorin | Alkali Chemicals & Fertilizers Ltd. v. CIT 227 ITR 172 (SC), wherein it held as below: |
“29. It is true that this Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override Section 56 or any other provision of the Act. As was pointed out by Lord Russell in the case of B.S.C. Footwear Ltd. [(1972) 83 ITR 269, the Income Tax law does not march step by step in the footprints of the accountancy profession.”
| (iv) | Treasure Island Resorts (P). Ltd (supra), wherein ITAT held as below:- |
“47. The learned Departmental Representative pleaded before us that entrance fee is a revenue receipt in the light of the decision of the Patna High Court in the case of United Club (supra) and so, the entire membership fee which is on par with such entrance fee has to be taxed in one year. This contention has to be rejected for more than one reason. Firstly, strictly speaking, there is no entrance fee as such in the present case. Secondly, the jurisdictional High Court has held in the case of Secunderabad Club(150 ITR 49) that the entrance fee is a capital receipt. Even as per accounting standard 9, entrance fee is normally capitalized. More basically, the issue in the present case is not whether the membership fee is capital receipt or revenue receipt. The assessee has not disputed that it is a revenue receipt. The only claim of the assessee is that, even if it is a revenue receipt, it cannot be brought to tax in one year and it should be recognized on a rational basis or time basis in the light of accounting standard 9. We see no reason to reject this claim as there is continuing liability to render services either free or at a reduced rate.
48. If the entire membership fee collected is shown in the present assessment year, there would be substantial deficit in future years, when the assessee has to incur expenditure for the provision of various services to the members without matching receipts. This would give a totally distorted picture of the working results of the assessee. While substantial profits will be taxed in the year under appeal, there will be substantial losses in” subsequent years. The revenue may seek such result, but we see no reason to allow it.
50. Before we conclude, we may mention that there appears to be some incongruity in item 6 of the appendix to the accounting standard 9, which we have extracted hereinabove While it states that entrance fee is generally capitalised, it proceeds to state that when membership fee permits only membership and all other services are paid for separately, it should be recognized when received. If the membership fee permits only membership it should be on par with entrance fee and so there seems to be some contradiction between the two statements. But the general import of item 6 of the appendix and more particularly of the accounting standard 9 itself is clear. The import of item 6 has to be seen in the light of other illustrations given under other headings of the appendix like installation fees, advertising and insurance agency commission, financial service commissions, admission fees, tuition fees, etc. Reading them all together, the principle is that when service is provided on a continuing basis and the cost relating to the service falls in a different year, revenue should be recognized on a time basis. Going by this general import of item 6 in the appendix and the wording in the body of the accounting standard 9 itself, it is clear that the assessee conformed to the accounting standard 9 and as such, the book results deserve to be accepted.
51. In the light of the foregoing discussion, we are of the view that the assessing officer is not justified in bringing to tax the entire membership fee collected to tax in the year under appeal. We accordingly set aside the impugned orders of the Revenue authorities on this aspect and direct the assessing officer to modify the assessment accordingly.”
| (v) | In Godhra Electricity Co. Ltd. v. CIT (SC) , the Hon’ble Supreme Court held as below: |
“13. Under the Act income charged to tax is the income that is received or is deemed to be received in India in the previous year relevant to the year for which assessment is made or on the income that accrues or arises or is deemed to accrue or arise in India during such year. The computation of such income is to be made in accordance with the method of accounting regularly employed by the assessee. It may be either the cash system where entries are made on the basis of actual receipts and actual outgoings or disbursements or it may be the mercantile system where entries are made on accrual basis, i.e., accrual of the right to receive payment and the accrual of the liability to disburse or pay. In CIT v. Shoorji Vallabhdas and Co. [(1962) 46 ITR 144 (SC)] it has been laid down:
“. Income tax is a levy on income. No doubt, the Income Tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a ‘hypothetical income’, which does not materialise.”
“. Even so, (the failure to produce account losses) we shall proceed on the footing that, the assessee company having followed the mercantile system of account, there must have been entries made in its books in the accounting year in respect of the amount to commission. In our judgment, we would not be justified in attaching any particular importance in this case to the fact that the company followed mercantile system of account.
That would not have any particular bearing in applying the principle of real income in the facts of this case.”
| (vi) | In the above case, the Hon’ble Supreme Court had also given its explanation on real accrual of income and income accrued for the purpose of book-keeping as below: |
“22. The question whether there was real accrual of income to the assessee company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee company in respect of the enhanced charges for supply of electricity which were added by the Income Tax Officer while passing the assessment orders in respect of the assessment years under consideration. The Appellate Assistant Commissioner was right in deleting the said addition made by the Income Tax Officer and the Tribunal had rightly held that the claim at the increased rates as made by the assessee company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the Income Tax Officer did not represent the income which had really accrued to the assessee company during the relevant previous years. The High Court, in our opinion, was in error in upsetting the said view of the Tribunal.
23. In the result, the appeals are allowed, the impugned judgment of the High Court is set aside and the questions referred by the Tribunal for opinion are answered in favour of the assessee company and against the Revenue. But in the circumstances, there will be no order as to costs.”
| (vii) | In Calcutta Company Ltd(supra), relied by both sides, and also referred the authorities below, it is said, |
“The appellant here is being assessed in respect of the profits and gains of its business and the profits and gains of the business cannot be determined unless and until the expenses or the obligations which have been incurred are set off against the receipts. The expression “profits and gains ” has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom — whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. (Emphasis Added)
| (viii) | In Madras Industrial Investment Corpn. Ltd. (supra), the case referred by the Learned Counsel for the assessee, the Hon’ble Supreme Court has said:- |
“…In the case of Indian Molasses Co. (P) Ltd. v. CIT [(1959) 37 ITR 66 : AIR 1959 SC 1049] this Court considered the meaning of “expenditure” under Section 10(2)(xv) of the Income Tax Act, 1922. The High Court was concerned with sums which were transferred by the Company to trustees to take out an annuity policy on the life of the managing director or the longest life policy in favour of the managing director and his wife. There was a provision in the policy for surrendering the annuity for a capital sum after giving notice. The payment by the Company to the trustees was contingent and the liability itself was contingent. The Court said that expenditure which is deductible for income tax purposes is one which is towards a liability actually existing at the time. Putting aside of money which may become expenditure on the happening of an event is not expenditure. Dealing with what is expenditure, this Court said (p. 78) that “expenditure” is equal to “expense” and “expense” is money laid out by calculation and intention. The idea of spending in the sense of “paying out or away” money is the primary meaning. Expenditure is what is paid out or away, something that is gone irretrievably. In the case of Calcutta Co. Ltd. v. CIT [(1959) 37 ITR 1: AIR 1959 SC 1165] decided in the same month, the assessee bought lands and sold them in plots for building purposes. The assessee undertook to develop the plots by laying out roads, providing drainage system, installing lights etc. When the plots were sold the purchasers paid only a portion of the purchase price and undertook to pay the balance in instalments. The assessee undertook to carry out the development of these plots. In the relevant accounting year, the assessee who followed the mercantile system of accounting, actually received in cash only a sum of Rs.29,392 towards the sale price of lands; but it credited in its accounts the sum of Rs.43,692 representing the full sale price of lands and at the same time it also debited an estimated sum of Rs.24,809 as expenditure for the development it had undertaken to carry out even though that amount was not actually spent. The Department disallowed this expenditure. Upholding the claim of the assessee to deduction, this Court said that the undertaking given by the assessee imported a liability on the assessee which accrued on the dates of the deeds of sale though that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of business. The difficulty in the estimation of liability did not convert the accrued liability into a conditional one. This Court said that the expression “profits or gains” in Section 10(1) of the Income Tax Act, 1922 had to be understood in its commercial sense; and there could be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom, whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date.
7. Thus “expenditure ” is not necessarily confined to the money which has been actually paid out. It covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure. ” (Emphasis added)
| (ix) | In Rotork Controls India (P.) Ltd. (supra) the Hon’ble Supreme Court had explained the expression, “provision made by the assessee” used in the Income Tax Act as below: |
“22. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognised when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognised.
23. 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. 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 is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognised as provision. 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.”
| (i) | For an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid; |
| (ii) | Just as receipts, though not actual receipts but accrued due are brought in for income tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business; |
| (iii) | a condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability; and |
| (iv) | a trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in a subsequent year if it can be satisfactorily estimated.” |
“7. Rendering of services.
7.1 Revenue from service transactions is usually recognised as the service is performed, either by the proportionate completion method or by the completed service contract method.
(i) Proportionate completion method— Performance consists of the execution of more than one act. The Revenue is recognised proportionately by reference to the performance of each act. The revenue recognised under this method would be determined on the basis of contract value, associated costs, number of acts or other suitable basis. For practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue is recognised on a straight line basis over the specific period unless there is evidence that some other method better represents the pattern of performance.
(ii) Completed service contract method— Performance consists of the execution of a single act. Alternatively, services are performed in more than a single act, and the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those acts. The completed service contract method is relevant to these patterns of performance and accordingly revenue is recognised when the sole or final act takes place and the service becomes chargeable.”