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I-T - Whether membership fees received by club, which are refundable on occurence of contingencies mentioned in byelaws, should be treated as capital receipt – YES: HC

By TIOL News Service

AHMEDABAD, DEC 28, 2016: THE ISSUE IS - Whether security deposit/membership fees received by a club, which are refundable on occurence of contingencies mentioned in the byelaws, should be treated as 'capital receipt'. YES IS THE VERDICT.

Facts of the case:

The assessee, carrying on the business of club activities had filed its return and the income was processed u/s 143(1). The case was selected for scrutiny, wherein the AO noticed the business of club activities carried out by the assessee was its main object. It was also noted that the assessee had enrolled members on payment of security deposit as entrance fee which was refundable to the members after 25 years without interest. The AO noticed that the assessee had not kept apart the security deposit obtained from the members but appropriated the same for construction and other amenities provided in the club. Accordingly, the AO held that 60% of the security deposit received by the assessee during the year under assessment be considered as its income.

On appeal, the HC held that,

Whether security deposit/membership fees received by a club, which are refundable on occurence of contingencies mentioned in the byelaws, should be treated as 'capital receipt' – YES: HC

++ Considering the fact that the security deposit is refundable after a period of 25 years or on occurrence of the contingencies mentioned in the byelaws and it cannot be said that the assessee club had absolute dominion over the impugned deposits. Merely because the security deposit is not kept apart and/or subsequently the amount of security deposit is utilized by the club for other purposes such as construction and providing other amenities at the club, the same shall not loose the "character of deposit". The security deposit recovered from the members at the time of their enrollment as a club member is refundable on occurrence of the contingencies mentioned in the Rules, Regulations and ByeLaws, same is required to be treated as a deposit and therefore, the same is required to be considered as capital receipts.

(See 2016-TIOL-3134-HC-AHM-IT)


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