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Membership Fee received by the Club, refundable after 25 years is Capital Receipt, not Taxable: Gujarat HC [Read Judgment]

In a recent decision, the division bench of the Gujarat High Court has held that the amount received by a Club as security deposit towards the enrollment of members is capital receipt and therefore, is not taxable under the provisions of the Income Tax Act.

The bench comprising of Justice M.R. Shah and Justice B.M. Karia had clarified that the impugned income collected by the Club does not lose its true nature merely due to the fact that it is used for construction and for providing other amenities.

The assessee Gulmohar Green Gold and Country Club Ltd is a Club, who enrolled its members on payment of security deposit as entrance fee. Assessee claimed that the income so received is a capital receipt. Rejecting the claim, the AO observed that security deposit though was refundable to the members after 25 years without interest. It was noticed by the AO that company had only a mere share capital of Rs.5,10,000/only and whatever amount collected as security deposits from the members as entrance fees was utilized for construction and providing other facilities at the club.

On appeal, the ITAT, by relying upon the Apex Court decision in S.S. Sakhar Karkhana Ltd. vs. CIT, Kolhapur, allowed the contentions of the assessee and held that the receiopt of membership fee is a capital receipt.

The bench noted that, as per the Articles of Association and the relevant Rules, Regulations and Bye Laws of the assessee, the security deposit collected by the assessee at the time of enrollment of the club members is refundable after a period of 25 years and/or on happening of the eventuality in Rule / Bye Law No.2 i.e. if a club member dies or institutional member is dissolved or wind up as the case may be. In other cases the security deposit shall be refunded to the member on expiry of 25 years and the said period may be extended by maximum period of 15 years at the discretion of the club member to avail club facilities for the extended period.It was further noted that the said security deposit shall be non interest bearing refundable security deposit.

Relying upon the decision of the Supreme Court in Bazpur Coop Sugar Factory Ltd, the bench held that “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, the case on behalf of the Revenue that the same be treated as revenue income cannot be accepted. 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 lose the “character of deposit”, which as observed herein above is refundable on occurrence of the contingencies as mentioned in the bye laws. No error has been committed by the learned Tribunal in holding the same as Capital Receipt in view of the decision of the Hon’ble Supreme Court in the case of S.S. Sakhar Karkhana Ltd. (Supra).”

Read the full text of the Judgment below.

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