Maintenance Charges Recognised Over Service Period, Not Fully in Year of Receipt: ITAT [Read Order]

The Income Tax Appellate Tribunal ( ITAT ) Mumbai held that annual maintenance charges collected by Sterling Holiday Resorts Ltd. from its vacation plan members are not fully taxable in the year of receipt.

Sterling Holiday Resorts Ltd., engaged in the business of providing timeshare services, had collected annual maintenance charges from its members and treated these as revenue. The AO made an addition on the basis that the entirety of such receipts should be taxed in the year of receipt, holding that deferred recognition was not permissible under the Income Tax Act.

On appeal, the CIT(A) allowed partial relief to the assessee, but the revenue challenged this order before the ITAT.

The Tribunal examined the long-standing accounting practice followed by Sterling Holiday in treating a portion of maintenance charges as deferred income.

The company recognised only the portion of the annual maintenance fees attributable to services rendered in the year of receipt, while the remainder was deferred and offered as income over the subsequent years in which services would be provided.

The assessee’s accounting treatment was consistent with its revenue recognition policy applied in preceding years and was substantiated with detailed records and supporting documentation.

The AO, however, had argued that no provision under the Act allowed deferral of such income and contended that annual maintenance fees constituted immediate income.

The Tribunal observed that the AO’s addition did not adequately account for the nature of the services involved or the fact that the payments collected were for membership benefits extending over multiple years.

The Tribunal also noted precedents in which similar deferrals were recognised, particularly for vacation ownership plans, where revenue accrues over the period during which the service obligation exists.

Upon reviewing the facts, the two-member bench comprising Amit Shukla (Judicial Member) and Padmavathy S (Accountant Member) found that the CIT(A) had correctly allowed partial relief. The Tribunal confirmed that the upfront collection of maintenance charges does not equate to immediate income for tax purposes.

Instead, only the portion corresponding to the current year’s services can be treated as taxable, while the balance should be matched to the period when the facilities and services are actually provided.

The Tribunal found that the assessee had maintained proper books of accounts reflecting the deferral and had provided supporting documentation to substantiate the amounts recognised in each year.

The Tribunal also observed that the AO had failed to critically examine the documentary evidence demonstrating the allocation of maintenance income to future periods.

Additional evidence submitted during the appellate proceedings, including reconciliations of receipts against service delivery schedules, validated the assessee’s accounting treatment.

The Tribunal directed the AO to verify supporting documentation, but the principle of deferral based on service period stands.

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