Revenue Recognition on Club Membership Fees Must Match Service Period: ITAT in Sterling Holiday's Case [Read Order]

The Income Tax Appellate Tribunal (ITAT) Mumbai bench has upheld the principle that revenue from vacation ownership membership fees should be recognised in alignment with the period over which services are provided, partly allowing Sterling Holiday Resorts Ltd.’s appeal.

Sterling Holiday Resorts Ltd., a company engaged in vacation ownership and timeshare operations, collects upfront membership fees from members. For the Assessment Year 2017-18, the AO made an addition on the basis that the entire membership fee collected should be taxed in the year of receipt, despite the company’s established practice of providing services over multiple years.

The assessee argued that only a proportion of the fees corresponding to the current year’s entitlement should be recognised as income, with the balance deferred and matched against the period over which holiday services are provided. The CIT(A) partially allowed the appeal, prompting further challenge by the revenue.

Your Ultimate Guide to India’s Latest Income Tax Laws, Click Here

The Tribunal closely examined the company’s accounting and revenue recognition methods. It noted that Sterling Holiday consistently allocated membership fee income over the tenure of membership rights, ensuring that the recognition of income matched the period in which services were delivered.

The assessee provided reconciliations, membership agreements, and records reflecting the phased delivery of holiday benefits, demonstrating that upfront collection did not entitle the assessee to all services immediately.

The Tribunal observed that this method is consistent with generally accepted accounting principles and widely recognised in the hospitality sector, particularly for timeshare and vacation ownership operations.

The AO contended that there was no provision in the Income Tax Act for deferring membership fee income and insisted that the entire receipt should be treated as taxable income in the year of receipt.

The Tribunal rejected this argument, noting that taxation must reflect the substance of the transaction rather than its form. The Tribunal emphasised that where services extend over multiple years, revenue recognition principles require income to be matched to the period in which the service obligation is fulfilled. The Tribunal also cited prior decisions in Sterling Holiday’s own case for earlier assessment years, which consistently upheld similar deferral of revenue.

Your Ultimate Guide to India’s Latest Income Tax Laws, Click Here

The two-member bench comprising Amit Shukla (Judicial Member) and Padmavathy S (Accountant Member) concluded that the CIT(A) had correctly applied accounting principles and law in allowing partial relief to the assessee.

By deferring recognition of a portion of membership fees, Sterling Holiday accurately reflected revenue corresponding to the entitlement period under the membership scheme.

The Tribunal dismissed the revenue’s appeal, confirming that membership fee income must be recognised in accordance with the delivery of services and the accounting policies consistently followed by the assessee.

The Tribunal directed that the addition made by the AO be deleted, holding that the upfront collection of membership fees does not warrant full taxation in the year of receipt and that the assessee’s books of accounts correctly matched income to the period over which benefits were provided.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates