Revenue Recognition under POCM Upheld for Vacation Ownership Plans: ITAT Partly Allows Sterling Holiday’s Appeal [Read Order]

In a recent ruling for the hospitality and vacation ownership sector, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) upheld Sterling Holiday Resorts Ltd.’s use of the Percentage Completion Method (POCM) for recognising income from vacation ownership plans.

Sterling Holiday Resorts Ltd., a company providing vacation ownership and time-share services, filed its return for AY 2017–18 declaring a loss of Rs. 21.61 crore.

During the assessment, the AO challenged the company’s revenue recognition under POCM, arguing that full income from upfront membership fees should be taxed in the year of receipt.

The AO made several additions, including disallowances related to rent, salaries, cash deposits, and ESOP expenses. Sterling challenged these before the CIT(A), which allowed partial relief. Both the assessee and the Revenue filed cross-appeals before the ITAT.

The ITAT carefully examined the accounting records, contractual terms, and the company’s consistent historical practice of proportionate revenue recognition.

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It noted that under POCM, revenue is recognised progressively as services are rendered over the tenure of vacation ownership plans, which often extend multiple years.

The Tribunal cited Accounting Standard (AS)-9 on revenue recognition, highlighting that revenue should reflect the performance of obligations rather than mere receipt of cash.

The AO’s objection was based on the premise that upfront payments must be fully taxed, ignoring the service obligation that extends over several years.

The Tribunal observed that the assessee had provided reconciliations, supporting documents, and evidence of consistent accounting policies.

The Tribunal emphasised that the AO did not dispute the genuineness of transactions or the source of revenue; the contention was purely on the timing of recognition.

Respecting judicial consistency, the Tribunal upheld the CIT(A)’s decision allowing Sterling to continue recognising income under POCM.

The two-member bench comprising Amit Shukla (Judicial Member) and Padmavathy S (Accountant Member) clarified that the AO cannot reject an accounting method that presents a true and fair view without evidence of income distortion.

Minor adjustments were remitted to the AO for verification, but the core principle of progressive revenue recognition was affirmed.

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