The Gujarat High Court has held that membership fees is not taxable until business commences.
The Division Bench of Justice Bhargav D. Karia and Justice Pranav Trivedi has observed that membership fees collected in advance by Snesh Resort Private Limited prior to commencement of its water park operations cannot be treated as taxable revenue income for that assessment year.
The appellant/assessee, Snesh Resort Pvt. Ltd. had filed a nil return for AY 1998–99, but the Assessing Officer determined taxable income of ₹18.24 lakh, including ₹8.14 lakh received as membership fees. The Assessing Officer treated this amount as revenue income, a finding later upheld by the Commissioner of Income Tax (Appeals) and confirmed by the ITAT in September 2007.
The resort, represented by Advocate B.S. Soparkar, contended that the fees were received in advance for memberships to a proposed water park that was not yet operational and therefore could not constitute income during that year.
The Bench noted that the ITAT’s order for AY 1998–99 was based on its earlier decision for AY 1997–98 in the same assessee’s case. However, the High Court had already set aside that earlier finding in Tax Appeal No. 113 of 2004 (decided on November 18, 2014), ruling that advance membership fees were not taxable until the business commenced.
Referring to precedents such as CIT v. Excel Industries Ltd. and Godhra Electricity Co. Ltd. v. CIT, the Court reiterated that only “real income” that has accrued and is accompanied by a corresponding liability to pay can be taxed — not hypothetical or unearned income.
The Bench emphasized that the resort company had not begun operations during the relevant year, and hence, services to members were not provided. The membership fees collected were in the nature of advance payments to be adjusted over future years once the resort commenced its activities.
“The amount received by way of membership fees was required to be considered as an advance, and thereafter as and when the business commenced, the liability was to be taxed over a period of time proportionately,” the Court observed.
Given that the facts for AY 1997–98 and AY 1998–99 were identical, the High Court concluded that the issue stood settled in favour of the assessee. Consequently, it allowed the appeal, holding that the advance membership fees could not be treated as income for the year 1998–99.
Case Details
Case Title: Snesh Resort Private Limited Versus Deputy Commissioner Of Inocme Tax
Case No.: R/Tax Appeal No. 1072 Of 2010
Date: 03/10/2025
Counsel For Petitioner: B.S.Soparkar
Counsel For Respondent: Karan G Sanghani, Sr. Standing Counsel
