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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI JOGINDER SINGH, JM & SHRI MANOJ KUMAR AGGARWAL, AM
Per Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year [AY] 2011-12 contest the order of the Ld. Commissioner of Income-Tax (Appeals)-30 [CIT(A)], Mumbai, Appeal No.CIT(A)-30/19(2)/70/15-16 dated 24/02/2017 qua confirmation of certain additions. The assessment for impugned AY was framed by Ld. Assistant Commissioner of Income Tax-19(2) on 13/03/2015 u/s 143(3) wherein the income of the assessee has been determined at Rs.23.81 Crores after certain additions / M/s. Jasani Assessment Year-2011-12 disallowances as against returned income of Rs.22.97 Crores filed by the assessee on 28/09/2011. During impugned AY, the assessee being resident firm was stated to be engaged in the business of diamonds. The grounds raised
in the appeal reads as under:- The Commissioner of Income Tax (Appeals)-30, Mumbai has erred:
1. In disallowing payment made for membership of a Club of Rs.33,20,030 for a partner and an Executive which the AO treated as a capital expenditure whereas the CITA held this to be an expense not incurred for business purposes but as a personal expenditure.
2. In confirming a disallowance of Rs.23,95,925 contributed towards sponsorship/ advertisement at various events related to the business of the appellant by treating the same as donations simpliciter and not considering the explanations given. As evident from grounds of appeal, the addition of Rs.33.20 Lacs on account of club membership fees and another addition of Rs.23.95 Lacs on account of sponsorship / advertisement is the subject matter of present appeal. 2.1 During assessment proceedings, it was noted that the assessee incurred expenditure of Rs.60.77 Lacs to obtain membership of Bombay Cricket Association at BKC, Bandra for its partners and one senior executive of the firm as per the following details:- Sr.No. Name Relation Amount paid
1. Ratilal and Becharilal & Sons Partner 27,57,500
2. Mukesh K. Shah Partner 16,60,015
3. Ameet M. Shah Sr. Executive 16,60,015 Total 60,77,530 Accordingly, the assessee was asked to justify the above expenditure. The assessee vide reply dated 09/02/2015 submitted that the membership was used to provide hospitality to customers during their visit to assessee’s office at BKC. However, Ld. AO noted that the M/s. Jasani Assessment Year-2011-12 aforesaid payment was a one-time expenditure to utilize the club facilities over a longer period of time and further, the personal element in the same could not be ignored. Finally, considering the fact that the assessee incurred club expenditure of Rs.0.41 Lacs in the immediately succeeding AY 2012-13, Ld. AO opined that the same was capital in nature which could not allowed to the assessee u/s 37(1). 2.2 The second addition of Rs.23.95 Lacs pertains to expenditure towards donations and scholarships paid to overseas parties as per the following details:- Sr.No. Name of Event Amount of expenditure Equivalent INR (Rs.) 1. Jewelers for Children 37,500 USD 16,70,275 2. Diamond empowerment 10,000 Pounds 7,25,650 fund for New York Total 23,95,925/- The assessee justified the same vide its submissions dated 25/02/2015 and submitted that the expenditure was in furtherance of business interest and for the ultimate benefit of the business. The purpose of the same was purely for promoting good business relations with suppliers / customers with whom it had to deal in the normal course of business. However, not convinced, Ld. AO declined the same by observing as under:- The Submissions of the AR is considered but not found to be acceptable. The AIR information describes these transactions as donation and sponsorship. It is commendable that the assessee-firm has given donations. The Income Tax Act, 1961 has however has been very clear on the donations that would qualify as allowable deductions and the provisions laid out for the same. However, the expenditure claimed by the assessee-firm of Rs.23,95,925/- for donations made overseas do not come under the said provisions. The donations made could have benefit for the business but they cannot be claimed as a deduction u/s 37. The Hon’ble Kerala HC has held in Malayala Manorama Co.Ltd v CIT [2016] that “the amount contributed by the assessee in the instant case might bring goodwill or enhance reputation of the assessee among the general public as a good philanthropist and in the process it might boost its business. But that by itself would not be sufficient to claim any deduction u/s 37(1).”
M/s. Jasani Assessment Year-2011-12 3. Aggrieved, the assessee contested both the additions without any success before Ld. CIT(A) vide impugned order dated 24/02/2017 wherein the matter was concluded against the assessee in the following manner:- DECISION: 5. I have given my careful consideration to the rival submissions, perused the material on record and duly considered the factual matrix of the case as well as the applicable legal position, for arriving at the following conclusion.
Ground No.1 is raised against the disallowance of payment made towards membership of club of Rs.66,77,350/- treating the same as capital expenditure. In the ground it is stated that the AO is not right in disallowing the said payment. 6.1 For making the addition AO called for the details of Rs.63,69,681/- debited towards membership and subscription expenses and to substantiate the expenses for exclusive usage of business. In response the appellant stated that Rs.60,77,530/- was paid for membership of BCA at BKC, Bandra for its partners and to nominate Senior Executives of the firm and it was used to provide hospitality to customers as and when required. AO felt that the quantum is very high and the payment is capital in nature as the same is for membership fees and not for visits to the club. The expenditure is one-time expenditure to utilize the facilities of the club over a long period of time and the membership is taken for individuals, which means personal element cannot be ignored. In the subsequent years the amount of expenditure under the head is very meager, which means the expenses Incurred for this year is capital in nature and claim of the appellant that the same is revenue is not correct as the same amount should be incurred which is not the case. By reproducing section 37(1) of the Act, AO concluded that the membership is for the use of club over a long period of time and not for a limited time and is not allowable u/s 37 of the Act and added Rs.60,77,350/- to the total income of the appellant. 6.2 Per Contra, the appellant in the written submissions stated that the purpose of the said membership was to enable entertaining the customers by partners and senior executive of the appellant. The issue of whether or not corporate membership fees or entrance fee to clubs is allowable revenue expenditure as decided in the judgment of Hon'ble Nigh Court of Delhi in Samtel Colour Ltd. 326 ITR 425. The appellant also relied on several cases cited in the written submissions (which are reproduced in Para-4 above), and also stated that the AO has not relied on any case and hence sought relief on this issue. 6.3 I have carefully considered the rival contentions on the issue. AO considered for addition, an amount of Rs.60,77,350/-, expenditure incurred towards membership and subscription expenses, for the reason that the quantum is very high and is capital in nature, the same is one-time expenditure to utilize the facilities of the club over a long period of time. The membership is taken for individuals which means that there is personal element involved and the same expenditure is not incurred in the subsequent years.
M/s. Jasani Assessment Year-2011-12 6.3.1 The Appellant in turn argues that the membership was to enable entertaining the customers by the partners and Senior Executives of the firm and the expenses incurred towards corporate membership fee or entrance fees to club is an allowable revenue expenditure. In support the appellant relied on the case of Samtel Colour Ltd., 326 ITR 425 (Del.), wherein the Hon'ble Delhi High Court held that corporate membership fee paid to clubs towards corporate membership is an expenditure incurred wholly and exclusively for the purpose of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to profit running apparatus of a business enterprise. 6.3.2 In the present case the appellant submits that the said expenditure is towards Corporate Membership fee for obtaining membership at the MCA club located at BKC to enable entertaining their customers by the partners and senior executives of the appellant, such expenditure is not in the nature of capital expenditure, which is clearly decided in the above cited case. However, in the assessment order, AO stated that the membership is in the individual names, which means that the personal element cannot be ignored. In page No. 2 of the assessment order AO reproduced the written submissions, wherein the appellant admitted that the appellant firm has taken three membership of that club in the names of M/s Ratilal and Becharilal & Sons of Rs.27,57,500/-, Shri Mukesh K. Shah(partner) of Rs.16,60,015/- and Shri Ameet M. Shah (Sr. Executive) of Rs. 16,60,015/- totaling to Rs.60,77,530/-. From this it is clear that though the amount said to be spent for corporate memberships, the same is not exclusively taken in the name of the appellant firm. 6.3.3 In view of the observation of the AO that there is personal element in the said expenditure and also the appellant admitted that the cards are in three different names, during the present proceedings, Ld. AR was asked to furnish the details of the expenditure and in whose names the cards are obtained. In response the appellant stated that the cards are in the names of M/s Ratilal Becharilal and Sons whose name is changed to M/s Jasani in 2012. In support appellant enclosed copies of PAN cards of both to show that PAN is the same and the B Form filed with the Registrar. This card is used by two employees nominated to use the facility, by name Shri Rajesh Jasani and Shri Apurva Kothari. Towards this membership, the appellant paid an amount of Rs.27,57,500/- and the application clearly stated that the same is for the Corporate membership. The other two cards are in the name of Shri Mukesh Shah, a partner and Shri Ameet Shah, Senior Executive of the firm and in the application it is clearly stated that the same for individual membership. No details of payments were also furnished with regard to these two applications. 6.3.4 From the above it is clear that out or the three memberships obtained, only one is towards corporate membership in the name of the firm, which can be operated by two authorized persons who can entertain the customers on behalf of the appellant firm. The other two cards are individual memberships in the name of the partner and senior executive and are nothing to do with the day to day business of the firm. In view of the same, the amount spent for obtaining these two cards cannot be allowed as the cards are not in the name of the firm and not utilized for the purpose of business as the cards are individual memberships standing in the names of individuals and are directly benefiting the two individuals, Accordingly, an amount of Rs.27,57,500/- is only allowed as business expenses spent towards obtaining the corporate membership in the name of the appellant firm, out of the M/s. Jasani Assessment Year-2011-12 total expenditure of Rs.60,77,530/ and the balance expenditure incurred of Rs.33,20,030/- (Rs.16,60,015/- each) for two individual memberships is treated as expenses not incurred for the business purpose, which is clearly benefiting the individuals and is personal in nature which is not an allowable expenditure. Ground No.1 is treated as 'Partly Allowed'.
In Ground No. 2, the appellant raised the issue that without prejudice to ground no, 1. It is stated in the ground that if the same was a right of an enduring nature, then the AO is not right in not allowing the appellant depreciation on the same by treating it as an intangible asset. While dealing with Ground No, 1, I have decided the issue in the above paras, partly in favor of the appellant by stating that the expenditure incurred towards obtaining the corporate membership is revenue nature, to the extent of the expenses incurred towards the membership obtained in the name of the firm. Part of the expenditure is not allowed which is incurred towards obtaining the individual memberships, due to the personal nature of expenditure involvement and not because of the capital nature of expenses. In view of the above, question of allowing the depreciation does not arise and this ground is redundant and needs no separate adjudication. Ground No. 2 is treated as dismissed ground for the statistical purposes.
Ground No. 3 of the appeal is against the disallowance of Rs.23,95,925/- contributed towards sponsorship/ advertisement. It is stated in the ground that the amount is contributed to various events related to the business of the appellant and AO treating simply the same as donations is not correct. 8.1 During the proceedings, AO noticed from the AIR information that the appellant firm incurred expenditure towards donation and scholarship which were paid to overseas parties. When questioned about the allowability of the expenses, it is stated that the expenses incurred are for promoting good business relationship with customers/ suppliers and for furtherance of business interest and not in the nature of donation to any organization. It is also stated that the inherent nature of expenditure is advertisement and as a measure of business promotion which is incurred wholly and exclusively for the business of the appellant. AO considered and not accepted the explanation, for the reason that the AIR information classified the expenses as donation and sponsorship. This expenditure is not coming under the provisions that would qualify as deductions. Following the Kerala High Court decision in Malayala Manorama Co. Ltd. Vs. CIT, the expenses claimed are disallowed and added back to the income of the appellant, by the Ld. AO. 8.2 Ld. AR, in the written submissions stated in support of the ground that the amount of Rs.16,70,275/- (US$ 37,500) is to an event 'jewelers for children' and the same is towards sponsorship and advertisement and is related to the direct business of the appellant, The other amount of Rs.7,25,650/- (GBP 10,000) is contributed to the diamond empowerment fund of New York towards Chairman's Council Patron Package, which is again for furthering the reputation of the appellant and is directly linked to the diamond business of the appellant. The amounts were not donations given for a cause unrelated to the business of the assessee and qualify for the deduction allowable u/s 37 of the Act. The expenses incurred are purely in the course of business and not with any ulterior philanthropic purpose and that the benefits ensure to the business and hence are allowable, as business expenses. It is further stated that out of Rs.23,95,925/- disallowed, a sum of M/s. Jasani Assessment Year-2011-12 Rs.7,25,650/- only is a donation and no reason is given by the AO for the other disallowance and requested for relief in the matter. 8.3. I have carefully considered the rival contentions on the issue and also the invoice/ donation pledge confirmations enclosed in support of the expenses incurred of Rs.23,95,925/-. First receipt is for us $ 37,500/- paid to M/s 'Jewelers for Children' and the description given in the invoice is Sponsor Underwriter - 2010 Facets of Hope (Sterling) $ 35,000 & Donation - 2010 Facets of Hope (Fredrick Goldman - $ 2,500. The second receipt is named as 'Invoice/ Donation Pledge Confirmation' to 'Diamond empowerment fund Helping Africans Help Africa' and the description given is 'Chairman’s Council patron package GBP 10,000. From the above it is clear that amounts paid are clearly falls under the category of donation as the description in both the invoices are clearly described the payments "Donation". In view of the above, contentions of the appellant that the expenses are advertisement and a measure of business promotion are rejected. Moreover, the appellant miserably failed to explain how the expenses are linked to sales promotion and are incurred wholly and exclusively for the purpose of business. In view of the same I am in agreement with the reasoning given by the AO that the donation given overseas could have benefited the business but the same cannot be claimed as deduction u/s 37 of the Act. In view of the same the appellant's claim that the expenses are incidental to business gains is rejected and the addition of Rs.23,95,925/- is confirmed. Ground No. 3 of the appeal is 'Dismissed'. Aggrieved, the assessee is in further appeal before us.
The Ld. Authorized Representative for assessee [AR], Apurva Shah, agitated the additions as confirmed by Ld. first appellate authority and submitted that the aforesaid expenditure being incurred for the purpose of assessee’s business, were allowable u/s 37(1). Per Contra, Ld. Departmental Representative [DR], Shri. V.K. Chaturvedi, placed reliance on the well reasoned order of the Ld. first appellate authority.
We have carefully heard the rival contentions and perused relevant material on record including the order of lower authorities. So far as the deductibility of the membership fees is concerned, the undisputed fact is that the assessee has obtained three memberships of the club out of which only one is corporate membership. Under the corporate membership, two employees of the assessee firm were authorized to access the facilities of the club and the same, in our opinion, was more M/s. Jasani Assessment Year-2011-12 than sufficient to cater to the business needs of the assessee considering the quantum of expenditure incurred by the assessee in the subsequent AY as club expenditure. The other two memberships were, beyond doubt, in individual names, the payment of which has been made by the assessee firm. However, the said payment, in our opinion, fails to qualify the test of Section 37(1) that the expenditure should not be of personal in nature and should be incurred wholly and exclusively for the purpose of assessee’s business. Nothing has been brought on record to demonstrate that the said expenditure was incurred wholly and exclusively for the business purposes of the assessee. For the same reason, the expenditure could not be allowed to be capitalized. The Ld. CIT(A) has clinched the issue in the proper perspective and therefore, does not require any interference on our part. This ground stand dismissed. 6.1 The second additions pertains to an expenditure of Rs.23.95 Lacs stated to be incurred by the assessee as advertisement expenditure but found to be donations in nature by the revenue. The facts regarding the same have already been noted by the Ld. first appellate authority in paras 7-8 of the impugned order and the same has already been extracted by us as above. Before us, the assessee has placed the same material on record as placed before Ld. CIT(A) to support the admissibility of this expenditure. Upon perusal of the same, we find that the impugned expenditure is more in the nature of Charities / donations rather than in the nature of advertisement expenditure as claimed by the assessee. The Ld. CIT(A) at para 8.3 has rightly noted that the assessee miserably failed to explain that how the expenses were linked to sales