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Facts
The assessee, a corporate entity, filed its income tax return. During processing, the CPC disallowed Rs. 8,50,902/- for club membership/entrance fees, as the Tax Audit Report (Form 3CD, clause 21(a)) indicated it could be capital or personal expenditure. The assessee's application for rectification under section 154 and subsequent appeal to NFAC were rejected, with NFAC upholding the disallowance stating no mistake apparent from record and that submitted evidences could not be considered at the rectification stage.
Held
The Tribunal noted that the Auditor did not explicitly categorize the club membership fees as capital, personal, or disallowable expenditure in Form 3CD. Following precedent from a Coordinate Bench and High Court rulings, the Tribunal held that a debatable claim cannot be disallowed through intimation under section 143(1)(a) and that club membership fees can be allowable business expenditure. Consequently, the disallowance was deleted.
Key Issues
Whether club membership/entrance fees, reported under clause 21(a) of Form 3CD, can be disallowed through an intimation under section 143(1)(a) as a mistake apparent from the record, and if such an adjustment is rectifiable under section 154.
Sections Cited
115JB, 143(1)(a), 154, 143(1)(a)(ii), 143(1)(a)(iv), 142(1), 36(1)(vii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SHRI SAKTIJIT DEY, VICE- & SHRI BRAJESH KUMAR SINGH
PER SAKTIJIT DEY, VICE-PRESIDENT
This is an appeal by the assessee against order dated 31.05.2023 passed by National Faceless Appeal Centre (NFAC), Delhi, for the assessment year 2018-19.
At the outset, learned counsel appearing for the assessee submitted that ground nos. 1, 4 and 5, being general grounds, do not require adjudication. Accordingly, ground nos. 1, 4 and 5 are dismissed.
In ground nos. 2 and 3, the solitary dispute relates to addition of Rs.8,50,902/- representing Membership/Entrance Fee paid to club.
Briefly the facts are, the assessee is a resident corporate entity. For the assessment year under dispute, the assessee filed its return of income on 30.11.2018 declaring nil income under the normal provisions of the Act after setting off of brought forward losses. Whereas, the assessee declared book profit of Rs.3,70,87,869/- under section 115JB of the Act and paid taxes thereon. While processing the return filed by the assessee, the Centralized Processing Centre (CPC) disallowed the amount of Rs.8,50,902/- debited to the profit and loss account on the ground that in the Tax Audit Report in Form 3CD the Auditor has shown the expenditure under clause 21(a), which is specified for capital and personal expenditure. After receiving the intimation under section 143(1)(a) of the Act making such adjustment, the assessee moved an application under section 154 of the Act seeking rectification, however, the application so filed was also rejected. Thereafter, the assessee filed an appeal before the first appellate authority.
5. While deciding the appeal, the NFAC upheld the addition stating that assessee’s application under section 154 of the Act was rightly rejected as there was no mistake apparent on the face of record, which could have been rectified under section 154 of the Act. NFAC observed that since the Auditor has mentioned the club expenditure in clause 21(a) of Form 3CD, which is specified for capital and personal expenses, it could not have been allowed as business expenditure. It was further observed, though, the assessee filed evidences along with the application under section 154 of the Act to demonstrate that the expenses were incurred for employees of the company, however, such evidences could not have been considered by the Assessing Officer, since, mistake can be rectified only if it is apparent from the existing record at the time of processing of return under section 143(1) of the Act. With the aforesaid observations, the first appellate authority sustained the disallowance.
6. Before us, learned counsel appearing for the assessee submitted that clause 21(a) of Form 3CD requires the Auditor to report various items of expenditure as stated therein. However, it does not necessarily required to be personal or capital in nature, unless such expenses shall be notified against the column meant for capital and personal expenditure. Referring to the Guidance Note on tax audit Revised 2014 Edition, learned counsel submitted that as per Guidance Note, which is mandatory on the Auditor, he is required to report expenditure in club being entrance fees and subscription, which are personal in nature under the head personal expenditure and not under the head expenditure incurred at club. Thus, he submitted, since in the Audit Report the Auditor has not stated the expenditure to be a disallowance item, it could not have been disallowed by way of an adjustment under section 143(1)(a) of the Act. In support of such contention, he relied upon the following decisions:
Sayaji Iron & Engg. Co. 253 ITR 749 (Guj.) 2. United Glass Manufacturing Co. Ltd., 28 Taxmann.com 429 (SC) 3. Ansal Housing Limited 153 Taxmann.com 102 (Del-ITAT) 4. SCV & LLP Vs. DCIT, dated 17.08.2022 5. Samtel Colour Ltd., (2002) 258 ITR 1 (Delhi) 6. S.R.F. Charitable Trust Vs. Union of India [1992] 183 ITR 95
Strongly relying upon the observations of the first appellate authority, learned Departmental Representative submitted, since the Auditor has reported the expenditure in the column specified for capital and personal expenditure, the CPC has correctly made the adjustment and it is not a case of mistake apparent on record so as to rectify under section 154 of the Act.
We have considered rival submissions and perused the materials on record. Perusal of the Audit Report in Form 3CD reveals that in column 21(a), the Auditor has mentioned club Membership/Entrance fee of Rs.8,50,902/-. A careful perusal of the said clause makes it clear that under the broad heading of expenditure in the nature of capital, personal, advertisement expenditure etc. various sub-headings are there, such as, capital expenditure, personal expenditure, advertisement expenditure, expenditure incurred at clubs being entrance fees and subscriptions, expenditure incurred at clubs being cost for club services and facilities used etc. Thus, it is quite clear that neither the Auditor has mentioned the disputed expenditure either as capital expenditure or personal expenditure, nor he has treated it as a disallowable item of expenditure.
From the observations of the first appellate authority, it is quite clear that before the Assessing Officer, the assessee along with the rectification application had furnished documentary evidences to demonstrate that the club Membership/Entrance fee was for the benefit of employees. In fact, such evidences were also furnished before the first appellate authority. However, merely stating that evidences could not have been verified at the stage of rectification proceeding, the first appellate authority has confirmed the disallowance. This, in our view, is unjustified.
10. Pertinently, while considering identical nature of dispute the Coordinate Bench in case of SCV & LLP Vs. DCIT (supra) has held as under:
“9. At the outset, it can be observed that Ld. CIT(A) has confirmed the disallowance with the very summary observations without going on the facts of the case. The copy of Form 3CD available at page no. 105 of the paper book shows that in clause 21(a) of the particulars of expenditures incurred, under head of club entrance fees and subscription has been shown with regard to Gymkhana Club at Rs. 14,407/- , Holiday Club Rs.3,263/- and Panchshila Club rs. 22,610/-, totaling to Rs. 42,280/-. The auditors have not shown these expenditure to be disallowable as required to be disclosed in Annexure available at page no. 73 of the paper book. When admittedly the assessment was completed with intimation u/s 143(1) of the Act then the disallowance based upon comments of auditor in audit report could not have been made as none of the specific circumstances mentioned u/s 143(1)(a)(ii) or 143(1)(a)(iv) of the Act are met out. If at all a disallowance was to be made an opportunity of hearing by issuance of notice u/s 142(1) was therefore required. In Chetas Gulabbhai Desai v. DCIT, CPC Bangalore (supra) the Mumbai Bench has dealt similar case of disallowance of club membership fee reflected in Tax Audit Report as processed under section 143(1) of the Act, and held ;
The Hon'ble Jurisdictional High Court in the case of Bajaj Auto Finance Ltd. vs. CIT reported as 404 ITR 564(Bom) has held that debatable claim cannot be disallowed by way of an intimation u/s.143(1) of the Act. The relevant extract of the observations made by Hon'ble High Court in this regard are reproduced herein under:
“10. In the present facts, it is undisputed that the decision of Gujarat High Court was referred to in the computation of income. Thus, the Assessing Officer could not have disallowed the claim on a prima facie view that the same is inadmissible. In fact, there can be no dispute that even according to the Assessing Officer, the issue was debatable. This is evident from the fact when the applicant assessee had filed an application under section 154 of the Act for deletion of the adjustment made of provision of bad debts by intimation under Section 143(1)(a) of the Act, it was disallowed on the ground that it is a debatable issue. This itself would indicate that whether the claim of a provision for bad debts is deductible under Section 36(1)(vii) of the Act or not is debatable. Further, the above claim for deductions as made by the applicant was by following the decision of the Gujarat High Court in Vithaldas Dhanjibhai (supra). Thus, a debatable issue. Therefore, the same could not have been disallowed by way of an intimation under section 143(1)(a) of the Act.”.
In view of the undisputed facts and the decision of Hon’ble Bombay High Court, referred above, we find that the authorities below have erred in disallowing assessee’s claim of expenditure in proceedings u/s. 143(1) of the Act and thereafter, rejecting assessee’s application u/s. 154 of the Act. Ergo, the impugned order is set-aside and appeal by the assessee is allowed.”
Assessee infact had had claim on merits also on the basis of judgment of Hon’ble Supreme Court of India in CIT v. United Glass Mfg. Co. Ltd. (supra) wherein Hon’ble Apex Court has considered the question of club expenses and held that the Club Membership Fees for subscription is allowable as a business expenditures and had it been given opportunity under law to explain same would have been allowed.”
Facts being more or less identical, respectfully following the decision of the Coordinate Bench, we delete the disallowance.
Grounds are allowed.
In the result, appeal is allowed.
Order pronounced in the open court on 30th May, 2024