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Facts
The assessee, a proprietor, paid membership and subscription fees of ₹25,49,449/- which he claimed as revenue expenditure under Section 37(1) of the Income Tax Act. The Assessing Officer treated this as capital expenditure and disallowed the claim. The CIT(A) upheld the AO's order.
Held
The Tribunal held that expenditures incurred for acquiring membership of a club, when directly related to business promotion and facilitating business interactions, are revenue expenditures. The aim and object of the expenditure determine its character.
Key Issues
Whether membership and subscription fees paid for a club are revenue or capital expenditure and allowable as a deduction under Section 37(1).
Sections Cited
Section 37(1), Section 143(1), Section 139(1), Section 44AB, Section 250
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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Instant appeal of the assessee is preferred against the order of the Ld. 01. Commissioner of Income-tax, appeal, Addl./ JCIT (A), Kochi, [in short, ‘Ld. CIT (A)] order passed under Section 250 of the Incometax Act, 1961 (in brevity, ‘the Act’) order passed for A.Y. 2018-19, passed on 5thMarch, 2024. The impugned order was emanated from order of the CPC, Bangaluru (in brevity “the AO’) passed under Section 143(1) of the Act, date of order 25thDecember 2018.
The assessee has taken following grounds: - 02.
“1. On the facts and under the circumstances of the case and in law, the ld. CIT(A) erred in confirming the disallowance made by the AO under section 37(1) of the Income tax Act, 1961 of Rs. 25,49,449/- paid towards membership and subscription fees which were revenue expenditure incurred by the appellant for the sales promotion of the business carried on by the appellant. Therefore, treating it as capital expenditure and personal in nature and affirming the disallowance of the aforesaid business expenditure is bad in law.”
Brief fact of the case is that the assessee in individual capacity filed 03. the return and running the business as proprietor. During this impugned assessment year, the assessee paid the membership and subscription fee amountof ₹25,49,449/- and claimed deduction under Section 37(1) of the Act. The assessee filed the return under Section 139(1) of the Act with the tax audit report under Section 44AB of the Act, where the auditor mentioned this expenses in point no. 21(a) “furnish the details of amounts debited to the profit and loss account, being in the nature of capital, personal, advertisement expenditure etc.”In the membership and subscription column the amount is mentioned as ₹25,49,449/-. In the processing of the return under Section 143(1) of the Act, the learned Assessing Officer has treated the amount as capital expenditure and rejected the assessee’s claim under Section 37(1) of the Act. Being aggrieved on the The learned Authorized Representative argued and filed a written 04. submission which is kept in record. The ld. ARargued that during processing of the return under Section 143(1) of the Act, the learned Assessing Officer disallowed the claim and rejectedthe revenue expenditure. The assessee was asked the explanation for rejection of claim and the reply of show cause was filed related to adjustment under Section 143(1) of the Act. The assessee fully relied on the order of Hon'ble Gujarat High Court in the case of PCIT Vs. Bayer Vapi (P.) Ltd. (2019) 106 taxmann.com 395 (Gujarat). The relevant paragraph is duly inserted as below:-
“4.4 The Tribunal relied upon the decision of this Court in case of Gujarat State Export Corpn Lad [1995] 80 Taxman 568/[1994] 209 ITR 649, wherein the payment of fees to the Sports Club of Gujarat Limited has been examined and it was held that if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefits of the business, it is properly attributable to capital and is of the nature of capital expenditure However, if it is made for running the business or working with a view to produce the profits, it is a revenue expenditure. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a 4.5 In view of above settled legal position, it cannot be said that the Tribunal has committed any error of law in allowing membership fees of Rs 22,000/- paid to club by the Chairman and the Managing Director as revenue expenditure.”
“14. Similarly, the Hon'ble Delhi High Court in CIT v. Samtel Color Ltd. (2009) 180 taxmann.com 82 (2010 326 ITR 425 held that admission fees paid to the club towards corporate membership is wholly and exclusively for business purpose and is revenue in nature. Paragraphs 5 to 5.3 of Samtel Color Ltd. (supra) read as under
Having heard the learned counsel for impugned judgment of the Tribunal deserves to be upheld for the following reasons the Revenue as well as the assessee we are of the view that the of the Act was the correct
5.1 The expenditure incurred towards admission fee, admittedly, was towards corporate membership. Av correctly held by the Tribunal, the nature of the expenditure was one for the benefit of the assessee. The business purpose basis adopted approach. This is more so in view of for eligibility of expenditure under section 37 the Tribunal's findings that it was the assessee which nominated the employee who would avail the benefit of the corporate membership given to the assessee.
The learned Departmental Representative argued and fully relied on 06. the order of the revenue authorities.
We heard the rival contentions and considered the documents available on record. The assessee is a proprietor and running business in his own hand. The adjustment was made of the membership fees of the club under Section 143(1) of the Act during the processing of return. The assessee was duly asked about the adjustment and reply was given and objection was filed. The learned AR argued that the assessee has taken this membership for his business promotion and for development of his business. Out of the business hour the connection with customer and the meeting with the parties are conducted in the club premises.So, this membership is very much connected for the furtherance of the business. We respectfully relied on the order of the Hon'ble Gujarat High Court in case of Bayer Vapi (P.) Ltd.(supra) and Hon’ble Jurisdictional High Court in the case ofSwiss Re Services India (P.) Ltd. (supra). In our considered view, expense claimed in the head of revenue In the result, the appeal of the assessee bearing in ITA No. 08. 2198/Mum/2024, is allowed.
Order pronounced in the open court on 22 .07.2024.