INFRES METHODEX PRIVATE LIMITED,DELHI vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 12(1), DELHI, DELHI

Against the said order, assessee preferred appeal before Ld. CIT(A) who vide impugned order dated 28.11.2024, partly allowed the appeal of the assessee and confirmed the disallowance made u/s 14A of the Act and partly sustained the disallowance out of club expenses and further, confirmed the additions towards custom duty paid.

Aggrieved by the order of Ld. CIT(A), assessee is in appeal before the Tribunal by taking following grounds of appeal:-

“That on the facts and circumstances of the case and in law, the impugned order dated 28.11.2024 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [NFAC], confirming the additions to the returned income to the tune of Rs 2,34,68,384/- (out of Rs 2,72,08,342/- made by the AO), is erroneous and bad-in-law. 2. That on the facts and circumstances of the case and in law, the NFAC has erred in confirming the disallowance of Rs 22,91,385/- under Section 14A of the Income-tax Act, 1961 by mechanically applying Rule 8D without appreciating the facts of the appellant's case and without considering the computation made by the appellant of only Rs 7,98,201/- which should actually be disallowed under Section 14A. The disallowance of Rs 22,91,385/-made under Section 14A should be restricted to Rs 7,98,201/- only. 3. That on the facts and circumstances of the case and in law, the NFAC has erred in confirming the disallowance of the membership fee of Rs 9,00,000/- paid to Friends Club Limited by holding this expenditure to be capital in nature which it is not. The disallowance of Rs 9,00,000/- made under Section 37 of the Income-tax Act, 1961 is bad-in-law and should be deleted. 4. That on the facts and circumstances of the case and in law, the NFAC has erred in confirming the addition of Rs 2,02,76,999/- (paid towards customs duty) as unexplained expenses under the provisions of Section 69C of the Income-tax Act, 1961. The addition of Rs 2,02,76,999/- to the returned income is bad-in-law and should be deleted. 5. That the appellant craves leave to add, alter, amend, delete or modify any of the above Grounds of Appeal.”

Ground of appeal No.1 is general in nature, hence not adjudicated.

Before us, Ld.AR for the assessee in support of Ground of appeal No.2 with respect to the disallowance of INR 22,91,385/- made u/s 14A of the Act r.w. Rules 8D of the Income Tax Rules, 1962 submits that the assessee is having investment which has yielded exempt income as well as non-yielding investment therefore, the disallowance, if any, should be computed by considering the value of those investments which has yielded exempt income. For this, reliance is placed on the judgement of Co-ordinate Bench of the Tribunal in the case of DCIT vs Elan India Pvt. Ltd. in ITA No.2539/Del/2023 dated 20.03.2025. Ld.AR further submits that if the computation of income is made by considering the investments on which the assessee has earned exempt income, the disallowance should be restricted to INR 7,98,201/-. He prayed accordingly.

Regarding Ground of appeal No.2 of club expenses, Ld.AR submits that out of total disallowance of INR 14,82,901/- made by AO, Ld. CIT(A) has allowed the expenses to the extent of INR 5,82,901/- and confirmed the balance disallowance of INR 9.00 Lakhs paid to Friends Club Ltd. for Corporate membership. Ld. AR submits that expenses claimed is in the nature of normal business expenditure and incurred for purpose of business. As these expenses were incurred wholly and exclusively for the purpose of business under business expediency, it should be allowed as claimed. In this regard, reliance is placed on the following judgments:- (i) CIT(A) Order dated 23/10/2017 in Appeal No. 336/16-17 for AY 2013-14 in appellant's own case (Para 7 on Page nos. 65 to 67 of the Paper Book); (ii) CIT(A) Order dated 14/11/2017 in Appeal No. 260/16-17 for AY 2014-15 in appellant's own case (Para 4.5 on Page nos. 79 to 81 of the Paper Book): (iii) 2848/Mum/2008): The club entrance fees cannot be considered as capital in nature as no asset was created -Page nos. 23 and 26 of PB for Compilation of Additional Case Laws; (iv) CIT vs Samtel Color Limited (Delhi HC ITA 1152/2008): Club Corporate Membership fees is an expenditure incurred wholly and exclusively for the purposes of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise; and (v) CIT vs United Glass Mfg. Co. Ltd. (SC) [2012] (28 taxmann.com 429): Club membership fees incurred for employees is business expense.

Regarding Excise Duty payment held as unexplained expenditure, Ld.AR for the assessee submits that assessee has not disclosed the custom duty paid separately and it is included in the gross value of purchases. Ld. AR assessee submits that in Note No. 32A of Balance Sheet, it is stated that the “value of import calculated on CIF basis”, meaning thereby the excise duty paid is included in the purchases. For this, ld. AR referred to page 86 of the Paper Book wherein Note No.32A is appearing. Further, he drew our attention to the charts available at pages 87 & 88 of the PB, according to which total CIF value of imported goods includes the custom duty paid as well. Ld. AR submits that similar queries were raised in AY 2023-24 and after considering the submissions of the assessee, no addition was made by the assessing unit on this issue. He, therefore, submits that no addition should be made in the year under appeal also on this issue. Copy of the assessment order for AY 2023-24 is filed at pages 94 to 108 of the Paper Book. Ld. AR prayed accordingly.

On the other hand, Ld. Sr. DR for the Revenue supported the orders of the lower authorities and submits that the AO has made disallowance u/s 14A by following the computation provided under Rule 8D of the Income Tax Rules, 1962 (the Rules). Once it is accepted that provisions of section 14A are applicable on the facts and circumstantiates of the case, the AO should have followed the method of computation provided in Rule 8D of the Rules to compute the amount of disallowance. Since the AO has followed the due procedure, ld. SR DR prayed for the confirmation of the disallowance made u/s 14A of the Act.

Regarding club expenses, Ld. Sr. DR for the Revenue submits that Ld. CIT(A) has already allowed relief for the expenses which are revenue in nature. One time entry fee paid for corporate membership is capital in nature having enduring benefits and therefore, the same should not be allowed as revenue expenditure. He prayed accordingly.

Regarding excise duty, Ld. Sr.DR submits that the matter may be sent back to the AO for necessary verification. 12. Heard both parties and perused the material available on record. With respect to the issue of disallowance u/s 14A of the Act, both the parties have agreed that in the instant case, there is exempt income and assessee has also incurred expenses to earn such exempt income therefore, provisions of section 14A are applicable. However, the sole dispute is regarding the quantum of disallowance. Claim of the assessee is that it should be made by considering the value of those investments which have yielded exempt income. The Hon’ble No.615/2014 vide order dated 24.03.2015 has held that the exact value of investment which yielded exempt income should be chosen as a factor in the value of total investment for the purpose of computation of disallowance under Rule 8D of the Rules. This view is followed by the Co-ordinate Bench of the Tribunal in the case of DCIT vs Elan India Pvt. Ltd. (supra). In the present case, assessee claimed that if the value of investments yielding exempt income are considered, the resultant disallowance would be of INR 7,98,201/-. Accordingly, we direct the AO to re-compute the amount of disallowance u/s 14A by taking the investment which yielded exempt income only. With these directions, Ground of appeal No.2 raised by the assessee is partly allowed for statistical purposes.

Regarding club expenses agitated in Ground of appeal No.3, in our considered opinion, the expenses incurred on one time entrance fee paid for corporate membership fee was in the nature of capital expenditure and, therefore, it is capital in nature. Under these circumstances, we do not find any merit in the arguments of the Ld.AR for the assessee. Accordingly, Ground of appeal No.3 raised by the assessee is dismissed.

Ground of appeal No.4 raised by the assessee is with respect to custom duty paid. Claim of the assessee is that it had already included the same in the gross value of purchases of goods from outside India debited in the Profit & Loss Account under the head “purchases” and assessee also filed charts before us in support of the claim.

In view of these facts, we direct the AO to make necessary verification of the facts and if the claim of the assessee is found to be correct, no addition is required to be made on this score. Needless to say that the assessee be allowed reasonable opportunity of being heard. With these directions, Ground of appeal No.4 raised by the assessee is partly allowed for statistical purposes.

In the result, appeal of the assessee is partly allowed for statistical purposes.