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Income Tax Appellate Tribunal, “SMC” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)
The appeal filed by the assessee is directed against the order dated 1.12.2014 passed by learned CIT(A)-34, Mumbai and it relates to A.Y. 2010- 11.
The assessee is aggrieved by the decision rendered by learned CIT(A) on following issues :- (a) disallowance of club membership fees of ` 4 lakhs (b) disallowance made u/s. 14A of the Act.
The assessee is management consultant in the area of real estate and infrastructure. In the profit and loss account, the assessee claimed business promotion expenses of ` 4,37,703/- which included Mumbai Cricket Association subscription of ` 4 lakhs. The assessee had acquired ‘Associate life time membership’ in Mumbai Cricket Association for a sum of ` 13.23 lakhs and also availed installment facility for payment of membership fees. Accordingly, the assessee paid ` 4 lakhs during the year and claimed the same
2 Mr. Sundaresan Narayan as deduction against his professional receipts. Before the Assessing Officer, the assessee submitted that he has become a member of Mumbai Cricket Association in order to establish contacts with industrialists and businessmen, which, in turn, will promote the profession of assessee. Accordingly it was contended that the expenditure is related to promotion of professional activities. However, the Assessing Officer noticed that the assessee has earned professional income during the current year only from companies in which he is a director. Even though the assessee contended that he earned professional income from outsiders in the subsequent years, yet the Assessing Officer did not accept the same and accordingly disallowed the claim on the reasoning that (a) he has received fees only from known companies. (b) Onetime fee paid for obtaining “life time associate membership” is in the nature of capital expenditure.
(c) the club membership fee paid by the assessee cannot be considered to have been incurred wholly and exclusively for the purpose of business.
Accordingly he disallowed claim of ` 4 lakhs. Learned CIT(A) also confirmed the decision of the Assessing Officer with following observations :-
“2.4.1 I have duly considered the submissions of the appellant, including the case la ws rel i ed up on b y him. T he decisi on in th e case of Davi d Dhawan(supra), as discussed by the AO was on different sets of facts hence, not applicable in the case of the appellant. The other two decisions relate to corporate assessees. I, therefore, find that the decisions relied upon by the appellant do not support his case. On the contrary, I find that ratio of the decision of the Mumbai ITAT in New India Extrusions (P) Ltd vs ACIT 10 taxmann.com 145 and DCIT vs. G. Corp (P) Ltd [2012] 21 taxmann.com 304 (Banglore Trib) is applicable. As the appellant has failed to explain as to how membership of the above club facilitated in his professional and business income, I uphold the finding of the AO and confirm the disallowance of the amount of Rs. 4 lac. This ground of appeal is dismissed.”
The Ld A.R submitted that the assessee, being a professional, is not entitled to give advertisements and hence one of the ways of promoting his
3 Mr. Sundaresan Narayan profession is by increasing his contacts by way of becoming a member of a club. Since the assessee’s clients shall be mostly industrialists and big businessmen, the assessee has thought it wise to become member of Mumbai Cricket Association, one of the prestigious clubs/associations in Mumbai. Accordingly he contended that the membership fee paid should be considered as expended wholly and exclusively for the purpose of business. He submitted that the Membership fee/Entrance fee paid cannot be considered as Capital Expenditure as held in the case of CIT Vs. Samtel Color Ltd (326 ITR 425)(Delhi). He further submitted that the expenditure may not bring the income immediately and hence the AO was not justified in examining the current year’s income alone. He submitted that the assessee has received income from outsiders in the subsequent years.
On the contrary, the ld D.R submitted that the membership of club is normally taken by individuals for entertainment purpose and the generating contacts is an incidental activity only. He submitted that a professional normally earns name and fame through the work carried on by him and the same shall bring more professional work. Accordingly he submitted that the Ld CIT(A) was justified in confirming the disallowance of membership fee.
I heard the rival contentions and perused the record. The assessee is an individual professional. The various case laws deal with the membership fee paid by a corporate company to clubs, which would entitle its directors and officials to use the club facilities. In that kind of situation, the membership taken by a corporate company is normally considered as related to its business activities, since the membership facilities are enjoyed by the directors and officials. Thus, it is a kind of perquisite provided to them. Hence, in my view, the decision rendered in respect of corporate membership cannot be straight away applied to the case of the assessee. However, in my view, the membership fee cannot be considered to be a capital expenditure in view of the decision rendered by Hon’ble Delhi High Court in the case of Samtel Colours (supra).
4 Mr. Sundaresan Narayan
Normally a person joins club with different objectives. In my view, the main objective is to spend leisure time in clubs in a qualitative manner. In the case of Sports clubs, the objective should normally be to enjoy the sports and also to work for promotion of sports. If a person announces prior hand to a club that he is becoming member only with the intention of promoting his profession, possibly he may not be given membership at all. As rightly pointed out by Ld D.R, in my view also, getting new contacts/acquaintances through clubs is only incidental benefits attached to a club. There is no doubt that popularity of a professional is the key to his success in profession, but the popularity alone may not bring success. A professional is normally judged by the quality of his work and his expertise.
Since the contacts developed through clubs also brings new clients and professional opportunity, in my view, only a part of the Membership fee may be considered to be related to carrying on profession. Since the predominant object of becoming member of a sports club is promotion of sports and spending leisure time, I am of the view that 2/3 rd of the expenditure may be considered as personal and 1/3rd of expenditure may be considered as attributable to professional activities.
In view of the above, I set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow 1/3rd of membership fee treating the same as related to the profession carried on by the assessee.
The next issue relates to the disallowance made u/s 14A of the Act. The assessee had earned dividend income of ` 43,391/- and claimed the same as exempt. However he did not make disallowance as required u/s 14A of the Act. Hence the AO disallowed a sum of ` 12,910/-, being 0.5% of average value of investments. The Ld CIT(A) also confirmed the same.
Before us, the Ld A.R submitted that the assessee did not incur any expenditure for earning the exempt income. However, a perusal of the Profit
5 Mr. Sundaresan Narayan and Loss account shows that the assessee has claimed administrative expense of ` 14.18 lakhs. Accordingly I am of the view that the tax authorities are justified in rejecting the contentions of the assessee and further computing disallowance as per Rule 8D(2)(iii) of the I.T Rules. Accordingly I confirm the order passed by Ld CIT(A) on this issue.
In the result, the appeal filed by the assessee is partly allowed.
Order has been pronounced in the Open Court on 22.6.2016.