PRICE WATERHOUSE COPPERS PRIVATE LIMITED,KOLKATA vs. ADDL C.I.T RG - 2,KOLKATA, KOLKATA

This appeal by assessee is arising out of order of CIT(A)-XX, Kolkata vide Appeal No. 149/CIT(A)-XX/Circle-2/2011-12/Kol dated 01.02.2013. Assessment was framed by ACIT, Circle-2, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year 2004-05 vide his order dated 28.12.2006.

The only issue to be decided in this appeal is as to whether the Ld. CIT(A) is justified in upholding the disallowance of club expenses in the sum of Rs.8,45,854/- in the facts and circumstances of the case.

Brief facts of the case are that during the course of assessment proceedings the assessee was asked to furnish various details of payments to club aggregating to Rs 13,50,635/-. The said details were furnished to the Ld. AO and he after perusing the details enquired as to why such expenditure should not be disallowed. The assessee filed a written submission in this regard. However, while passing the order, the Ld. AO listed out certain expenses aggregating to Rs 8,45,854/- and observed the same as personal expenditure and disallowed the same. On first appeal, the addition was upheld by the Ld. CIT(A) on the ground that though the assessee tried to co-relate the club expenses with its business but no supporting documents were produced substantiating its claim that these club expenses were not in the nature of non- business purposes. The Ld. CIT(A) also observed that there is a very thin line of difference between business expenditure or non-business expenditure on such issue. Aggrieved, assessee is in appeal before us.

Ld. AR argued that the entire expenditure on account of club subscription and entertainment expenditure were in connection with assessee’s business. Subscription/ entrance fees of various clubs are paid only to its employees who are entitled to such benefit. The activities undertaken by employees in such social clubs are in the nature of business meetings, dealings and business gatherings between prospective customers and/or senior executives of the assessee company, which mainly caters to the business interest of the company. These are purely for the purpose of the business. It may be appreciated that in a consultancy firm it is obvious that certain prospective clients are asked for lunch or dinner at reputed clubs because of its ambience and privacy. Although the Ld. AO inferred that such expenditure are incurred are purely personal in nature, it cannot be denied that the Ld. AO had no material on record in bringing such allegation. He argued that the tax auditor and the statutory auditor had categorically mentioned that there is no personal expenditure debited in the books of accounts. Further payments were made to clubs having Gym and other sports facilities, where the executive directors could spend some time with the clients who are sports savvy. In the case of Otis Elevator Co.(India) Limited vs. CIT (195 ITR 682) the Hon'ble Bombay High Court held that "membership to clubs would provide offices and executives better contract and association with persons in good position and would result publicity. Payment of club fees was with a view to enable assessee to improve its business relations and prospects and hence an allowable business expenditure". It may be noted that this tribunal had allowed such payments to clubs in the case of Coats of India Ltd vs. DCIT [ITA 561/C/92] by following Calcutta High Court in the case of CIT vs. Ashoka Marketing Ltd (181 ITR 493). Further it has been held by the Mumbai Tribunal in the case of Sterlite Industries (India) Ltd vs. Addl CIT 6 SOT 497 wherein the Hon'ble Tribunal relied on the decisions of the Otis Elevators Co (India) Ltd. (supra) and that of the Gujarat High court in the case of Gujarat State Export Corpn. Ltd vs. CIT 209 ITR 649 (Guj) and observed that aforesaid Courts had laid down the principle that payment of club fees is to be considered for the promotion of the business interest and hence is an allowable expenditure. Relying on the said principle the Tribunal held that payment to health clubs as membership subscription is allowable business expenditure. He also argued that the Act does not prescribe any disallowance on entertainment and travelling expenses. Sections 37(2) and Section 37(3) of the Act imposed certain 3 Pricewaterhouse Coopers Pvt. Ltd. AY 2004-05 restrictions on the allowance of entertainment and travelling expenditure. Both such sections have been withdrawn from the statute vide Finance Act 1997, with effect from 1st April, 1997. On the other hand, Ld. DR vehemently supported the orders of the lower authorities.

We have heard rival submissions and perused the material available on record. We find from the details of club expenses filed, the Ld. AO had allowed the club expenses incurred by the assessee in various clubs situated in Kolkata and had sought to disallow club expenses incurred in other clubs outside Kolkata. It cannot be doubted that assessee is an internationally reputed consultancy company having clients and business across the globe and in that process, key employees and directors had to travel to various destinations in furtherance of their business. We find that the issue is covered by the various decisions of High courts and by this tribunal in assessee’s own case for AY 2002-03 in ITA No. 578/Kol/2006 dated 22.01.2010. The issue is also covered by the decision of the Hon’ble Apex Court in the case of CIT Vs. United Glass Mfg. Co. Ltd. reported in 2012-TIOL-102-SC-IT dated 12.09.2012 wherein it was held as below: “(ii) Whether club membership fee for employees incurred by the assessee is a business expense and liable to be deducted under section 37(1) of the Income tax Act, 1961?” “As far as question no. (ii) is concerned, we find that a series of judgments have been passed by High courts holding that club membership fees for employees incurred by the assessee is business expense under section 37 of the Income Tax Act, 1961. We also find that none of the decisions have been challenged in this Court. Even otherwise, we are of the view that it is a pure business expense. In the circumstances, this civil appeal filed by the Department stands dismissed with no order as to cost.”