TOP CLASS CAPITAL MARKETS P.LTD,MUMBAI vs. CIT 1, MUMBAI

The assessee is engaged in the business of trading in shares and securities, investment in shares and financing. The assessment of the AO u/s 143(3) of the Act on 19.11.2012. The Ld CIT, on examination of record, noticed the assessee‟s claim for deduction of Rs.9,98,215/- towards the payment made to Mumbai Cricket Association was allowed by the assessing officer. The above said payment consisted of Entrance fee of Rs.9,92,700/- and charges for recreation centre of Rs.5,515/-. The Ld CIT noticed that the assessee has explained that the above said payment was made in the name of its representative in order to utilise the facilities of the club for meeting and entertaining business associates. The Ld CIT noticed that the AO has accepted the above said explanation of the assessee without examining the details such as the nature of membership fee paid, who was made the member etc. Hence the Ld CIT initiated revision proceedings u/s 263 of the Act considering the assessment order to be erroneous and prejudicial to the interests of the revenue.

The Ld CIT noticed that the membership fee was paid in the name of Mrs. Lata Vasvani in her personal name, who was claimed to be the representative of the assessee. It was noticed that she was neither an employee nor a director of the assessee company. Accordingly, the Ld CIT took the view that the AO has failed to examine the claim of the expenditure in terms of conditions prescribed u/s 37(1) of the Act. Accordingly he held that the assessment order is erroneous and is prejudicial to the interests of the revenue. Accordingly he set aside the assessment order.

The ld A.R submitted that the assessing officer has raised a query about the major expenses incurred by the assessee and the assessee has also furnished the details relating to the membership fee along with the explanation that the same was paid for a “representative” of the assessee. The said explanation was accepted by the AO and hence he did not make

On merits, the Ld A.R submitted that the club membership fee is an admissible deduction as held by the Hon‟ble jurisdictional Bombay High Court in the case of OTIS Elevator Co. (India) Ltd (1992)(195 ITR 682). He submitted that the membership fee was paid for a representative of the assessee, who could bring business for the assessee. Hence the same is allowable as deduction. Accordingly he submitted that the view taken by Ld CIT was a case of mere change of opinion and hence the revision proceeding initiated by Ld CIT is not valid on this ground also. In this regard, he placed reliance on the decision rendered by Hon‟ble Rajasthan High Court in the case of CIT Vs. Jain Construction Co. (2013)(344 taxmann.com 84).

On the contrary, the Ld D.R submitted that the so called representative named Mrs. Lata Vasvani is neither an employee nor a director of the assessee company. He submitted that the assessee has paid the membership fee for a third party and it was allowed by the AO without ascertaining the factual position. Accordingly he submitted that there is no application of mind on the part of the assessing officer on this issue and hence the revision proceedings are justified. The Ld D.R placed

Before going into the merits of the issue, we would like to discuss about the legal position with regard to the power of Learned CIT to invoke revision proceedings under section 263 of the Act. The scope of revision proceedings initiated under section 263 of the Act was considered by Hon'ble Bombay High Court, in the case of Grasim Industries Ltd. V CIT (321 ITR 92) by taking into account the law laid down by the Hon'ble Supreme Court. The relevant observations are extracted below: Section 263 of the Income-tax Act, 1961 empowers the Commissioner to call for and examine the record of any proceedings under the Act and, if he considers that any order passed therein, by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, to pass an order upon hearing the assessee and after an enquiry as is necessary, enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. The key words that are used by section 263 are that the order must be considered by the Commissioner to be “erroneous in so far as it is prejudicial to the interests of the Revenue”. This provision has been interpreted by the Supreme Court in several judgments to which it is now necessary to turn. In Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, the Supreme Court held that the provision “cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer” and “it is only when an order is erroneous that the section will be attracted”. The Supreme Court held that an incorrect assumption of fact or an incorrect application of law, will satisfy the requirement of the order being erroneous. An order passed in violation of the principles of natural justice or without application of mind, would be an order falling in that category. The expression “prejudicial to the interests of the Revenue”, the Supreme Court held, it is of wide import and is not confined to a loss of tax. What is prejudicial to the interest of the Revenue is explained in the judgment of the Supreme Court (headnote) : “The phrase „prejudicial to the interests of the Revenue‟ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law.” The principle which has been laid down in Malabar Industrial Co. Ltd. [2000] 243 ITR 83 (SC) has been followed and explained in a subsequent judgment of the Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 282.”

Based on the legal principles enunciated by the Hon‟ble Courts, if we examine the facts available in the present case, we notice that the assessee‟s explanation that the club membership fee was paid for a representative of the assessee was accepted by the AO on the face of it. The documents furnished along with the reply letter furnished by the assessee clearly show that the membership fee was paid for Mrs. Lata Vasvani. There should not be any dispute that the club membership fee was allowed u/s 37(1) of the Act, where in there is a requirement to show that the expenditure was incurred for the purpose of business, it was not personal expenditure or capital expenditure etc. We notice that Mrs. Lata Vasvani was not an employee or a director of the assessee company. She was not paid any other kind of compensation from the funds of the company. Normal business practice is to take the membership in the name of the company or in the name of top employees as per their service terms and conditions. Hence, in our view, the assessing officer has failed to apply his mind on the reply given by the assessee. The assessing officer, in our view, has failed to examine as to whether the conditions specified in sec. 37(1) were satisfied or not in the claim so made by the assessee. Accordingly, we are of the view, the present case is a case of lack of enquiry on the claim made by the assessee. Further, in the absence of required enquiry, it cannot be said that the assessing officer has taken one of the possible views. Accordingly, we are of the view that there is no infirmity in the action of the Ld CIT in initiating the revision proceedings u/s 263 of the Act. Accordingly, we affirm his order.

In the result, the appeal filed by the assessee is dismissed.