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2010 (9) TMI 1084 - AT - Income TaxDisallowance of club membership fee - capital or revenue expenditure - The ld. CIT(A) while relying on the decision of the HC in the case of Gujarat State Export Corpn. Ltd. vs. CIT 1993 (9) TMI 52 - GUJARAT HIGH COURT that the expenditure incurred in payment of entrance fee for becoming member of sports club is in the nature of an advantage in the commercial sense but not an advantage in the capital field therefore revenue expenditure. deleted the addition of 16.00 lacs made by the AO being entrance fee and allowed the appeal. HELD THAT - Respectfully following the decisions of the High Court in the case of Samtel Colour Ltd. 2009 (1) TMI 26 - DELHI HIGH COURT and the Tribunal in the assessee s own case we are of the view that admission fees paid towards corporate membership of the club is an expenditure incurred wholly and exclusively for the purpose of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus of a business enterprise and accordingly we are inclined to uphold the finding of the ld. CIT(A) in deleting the disallowance of 16.00 lacs made by the AO. The grounds taken by the revenue are therefore rejected. In the result revenue s appeal stands dismissed.
Issues Involved:
1. Deductibility of club membership fees as revenue expenditure versus capital expenditure. Issue-wise Detailed Analysis: 1. Deductibility of Club Membership Fees as Revenue Expenditure versus Capital Expenditure: The primary issue in this case is whether the club membership fees paid by the assessee should be treated as revenue expenditure, which is deductible, or capital expenditure, which is not. The assessee company, engaged in trading government bonds and treasury bills, claimed a deduction for the Rs. 16.00 lacs paid as an entrance fee to Bombay Gymkhana. The Assessing Officer (AO) disallowed the deduction, categorizing it as capital expenditure, arguing that the membership fee provided an enduring benefit and thus should be capitalized. Assessee's Argument: The assessee contended that the expenditure was incurred wholly and exclusively for business purposes, facilitating meetings and entertaining business associates, which in turn promoted business and extended business relationships. The assessee cited various judicial precedents, including decisions from the Bombay High Court and other ITAT benches, to support the claim that such expenditure is revenue in nature. CIT(A)'s Decision: On appeal, the CIT(A) observed that the AO did not dispute the business purpose of the expenditure. The CIT(A) relied on the precedent set by the Bombay High Court in Otis Elevators Co. (India) Ltd. vs. CIT and the Gujarat High Court in Gujarat State Export Corpn. Ltd. vs. CIT, which held that such payments are revenue expenditures. The CIT(A) thus deleted the addition of Rs. 16.00 lacs made by the AO. Revenue's Argument: The revenue appealed against the CIT(A)'s decision, arguing that the payment is capital in nature. The revenue referenced the Kerala High Court's decision in Framatone Connector OEN Ltd. vs. DCIT, which held that club membership fees are capital expenditures. The revenue also contended that the decisions cited by the assessee were not applicable to the current case. Tribunal's Analysis: The Tribunal examined the facts and legal precedents. It noted that the AO did not dispute that the expenditure was incurred for business purposes. The Tribunal found no merit in the revenue's argument that the decision in Alembic Chemical Works Co. Ltd. was not applicable. The Tribunal referred to the principles laid down in various cases, including Assam Bengal Cement Co. Ltd. vs. CIT, which distinguished between capital and revenue expenditures based on the purpose and nature of the expenditure. The Tribunal also considered the decision in Samtel Colour Ltd., where the Delhi High Court disagreed with the Kerala High Court's decision in Framatone Connector OEN Ltd. and followed the Bombay High Court's decision in Otis Elevator Co. (India) Ltd. The Tribunal emphasized that the expenditure did not create any capital asset or new source of income but was incurred for the efficient conduct of business, making it a revenue expenditure. Conclusion: The Tribunal upheld the CIT(A)'s decision, concluding that the club membership fees were incurred wholly and exclusively for business purposes and were revenue expenditures. The grounds of appeal by the revenue were rejected, and the appeal was dismissed. Final Judgment: The Tribunal affirmed the CIT(A)'s order, allowing the deduction of Rs. 16.00 lacs as revenue expenditure and dismissing the revenue's appeal. The order was pronounced in the open court on 9.9.2010.
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