2011 (2) TMI 529 - AT - Income Tax

Club membership fees - Membership was taken in the name of Shri Vishnukumar Agarwal who is none other than the Director of the assessee-company and none of the Executives of the company appears to have been made members of the club - Assessing Officer as well as the CIT(A) have recorded a finding that no evidence was produced by the assessee as to how this membership was actually utilised for the benefit of the assessee-company - Learned CIT(A) observed that Garware Club does not grant membership to companies which implies that the club is not meant for corporate world in which event the claim of the assessee that Garware Club provides incentives to a company for conducting business meetings cannot be accepted. the expenditure incurred by the assessee is not allowable under section 37 (1) of the Act since it was not wholly and exclusively incurred for the purpose of business - Since the impugned expenditure did not pass the first test, it is not necessary for us to go into the next issue as to whether it was a capital expenditure or a revenue expenditure - Hence, decided against of assessee.

Summary

Issues Involved:
1. Disallowance of claim of deduction for membership fees paid to Garware Club.
2. Determination of whether the expenditure is capital or revenue in nature.
3. Assessment of whether the expenditure was incurred wholly and exclusively for business purposes.

Issue-wise Detailed Analysis:

1. Disallowance of Claim of Deduction for Membership Fees Paid to Garware Club:
The primary issue revolves around the disallowance of a deduction claim of Rs. 3,50,000 paid towards the membership fees of Garware Club in the name of one of the Directors of the assessee-company. The assessee argued that the membership was intended to facilitate business meetings and interactions with various industrialists, thereby promoting the business. The Assessing Officer (AO) rejected this claim, categorizing the payment as a capital expenditure due to its enduring benefit. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, noting a lack of evidence showing that the membership was used for the company's benefit. The Tribunal also found that no evidence was provided to demonstrate that the membership facilitated business activities, leading to the dismissal of the appeal.

2. Determination of Whether the Expenditure is Capital or Revenue in Nature:
The Tribunal noted that the determination of whether an expenditure is capital or revenue in nature is a complex issue. Courts have established that the line between capital and revenue expenditure is thin and often depends on the 'enduring benefit' test. The Tribunal referenced the Hon'ble Delhi High Court's observation that there's no single infallible test for this determination. The Tribunal concluded that since the expenditure did not pass the initial test of being incurred wholly and exclusively for business purposes, it was unnecessary to delve into whether it was capital or revenue in nature. However, it was noted that life membership typically provides an enduring advantage, suggesting it should be treated as capital expenditure, aligning with the Hon'ble Kerala High Court's ruling in Framatone Connectors OEN Ltd.

3. Assessment of Whether the Expenditure Was Incurred Wholly and Exclusively for Business Purposes:
The Tribunal emphasized that the initial burden of proof lies with the assessee to demonstrate that the expenditure was incurred wholly and exclusively for business purposes. The Tribunal found that the assessee failed to provide evidence showing that the membership was used for business benefits. The CIT(A) observed that Garware Club does not offer memberships to companies, implying it is not intended for corporate use, thereby undermining the assessee's claim. The Tribunal agreed with the CIT(A) that no evidence was presented to prove that the membership was used for business purposes. Consequently, the Tribunal concluded that the expenditure was not allowable under section 37(1) of the Income-tax Act.

Conclusion:
The Tribunal dismissed the appeal, upholding the disallowance of the deduction claim for the membership fees paid to Garware Club. The Tribunal found that the assessee failed to prove that the expenditure was incurred wholly and exclusively for business purposes and noted that the expenditure provided an enduring benefit, suggesting it should be treated as capital expenditure. The case law cited by the assessee was distinguished on the facts, as those cases involved different circumstances and did not directly address the issue at hand.