2017 (3) TMI 480 - AT - Income Tax

Expenditure incurred for re- possession of the club - capital or revenue in nature or is an allowable expenses for determining real income - said expenditure though paid by the assessee for an amount already spent by the SP for earlier years after taking the loan from the bank - Held that - The undisputed facts are that as per the joint development agreement the ownership of the assets of the club to be developed by the assessee was belonging to the assessee and the purchasers of the plots were not having any right in those assets. In the same, this is also provided that purchasers of the plots are to be admitted as members of the club subject to payment of necessary admission fees and other fees. This is also provided in the agreement that other persons can also be admitted as member of the club on payment of donations, entry fees and other fees. This is also agreed position of facts that the club was built by SP and the assessee was sharing revenue with SP. From these facts, it comes out that the providing of club facility and running of club is a doing of business in the present case because the assets of the club is property of the assessee and any accretion in the value of asset will be a gain to the assessee. Similarly, the club can charge admission fees and other fees without any cap and it will result in to income which was initially shared between the assessee and SP and after 20207. it was fully accruing to the assessee. The impugned payment of Rs. I Crore in the present year to PNB in settlement of the liability of SP had resulted into ownership of assets of the club to the assessee and therefore, it is as cost of purchase of assets of club and it cannot be allowed as revenue expenditure. Had the ownership of the assets of the club was required to be vested in the purchasers of plots or their association, there might have some merit in the claim of the assessee but when as per the JDA, the ownership is vested in the assessee and the plot owners have no right in the assets of the club, it cannot be said that creating the asset of the club is a revenue expenditure. Regarding commercial expediency aspect, we are of the considered opinion that this may be helpful in those cases where the expense is revenue in nature but the objection of the revenue is this much only that it is not for the purpose of business of the assessee. If the assessee is incurring some maintenance loss because the facility is provided free of cost or at subsided prices, such loss may be held to be allowable as business expenditure but even then, the cost of construction of the Guest House cannot be considered and allowed as revenue business expenditure. In the present case, this is not the case of the assessee that there is some loss in day to day running of club and such loss should be allowed by applying the principle of commercial expediency. The assessee is claiming the cost of the assets of the club as revenue expenditure which is akin to allowing of Guest House construction cost in the given example, which is not allowable by any stretch of imagination. Hence, there is no merit in the claim of the assessee. - Decided against assessee

Issues Involved:
1. Disallowance of Club House Facility Expenses
2. Nature of Expenditure (Capital vs. Revenue)
3. Deduction under Section 8-IB of the Income Tax Act
4. Liability for Interest under Sections 234B and 234D of the Income Tax Act

Detailed Analysis:

1. Disallowance of Club House Facility Expenses:
The assessee, a firm engaged in the business of property development, claimed an expense of ?1,18,03,920 towards club facility in its return of income. The Assessing Officer (AO) disallowed this expense, reasoning that the expenditure was not substantiated and was capital in nature. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld this disallowance, citing that the liability was uncertain and had not crystallized during the assessment year. The CIT(A) noted that the club house was constructed by a service provider (SP), M/s Suman Motels Ltd., which later became bankrupt, leading the assessee to negotiate with Punjab National Bank to settle the dues of the SP for ?1 crore to provide the club facility to plot owners.

2. Nature of Expenditure (Capital vs. Revenue):
The core issue was whether the expenditure incurred for the club house facility was capital or revenue in nature. The Tribunal referred to the joint development agreement, which indicated that the ownership of the club house and its assets belonged to the assessee. The Tribunal concluded that the payment of ?1 crore to Punjab National Bank was for acquiring the ownership of the club house assets, making it a capital expenditure. The Tribunal emphasized that the expenditure resulted in the creation of an asset for the assessee, thus it could not be treated as revenue expenditure. The Tribunal also referred to relevant judgments, including the Supreme Court's decision in S.A. Builders Ltd., which highlighted that commercial expediency could justify revenue expenditure but not capital expenditure.

3. Deduction under Section 8-IB of the Income Tax Act:
The assessee claimed a deduction of ?7,54,533 under Section 8-IB related to the project G.R Grand Residency. The authorities disallowed this claim without providing cogent reasons. However, the detailed analysis of this issue was not elaborated in the judgment provided.

4. Liability for Interest under Sections 234B and 234D of the Income Tax Act:
The assessee contested the liability for interest under Sections 234B and 234D, arguing that no opportunity was given before the levy of interest. The Tribunal did not provide a detailed analysis or ruling on this issue within the provided judgment excerpt.

Conclusion:
The Tribunal dismissed the appeal of the assessee, affirming the CIT(A)'s decision that the expenditure on the club house was capital in nature and thus not allowable as a revenue expense. The Tribunal's judgment was based on the interpretation of the joint development agreement and relevant legal precedents, emphasizing that the expenditure resulted in the creation of an asset for the assessee, which could not be treated as a revenue expense. The issues of deduction under Section 8-IB and interest liability under Sections 234B and 234D were not comprehensively addressed in the provided judgment.

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