2020 (4) TMI 20 - AT - Income Tax

Disallowance of Membership Fees paid to Cricket Club of India - Nature of expenditure - revenue or capital expenditure - HELD THAT - In the present case, assessee has taken permanent membership of CCI Club and assessee is allowed to use the facility of the club and it can never create any capital assets. As the assessee can only utilize the facility and in case, he decides to surrender the membership, he will not get any refund. Therefore, assessee does not get any right by becoming a member. The fact that assessee utilizes the facilities for the purpose of his business and it is brought on record by the assessee that the business has increased after taking membership in the club. Considering the turnover, the membership fees is very negligible and it can never be treated as capital assets having enduring benefit. It may give benefit of utilizing the club facilities, but cannot create any right of endurance /right of possession. - Decided in favour of assessee.

Summary

Issues Involved:
Disallowance of Membership Fees as Capital Expenditure instead of Revenue Expenditure.

Detailed Analysis:

1. Background and Facts:
The appellant, an individual and dealer of jewellery, paid 22 lakhs as full-time membership fees to CCI Club. The Assessing Officer (AO) questioned the nature of this payment and whether it should be treated as capital or revenue expenditure. The appellant argued that the membership was essential for business purposes and cited increased turnover post-membership.

2. Legal Provisions and Interpretation:
The ITAT Mumbai bench emphasized that for an expenditure to be allowed under section 37(1) of the Income Tax Act, it must be paid wholly and exclusively for the business purpose and not be of a capital or personal nature. The expression "wholly" pertains to the quantum, while "exclusively" relates to the purpose of the expenditure.

3. Lower Authorities' Decisions:
The AO rejected the appellant's submission, disallowing the membership fees. The Commissioner of Income Tax (Appeals) upheld this decision, considering the membership to have enduring benefits and thus capital in nature.

4. Appellant's Arguments and Case Law:
The appellant contended that the membership facilitated business activities and pointed to precedents like CIT vrs. Groz Beckert Asia Ltd and Otis Elevator Co. (India) Ltd. to support the revenue expenditure classification.

5. ITAT Decision and Precedents:
The ITAT referred to the decision in DCIT vrs. Deloitte Touche Tohmatsu India Pvt. Ltd, where club membership fees were allowed as revenue expenditure. Additionally, the judgment in CIT vrs. Groz Beckert Asia Ltd emphasized that if an expenditure does not create an asset or enduring benefit, it qualifies as revenue expenditure.

6. Conclusion and Ruling:
Considering the nature of the membership and its impact on business, the ITAT deemed the membership fees as revenue expenditure. The club membership did not create any capital asset or enduring benefit, and the appellant's increased turnover post-membership further supported the revenue classification. Therefore, the appeal was allowed in favor of the appellant.

In conclusion, the ITAT ruled in favor of the appellant, allowing the membership fees as revenue expenditure based on the business necessity and lack of enduring benefit or capital asset creation. The decision aligned with precedents emphasizing the distinction between revenue and capital expenditure in such cases.