2020 (11) TMI 737 - AT - Income Tax

Disallowance of club services and facilities used for entertaining the customers and to promote the business interests of the company - expenses allowable u/s 37(1) - HELD THAT - The assessee has incurred the expenses on account of club membership fees for the employees and to entertain customers, so, these were business expenses under section 37(1) of the Act. We therefore by following the ratio laid down in UNITED GLASS MFG CO. LTD. 2012 (9) TMI 914 - SUPREME COURT , delete the disallowance made by the A.O. and sustained by the Ld. CIT(A). - Decided in favour of assessee.

Summary

Issues:
- Disallowance of expenses incurred for club services and facilities used for business promotion.

Analysis:
1. The assessee appealed against the order of the Ld. CIT(A) upholding the disallowance of ?1,67,060 incurred for club services and facilities used for business promotion.

2. The A.O. disallowed the expenses under section 37(1) of the Income Tax Act, considering them personal in nature.

3. The Ld. CIT(A) sustained the disallowance stating that the nature of the expenses was not verified, as no detailed explanation was provided, and the auditor classified them as personal.

4. The assessee contended that similar disallowances were deleted in previous years by the Ld. CIT(A), citing relevant case laws supporting the deductibility of such expenses for business promotion.

5. The assessee detailed the expenses incurred for club membership fees, arguing they were allowable business expenditures under section 37(1) based on the total turnover and previous rulings.

6. The Tribunal referred to previous instances where similar disallowances were deleted by the Ld. CIT(A) and cited relevant case laws, including judgments of the Hon'ble Supreme Court, to support the deductibility of club membership fees for business purposes.

7. Following the precedent set by the Hon'ble Apex Court and considering the purpose of the expenses, the Tribunal allowed the appeal, deleting the disallowance made by the A.O. and sustained by the Ld. CIT(A).

This judgment highlights the importance of providing detailed explanations and supporting evidence for expenses claimed as business expenditures, especially when faced with disallowances. It emphasizes the need to establish a clear business purpose for such expenses to ensure their deductibility under the Income Tax Act.