2023 (10) TMI 979 - HC - Income Tax

Reopening of assessment - Nature of expenses - entrance and subscription fees to Willington Sports Club (WSC) - whether benefit of the above payment is long term in nature and should have been considered as Capital Expenditure and should not have been claimed as Revenue expenditure in P L account ? - HELD THAT - We are unable to accept the submissions of the revenue because first of all there is no basis on which the assessing officer has formed a reason to believe that amount was paid towards entrance and subscription fees to WSC. Schedule 9 of the profit and loss account only enumerates membership and subscription and does not disclose anywhere which club it was. Moreover, petitioner has, in its reply to the notice u/s 148 of the Act, given a breakup of the amount towards entrance fees and towards subscription fees for 1 year and it is incurred for the purpose of business. Even if, we accept what has been stated in the order disposing objection that petitioner did not produce the bill to substantiate its claim, schedule 9 of the profit and loss account itself discloses that membership and subscription is recurring annual expenditure. In the schedule, it is mentioned for the year ended 31st March 2007 the amount was Rs. 2,05,639/- and for the year ended 31st March 2006 the amount was Rs. 1,98,326/-. It, therefore, shows that it was an annual expenditure and certainly of a recurring nature and has to be allowed as revenue expenditure. As decided in Lubrizol India Ltd. 2015 (8) TMI 134 - BOMBAY HIGH COURT court was pleased to answer that expenses incurred in obtaining club membership is allowable as revenue expenditure. Thus the expenditure incurred towards entrance fees and annual membership would be a revenue expenditure because it has been incurred wholly and exclusively for the purposes of business and not towards capital account. Such expenditure only facilitates the smooth and efficient running of the business enterprise and does not add to the profit earning apparatus of the business enterprise. The impugned notice is quashed and set aside - Decided in favour of assessee.

Summary

Issues Involved:

1. Legality of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Nature of expenditure towards entrance and subscription fees to Willington Sports Club (WSC) - whether it is capital or revenue expenditure.

Summary:

1. Legality of the Notice Issued under Section 148:
The petitioner impugned a notice dated 29th March 2010 issued under Section 148 of the Income Tax Act, 1961 for the Assessment Year (A.Y.) 2008-2009. The notice claimed that there were reasons to believe that the petitioner's income chargeable to tax had escaped assessment within the meaning of Section 147 of the Act. The petitioner filed objections through its chartered accountant, explaining the nature of the expenses. However, these objections were rejected by an order dated 10th October 2011, leading to the current petition.

2. Nature of Expenditure - Capital vs. Revenue:
The core issue revolved around whether the expenditure of Rs. 1,98,326/- towards entrance and subscription fees to WSC should be considered as capital expenditure or revenue expenditure. The assessing officer initially claimed that the benefit of the payment was long-term in nature and should have been treated as capital expenditure. However, the petitioner argued that the expenditure was for short-term membership renewal fees and was incurred wholly and exclusively for business purposes, making it revenue in nature.

The court noted that the assessing officer did not provide a basis for the belief that the amount was paid towards entrance and subscription fees to WSC. The profit and loss account only mentioned membership and subscription without specifying the club. The court further observed that the expenditure was recurring in nature, as indicated by similar expenses in previous years.

Judicial Precedents:
The court referred to several judgments, including:
- Lubrizol India Ltd.: Held that expenses incurred in obtaining club membership are revenue in nature.
- United Glass Mfg. Co. Ltd.: Concluded that club membership fees for employees are business expenses and deductible under Section 37 of the Act.
- Gujarat State Export Corporation Ltd.: Held that entrance fees for sports club membership cannot be termed as capital expenditure.
- Samtel Color Ltd.: Held that admission fees paid towards corporate membership are for business purposes and are revenue in nature.

Conclusion:
The court concluded that the expenditure towards entrance fees and annual membership is revenue expenditure because it is incurred wholly and exclusively for business purposes and not towards capital account. Such expenditure facilitates the smooth and efficient running of the business enterprise and does not add to the profit-earning apparatus of the business enterprise. Consequently, the impugned notice dated 29th March 2010 was quashed and set aside. The petition was disposed of with no order as to costs.