2024 (6) TMI 596 - AT - Income Tax

Disallowance of club expenses - Whether the club expenses were incurred for business purposes? - HELD THAT - AO had made impugned additions on the basis that the expenditure so incurred was personal in nature. This finding in our view is erroneous. Undisputedly, the assessee is a company, it would have no expenses of personal in nature. AO ought to have verified whether such expenses were incurred in the course of business and for the business of the assessee. The company being juristic person would not have any personal expenses and would not incur personal expenses unlike living being. The body corporate operates through living beings. The authorities below failed to advert to this fundamental question. Hon ble Gujarat High Court in the case of Sayaji Iron Engg.Co. vs CIT 2001 (7) TMI 70 - GUJARAT HIGH COURT assessee which is a private limited company is a distinct assessable entity as per the definition of person under section 2(31) of the Act. Therefore, it cannot be stated that when the vehicles are used by the directors, even if they are personally used by the directors the vehicles are personally used by the company, because a limited company is an inanimate person and there cannot be anything personal about such an entity. The view that we are adopting is supported by the provision of section 40(c) and section 40A(5). The findings of the CIT(A) cannot be sustained as same is bereft of any specific finding about the expenses under question. It is well-settled that a bald assertion would not be sufficient concluding that the expenditure is personal in nature when admittedly, the assessee is a company. Assessee appeal allowed.

Summary

Issues Involved:
1. Disallowance of club expenses.
2. Whether the club expenses were incurred for business purposes.
3. Sustaining the impugned assessment order u/s 143(3) for AY 2017-18.

Summary:

Issue 1: Disallowance of Club Expenses
The assessee filed an appeal against the order of Ld.CIT(A), NFAC, Delhi, which sustained the disallowance of club expenses amounting to Rs. 3,26,214/-. The AO disallowed these expenses during the assessment u/s 143(3) of the Income Tax Act, 1961, on the grounds that they were personal in nature and not incurred wholly and exclusively for business purposes.

Issue 2: Whether the Club Expenses Were Incurred for Business Purposes
The assessee contended that the club expenses were for business promotion and should be deductible. However, the Ld. Sr. DR for the Revenue argued that the assessee failed to prove that the expenses were incurred wholly and exclusively for business purposes as required u/s 37(1) of the Act. The Tribunal noted that the burden of proof lies with the taxpayer to demonstrate that the expenses were for business purposes and not personal.

Issue 3: Sustaining the Impugned Assessment Order u/s 143(3) for AY 2017-18
The Tribunal reviewed the findings of the Ld.CIT(A) and various case laws. It was observed that the AO's conclusion that the expenses were personal was erroneous. The Tribunal emphasized that a company, being a juristic person, cannot have personal expenses. The AO should have verified whether the expenses were incurred in the course of business. The Tribunal cited the Gujarat High Court's judgment in Sayaji Iron & Engg.Co. vs CIT, which held that a company cannot have personal expenses.

Conclusion:
The Tribunal concluded that the Ld.CIT(A)'s findings were not sustainable as they lacked specific evidence about the nature of the expenses. The appeal was allowed, and the impugned addition of Rs. 3,26,214/- was deleted. The order was pronounced in the open Court on 31st May, 2024.