CORPORATE MEMBERSHIP FEES OF CLUBS MAY BE ALLOWED AS BUSINESS EXPENDITURE.

[C.A. DEV KUMAR KOTHARI]

Corporate or business membership of clubs:

Many clubs allow membership to companies or other business entities. The membership is in name of company (or other concern). The member can nominate certain number of persons to attend the clubs or association activities or welfare and entertainment places. The clubs may provide several type of facilities.

Place to meet people:

It is very well known that clubs are a platform to meet people. The meetings can be privately organized or can be in the course of mass meetings or gatherings at the time of functions or celebrations at club. By visiting clubs, chances of making new contacts improve. With new contacts people can do more interactions which can be beneficial for business and profession.

Business organization as member:

Business organizations like company, firm, bank, co-operative society etc. functions through human agencies which may be directors or other officers of business organization. Therefore business organization provide facility to their officers to attend and avail services of clubs. Clubs make company or other business organization as its member. This is generally called as corporate membership. The expenses may be in nature of entrance fees, annual fees, life membership fees and reimbursement of actual expenses etc. The purpose of the expenditure is to have a suitable platform for meeting people and getting advantages of meeting many people at a time to maintain old contacts and also to make new contacts. The main purpose of the organization is to induce its officers to attend such places for maintaining and making contacts for the benefit of business. Even if some personal advantage is obtained by officers, it will be in nature of maintaining good relations with officers and in nature of staff welfare expenses. Therefore, the expenses are incurred wholly and exclusively for the purpose of business. By obtaining membership for a period of more than one year, there may be an advantage of enduring nature, however such advantage is in the field of revenue benefit and not for obtaining any capital asset or obtaining benefit in capital field. Therefore such expenses will be of revenue nature.

Recent judgment of Delhi High Court:

In CIT Vs. Samtel Color Ltd. [2009 -TMI - 32263 - DELHI HIGH COURT] Vide judgment dated  January 30, 2009 in  IT Appeal No. 1152 of 2008 the Delhi High Court had occasion to consider allowability of corporate membership fees of clubs as allowable business expenditure.

Reasonings of the A.O. to disallow:

As usual the learned A.O disallowed the claim of expenses for following reasons:

No nexus with the business of  the assessee;

Expenditure was incurred for benefit of its employees or its director; expenditure did not enhance image of the assessee or its products as its membership could not be used to advertise products of assessee;  that expenditure resulted in benefit of an enduring nature. CIT(A) allowed 80% of expenses:

On first appeal, the CIT (Appeals) held that membership of clubs did provide assessee a benefit which fulfilled business purpose test and it also resulted in benefits to directors and executives in their personal capacity. Therefore, he allowed 80 per cent of the amount as revenue expenditure.

Tribunals finding:

 On cross appeals, the Tribunal allowed fully assessee's claim holding that since membership allowed employees to interact with its customers, the expenses were for business purposes.

High Courts judgment:

The High Court dismissed the appeal of revenue and held that the Tribunal was right in allowing entire amount as business expenditure. The courts observations and judgment are analyzed below:

The expenditure incurred towards admission fee was towards corporate membership. The nature of the expenditure was one for the benefit of the assessee.

The 'business purpose' basis adopted for eligibility of expenditure under section 37 was the correct approach.

That was more so in view of the Tribunal's findings that it was the assessee which nominated the employee who would avail the benefit of corporate membership given to the assessee..

It is well-settled that an expenditure which gives endurring benefits is, by itself, not conclusive as regards the nature of the expenditure. Even a lump sum payment is not decisive as regard the nature of the payment. The true test for qualification of expenditure under section 37 is that it should be incurred wholly and exclusively for the purpose of business and the expenditure should not be towards capital account.

The admission fee paid towards corporate membership was an expenditure incurred wholly and exclusively for the purpose of business and not towards capital account as it only facilitated smooth and efficient running of a business enterprise and did not add to profit earning apparatus of a business enterprise. 

Therefore, the Tribunal's order was to be upheld and the revenue's appeal was to be dismissed.

CASE LAWREVIEWED by the court:

CIT v. Nestle India Ltd. [2008 -TMI - 3198 - DELHI HIGH COURT]

Out of Rs. 2 lakhs paid towards membership fee of club, the A.O. disallowed Rs. 1 lakh, under section 37(2) as Assessing Officer's order showed that expenses incurred by assessee were for the business purposes, entire club membership fee was allowable as deduction

There was no specific finding that the payment was made by the assessee for improving its business. However, as the A.O.  had allowed a deduction of 50 per cent of Rs. 2 lakhs under section 37(2)  on the basis that half of the expenditure incurred was for business purposes, otherwise the entire amount would have been disallowed by him. Consequently, even though there was no explicit finding to that effect, but there was an implicit acknowledgment that the expenses incurred by the assessee were for business purposes. Therefore, the assessee was entitled to the deduction of the club fee to the full extent.

OTID Elevator Co. (India) Ltd. v. CIT [1992] 195 ITR 682/60 Taxman 215 (Bom.)

Assessee paid club fee on behalf of its executives. In first appeal the AAC held that aforesaid payment helped assessee to improve its business relations and prospects. This finding was not challenged and not disturbed by Tribunal. However, Tribunal held that the payment of club fees amounted to perquisite and was subject to disallowance under section 40A(5). The court held that since AAC's finding were not distrurbed or altered, the Tribunal was not justified in applying Section 40A (5).

Framatone Connector DEN Ltd. v. Dy. CIT 2006 -TMI - 13623 - (KERALA High Court)  - distinguished and not followed by Delhi High Court. In this case expenses for taking membership of clubs was held capital expenditure by applying  The Apex Court ruling  in Punjab State Industrial Development Corporation Ltd. v. CIT [1997] 225 ITR 792/93 Taxman 5, The Delhi High Court held that that judgment was not applicable in relation to club fees where membership was for business purpose whereas Apex Court was concerned with expenses incurred  for raising capital base..

Authors view and practical aspects:

To improve the chances of allowability it is desirable that the assessee should keep some evidence of commercial expediency in obtaining and continuing club membership. This can be by establishing commercial expediency by:

Maintaining applications and recommendations from employees and business associates to obtain membership and to continue membership of clubs.

Use: There should be some use of such membership by employees and business associates and that use must be for advancement of business. Some evidence of meetings and benefits should be maintained. The meetings can be with present and expected customers, suppliers, service providers, to discuss business matters.

The benefit obtained must be shown in the field of revenue special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. [Para 2]

In view of the above principle, the Tribunal was justified in holding that the amount paid by the assessee for taking institutional membership in the club was a capital expenditure and was not allowable as business expenditure. [Para 3]

 

 CIT Vs. Samtel Color Ltd. [2009 -TMI - 32263 - DELHI HIGH COURT]