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2012 (6) TMI 229 - AT - Income TaxCapital vs revenue expenditure Accounting Standards and GAAP, AS1 and AS26 - Amount paid to Club as corporate membership fee. - The AO was, however, of the view that the amounts paid to a club membership which was a payment once and for all, resulting in an enduring benefit to the assessee and, thus, treated the same as capital expenditure Held that - the gross income of the assessee is Rs.90,00,000. The assessee has claimed Rs.15 lakhs as expenses for obtaining corporate membership in the club thereby declaring a net income of Rs.75 lakhs in its return of income. It amounts to approx. 16.67% of the gross income of the assessee which is on a higher side thereby distorting the correct income of the assessee for the previous year. Following the matching concept, the materiality concept and Accounting Standard AS 26 in the assessee s case before us, the amount of Rs.15 lakhs claimed as expenses towards corporate membership for a period of 15 years has to be apportioned in ten years proportionately from the date of obtaining the membership. However, if the amount paid is negligible, it will be appropriate to write off the expense in the year in which such expense is incurred. We further make it clear that the expenditure incurred by way of fees for obtaining corporate membership in a club is revenue and prepaid in nature and has to be written off in the year in which it is incurred or to be apportioned for a period not exceeding ten years, as the case may be - Appeal of the Revenue is partly allowed
Issues Involved:
1. Whether the CIT(A) was justified in deleting the addition of Rs.15 lakhs being corporate membership fee paid to Bangalore Club. Issue-Wise Detailed Analysis: 1. Deletion of Addition of Rs. 15 Lakhs as Corporate Membership Fee: Background: - The assessee, a Private Limited company engaged in property development/real estate management, claimed Rs.15 lakhs as revenue expenditure for corporate membership fee paid to Bangalore Club. - The AO treated this as capital expenditure, arguing it provided an enduring benefit to the assessee. Arguments by the Assessee: - The payment was made out of business expediency to foster business relations and improve prospects. - It provided a venue for meetings, facilitating business discussions and client entertainment. - The fee was non-refundable, and no capital asset or enduring benefit was acquired. - Cited case laws supporting the view that such expenditure is revenue in nature: - Otis Elevator Co. (India) Ltd. v. CIT - Gujarat State Export Corporation Ltd. v. CIT - CIT v. Sundaram Industries Ltd. - JCIT v. M/s. Cabot India Ltd. - DCIT v. Kodak India Ltd. - Engineers India Ltd. Arguments by the Revenue: - The first appellate authority erred in allowing the payment as revenue expenditure. - The payment provided an enduring benefit and should be treated as capital expenditure. Tribunal's Analysis: - Revenue Expenditure: Defined as expenditure incurred for earning income for the previous year, with benefits exhausted within that year. - Capital Expenditure: Involves bringing into existence an asset or advantage of enduring benefit. - Prepaid Expenditure: Incurred for benefits/services over multiple years, paid in a lump sum in a previous year. Corporate Membership Analysis: - Corporate membership of Bangalore Club entitles the company to nominate directors/executives to use club facilities for ten years, without voting rights or management participation. - The fee paid is non-refundable, and benefits extend over the membership period. Accounting Standards: - AS 26: Intangible assets should be amortized over their useful life, presumed not to exceed ten years. - Materiality Concept: If the cost is significant relative to the company's financials, it should be apportioned over the membership period. Conclusion: - The Rs.15 lakhs paid for corporate membership should be apportioned over ten years, not written off entirely in the year of payment. - The expenditure is revenue and prepaid in nature, requiring proportional write-off over the membership period. Relevant Case Laws: - Orchid Chemicals & Pharmaceuticals Ltd. v. Asstt. CIT: Non-compete fees spread over the agreement period. - Techno Shares & Stocks Ltd. v. CIT: Membership of Bombay Stock Exchange as an intangible asset eligible for depreciation. Order: - The appeal of the Revenue is partly allowed, directing the apportionment of the corporate membership fee over ten years. Appreciation: - The tribunal acknowledged the detailed arguments presented by both the Ld. DR and the Ld. AR. Result: - The appeal of the Revenue is partly allowed.
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