2012 (7) TMI 798 - HC - Income Tax

Disallowance of corporate membership fees - revenue in nature or capital? - Held that - The club membership enable the nominated executives to meet people and develop relationship for smooth conduct of day to day business. The Tribunal followed its order for the Assessment year 1998-99 in respondent s own case where both entrance and renewal fees paid for club membership were allowed as revenue expenditure and as the earlier order of the Tribunal has not been challenged by the revenue no reason why the renewal membership fees should not be allowed as revenue expenditure - against revenue. Disallowance of excess provision on account of free service provided - Held that - Quantification of the provision as done on the basis of the unencashed valid coupons was on a reasonable and consistent basis - the provision is of a estimate and if subsequently the same is found to be in excess then the excess is added back and offered to tax. Further, this has been a practice followed by the respondent assessee and accepted by the department for many years - against revenue. Depreciation in respect of telephone trolleys, furniture and equipment as plant and machinery in factory - Held that - The issue is settled by the Tribunal in the earlier year in respect of the same assessee and the revenue has not been able to point out any change in the circumstances. Appeal admitted only on deleting disallowance by ITAT being expenses incurred by the assessee on account of taxes and fees not pertaining to year under consideration.

Issues:
1. Disallowance of corporate membership fees
2. Disallowance of expenses not pertaining to the year under consideration
3. Claim of unclaimed expenditure
4. Application of Sec.43B of the Income Tax Act
5. Disallowance of excess provision on account of free service
6. Application of Supreme Court ratio in estimating liability
7. Depreciation on telephones/trolleys, furniture, and equipment

Analysis:

1. Disallowance of Corporate Membership Fees:
The Tribunal allowed the corporate membership fee as revenue expenditure, citing the importance of club memberships for business relationships. The appellant's challenge was dismissed as the earlier order for the same assessee was not contested. Hence, no substantial question of law arose, and the issue was resolved in favor of the respondent.

2. Disallowance of Expenses Not Pertaining to the Year:
The Tribunal remanded the matter to the Assessing Officer for a decision, leading to no substantial question of law at that point. Consequently, the issue was dismissed without further consideration.

3. Claim of Unclaimed Expenditure:
The Tribunal directed the Assessing Officer to consider the unclaimed expenditure, leading to no substantial question of law at the current stage. Therefore, this issue was dismissed without further analysis.

4. Application of Sec.43B of the Income Tax Act:
The question raised under this issue was considered a submission supporting another question and did not independently raise a substantial question of law. Hence, this issue was not further deliberated upon.

5. Disallowance of Excess Provision on Account of Free Service:
The respondent provided free services with the sale of motor vehicles, making provisions for unencashed coupons. The Tribunal upheld the provision, emphasizing the consistent and reasonable quantification basis followed by the respondent over the years. The practice aligned with the Apex Court's criteria for recognizing provisions, and the excess provision, if any, would be adjusted subsequently. As the provision was in line with legal standards and past practices, no substantial question of law was raised, leading to the dismissal of this issue.

6. Application of Supreme Court Ratio in Estimating Liability:
The Tribunal found that the respondent's provision for free services met the criteria set by the Apex Court, emphasizing the reliability of estimates made by the respondent. The consistent practice followed by the respondent over the years, accepted by the department, further supported the decision. As the provision was in compliance with legal standards and past practices, no substantial question of law was identified, resulting in the dismissal of this issue.

7. Depreciation on Telephones/Trolleys, Furniture, and Equipment:
The issue revolved around the classification of assets for depreciation, with the Assessing Officer considering them as furniture and not plant and machinery. The Tribunal, based on previous rulings, allowed depreciation at the rate applicable to plant and machinery. The lack of significant changes in circumstances to warrant a different view led to the dismissal of this issue as it did not raise a substantial question of law.

In conclusion, the judgment addressed various issues raised by the appellant, with most issues being dismissed due to the lack of substantial questions of law or compliance with legal standards and past practices. Only the issue related to the disallowance of expenses not pertaining to the year under consideration was admitted for further consideration.

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