2013 (2) TMI 375 - HC - Income Tax

Corporate membership fee paid to Golf Club - Capital v/s Revenue expenditure - Held that - The nature of the expenditure incurred by the assessee cannot be said to be a capital expenditure. The corporate membership of Rs.6 lacs was for a limited period of 5 years. The corporate membership was obtained for running the business with a view to produce profit. Such membership does not bring into existence an asset or an advantage for the enduring benefit of the business. It is an expenditure incurred for the period of membership and is not long lasting. By subscribing to the membership of a club, no capital asset is created or comes into existence. By such membership, a privilege to use facilities of a club alone, are conferred on the assessee and that too for a limited period. Such expenses are for running the business with a view to produce the benefits to the assessee. Consequently, it cannot be treated as capital asset - in favour of assessee.

Issues Involved: Whether the ITAT was correct in not sustaining the addition of Rs.6,16,945/- on account of corporate membership fee paid to Golf Club as a capital expenditure.

Issue-wise Detailed Analysis:

1. Background and Referral to Larger Bench:
A Division Bench of the Punjab & Haryana High Court referred the question of whether the ITAT was right in not sustaining the addition of Rs.6,16,945/- as capital expenditure to a Larger Bench. This referral was made due to doubts about the correctness of a previous Division Bench's view in ITA No.448 of 2007, "Commissioner of Income Tax - I, Ludhiana Vs. M/s Majestic Auto Limited, Ludhiana."

2. Facts of the Case:
The assessee obtained corporate membership of Golf Club, Chandigarh, paying Rs.6 lacs, with Rs.16,945/- paid towards services and facilities during the relevant assessment year. The Assessing Officer added these expenses back to the income, considering them personal expenses. However, the Commissioner of Income Tax (Appeals) set aside this disallowance, stating that club membership is an advantage in the commercial sense, not in the capital field. The Tribunal affirmed this view, noting the membership facilitated business interactions and was not a capital expenditure.

3. Conflicting Judgments:
The Division Bench in M/s Majestic Auto Limited's case dissented with the Bombay High Court's judgment in "OTIS Elevator Company (India) Limited Vs. Commissioner of Income Tax" and agreed with the Kerala High Court's judgment in "Framatone Connector OEN Limited Vs. Deputy Commissioner of Income Tax," holding that the expenditure on corporate membership was capital expenditure. This conflict prompted the referral to the Larger Bench.

4. Revenue's Argument:
The Revenue argued, relying on the Kerala High Court's judgment, that corporate membership is a capital expenditure due to its long-term advantage.

5. Assessee's Argument:
The assessee cited various judgments, including "Assam Bengal Cement Co. Ltd. Vs. Commissioner of Income Tax," "Empire Jute Co. Ltd. Vs. Commissioner of Income Tax," and others, to argue that such expenditure is revenue in nature.

6. Analysis of Legal Principles:
The court examined Section 37 of the Income Tax Act, 1961, which allows business expenditure unless it is capital or personal. The term 'capital expenditure' was analyzed through various judgments. The Supreme Court in "Assam Bengal Cement Co. Ltd." provided broad principles, stating that expenditure for initiating or extending a business or substantial replacement of equipment is capital expenditure. However, expenditure for running the business or working it to produce profits is revenue expenditure.

7. Tests for Determining Nature of Expenditure:
The court reiterated tests from "Empire Jute Co. Ltd.," emphasizing that the nature of the advantage in a commercial sense determines whether the expenditure is capital or revenue. If the advantage facilitates trading operations without touching fixed capital, it is revenue expenditure.

8. Application of Principles to Club Membership:
The court noted judgments like "Otis Elevator Co. (India) Ltd." and "Engineers India Ltd." which treated club membership fees as revenue expenditure. These judgments emphasized that such fees do not create a capital asset but provide a business advantage.

9. Overruling M/s Majestic Auto Limited's Case:
The court found the judgment in M/s Majestic Auto Limited's case incorrect, as it did not consider Supreme Court judgments. The corporate membership of Rs.6 lacs for 5 years did not create an enduring asset or advantage but was for running the business, making it a revenue expenditure.

10. Conclusion:
The court concluded that the expenditure on corporate membership is revenue, not capital, overruling the judgment in M/s Majestic Auto Limited's case. The matter was placed before the appropriate Bench for decisions on other questions of law.

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