2013 (8) TMI 837 - AT - Income Tax

Whether the expenditure regarding club membership and entrance fee is revenue in nature or capital Deduction u/s 37 of the Income Tax Act - Club membership has been taken for the purpose of the business of the assessee as the directors of the assessee company conduct meeting/conference with the clients, suppliers and business associates Held that - Relying upon the judgment in the case of Otis Elevator Co. (India) Ltd. Vs CIT 1991 (4) TMI 53 - BOMBAY High Court ; CIT Vs Samtel Color Ltd 2009 (1) TMI 26 - DELHI HIGH COURT , it was held that 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 of the Act was the correct approach. Qualification of the expenditure under section 37 of the Act is that expenditure incurred should not be on capital account - Expenditure which gives enduring benefit is by itself not conclusive as regards the nature of the expenditure - The true test for qualification of expenditure under section 37 of the Act is that it should be incurred wholly and exclusively for the purposes of business and the expenditure should not be towards capital account - In the instant case, the admission fee paid towards corporate membership is an expenditure incurred wholly and exclusively for the purposes of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profitearning apparatus of a business enterprise. Expenditure made as donation for religious purposes On souvenirs /booklets assessee name appeared on the religious occasion Expenditure as advertisement expenditure Held that - These so called souvenirs/booklets are not the publication of any institution, industrial organisation or other association or institutions as permanent in nature and related to the business of the assessee. Accordingly, no merit in the assessee s contention that the expenditure incurred for advertisement in souvenirs of all these parties is an allowable expenditure Decided against the Assessee.

Issues Involved:
1. Disallowance of entrance fees and subscription for club membership.
2. Addition on account of difference in closing balance with M/s Jindal Saw Ltd.
3. Disallowance of certain advertisement expenses.
4. Levy of interest under sections 234B and 234C.
5. Initiation of penalty proceedings under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Disallowance of Entrance Fees and Subscription for Club Membership:
The assessee incurred an expenditure of Rs. 22,60,504/- for club membership fees for Bombay Presidency and Golf Club in the names of its directors to promote business interests. The AO treated this expenditure as capital in nature, citing it as non-recurring and resulting in an enduring benefit. The CIT(A) upheld this disallowance. The assessee argued that the expenditure was for business purposes, facilitating meetings and conferences with clients and suppliers, thus not capital in nature. The Tribunal referenced several judgments, including Otis Elevators Co. (India) Ltd. vs. CIT, where similar expenditures were allowed as business expenses. The Tribunal concluded that the expenditure was revenue in nature and allowed the assessee's appeal on this ground.

2. Addition on Account of Difference in Closing Balance with M/s Jindal Saw Ltd.:
The AO noted a discrepancy of Rs. 79,092/- in the closing balance with M/s Jindal Saw Ltd. and added this amount to the assessee's income due to lack of reconciliation. The CIT(A) confirmed this addition. The assessee provided a reconciliation statement and argued that no excess deduction of expenses was claimed. The Tribunal remanded the issue back to the AO for verification of the reconciliation and to decide the matter after giving the assessee an opportunity to present their case.

3. Disallowance of Certain Advertisement Expenses:
The assessee claimed Rs. 1,86,989/- as advertisement expenses, of which Rs. 81,750/- was disallowed by the AO, treating it as donations for religious and social purposes. The CIT(A) confirmed the disallowance to the extent of Rs. 71,750/-, noting the assessee's suo-motto disallowance of Rs. 10,000/-. The assessee contended that these were legitimate advertisement expenses. However, the Tribunal found that the payments were made to religious organizations and functions, not related to the business, and upheld the disallowance.

4. Levy of Interest Under Sections 234B and 234C:
The interest under sections 234B and 234C was deemed consequential by the CIT(A). The Tribunal agreed that these interests are consequential and do not require specific findings.

5. Initiation of Penalty Proceedings Under Section 271(1)(c):
The assessee challenged the initiation of penalty proceedings under section 271(1)(c). The CIT(A) held that this ground was premature. The Tribunal concurred, stating that the challenge to the initiation of penalty proceedings is premature and dismissed this ground.

Conclusion:
The appeal was partly allowed. The disallowance of club membership fees was overturned, the issue of the closing balance discrepancy was remanded for further verification, the disallowance of advertisement expenses was upheld, and the grounds regarding interest and penalty proceedings were dismissed as either consequential or premature.

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