2016 (6) TMI 788 - AT - Income Tax

Subscription amount paid for club membership - whether an allowable business expenditure? - Held that - In the instant case the subscription paid towards membership for a period of five years and the same is being paid annually thus 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 profit earning apparatus of a business enterprise. Thus we hold that subscription amount paid towards membership in N.L.Planters club for a period of five years is an expenditure incurred wholly and exclusively for the purposes of business of the assessee. See COMMISSIONER OF INCOME TAX vs. SAMTEL COLOR LTD 2009 (1) TMI 26 - DELHI HIGH COURT - Decided in favour of assessee Addition on marked to market loss on unexplained forex contracts - AO was of the view that the marked to market loss is a notional loss contingent in nature and it is not allowed to be set off against the taxable income - CIT(A) deleted the addition - Held that - the claimed loss under consideration occurred to the assessee on account of five unexpired forex forward contracts i.e is a loss incurred on account of revaluation of contract on last day of accounting period before date of maturity of forward contract. The Ld.CIT-A observed that the assessee has been following a consistent accounting policy for determining loss under AS-11 and AS-30 as required under Companies Act and it is to be noted that the accounting standards were issued by the ICAI which has received judicial recognition. Accordingly the assessee the gain or loss on revaluation of the outstanding contracts was booked in the P 85, 70, 425/- for 2010-11 which supports to show that the assessee has been following consistently accounting standards and the liability has been accrued for a pending obligation for every year i.e the difference was arising for more than one accounting period. Thus disallowance made by the AO treating the impugned amount for A.Y 2009-10 as contingent and notional loss is not justified and that the loss incurred to the assessee on account of five unexpired forex forward contracts on the last date of the accounting period i.e. before the date of maturity of the forward contract is not contingent and it is a actual loss is allowable. - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of addition on account of club membership subscriptions.
2. Deletion of addition on account of marked to market loss on unexplained forex contracts.

Issue-wise Detailed Analysis:

1. Club Membership Subscriptions:

The Revenue challenged the deletion of an addition of ?2,12,617/- made by the Assessing Officer (AO) on account of club membership subscriptions. The AO had disallowed this expenditure, considering it not incidental to business. However, the CIT(A) deleted the addition, relying on precedents from the Delhi and Bombay Tribunals in cases like CIT vs. Samtel Colour Ltd. and DCIT vs. Bank of America Securities (India) (P) Ltd.

The Tribunal examined whether the subscription paid for club membership is a business expenditure under Section 37(1) of the I.T. Act. Section 37(1) allows any expenditure laid out wholly and exclusively for business purposes, provided it is not capital expenditure or personal expenses. The Tribunal referred to the Delhi High Court's decision in CIT vs. Samtel Colour Ltd., which held that corporate membership fees facilitating business interactions are allowable business expenditures. Similarly, the Mumbai Tribunal in DCIT vs. Bank of America Securities (India) (P) Ltd. held that club membership fees incurred wholly and exclusively for business purposes are not capital expenditures.

In the present case, the subscription paid annually for a five-year club membership was deemed to facilitate the smooth and efficient running of the business, not adding to the profit-earning apparatus. Thus, the Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground.

2. Marked to Market Loss on Forex Contracts:

The Revenue also contested the deletion of an addition of ?54,23,955/- made by the AO, who viewed the marked to market loss as notional and contingent, thus not allowable against taxable income. The CIT(A) deleted the addition, referencing the Special Bench of the Mumbai ITAT's decision in DCIT vs. Bank of Bahrain & Kuwait.

The Tribunal noted that the assessee incurred a total loss of ?1,39,94,380/- on the cancellation of five forward contracts for assessment years 2009-2010 and 2010-2011. The AO had allowed the loss for the subsequent year 2010-2011, indicating consistent accounting practices by the assessee. The Tribunal referred to the Special Bench's decision, which allowed losses on revaluation of forward contracts before their maturity date, following the Supreme Court's ruling in CIT vs. Woodward Governor India (P) Ltd. that anticipated losses on existing obligations, determinable with reasonable accuracy, are allowable.

The Tribunal found that the claimed loss was due to revaluation of contracts on the last day of the accounting period, not contingent but an actual loss. The CIT(A)'s decision was supported by the consistent accounting standards followed by the assessee as per AS-11 and AS-30, mandated by the Companies Act and RBI guidelines. Consequently, the Tribunal upheld the CIT(A)'s order, dismissing the Revenue's ground.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both grounds. The club membership subscription was deemed a business expenditure, and the marked to market loss on forex contracts was considered an actual, allowable loss. The order was pronounced in open court on 29.04.2016.