2018 (3) TMI 1172 - AT - Income Tax

Disallowance on account of expenditure incurred on advertisement - Held that - We feel that the impugned expenditure has been incurred by assessee exclusively for its business activity and therefore the same is eligible for deduction us 37(1) of the Act. As such, in the given facts and circumstances no disallowance of impugned expenditure is warranted. Thus, we reverse the order of lower authorities and direct the AO to delete the addition. Addition of club membership fees paid by assessee - Held that - The main purpose of the organization is to induce its officers to attend such places for maintaining and making contacts for the benefit of business. Even if some personal advantage is obtained by officers, it will be in nature of maintaining good relations with officers and in nature of staff welfare expenses. Therefore, the expenses are incurred wholly and exclusively for the purpose of business. By obtaining membership for a period of more than one year, there may be an advantage of enduring nature. However, such advantage is in the field of revenue benefit and not for obtaining any capital asset or obtaining benefit in capital field. Therefore such expenses will be of revenue nature. - Decided in favour of assessee.

Issues Involved:
1. Disallowance of advertisement expenses of ?6,09,402.
2. Disallowance of club membership fees of ?52,555.

Issue-wise Detailed Analysis:

1. Disallowance of Advertisement Expenses of ?6,09,402:

The first issue raised by the assessee pertains to the disallowance of ?6,09,402 incurred on advertisement expenses. The assessee, a private limited company engaged in trading stainless steel and allied products, claimed this expense for celebrating French National Day. The Assessing Officer (AO) disallowed the expense on the grounds that the assessee had no export business to France, thus deeming the expense unrelated to the business activity.

The assessee argued that ?5,91,402 was spent on publishing an award conferred on its Managing Director (MD) by the French Embassy in India, which was published in a regional newspaper. An additional ?18,000 was spent on artwork and translation related to the advertisement. The assessee contended that the award, given for promoting trade and culture between France and India, added to the company's brand value and was thus a commercial expediency to promote business. The assessee cited Section 37(1) of the Income Tax Act, 1961, which allows for the deduction of business expenses, and referenced the case of Sarada Plywood Industries Ltd. vs. CIT, where advertisement expenses were considered from the assessee's perspective.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's disallowance, noting the lack of business connection with France. The Tribunal, however, found that the Managing Director's award increased the company's image and brand value, which indirectly benefited the business. The Tribunal referenced the legal principle that business expenditures are deductible under Section 37(1) if incurred exclusively for business purposes, regardless of immediate business outcomes. Citing the case of Sarda Plywood Industries Ltd. vs. CIT, the Tribunal concluded that the advertisement expense was indeed for business purposes and directed the AO to delete the addition.

2. Disallowance of Club Membership Fees of ?52,555:

The second issue involved the disallowance of ?52,555 related to club membership fees. The assessee incurred club membership expenses for various organizations, totaling ?4,12,555, which included fees for Indian Chamber of Commerce (ICC), Federation of Indian Chamber of Commerce and Industry (FICCI), and other clubs. The AO disallowed these expenses, considering them personal in nature and unrelated to business activities.

The assessee argued that the corporate memberships were aimed at promoting business through networking and meetings held at these clubs. The CIT(A) allowed partial relief, accepting the business purpose of memberships for ICC and FICCI but disallowing other club expenses due to lack of evidence for business purposes.

The Tribunal examined whether the club expenses had a nexus with the business. It noted that clubs provide facilities for business meetings and networking, which can benefit business operations. The Tribunal referenced judgments from the Punjab & Haryana High Court in CIT Vs. Groz Beckert Asia Limited and the Delhi High Court in CIT Vs. Samtel Color Limited, which held that corporate membership fees are business expenses if incurred for business purposes and not for creating capital assets.

The Tribunal concluded that the club expenses were incurred for business purposes, facilitating networking and business meetings, and thus should be allowed as business expenses. Consequently, the Tribunal reversed the orders of the lower authorities and allowed the deduction of the club membership fees.

Conclusion:

The Tribunal allowed the appeal of the assessee, directing the deletion of disallowances related to advertisement expenses and club membership fees. The judgment emphasized the principle that business expenses are deductible if incurred exclusively for business purposes, even if they do not result in immediate business outcomes.

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