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2020 (4) TMI 550 - HC - Income TaxClub membership expenditure - capital expenditure OR revenue expenditure - HELD THAT - Tribunal followed the decision in case of FRAMATONE CONNECTOR OEN LTD. VS. DCIT 2006 (7) TMI 180 - KERALA HIGH COURT and held the same to be a capital expenditure. However, the Tribunal failed to take into account the fact that its order passed in CIT AND ANOTHER VS. INFOSYS TECHNOLOGIES LTD. 2013 (2) TMI 629 - KARNATAKA HIGH COURT by which it had held that the club membership expenditure was in the nature of revenue expenditure was upheld by division bench of this court vide dated 21.10.2011, which was binding on the Tribunal. The Tribunal also failed to appreciate that the order of the Commissioner of Income Tax (Appeals), by which it has held the expenditure to be revenue expenditure in previous years was not challenged by the revenue. Therefore, the first substantial question of law is held in the negative and in favour of the Revenue. Disallowance u/s 14A - HELD THAT - In CIT VS. ESSAR TELE HOLDINGS LTD. 2018 (2) TMI 115 - SUPREME COURT the Supreme Court has held that sub-Section (2) and (3) are prospective nature and have to be utilized for computing expenditure for the assessment year 2007-08 and onwards. In the absence of any mechanism to compute the disallowance as expenditure incurred for earning exempt income, the Tribunal grossly erred in setting aside the order of the CIT (Appeals). Therefore, the second substantial question of law is answered in the negative and in favour of the assessee. CIT (Appeals) without any evidence on record, treated the adhoc disallowance of ₹ 10,000/- out of the expenditure incurred for entertainment, business, meals, gifts fees for association etc. and in disallowing ₹ 5,000/- on estimation basis. The Supreme Court in the case of WALCHAND 1967 (3) TMI 2 - SUPREME COURT has held that the Tribunal has to record the satisfaction that the expenditure was laid out or expendid wholly and exclusively for the purpose of business of the assessee and there is no reason why the full amount should not have been allowed. In the instant case, no such satisfaction has been recorded by the authorities. Therefore, the third substantial question of law is also answered in favour of the assessee. Deduction u/s 80HHC - Whether service charges could not be deducted as profits of business means profits of business reduced by 90% of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of Section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits - HELD THAT - In COMMISSIONER OF INCOME TAX VS. PFIZER LTD. 2010 (6) TMI 433 - BOMBAY HIGH COURT it has been held that Explanation (baa) in terms does not refer to export turnover. Therefore, before a receipt is liable to be excluded to the extent of 90% it must be a receipt of a nature similar to brokerage, commission, interest, rent or charges. The finding in this regard recorded by the Tribunal is factually incorrect. Therefore, the service charges are liable to be excluded from profits of business for the purposes of computing deduction under Section 80HHC. Accordingly, the fourth and fifth substantial questions of law is also answered in favor of the assessee and against the revenue.
Issues:
1. Deductibility of club membership fee as revenue expenditure 2. Disallowance of expenditure incurred for earning exempt income 3. Adhoc disallowance of certain expenses 4. Reduction of income from services rendered and sundry income for deduction under Section 80HHC Analysis: Issue 1: The appellant contested the disallowance of club membership fee as capital expenditure. The Tribunal upheld the disallowance, citing a previous case. However, the appellant argued that a different case decision favored their claim. The High Court ruled in favor of the Revenue, emphasizing the binding nature of the division bench's decision on the Tribunal. Issue 2: Regarding the estimation of expenses for earning exempt income, the Tribunal's decision was overturned. The High Court highlighted the lack of a mechanism for computation, citing a Supreme Court ruling that the relevant provisions were prospective. The Tribunal's decision was deemed erroneous, and the issue was resolved in favor of the assessee. Issue 3: The adhoc disallowance of certain expenses was challenged by the appellant. The High Court emphasized the necessity of evidence for such disallowances, referencing a Supreme Court case. As no satisfactory evidence was presented, the Tribunal's decision was overturned in favor of the assessee. Issue 4: The reduction of income from services and sundry income for deduction under Section 80HHC was disputed. The High Court analyzed relevant legal provisions and case law to determine that the service charges should be excluded from profits of business for computing the deduction. The Tribunal's decision was overturned, and the issue was resolved in favor of the assessee. Conclusion: The High Court quashed the Tribunal's decision and the Commissioner of Income Tax (Appeals) order, allowing the appeals in favor of the assessee for all the issues discussed. The judgment provided detailed legal reasoning and interpretations to resolve each issue effectively.
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