2022 (1) TMI 38 - AT - Income Tax

Disallowance u/s 37(1) expenses towards fees, subscription and payment of services for various clubs such as Karnataka Golf Association, Bangalore Club, the Karnataka Cricket Association Club House - assessee stated that those expenses were incurred for entertaining the guest of the assessee to promote its business - AO did not accept the explanation of the assessee and made the disallowance u/s 37(1) by treating it to be personal in nature - HELD THAT - In the present case also the assessee has incurred the expenses on account of club membership fees for the employees and to entertain customers. An identical issue the Hon ble Madras High Court in the case of CIT Vs. Sundaram Industries Ltd 1999 (4) TMI 50 - MADRAS HIGH COURT wherein as held that assessee-company had incurred the expenditure wholly and exclusively for the purpose of its business and therefore the expenditure incurred by way of subscription to the club was an allowable expenditure. Also see UNITED GLASS MFG CO. LTD. 2012 (9) TMI 914 - SUPREME COURT wherein held that club membership fees for employees incurred by the assessee is business expense under Section 37 - Decided in favour of assessee.

Issues:
1. Disallowance of club expenses under section 37(1) of the Income Tax Act.
2. Validity of adjustment made under section 143(1)(a).
3. Proper opportunity given to appellant for response.
4. Justification for upholding adjustment by CIT(A).
5. Compliance with guidance notes and legal provisions.
6. Allowability of club membership fees for business promotion.
7. Interpretation of business expenditure under Section 37.

Analysis:

Issue 1: Disallowance of club expenses under section 37(1) of the Income Tax Act
The Assessing Officer (AO) disallowed club expenses of the assessee under section 37(1) treating them as personal in nature. The CIT(A) upheld this disallowance based on the auditor's report mentioning the expenses under a specific clause, indicating personal nature. However, the Tribunal considered the submissions that the expenses were for business promotion, following precedents where similar expenditures were allowed as business expenses. Consequently, the disallowance was deleted, emphasizing that the expenses were incurred wholly and exclusively for business purposes.

Issue 2: Validity of adjustment made under section 143(1)(a)
The appellant challenged the adjustment made by the AO under section 143(1)(a) as unauthorized, arguing that proper opportunity for response was not provided. The CIT(A) upheld the adjustment, stating it was valid and in accordance with the law. However, the Tribunal found in favor of the appellant, emphasizing that the adjustment was debatable, and directed the AO to cancel the addition.

Issue 3: Proper opportunity given to appellant for response
The appellant contended that the AO did not provide a proper opportunity to respond to the proposed adjustment. The CIT(A) did not find merit in this argument. However, the Tribunal sided with the appellant, highlighting the importance of affording a fair opportunity for response, especially in matters affecting the appellant's rights.

Issue 4: Justification for upholding adjustment by CIT(A)
The CIT(A) justified upholding the adjustment by emphasizing compliance with guidance notes and legal provisions regarding the nature of club expenses. However, the Tribunal disagreed, considering the specific circumstances of the case and the business purpose behind the expenses, leading to the cancellation of the addition directed by the CIT(A).

Issue 5: Compliance with guidance notes and legal provisions
The case involved a discussion on compliance with guidance notes and legal provisions related to the treatment of club expenses. While the CIT(A) based its decision on these guidelines, the Tribunal focused on the actual purpose of the expenses and their alignment with the business objectives of the assessee, ultimately deciding in favor of allowing the expenses as business promotion costs.

Issue 6: Allowability of club membership fees for business promotion
The Tribunal analyzed the allowability of club membership fees for business promotion, citing precedents that considered such expenses as business-related. By emphasizing the business purpose behind the expenses and their contribution to promoting business relationships, the Tribunal concluded that the expenses were allowable under Section 37 of the Income Tax Act.

Issue 7: Interpretation of business expenditure under Section 37
The Tribunal's decision highlighted the interpretation of business expenditure under Section 37, emphasizing that expenses incurred wholly and exclusively for business purposes should be allowed. By considering the nature of the expenses and their direct relation to business promotion and relationship-building, the Tribunal directed the AO to delete the disallowance made under section 37(1) of the Act.

In conclusion, the Tribunal allowed the appeal filed by the assessee, directing the deletion of the disallowance of club expenses and emphasizing the business purpose behind the expenses incurred.

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