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TMI Blog2012 (6) TMI 229X X X X Extracts X X X X X X X X Extracts X X X X ..... if the amount paid is negligible, it will be appropriate to write off the expense in the year in which such expense is incurred. We further make it clear that the expenditure incurred by way of fees for obtaining corporate membership in a club is revenue and prepaid in nature and has to be written off in the year in which it is incurred or to be apportioned for a period not exceeding ten years, as the case may be - Appeal of the Revenue is partly allowed - IT APPEAL NO. 465 (BANG.)OF 2010 - - - Dated:- 10-3-2011 - GEORGE GEORGE K., A. MOHAN ALANKAMONY, JJ. P.H. Naragundkar for the Appellant. Cyrus Jal Bharucha for the Respondent. ORDER A. Mohan Alankamony, Accountant Member - This appeal of the Revenue is directed against the order of Ld. CIT (A) - I, Bangalore, in ITA No: 21/DC - 11(3)/ CIT (A)-I/ 07-08 dated: 22.1.2010 for the assessment year 2005-06 in the case of M/s. G. Corp Private Limited, Bangalore. 2. The Revenue raised five grounds in which ground Nos: 1, 4 and 5 being general and no specific issues involved, they have become non-consequential. In the remaining grounds, the crux of the lone issue is confined to- "that the CIT (A) was not jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s there any enduring benefit to the business, but, it was a normal expenditure incurred in the day-to-day running of the business; ( ii ) the fee paid is non-refundable. Even if the assessee decides after a period of time that it does not want the membership, the money is not refundable and, thus, there was both accrual and payment during the year under consideration ( iii ) relies on the following case laws - ( a ) Otis elevator Company (India) Ltd. v. CIT 195 ITR 682 (Bom) ( b ) Gujarat State Export Corporation Ltd . v. CIT 209 ITR 649 (Guj) ( c ) CIT v. Sundaram Industries Ltd. 240 ITR 335 (Mad) ( d ) JCIT v. M/s. Cabot India Ltd. in ITA NO:5043/Mum/2001 dt:25.7.2005 of the ITAT, Mumbai Bench 'H' ( e ) DCIT v. Kodak India Ltd. in ITA NO.934/M/.07 dated: 16.2.2009 of the ITAT, Mumbai Bench 'A' ( f ) Engineers India Ltd. 239 ITR (Del) 237 ( iv ) Neither the assessee has acquired any capital asset with respect to the payment made nor there is any enduring benefit accruing to the business of the assessee. ( v ) There is no concept of deferred revenue expenditure defined in the income tax proceedings. Expenditure has to be either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ership is not refunded. Therefore, the entire expenditure has to be considered as revenue expenditure in the year in which it is incurred. 8. On the other hand, ld. DR emphasized that the payment made for corporate membership is for a benefit of enduring nature and, therefore, the expenditure is purely a capital expenditure. At no stretch of imagination this lump sum payment of Rs.15 lakhs could be considered as revenue expenditure for the benefit derived out of this payment subsists over a period of 15 years. Ld. DR prayed for upholding the order of ld. AO. 9. We have duly considered the rival submissions and carefully perused the relevant records and also the aide memoir furnished by the Ld. A R during the course of hearing to drive home his point. 10. Let us first advert to analyze the provisions of the Act relevant to decide the issue. Section 28 of the Act is the charging section bringing under its fold the chargeability of income under the head 'profits or gains of business or profession'. Section 29 of the Act provides the manner in which the income under the head 'profits or gains of business or profession' is to be computed i.e., in accordance with sections 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equent years are not measurable. Capital expenditure 10.2 It is an expenditure incurred for bringing into existence an asset or an advantage of enduring benefit. The word 'capital' refers to permanency. Hence, such expenditure revolves around to bring in a tangible or intangible asset. Such asset either delivers income or assists in earning income year after year. Prepaid expenditure 10.3 It is an expenditure incurred for deriving a benefit or service for a predetermined period consisting of several previous years; however the entire expenditure is paid in a previous year. For example, (i) rent paid in advance say for five years, (ii) hire charges paid in advance say for 3 years, (iii) premium paid for securing warranty benefits say for 3 years, etc. Thus, a lump sum amount is determined and paid by an entity for the service to be obtained for a definite period of time. It is an advance payment made for the service to be rendered for the current previous year and also for later years. Therefore, it is appropriate not to charge the advance portion of payment made as revenue expenditure for the previous year. The advance portion has to be reflected in the balance shee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the absence thereof, the nominee/s will not be allowed use of the Club facilities. The Club shall have authority to reject a nominee if it considers him/her unsuitable. The total number of Corporate Members shall at no time exceed One Hundred and Seventy Five. ( b ) A Corporate Member shall ensure prompt payment of Club dues by its nominees and shall lose its membership in the event any or all of its nominees after being denoted a defaulter fails to pay their/his/her dues to the Club within the period prescribed in these Rules. Provided that the Corporate Membership of such Company/Organisation shall stand automatically terminated upon the expiry of 10 years from the date of election, or earlier in the event of a change in status of the Company/Organisation, under which it ceases to exist by reason of its amalgamation with another organisation, its liquidation or otherwise and upon such termination all nominations of such Corporate Member shall ipso facto determine. Corporate Member may however, apply for re-election if they are eligible to do so and their said application for re-election shall be considered immediately, if they apply for such Membership not less than six ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that period and after arriving at such expenditure, it should be taken off from the total income earned for the period. The net result will be the actual income of the period. The capital expenditure which brings into existence a capital asset cannot be fully charged to the profit loss account in the year in which such expenditure is incurred because the benefit derived from the asset extends till the lifetime of the asset. The Act has recognized the concept of depreciation being a notional expenditure allowable under the Act with specific rates with respect to such expenditure incurred for acquiring assets. This concept of depreciation is aimed at for absorbing the cost of the asset rationally over a period of years to determine the correct income earned for the previous year. As per section 4 of the Act, income tax shall be charged for any assessment year at any rate or rates prescribed in respect of the total income of the previous year. Previous year is defined in the Act as the financial year immediately preceding the assessment year. Therefore, it is essential to determine the actual income of the previous year considering all factors for levy of tax. For arriving at the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from the date when the asset is available for use. Amortization should commence when the asset is available for use. The objects of AS26 are to prescribe the accounting treatment for intangible assets that are not dealt with specifically in other accounting standards. The statement requires an enterprise to recognise an intangible asset if certain criteria are met. The statement also specifies how to measure the carrying amount of intangible assets and requires certain disclosures about intangible assets. It also lays norms for amortisation of the assets. 15. From the nature of expense incurred and the benefits derived, club membership can be construed as an intangible asset. By following the guidelines of AS 26 it can be judiciously concluded that this expense has to be written off in proportion to the life term of the membership and if the life term extends beyond ten years, it should be restricted to ten years. With regard to the argument put forth by the Ld. AR that the club membership fees is not refundable if the appellant decided to cede the membership and therefore the entire amount has to be written off in the year in which the amount is paid; we hold that in such si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the accounting policies such as "prudence", "substance over form", "materiality" and concept of "accrual", "going concern" etc. are embedded, which are very relevant to decide the issue before us. 17. Now after determining the nature of asset, it is very essential to comply with the convention of materiality i.e., if the cost incurred on the asset is negligible or small in value though technically the expense has to be apportioned for the number of years of the life of the asset it has to be written off in the year in which the cost is incurred. As per this convention one must attach importance to material details and ignore insignificant details in the financial statements. Unnecessarily insignificant details should not be burdened in the financial statements. According to Indian Accounting Standards-1, materiality should govern the selection and application of accounting policies. By this concept In the case of the Corporate Club membership if the fee paid is insignificant comparing with the profit/loss or turnover of the assessee the same has to be written off in the same year. 18. Having briefly discussed with the Indian accounting standards, generally accepted accou ..... 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