Intervalve (India) Ltd.,, Pune vs Assessee

The above two appeals filed by the assessee are directed

against the separate orders dated 29.08.2013 and 30.08.2013 of the

CIT(A)-I, Pune relating to Assessment Years 2005-06 and 2006-07

respectively. Since identical grounds have been taken by the

assessee in both the appeals, therefore, for the sake of convenience

both were heard together and are being disposed of by this common

order.

ITA No.1812/PN/2013 (A.Y. 2005-06) :

2. The assessee in this appeal has challenged the order of the

CIT(A) in confirming the order of the Assessing Officer in 2

disallowing the entrance fee of Rs.5,00,000/- for membership of

'business club'.

3. The facts of the case, in brief, are that the Assessing Officer,

during the course of assessment proceedings, observed that assessee

had claimed club expenses of Rs.5,08,750/- as expenditure, which

consists of one-time entrance fee of Rs.5,00,000/- and the annual

subscription of Rs.8,750/-. The amount was paid to Indian Hotels

Co. Ltd. (Taj Group) for acquiring membership in the club known

as "The Chambers" of Taj Group. The expenditure incurred by way

of entrance fee of Rs.5,00,000/- was disallowed by the Assessing

Officer on the ground that it is nothing but a non-refundable

deposit, which provides an enduring benefit to the assessee till the

expiry of the membership of the club and it is a capital expenditure.

4. In appeal the Ld. CIT(A) upheld the action of the Assessing

Officer. On further appeal, the Tribunal vide ITA No.659/PN/2009

and other connected appeals vide orders dated 16.12.2010 for A.Y.

2005-06 restored the issue back to the file of the CIT(A) with the

following observation :-

"3. In connection with ground no.3 Ld. Counsel mentioned that the issue in question relates to disallowance of Rs.5,00,000/- towards entrance fee for membership of the 'business club' in the hotel. Ld. Counsel relied upon Gujrat High Court decision in the case of Gujrat State Export Corporation Limited (Guj) 209 ITR 649 in his favour. On the other hand, Ld. DR for the revenue relied on the Kerala High Court judgement in the case of Framatone Connector Oen Ltd. (Ker) reported in 294 ITR 559 for the proposition that the entrance fee paid is capital in nature. Ld. Counsel also mentioned when there are 2 divergent 3

decisions, favourable to the assessee may be considered in favour of the assessee. We have heard the parties and perused the orders of the revenue and the decisions filed before us. On perusal, we find there is need for comparison of the facts of the present case to the facts of the both cases decided by the Hon'ble High Courts of Kerla and Gujarat. For this limited exercise, we are of the opinion, the matter should go to the file of the CIT(A) for want of facts and a finding on the applicability of the decisions. CIT(A) shall grant the opportunity of being heard to the assessee. Accordingly, ground no.3, 3.1 and 3.2 are set aside to the file of the CIT(A)."

5. Subsequently, after the matter was restored back to the file of

the Ld. CIT(A), he decided the issue against the assessee. While

doing so he observed that the membership is national and the

member can use the Chambers in Bombay, Delhi, Hyderabad and

Calcutta and the Chambers at Bombay has various facilities as well

as additional facilities which are in the nature of hiring premium

accommodation with several facilities by making payment of initial

deposit and annual rent. The fees of Rs.5,00,000/- paid by the

assessee is akin to initial deposit and not an annual fees paid and it

was a one-time payment to facilitate membership of the assessee

company in the Chambers. The payment of one-time entrance fees

provides a benefit or an advantage to the assessee over a period of

time till the expiry of membership. Relying on the decision of the

Hon'ble Kerala High Court in the case of Framatone Connector

Oen Ltd. vs. DCIT reported in 294 ITR 559 and distinguishing the

various decisions relied upon before him the Ld. CIT(A) held that

the expenditure is in the nature of capital expenditure. 4

5.1 Aggrieved with the such order of the Ld. CIT(A), assessee is

in appeal before us.

6. The Ld. Counsel for the assessee referred to the decision of

the Mumbai Bench of the Tribunal in the case of DCIT vs. M/s

Bank of America Securities (India) Pvt. Ltd. vide ITA

No.6611/Mum/2008 order dated 09.09.2010 for A.Y. 2004-05 and

submitted that the Tribunal after considering the decision of

Hon'ble Kerala High Court in the case of Framatone Connector

Oen Ltd. (supra) has held that admission fees paid towards

corporate membership of the club 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 profits earning apparatus

of a business enterprise and accordingly the appeal of the Revenue

was dismissed.

6.1 Referring to the decision of the Hon'ble Delhi High Court in

the case of CIT vs. Samtel Color Ltd. reported in 326 ITR 425, the

Ld. Counsel for the assessee submitted that corporate membership

fee paid to clubs is an allowable expenditure being for business

purposes. He accordingly submitted that the order of the Ld.

CIT(A) be set-aside and the ground raised by the assessee be

allowed.

5

7. The Ld. Departmental Representative, on the other hand,

strongly supported the order of the CIT(A). He submitted that the

Ld. CIT(A) following the decision of the Hon'ble Kerala High

Court in the case of Framatone Connector Oen Ltd. (supra) and

distinguishing the decision of the Hon'ble Delhi High Court in the

case of Samtel Color Ltd. (supra) has decided the issue against the

assessee by holding that the expenditure of Rs.5,00,000/- incurred

by way of entrance fee for the membership of the Chambers as

capital expenditure. He accordingly submitted that the order of the

CIT(A) be upheld.

8. We have considered the rival arguments made by both the

sides, perused the orders of the Assessing Officer and CIT(A) and

the Paper Book filed on behalf of the assessee. We have also

considered the various decisions cited before us. The dispute in the

impugned appeal is regarding the allowability of entrance fee of

Rs.5,00,000/- as revenue expenditure or capital expenditure.

8.1 We find the Mumbai Bench of the Tribunal in the case of

M/s Bank of America Securities (India) Pvt. Ltd. (supra) while

deciding an identical issue has allowed the admission fee paid

towards corporate membership of the club as an expenditure

incurred wholly and exclusively for the purpose of business and not

towards capital account. It was held that such expenditure only

facilitates smooth and efficient running of a business enterprise and

does not add to the profit earning apparatus of a business enterprise. 6

The relevant observation of the Tribunal from paras 8 to 13 reads as

under :-

"8. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it has been rightly observed by the Id. CIT(A) the Assessing Officer has not disputed the fact that the expenditure of Club Membership fees Rs.16.00 lacs has been incurred by the assessee wholly and exclusively for the purpose of business of the assessee. Further we find no merit in the plea of the Id. DR that the decision in Alembic Chemical Works Co. Ltd. (supra), is not applicable to the facts of the assessee's case. In fact, Their Lordships referred to various decisions particularly the decision in the case of City of London Contract Corporation vs. Styles (1987) 2 Tax Cases 239 wherein broad area of distinction is pointed out. It is held in that case that the outlay on the 'acquisition of the concern' would be capital while an outlay in 'carrying on the concern' is revenue. The Court further referred to the following observations in the case of Assam Bengal Cement Companies Ltd. vs. CIT (1955) 27 ITR 34 (SC): TC 16R 841: "If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure."

The aforesaid principle of law has been applied by Their Lordships in Gujarat State Corpn. Ltd. supra, and it has been held that the expenditure incurred in payment of entrance fee for becoming member of sports club is in the nature of an advantage in the commercial sense but not an advantage in the capital field, therefore, revenue expenditure.

9. In Otis Elevator Co. (India) Ltd. (supra), Their Lordships have held as under:

"In our judgment considering the clear finding given by the AAC, without a contrary finding thereto by the Tribunal, we must accept the facts as found by the AAC. Consequently, the payments must be allowed as business expenditure not falling within the mischief of s 40(a)(v)".

10. In Samtel Colour Ltd. supra, Their Lordships after considering the various decisions including the decision in 7

Framatone Connector OEN Ltd. supra, relied on by the Id. DR have observed and held as under:

"5.3 To support the revenue's contention that the impugned expenditure is on capital account the Id. Counsel, Ms. Prem Lata Bansal has cited the judgment of the Framatone Connector OEN Ltd. vs. Dy. CIT (2006) 205 CTR (Ker.) 250: (2006) 157 Taxman 116 (Ker.). The said judgment is based on the Supreme Court judgment in the case of Punjab State Industrial Development corporation Ltd. vs. CIT (1997) 140 CTR (SC) 594: (1997) 225 ITR 792 (SC). The judgment of the Supreme court on which the Kerala High Court has relied heavily dealt with the issue with regard to fee paid to the RoC for increase of authorized capital, that is, whether such an expense was in the nature of revenue or capital expenditure. The Supreme Court came to the conclusion that since the fee was paid to the RoC for increase in the capital base of the assessee it was in the nature of capital expenditure. According to us the ratio of the aforementioned Supreme Court judgment is not applicable to the expenses incurred on an admission fee for corporate membership. We respectfully disagree with the ratio of the judgment of the Kerala High Court. In turn, we respectfully follow the ratio of the judgment of the division Bench of this Court in CIT vs. Nestle India Ltd. (2008) 296 ITR 682(Del.) and that of the Bombay High Court in the case of Otis Elevator CO.(India) Ltd. vs. CIT (1991) 96 CTR (Bom.) 14: (1992) 195 ITR 662(Bom)."

11. In assessee's own case in Bank of America Securities (India) Pvt. Ltd. (supra), the Tribunal has observed and held vide para 3.1 of the order as under:

"3.1 We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of expenditure on account of entree fees towards membership of a club as a revenue expenditure. No doubt, the payment made is one time lumpsum payment but this criteria of lumpsum payment is not decisive in understanding the true nature of an expenditure as held by Hon'ble Supreme Court in case of Empire Jute Co. (124 ITR Page 1) Similarly test of enduring benefit is also not conclusive. Hon'ble Supreme Court have held in the said case that what is required to be seen is whether the expenditure has resulted into an advantage in the revenue field or in the capital field. In case the expenditure has not resulted into creation of any capital asset or any new source of income and it has not changed the capital structure of the company and had been incurred only for conduct of the business more efficiently and profitably, 8

then it will be revenue expenditure. In this case the expenditure has not resulted into creation of any capital asset or acquisition of any new sources of income. The expenditure has been incurred for the efficient conduct of the business and therefore the expenditure will be of the nature of revenue expenditure. This view is also supported by the judgment of Hon'ble High Court of Gujarat in case of Gujarat State Export Corporation Ltd. (209 ITR 649) in which the lumpsum entrance fees paid towards membership of the club has been held to be allowable as revenue expenditure. Though the Hon'ble High Court of Kerala in case of Connector Oven Ltd. (294 ITR 559) have taken a different view, we have to follow the view taken by Hon'ble High Court of Gujarat which is favourable to the assessee in view of the judgment of Hon'ble Supreme Court in case of Vegetable Products (88 ITR 192). We therefore see no infirmity in the order of CIT(A) and the same is upheld."

12. In National Textile Corporation Ltd. (M.P.) vs. err (2008) 216 CTR (MP) 153 it has been held as under:

"Tribunal has to follow the decision of the Jurisdictional High Court without making any comment upon the said decision; it is not permissible for the Tribunal to sidetrack and/or ignore the decision of the Jurisdictional High Court on the ground that it did not take into consideration a particular provision of law."

13. Respectfully following the above decisions of the Hon'ble Jurisdictional High Court and the Tribunal in the assessee's own case and for the reasons as mentioned in para 5.3 in the case of Samtel Colour Ltd. supra, we are of the view that admission fees paid towards corporate membership of the club is an expenditure incurred wholly and exclusively for the purpose 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 and accordingly we are inclined to uphold the finding of the Id. CIT(A) in deleting the disallowance of Rs.16.00 lacs made by the Assessing Officer. The grounds taken by the revenue are, therefore, rejected."

9. We find the Hon'ble Delhi High Court in the case of Samtel

Color Ltd. (supra) while deciding an identical issue has

distinguished the decision of the Hon'ble Kerala High Court in the

case of Framatone Connector Oen Ltd. (supra) and decided the 9

issue in favour of the assessee and against the Revenue. In that case

assessee had paid corporate membership fee to Indian Habitat

Centre and Sports & Caltural Club, Noida amounting to

Rs.5,00,000/- and Rs.1,00,000/- respectively. The Assessing

Officer disallowed the expenditure on the following ground :-

"(i) the expenditure did not bear any nexus with the business carried on by the assessee;

(ii) the expenditure was incurred for the benefit of employees or its directors;

(iii) the expenditure did not enhance the image of the assessee or its products as its membership could not be used to advertise the products of the assessee; and

(iv) lastly, the expenditure resulted in benefit of an enduring nature."

10. The Ld. CIT(A) held that the clubs had various facilities for

conference, business meetings, as well as, provision for multimedia

exhibition for the directors and senior executives could also use the

club facilities for their private purposes for which they would have

to incur extra expenditure out of their own pockets. He accordingly

concluded that while the membership of the clubs did provide for

the assessee a benefit which fulfilled the business purpose test, it

also resulted in benefits of the directors and executives in their

personal capacity. He accordingly directed the Assessing Officer to

disallow 20% of Rs.6,00,000/- and allow the balance amount as

revenue expenditure on the ground that the entire expenditure was

not incurred for business purposes. The assessee and the Revenue

both preferred appeal before the Tribunal. The Tribunal held that

membership by itself did not confer any enduring benefit on the 10

assessee and it allowed the expenditure as revenue in nature. On

further appeal, the Hon'ble High Court observed as under :-

"5. Having heard the learned counsel for the Revenue as well as the assessee we are of the view that the impugned judgment of the Tribunal deserves to be upheld for the following reasons:

5.1 The expenditure incurred towards admission fee, admittedly, was towards corporate membership. As correctly held by the Tribunal, the nature of the expenditure was one for the benefit of the assessee. The 'business purpose' basis adopted for eligibility of expenditure under s. 37 of the Act was the correct approach. This is more so in view of the Tribunal's findings that it was the assessee which nominated the employee who would avail the benefit of the corporate membership given to the assessee. 5.2 The other hurdle for qualification of the expenditure under s. 37 of the Act is that expenditure incurred should not be on capital account. The AO came to the conclusion that the expenditure was of a capital nature based on a fallacious reasoning that the expenditure was of an enduring nature and hence on a capital account. It is well settled that an expenditure which gives enduring benefit is by itself not conclusive as regards the nature of the expenditure. We may add that even lump sum payment, which was the case in the instant matter, is not decisive as regards the nature of the payment.

See observations in Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) as also the judgment of the Division Bench of this Court in CIT vs. J.K. ynthetics IT Ref. Nos. 139 of 1988 and 202 of 1989. The true test for qualification of expenditure under s. 37 of the Act is that it should be incurred wholly and exclusively for the purposes of business and the expenditure should not be towards capital account. In the instant case, as discussed above, the admission fee paid towards corporate membership 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. 5.3 To support the Revenue's contention that the impugned expenditure is on capital account the learned counsel, Ms. Prem Lata Bansal has cited the judgment of the Framatone Connector OEN Ltd. vs. Dy. CIT (2006) 205 CTR (Ker) 250 : (2006) 157 Taxman 116 (Ker). The said judgment is based on the Supreme Court judgment in the case of Punjab State Industrial Development Corporation Ltd. vs. CIT (1997) 140 CTR (SC) 594 : (1997) 225 ITR 792 (SC).

The judgment of the Supreme Court on which the Kerala High Court has relied heavily dealt with the issue with regard to fee paid to the RoC for increase of authorized 11

capital, that is, whether such an expense was in the nature of revenue or capital expenditure. The Supreme Court came to the conclusion that since the fee was paid to the RoC for increase in the capital base of the assessee it was in the nature of capital expenditure. According to us the ratio of the aforementioned Supreme Court judgment is not applicable to the expenses incurred on an admission fee for corporate membership. We respectfully disagree with the ratio of the judgment of the Kerala High Court. In turn, we respectfully follow the ratio of the judgment of the Division Bench of this Court in CIT vs. Nestle India Ltd. (2008) 296 ITR 682 (Del) and that of the Bombay High Court in the case of Otis Elevator Co. (India) Ltd. vs. CIT (1991) 96 CTR (Bom) 14 : (1992) 195 ITR 682 (Bom).

6. In view of the above, in the aforesaid circumstances we are of the opinion that the impugned judgment as indicated above, deserve to be upheld. In the result, the appeal is dismissed."

11. So far as the decision of Hon'ble Kerala High Court relied on

by Ld. Departmental Representative is concerned, the same has

been distinguished by Hon'ble Delhi High Court cited (supra). In

any case, when two divergent views are available on the same issue,

the view favourable to the assessee has to be followed in view of

the decision of the Hon'ble Supreme Court in the case of Vegetable

Products Ltd. reported in 88 ITR 192. In view of the above, we are

of considered opinion that entrance fee for membership of business

club is revenue expenditure. The order of the Ld. CIT(A) is,

therefore, set-aside and the ground of appeal raised by the assessee

is allowed.

ITA No.1813/PN/2013 (A.Y. 2006-07):

12. After hearing both the sides, we find identical ground has

been taken by the assessee in the above appeal. Since facts of the

above appeal are identical to the facts in the case of ITA

No.1812/PN/2013, therefore, following the same reasoning, we 12

hold that the entrance fee for membership of business club is a

revenue expenditure and accordingly the appeal by the assessee is

allowed.

13. In the result, both the appeals filed by the assessee are

allowed.

Pronounced in the open court on 30.04.2015

Sd/- Sd/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER Pune Dated: 30th April, 2015 Sujeet

Copy of the order forwarded to:

1. Assessee 2. Department 3. The CIT(A)-I, Pune 4. The CIT-I, Pune 5. The D.R, "B" Pune Bench 6. Guard File By order //True Copy//

Assistant Registrar ITAT, Pune Benches, Pune