IN THE ITAT MUMBAI BENCH ‘K’
SKOL Breweries Ltd.
Versus
Assistant Commissioner of Income-tax
IT APPEAL NO. 6175 (MUM.) OF 2011
[ASSESSMENT YEAR 2007-08]
JANUARY 18, 2013
ORDER
Vijay Pal Rao, Judicial Member
This appeal by the assessee is directed against the assessment order dated 29th July 2011 passed u/s 143(3) r.w.s 144C(13) in pursuant to the directions of the DRP u/s 144C(5) of the I T Act for the Assessment Year 2007-08.
2. The assessee has raised the following concise grounds in this appeal.
1. That the order of the assessment dated July 29, 2011 framed on the directions of learned Dispute Resolution Panel (“DRP”) under section 144C(5) of the Act is bad both on facts and in law.
1.1 That in framing the order of the assessment, the Learned Assessing Officer (“Ld. AO”) has overlooked the declared return in the revised computation of income and as such, various disallowances made as have been made are on misconceived facts and highly arbitrary and unjustified both on the facts and in law.
2. The Ld. Assessing Officer while framing the instant assessment has erred in making the following additions/disallowances:
2.1 Club Membership Fees treating the same as ‘capital expenditure’ Rs. 16,91,442
2.2 Disallowance made under section 40(a)(ia) of the Act in respect of discounts given to distributors by treating the same as ‘commission Rs. 57,01,01,930
2.3 Disallowance made by invoking the provisions of section 40(a)(i) of the Act r.w.s. 9,195 & 200 of the Act in respect of claim of depreciation on Foster’s Brand (being an amortization of capital expenditure) and did not represent the sum chargeable to tax so as to invoke the provisions of section 40(a)(i) of the Act – Rs. 38,35,20,000
2.4 Disallowance made by invoking section 40(a)(i) of the Act and alleging that the amount reimbursed to SABMi1Ier Africa & Asia Pty Ltd (an associated company) is ‘Royalty’ and disregarding the fact that the expenditure was incurred for annual accounting charges for software of Rs. 17,52,862 and Rs. 23,86,119 for of up- gradation of software, paid by SAB Miller Africa & Asia Pty Ltd. to M/s Pilog and MIs Syspro Pty. Ltd. – Rs. 41,39,061
2.5 Disallowance of interest under section 36(1)(iii) of the Act alleging diversion of borrowed funds and advancing at a lesser rate of interest to sister group companies during the course of business by way of business and commercial considerations Rs. 7 48 58 033
2.6. Enhancement to the total income by enhancing Arm’s Length Price in respect of royalty (i.e. technology fees) payment to SABMiIIer Management (IN) By, Netherlands of Rs. 31,75,51,028 and Purchase cost of traded goods to SPA Birra Peroni of Rs. 4,34,492 – Rs. 18 06 07
3. That the Ld. AO erred on facts and in law in initiating the penalty proceedings against the appellant under section 271(1)(c) of the Act.
4. That the Ld. AO while computing the assessed income has erred in computing the total assessed income at Rs. 47,75,15,534 by making an aggregate addition of Rs. 121,49,17,586 to the loss declared by the appellant in its revised computation of total income.”
3. Ground nos 1 & 4 are general in nature as well as consequential to the main grounds raised in ground no.2. Therefore, no specific finding is required with respect to grounds nos 1 & 4.
3.1 Ground no.3 is regarding initiation of penalty proceedings u/s 271(1)(c) which is immature and therefore, cannot be admitted.
4. Ground no. 2.1 is regarding disallowance of club membership fee.
4.1 The Assessing Officer has noted from the tax audit report that the assessee has paid a sum of Rs. 16,91,442/- towards club entrance fees and subscriptions. Apart from this, the assessee has also paid cost for club services of Rs. 1,90,104/-. The assessee claimed the club membership fee expenses as has been incurred for the purpose of the business of the assessee company and accordingly, considered a allowable expenses in view of the decisions of the Hon’ble jurisdictional High Court in the case of Otis Elevator Co India Ltd v. CIT reported in 195 ITR 652. The Assessing Officer has questioned the allowability of the expenses being capital in nature in view of the decision of the Hon’ble jurisdictional High Court in the case of CIT v. W I A A Club Ltd (Bom) reported in 136 ITR 569 as well as in the case of CIT v. Diners Business Services Pvt Ltd reported in 263 ITR 1. The Assessing Officer has also placed reliance on the decision of the Hon’ble Kerala High Court in the case of Framatone Connector Oen Ltd reported in 294 ITR 559 and accordingly the payment for entrance fee and subscription amounting to Rs. 16,91,442/- has been treated as capital in nature and the same was disallowed and added to the income of the assessee company.
4.2 Before the DRP, the assessee has submitted that the sum of Rs. 16,91,442/- contains both entrance fees and monthly subscription/expenses. The DRP has recorded its observation in para 3.1 that the assessee has not produced the figure separately and the details produced before them are so sketchy that even the locations of the clubs are not disclosed. It was further observed by the DRP that some holiday resorts have been shown as clubs. Since the assessee has not produced the evidence showing monthly subscription and routine bill payments, the DRP has confirmed the disallowance made by the Assessing Officer.
5. Before us, the ld Sr counsel Shri C S Aggarwal has submitted that these expenses have been incurred in the course of business and thus, enabling the assessee company to hold meetings and conferences with important clients. The ld Sr counsel has referred the details of the expenses at page 157 of the paper book and submitted that the expenses incurred by the assessee is on account of entrance fee and subscription to the various clubs. Therefore, the expenses in question do not contain any expenditure which is incurred other than the club expenses.
5.1 The ld Sr counsel has pointed out that the Assessing Officer disallowed similar expenditure for the AYs 2004-05 to 2006-07 which has been deleted by the ld CIT(A) and the revenue has accepted the order of the Commissioner of Income Tax (Appeals) wherein it has been held that the expenses incurred are not capital in nature and therefore, allowable being of revenue character. The Commissioner of Income Tax (Appeals) while allowing the claim of the assessee for the earlier AYs has followed the decision of the Hon’ble jurisdictional High Court in the case of Otis Elevator Co (I) Ltd (supra). Even in the case of WIAA Club Ltd (supra), the Hon’ble High Court has held that membership fee and subscription paid to clubs is revenue in nature and not capital expenditure. Similar view has been taken in the case of Diners Business Service Pvt Ltd (supra) and the Hon’ble Madras High Court in the case of CIT v. Sundaram Industries Ltd reported in 240 ITR 335 as well as the decision of the Delhi Benches of the Tribunal in the case of Delhi Automobiles Ltd v. DCIT reported in 79 ITD 511.
5.2 On the other hand, the ld DR has relied upon the orders of the authorities below.
6. We have considered the rival submissions as well as the relevant material on record. The Assessing Officer, while disallowing the club expenses on the ground of capital in nature, has relied upon the decision of the Hon’ble jurisdictional High Court in the case of W I A A Club Ltd (Bom) (supra). It is to be noted that in the said case the issue before the Hon’ble High Court was regarding the receipt in the hand of club towards the entrance fee received from the Members. The Hon’ble High Court has held that part of the entrance fee which was a commuted value of annual subscription would be the income and the balance would be a capital receipt. Thus, it is clear that the decision of the Hon’ble High Court is only on the point of the revenue receipt or capital receipt in the hands of the club and not on the point of nature of expenditure in the hands of the Members. The amount, which is a revenue expenditure in the hands of one party may not necessarily be revenue receipt in the hand of counterpart.
6.1 Similarly, a receipt which may be revenue in nature in the hand of one party may not be revenue expenditure in the hand of the counterpart. A simple example thus can be that, if the assessee purchases machinery for its business purposes from the manufacturer/trader, the expenditure in the hands of the assessee is capital in nature whereas the receipt in the hands of the manufacturer/trader of the machinery will be a revenue receipt. Similarly, on sale of plot of land held as asset by an individual, the sale proceeds will be capital receipt whereas if the land in question purchases by a developer, the expenditure in the hands of the developer will be revenue in nature.
6.2 The DRP has confirmed the disallowance by making the observations on the point that the assessee has not filed the details showing separately for monthly subscription and some holiday resorts have been shown as club. The details of the club and the respective fee and other charges are given at page 157 of the paper as under:
