Entrance fee paid to golf association in order to develop contacts with other corporate leaders is allowable business expenditure

Brief of the case:

In this case ITAT examined the issue whether fee paid to golf club on behalf of director to develop links with other corporates leaders is an allowable business expenditure. On the basis of other judicial pronouncement ITAT decided this question in favour of assessee. In an another important and major issue in this case ITAT remanded the matter to AO to examine afresh deduction claimed u/s 10A to examine whether the assessee has fulfilled the conditions stipulated in the Act and more specifically within the parameter of section 10A of the Act.

Facts of the case:

• The assessee company had five units, all engaged in providing ITeS services.
• The assessee claimed deduction of Rs. 53,32,23,685/- u/s 10A for unit no. II (Rs.44,46,49,552/-) and (Rs.8,85,74,133) for unit no.III.
• The ld. Assessing Officer disallowed the claimed deduction for the first time for Assessment Year 2005-06, broadly on the ground that both the units are not new units but expansion of unit no. I.
• The stand of the Assessing Officer was based upon the approval of STPI, which was granted to the assessee, not for setting up of a new unit but it was merely a expansion of unit no. I, whereas, the claim of the assessee is that unit no. II and III were set up as new units but not the expansion of old unit no. I and further the new units were set up using fresh investment/new plant and machinery.
• It was also claimed that customers of unit no.III are different/unrelated, thus, the units are new and independent. Unit no.II and III were claimed to be acquiring new clients and it is not a case of transfer of old clients of unit no.I to new units.
• The whole case of the assessee is based upon seeking approval of unit no.II and III. The necessary documents were examined by the ld. AO as well as by the ld. DRP and found that the assessee sought for approval of expansion of old unit no.I and never sought approval to set up of a new units and further STPI granted approval for expansion of unit no.I.
• During the year under consideration assessee also claimed fee paid to gold club paid on behalf of director amounting to Rs. 20 Lakh as business expenditure.

Contention of the revenue:

• Both the units are not new units but expansion of unit no. I.
• The assessee sought for approval of expansion of old unit no.I and never sought approval to set up of a new units and further STPI granted approval for expansion of unit no.I.
• Fee paid to golf club was personal in nature and can not be held to used wholly and exclusively for the purpose of business.

Contention of the assessee:

• Unit no.II and III were claimed to be acquiring new clients and it is not a case of transfer of old clients of unit no.I to new units.
• These expenses were incurred towards entrance fee of Karnataka Golf Association/wholly and exclusively for the purposes of business.
• The club membership is obtained to enable its Directors/Key Personnel’s to develop contacts with various important persons including corporate leaders.

Held by ITAT:

• The AO is expected to record a factual finding after examining the claim of the assessee. The assessee is expected to explain its case with the help of the documentary evidences, if any, whether it is expansion of earlier business or the assessee has set up new business by making fresh investment in plant and machinery.
• The AO is also to examine whether unit no. II and III/other units are merely expansion of unit no.I or it was merely a change of nomenclature by the assessee.
• The issue of fee paid to golf club is squarely covered in favour of the assessee by the decision from Hon’ble Apex Court in CIT vs United Glass Mfg. Co. Ltd. (2012) Civil Appeal No.6447 of 2012, CIT vs Nestle India Ltd. (2008) 296 ITR 682 (Del.), CIT vs Engineers India Ltd. (239 ITR 237) (Del.) and Gujarat Estate Export Corporation v/s CIT 80 taxman 568 (Guj.). The Hon’ble Delhi High Court in CIT vs Engineer India Ltd. (supra) held that initial admission fee paid to become a member of organization is allowable, likewise, Hon’ble Madras High Court in Sundaram Industries Ltd. (240 ITR 335) (Mad.) held that subscriptions paid by the company to club for enrolling its Director as members are deductible.