Balrajsingh Jagjitsingh Kharbanda Vs ADIT (ITAT Mumbai)
ITAT Mumbai held that membership fee expenses have been incurred for acquisition of individual club membership is not allowable as expenditure in terms of provisions of section 37 of the Income Tax Act.
Facts- The assessee , an individual, filed return of income for the year under consideration which has been processed by the Centralized Processing Centre, Bangalore (CPC) u/s. 143(1) of the Income-tax Act, 1961. In order u/s 143(1) of the Act i.e. intimation order, CPC made upward adjustment of Rs.10,76,720/- to the returned income. The said amount was paid for the entry fee of the membership of Mumbai Cricket Association, Bandra, for the benefit of the employees and for entertaining the customers of its business.
CIT(A) dismissed the appeal. Being aggrieved, the present appeal is filed.
Conclusion- In the instant case membership fee expenses have been incurred for acquisition of membership for assessee individual and not for employees. The membership entry fee paid by the assessee is not for corporate membership.
Held that membership entries fee to club could be business expenditure in case of “corporatemembership”, but not in case of individual club membership.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against order dated 18.01.2023 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2019-2020, raising following grounds :
1. The learned Hon’ble Commissioner of Income-tax (A) erred in confirming the disallowance of Associateship fees of Rs. 10,76,720 paid to Mumbai Cricket Association towards licence for using its facility wholly and exclusively for the purposes of his business disregarding the following factual aspects:
a. The present area of the office premises of the assessee is not sufficient to cater the needs of the visitors or customers of the asse The sales team of the assessee also meets at Mumbai Cricket Association in view of shortage of space at the office.
b. The assessee used the premises of Mumbai Cricket Association for meeting its customers on regular basis.
c. The expenses are incurred as licence for using the facility of the Association.
d. There is no enduring benefit availed by the assessee.
e. The expense incurred is not a capital expenditure.
f. The licence fee is not transferable and available only till the life of the proprietor of the business.
g. The expenses incurred is commensurate with the assessee’s turnover for the year.
2. The learned Hon’ble Commissioner of Income–ta (A) erred in confirming the disallowance of Associateship fees of Rs. 10,76,720 made by the PC while passing an intimation u/s. 143(1) of the Income–tax Act, 1961 though it is not an adjustment as prescribed u/s. 143(1)(a) of the Act and it is a debatable issue on the facts and circumstances of the case and in law.
2. Briefly stated, facts of the case are that the assessee , an individual, filed return of income for the year under consideration which has been processed by the Centralized Processing Centre, Bangalore (CPC) on 02.06.2020 under section 143(1) of the Income-tax Act, 1961 (in short ‘the Act’) . In order u/s 143(1) of the Act i.e.intimation order, the Ld. CPC made upward adjustment of Rs.10,76,720/- to the returned income.
3. Aggrieved, the assessee filed appeal before the Ld. CIT(A) and claimed that this amount of Rs.10,76 ,720/-, which was paid for the entry fee of the membership of Mumbai Cricket Association, Bandra, for the benefit of the employees and for entertaining the customers of its business, therefore , same is allowable expenditure in terms of section 37 of the Act. The Ld. CIT(A), however rejected the contention of the assessee observing as under:
“5.1I have carefully considered the submissions of the appellant. Appellant submitted that the amount of Rs.10,76,720/ – paid to Shirke Infrastructure Ltd. which is managing the MCA Recreation Centre at Bandra Kurla Complex, Bandra East is club membership fee taken for the benefit of employees and entertaining the guests in its business. There is no doubt a business man has to entertain the guests for the business promotion. However, the issue here is, there are two kinds of payments to clubs. One is ‘Club membership fee’ paid as one time payment for getting the membership and second kind of payment is running expenditure paid for usage of club, food and beverages etc. There is no doubt that the expenditure incurred for using the club food and beverages expenses for entertaining the business guests is an allowable expenditure, but the ‘club membership fee’ is not a revenue expenditure but it is a ‘capital expenditure’. Section 37 reads as under.
“37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.
Condition for allowance under section 37
Such expenditure should not be covered under the specific section i.e. sections 30 to 36.
Expenditure should not be of capital nature
The expenditure should not be of personal nature.
The expenditure should be incurred during the previous year.
The expenditure should have been incurred wholly or exclusively for the purpose of the business or profession.
The business should be commenced.
5.2 In this case, the membership fee paid to the club is admittedly a onetime membership fee paid to a Club, MA Recreation Centre, which is capital in nature.Therefore, the disallowance made by the AO-CPC is in order and confirmed. Ground number 1 is dismissed.”
4. Before us, the Ld. Counsel of the assessee filed a paper book containing pages 1 to 117 including a copy of the return of income and tax audit report in prescribed form, i.e. form No. 3CD of Income-tax Rules, and submitted that the club membership fee cannot be disallowed or prima facie adjusted while passing intimation u/s 143(1)(a) , because firstly, it is not an adjustment prescribed under section 143(1)(a) of the Act ,secondly, the disallowance of club membership fee as capital expenditure u/s 37(1) of the Act isa debatable issue ,therefore, the Ld. CPC is not justified in making adjustment invoking section 143(1)(a) of the Act. The learned counsel in support of the contention, relied on the decision of Tribunal in the case of ChetasGulabbhai Desai Vs DCIT in ITA No. 1934/Mum/2021 and in the case of SCV & LLP Vs DCIT in ITA No. 1756/Del/2020. The Ld. Counsel also justified that on merit also the expenditure incurred on entries fees of the club is allowable expenditure. In support of contention, he relied on (i) the decision of the Tribunal in the case of DCIT Vs Del oitte Touche Tohmatsu India P. Ltd in ITA No. 276,277,2200 & 3017/Mum/2016 , (ii) Decision of Hon’ble Supreme Court in the case of CIT Vs United Glass mfg Co. Ltd in Civil Appeal no. 6447 of 2012, (iii) ITA No. ITA No. 6611/Mum/2008 in the case of DCIT v. Banc of America Securities (India) (P) Ltd. (Mum ITAT) (iv) ITA Nos.4281 & 4983/Mum/2011 for assessment year 2006-07 in the case of Clariant Chemicals (I) Ltd. v. Addl. CIT (Mum ITAT) and decision of Hon’ble Gujrat High Court in the case of PCIT Vs Bayer Vapi P Ltd reported in (2019) 106 taxmann.com 395 (Guj).
5. On the other hand, the Ld. Departmental Representative (DR) submitted that the Ld. CPC has made adjustment on the basis of the information available in the 3CD report, which was filed along with return of income and there being variation in the 3CD report and in the return of income on the issue of membership fee, the Ld. CIT(A) is justified in upholding the adjustment in terms of section 143(1)(a) of the Act. On the merit, the learner DR submitted that the assessee has acquired club membership in the individual name which is for personal purposes and cannot be held as acquired for the purpose of the business. He submitted that any expenses for entertaining business customer during club visit, could have been allowed as business expenditure subject to verification, however the one-time entrance fee for acquiring club membership by individual member cannot be treated as business expenditure. He distinguished the cases relied upon by the assessee and submitted that in the cases relied upon by the assessee subject matter was related to the corporate membership acquired for the benefit of the employees as well as for entertaining business customers by the
6. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. We find that the Ld. CPC has made disallowance of expenditure of Rs.10,76,720/- invoking section 143(1)(a)(iv) of the Act, for the reason that amount disallowed by the Tax Auditor in the audit report i.e. form No. 3 CD, has not been taken into account by the assessee while computing the total income in the return. The ld. CPC has also invoked section 143(1)(a)(ii) holding the same as incorrect claim by the assessee. The CPC has also held this adjustment as an arithmetic error u/s 143(1)(a)(iv) of the Act.
6.1 The relevant provisions of section 143(1)(a) of the Act referred by the Ld CPC are reproduced for ready reference:
(a) the total income or loss shall be computed after making the following adjustments, namely: –
(i) any arithmetical error in the return;
(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return;
(iii) disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139;
(iv) disallowance of expenditure or increase in income] indicated in the audit report but not taken into account in computing the total income in the return;
(v) disallowance of deduction claimed under “[section 10AA or under any of the provisions of Chapter VI-A under the heading”C. -Deductions in respect of certain incomes”, if ] the return is furnished beyond the due date specified under sub-section (1) of section 139; or
(vi) addition of income appearing in Form 26AS or Form 16A or Form16 which has not been included in computing the total income in the return:
Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode:”
6.2 On perusal of the tax audit report in Form No. 3CD filed by the assessee, we find that under the clause 21(a), thetax auditor listed the items, which are in the nature of the capital expenditure, personalexpenditure, advertisement expenditure etc. which are not allowable u/s 37(1) of the Act. The relevant clause of the tax audit report is reproduced as underfor ready reference:
