Expenditure on Club membership fees for business allowable

ISGEC Heavy Engineering Ltd Vs DCIT (ITAT Chandigarh)

In the present case the assessee has incurred the expenses on account of club membership fees for the employees and to entertain customers, so, these were business expenses under section 37(1) of the Act. ITAT Follows Hon’ble Supreme Court Judgment in the case of CIT Vs. United Glass Mfg. Co. Ltd. reported at [2012] 28 taxmann.com 429.

FULL TEXT OF THE ITAT JUDGEMENT

This is an appeal by the Assessee against the order dt. 19/03/2019 of the Ld. CIT(A), Panchkula.

2. Following grounds have been raised in this appeal:

1. That the Ld. Commissioner of Income Tax (Appeals)-4, Panchkula has erred in upholding the disallowance of Rs. 1,67,060/- incurred by the appellant for club services and facilities used for entertaining the customers and to promote the business interests of the company as per para 6.2 of his order.

2. That addition of Rs. 1,67,060/- as per para No. 1, has been made against the facts and circumstances of the case and submission filed by the assessee during the course of hearing has not been considered properly.

3. That the Appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed off.

3. From the aforesaid ground it is gathered that only grievance of the assessee relates to the sustenance of disallowance of Rs. 1,67,060/- incurred by the assessee for club services and facility used to entertain the customers for promoting the business interest of the assessee company.

4. Facts of the case in brief are that the assessee electronically filed its return of income declaring an income of Rs. 2,76,37,56,030/- on 29/11/2016 which was processed under section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’) on 13/12/2016. Later on the case was selected for scrutiny. The assessee company was engaged in the business of manufacturing of Heavy Engineering Goods such as setting up of Boilers, Sugar Plants & Captive Plants. It also undertakes erection of these projects on turnkey basis both in domestic market and foreign markets.

5. During the course of assessment proceedings the A.O. noticed that in Column No. 21(a) of Form No. 3CD of the Tax Audit Report it has been mentioned that the assessee company had debited expenses of Rs. 1,67,060/-under the head “ Club Services” which were of personal nature and not allowable under section 37(1) of the Act. The A.O. confronted the assessee on this issue, in compliance, it was stated that those expenses were incurred for entertaining the guest of the assessee company to promote the business interest. However the A.O. did not accept the explanation of the assessee and made the disallowance of Rs. 1,67,060/-.

6. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and submitted as under:

“While framing the assessment order Ld. AO in para 4 of the order has mentioned that company has debited expenses of Rs. 1,67.060/- under the head Club Fee & Subscription on account of club services & facilities used. These expenses are of personal nature and not allowable expenses under section 37(i) of the Income Tax Act, 1961. Actually Ld. AO has misconstrued the facts and considered that these expenses has been incurred for the personal use of director where as fact is that these expenses have been incurred for business promotion of the company and facilities have been used by the director as well as other employee of the company and which has been properly explained to AO and hence are allowable as business expenditure u/s 37(1) of the Income Tax Act, 1961. Even otherwise it is pertinent to mention here that appellant is a listed company and in case of companies there is no concept of personal expenses. Directors are also one of the key managerial persons cum employee of the company and getting the salary. Further every issue of the company is governed by Companies Act and in case listed company much more compliances are to be made as per SEBI guidelines as such there could not be any possibility of personal expenses. “Regarding personal use of company’s facilities by the directors; may I take the liberty of drawing your Honour’s kind attention in the cases o f –

Sayaji Iron &Engg. Co. Vs Commissioner of Income Tax (2002) 253 ITR 749(Gujrat) D.S Construction (P) Ltd. Vs Income Tax officer ITAT Delhi (1987) 29TTJ(Del) 22 Deputy Commissioner of Income Tax Vs Haryana Oxygen Ltd. (2001) 73 TTJ(Del) 575 Metallizing Equipment Co.(P) Ltd. Vs Deputy Commissioner of Income Tax 70 TTJ (Jd) 358.

In all these cases; additions made on account of personal use of company’s facilities by directors was held to be an allowable expenditure. The fact of the expenses has been properly explained to Ld. AO, As such addition made by AO is completely based on conjectures and surmises and need to be deleted. “

7. After considering the submissions of the assessee the Ld. CIT(A) observed that those expenses had been incurred on account of club service facility used. She further observed that the expenses had been claimed under section 37(1) of the Act which provide for expenses which had been incurred wholly and exclusively for the purposes of business of the assessee. She also observed that the assessee had claimed that those expenses were incurred for business promotion of the assessee company which makes them allowable under section 37(1) of the Act, however, no detail of those expenses had been provided, therefore, the nature of the expenses could not been verified and that the auditor had clearly mentioned those expenses to be of a personal nature. She therefore sustained the disallowance made by the A.O.

8. Now the assessee is in appeal.

9. Ld. Counsel for the Assessee reiterated the submissions made before the authorities below and further submitted that in the earlier years similar disallowances were deleted by the Ld. CIT(A). The reference was made to page no. 52 of the assessee’s compilation wherein the similar disallowance made by the A.O. has been deleted vide order dt. 08/02/2019 by the Ld. CIT(A)-4 Ludhiana for the A.Y. 2014-15.

9.1   It was contended that the assessee had paid only subscription to club membership fee to promote the business promotion which is allowable as per the ratio laid down by the Hon’ble Supreme Court in the case of CIT Vs. United Glass Mfg. Co. Ltd. reported at [2012] 28 taxmann.com 429. It was submitted that considering the total turnover of the assessee which was Rs. 3927.52 Crores, the expenses incurred were vary meager and when the similar disallowance has been deleted in earlier years by the Ld. CIT(A), there was no reason to sustain the addition for the year under consideration.

9.2   Ld. Counsel for the Assessee also drew our attention towards page no. 19 of the assessee’s paper book which is the detail of the expenditure of club services during the year under consideration and submitted that all the expenses were related to the subscription for club membership fee. Reliance was placed on the following case laws:

• Deputy Commissioner of Income Tax V/s Deloitte Touche Tohmatsu ITA NO.3017/MUM/2016 MUM-TRIB order dt. 27/04/2018
• Commissioner of Income Tax V/s Nestle India Ltd. 296ITR682 (DEL)
• Commissioner of Income Tax V/s Samtel Color Ltd. 180 taxmann.com 82 (DEL)
• Commissioner of Income Tax V/s Sundaram Industries Ltd. 240ITR335 (MAD)
• Commissioner of Income Tax V/s United Glass Mfg. Co. Ltd reported in 28 taxmann.com 429 (SC)

10. In his rival submissions the Ld. DR strongly supported the orders of the authorities below and reiterated the observation made therein.

11. We have considered the submissions of both the parties and perused the material available on the record. In the present case it is noticed that the assessee had incurred club expenses of Rs. 1,67,060/- (copy is placed at page no. 19 of the assessee’s paper book) as per following details:

11.1 It is also noticed that a similar disallowance was made for the A.Y. 2014-15 amounting to Rs. 82,573/- by the A.O., the said disallowance was deleted by the Ld. CIT(A) vide order dt. 08/02/2019 (copy is placed at page no. 36 to 53 of the assessee’s paper book) by observing in para 7.1 of the said order as under:

“ During appeal proceedings, it has been argued that the expenses have been incurred for the business promotion of the company and the facilities have been used by the director as well as other employees of the company. Considering the submissions of the assessee, since the expenditure has been incurred for business promotion and for the purposes of the business of the assessee company, the disallowance made is deleted. Reliance is placed on the case ITAT Mumbai DCIT Vs. M/s Deloitte Touche Tohmatsu, ITA No. 3017/Mum/2016 dated 27/04/2018 wherein it was held that expenditure incurred towards club and hotel membership fee is an allowable expenses u/s 37(1) of the Income Tax Act, 1961. In view of the above this ground of appeal is allowed.”

11.2 On an identical issue the Hon’ble Madras high Court in the case of CIT Vs. Sundaram Industries Ltd. (supra) held as under:

“Section 37 postulates that any expenditure laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income of the assessee. The essential requirement for claiming the deduction of the expenditure is that the expenditure should have been incurred wholly and exclusively for the purposes of business of the assessee in the instant case, the assessee was a company and it was found by the Appellate Tribunal that the expenditure by way of subscription to the clubs was incurred for the. purpose of promoting the business of the company and in view of the finding of the Tribunal, it must be held that the expenditure incurred was an allowable business expenditure. In the case of subscription to clubs, in so far as the assessee was concerned, the expenditure was incurred to promote and foster its business relationship. The object of the assessee was that its directors by remaining as members in some of the city clubs would give them certain social status, and it was obvious that by being members of the club, they would be able to meet various kinds of people in a calm and cool atmosphere of the club and because of the meeting they would develop business relationship, benefiting the assessee. Therefore, it could not be said that the possible advantage to the assessee was remote and far fetched. No doubt, there might be a personal benefit enjoyed by the director by the various types of amenities afforded at the club. But the personal benefit that went to the director was incidental to the membership of the club. The question whether a particular expenditure is allowable or not has to be tested from the point of view of the person expending the same and the object with which he incurred the expenditure. The assessee had not spent the money with the object of providing a personal relaxation to the director, but it was incurred to promote its business. In the commercial world, the contact with the right person is vital for an efficient business organisation. The expenditure incurred could not be regarded as having been incurred for the personal benefit of the director. In each case, it has to be seen whether the object of the expenditure was to promote the business of the assessee. In view of the finding by the Tribunal, the assessee-company had incurred the expenditure wholly and exclusively for the purpose of its business and therefore the expenditure incurred by way of subscription to the club was an allowable expenditure.”

12. On a similar issue the Hon’ble Apex Court in the case of CIT Vs. United Glass Mfg. (supra) held as under:

“ 3.3 As far as Question No. 1 is concerned, the issue is answered in favour of the assessee in the order passed today in civil appeal arising out S.L.P.(C) No. 20791 of 2009. As far as Question No. 2 is concerned, we find that a series of judgements have been passed by High Courts holding that club membership fees for employees incurred by the assessee is business expense under Section 37 of the Income Tax Act, 1961. We also find that none of the decisions have been challenged in this Court. Even otherwise, we are of the view that it is a pure business expense.”

13. In the present case also the assessee has incurred the expenses on account of club membership fees for the employees and to entertain customers, so, these were business expenses under section 37(1) of the Act. We therefore by following the ratio laid down by the Hon’ble Apex Court in the aforesaid referred to case, delete the disallowance made by the A.O. and sustained by the Ld. CIT(A).

14. In the result, appeal of the Assessee is allowed.

(Order pronounced in the open Court on 23/09/2020 )