Expenditure on corporate membership of club is revenue expenditure

By TG Team Income Tax Judiciary January 24, 2013

TaxGuru Citation: 2013 taxguru.in 299
Case Name: The Commissioner of Income Tax, Patiala Vs M/s Groz Beckert Asia Limited (Punjab And Hariyana High Court)
Appeal Number: Only available for paid members
Date of Judgement/Order: Only available for paid members
Courts: All High Courts, Punjab and Haryana HC

Upgrade to Basic or Premium to download.

Already Upgraded? Log in.

Expenditure should bring into existence an asset or an advantage for the enduring benefit of a trade. In the present case, the corporate membership of Rs.6 lacs was for a limited period of 5 years.

The corporate membership was obtained for running the business with a view to produce profit. Such membership does not bring into existence an asset or an advantage for the enduring benefit of the business. It is an expenditure incurred for the period of membership and is not long lasting. By subscribing to the membership of a club, no capital asset is created or comes into existence. By such membership, a privilege to use facilities of a club alone, are conferred on the assessee and that too for a limited period. Such expenses are for running the business with a view to produce the benefits to the assessee. Consequently, it cannot be treated as capital asset.

PUNJAB & HARYANA HIGH COURT AT CHANDIGARH

Date of Decision: 24.01.2013

ITA No.366 of 2008

The Commissioner of Income Tax, Patiala

Versus

M/s Groz Beckert Asia Limited

ORDER

HEMANT GUPTA, J.

1. A Division Bench of this Court vide its order dated 31.10.2012 referred the following Question No.5.1 to the Larger Bench in view of the doubt expressed about the correctness of the view of a Division Bench of this Court in ITA No.448 of 2007 titled “Commissioner of Income Tax – I, Ludhiana Vs. M/s Majestic Auto Limited, Ludhiana” decided on 11.09.2008:

“5.1 Whether on the facts and in the circumstances of the case, the ITAT was right in law in not sustaining the addition of Rs.6, 16,945/- on account of corporate membership fee paid to Golf Club as a capital expenditure?”

2. The said question of law arises out of the fact that the assessee obtained corporate membership of Golf Club, Chandigarh on payment of Rs.6 lacs. Rs. 16,945/- was paid towards services and facilities used during the relevant assessment year. The Assessing Officer declined such expenses for the reason that the same are personal expenses of the Managing Director and other employees and, thus, added back to the income of the assessee. In appeal before the Commissioner of Income Tax (Appeals), the said disallowance was set aside holding that club membership is in the nature of an advantage in the commercial sense and not in the capital field. The Commissioner of Income Tax (Appeals) also considered the remand report dated 17.11.2005, wherein it was observed that the payment is for acquisition of Club Membership, therefore, it is a capital expenditure. The learned Income Tax Appellate Tribunal, Chandigarh Bench – A, (for short ‘the Tribunal’) affirmed the findings recorded by the Commissioner of Income Tax (Appeals) by observing to the following effect:

“5. We have considered the rival submissions. Ostensibly, the membership of the club has been acquired by the assessee for the use of its personnel. The CIT(A) has accepted the plea of the assessee that the membership of club was obtained for business purposes in as much as it facilitated interaction with business associates etc. The decision of the CIT(A), in our view is in consonance with the judgment of the Hon’ble Bombay High Court in the case of Otis Elevator Company (I) Limited (supra). The plea of the Revenue that the membership of the club provides an enduring benefit and therefore the expenditure incurred is of capital nature, in our view, is unsustainable. No doubt, payment of membership fee results in obtaining of club membership for a period beyond the year of payment but the benefit remains in the revenue field and not in the capital field. Resultantly, the expenditure incurred on acquiring an enduring benefit in the revenue field is liable to be treated as a revenue expenditure. A gainful reference can be made to the judgment of the apex court in the case of Empire Jute Co. Ltd. 124 ITR 1 (SC) in this regard. Further, the Hon’ble High Court of Gujarat in the case of Gujarat State Export Corporation (supra) has held that the acquisition of club membership results in an advantage in the commercial sense and not in the capital field. On the basis of the aforesaid discussion, we do not find any justifiable reason to interfere with the decision of the CIT(A) on this issue. Accordingly, this ground of appeal of the Revenue is dismissed.”

3. In M/s Majestic Auto Limited’s case (supra), a Division Bench of this Court has dissented with the judgment of Bombay High Court in OTIS Elevator Company (India) Limited Vs. Commissioner of Income Tax (1992) 195 ITR 682 and agreed with the judgment of Kerala High Court in Framatone Connector OEN Limited Vs. Deputy Commissioner of Income Tax (2006) 294 ITR 559 to hold that the expenditure of the assessee company on the corporate membership of the Delhi Golf Club was in the nature of capital expenditure as the same is properly attributable not to revenue but to capital. It is the said view with which the Division Bench expressed reservation and referred the matter to the Larger Bench. In these circumstances, the matter is placed before this Bench.