Axis Finance Limited Vs DCIT (ITAT Mumbai)
The Income Tax Appellate Tribunal (ITAT) Mumbai has issued a partial ruling in favor of Axis Finance Limited, allowing the company to claim expenses for employee club memberships as a deductible business expense. The decision provides clarity on the tax treatment of such expenditures, which had been contested by the tax authorities. The case, Axis Finance Limited vs. DCIT, focused on a disallowance of Rs. 7,59,872 made by the Assessing Officer (AO) for the Assessment Year 2018-19.
The central issue revolved around the nature of three specific expenses reported by the company:
- Club membership fees: Rs. 6,03,041
- Club subscription fees: Rs. 34,950
- Restaurant charges at the club: Rs. 1,21,881
The AO had disallowed these expenses, citing the company’s own Tax Audit Report (Form 3CD), which listed the items under a clause that requires disclosure of certain expenditures. The AO interpreted this disclosure as an admission that the expenses were “inadmissible.” This view was subsequently upheld by the National Faceless Appeal Centre (NFAC).
Axis Finance, a non-banking finance company (NBFC), contended that the tax auditor’s report merely disclosed the expenses to comply with a formatting requirement and did not classify them as personal or inadmissible. The company argued that these expenses were incurred for business purposes and should be allowed under Section 37(1) of the Income-tax Act, which permits the deduction of business expenditures not specifically disallowed elsewhere.
Judicial Precedents and the ITAT’s Analysis
The ITAT Mumbai, in its analysis, referenced a key precedent from the Supreme Court of India in the case of CIT vs. United Glass Manufacturing Co. Ltd. [2012]. This landmark ruling established that club membership fees for employees are a “pure business expense” under Section 37 of the Income-tax Act.
The Supreme Court’s decision was pivotal. It noted that a series of High Court judgments had consistently held that such fees are a legitimate business expense, and these decisions had gone unchallenged. The ITAT applied this principle directly to the Axis Finance case, concluding that the club membership fees (Rs. 6,03,041) and club subscription fees (Rs. 34,950) were indeed valid business expenses.
However, the ITAT’s ruling was not a complete victory for the company. The Tribunal distinguished between the membership fees and the restaurant charges. While the membership and subscription fees were deemed for business purposes, the restaurant charges of Rs. 1,21,881 were a different matter. The ITAT reasoned that it was not clear whether these expenses were incurred for a business purpose or were of a personal nature, such as for food and beverages consumed by employees. Lacking clear evidence to support their business purpose, the ITAT upheld the disallowance of the restaurant expenses.
Conclusion of the Appeal
Based on this reasoning, the ITAT Mumbai partially allowed the appeal. It granted relief to Axis Finance for the club membership and subscription fees, which amounted to a significant portion of the total disallowed amount. The disallowance of the restaurant charges, however, was sustained.
The final verdict, pronounced on July 31, 2025, serves as an important reminder for businesses regarding the documentation of expenses. While the United Glass Manufacturing precedent provides a clear path for deducting employee club fees, companies must be prepared to demonstrate that all related expenses are genuinely for a business purpose, particularly those that could be construed as personal. This decision reinforces the legal standing that club memberships for employees are not a personal benefit but a legitimate business tool for corporate networking and employee welfare.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal filed by the assessee is against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi, vide order no. ITBA/NFAC/S/250/2024-25/1073281158(1), dated 14.02.2025 passed against the assessment order passed by National e-Assessment Centre, u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 06.04.2021 for Assessment Year 2018-19.
2. Grounds taken by the assessee are reproduced as under:
” 1. On the facts and in circumstances of the case and in law, the Hon’ble NFAC has erred in upholding the disallowance of club membership expense of Rs. 7,59,872 claimed as business expenditure under section 37(1) of the Income-tax Act, 1961.
2. On the facts and in circumstances of the case and in law, the Hon’ble NFAC has erred in upholding the disallowance of club membership expense stating that the appellant’s statutory auditor in entry no. 21 of Audit Report gives further acknowledgement towards these expenses being of personal nature, without appreciating that such club membership expense is not disclosed as personal or inadmissible in nature in the tax audit report and were merely reported to comply with the format of Form 3CD i.e. the tax audit report.”
3. The only issue involved in this appeal is in respect of disallowance made by ld. Assessing Officer towards expenditure incurred by the assessee amounting to Rs.7,59,872/- towards club membership fees, club subscription fees and restaurant charges at the club. Ld. Assessing Officer has made the addition by noting that these items are inadmissible as mentioned in Tax Audit Report furnished by the assessee. The break-up of the expenses noted by ld. Assessing Officer are as under:
i) Restaurant charges at club – 1,21,881/-
ii) Club membership fees – 6,03,041/-
iii) Club subscription fees – 34,950/-
4. According to the assessee, these expenses were reported by the tax auditor in the Tax Audit Report in Form 3CD in the relevant clauses by way of disclosure and not as inadmissible expenses. For this, reference was made to the Tax Audit Report contained in Form 3CD placed on record. Clause 21(a) of Form 3CD requires furnishing of details of amounts debited to the profit and loss account being in the nature of capital, personal, advertisement expenditure, etc. Under the head ‘expenditure incurred at clubs’ being entrance fees and subscriptions, amount of Rs.34,950/- is reported at Sr.No.1 as subscription fees and amount of Rs.6,03,041/- is reported at Sr. No.2 as membership fees. Another amount of Rs.1,21,881/- is reported under the heading, ‘expenditure incurred at clubs being cost for club services and facilities’ mentioned as restaurant charges at club. It is on these noting that ld. Assessing Officer took an adverse view and disallowed the same to make an addition.
5. Assessee is a non-deposit accepting non-banking finance company registered with Reserve Bank of India. It filed its return of income on 04.10.2018, reporting total income at Rs.332,10,00,310/-which was revised on 17.11.2019 with the same total income reported in the original return. We note that the issue raised before us is no longer res integra, in respect of club membership and subscription fees claimed by the assessee as its business expenses u/s.37(1) of the Act.
5.1. We draw force from the decision of Hon’ble Supreme Court in the case of CIT vs. United Glass Manufacturing Co. Ltd. [2012] 28 taxmann.com 429 (SC), wherein Hon’ble Court held that these are pure business expenses. Relevant para-3.3 from the said judgement is reproduced below, wherein Hon’ble Court observed that club membership fees for employees incurred by the assessee is business expense u/s.37 of the Act.
“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.”
5.2. On the issue in respect of claim of restaurant charges at the club incurred by the assessee, it is not discernible as to whether these were incurred for the purpose of business or were on account of personal expenses by the employees. Accordingly, restaurant expenses at the club are on account of food and beverages which are held to be disallowed. Assessee thus gets relief in respect of expenses incurred towards membership fees and subscription fees and the balance of Rs.1,21,881/- is sustained as addition. Ground raised by the assessee is thus, partly allowed.
6. In the result, appeal of the assessee is partly allowed.
Order is pronounced in the open court on 31 July, 2025
