TMI Blog2013 (2) TMI 375X X X X Extracts X X X X X X X X Extracts X X X X ..... MR. GURMEET SINGH SANDHAWALIA, JJ. Ms. Savita Saxena, Advocate, for the appellant. Mr. C.S.Aggarwal, Senior Advocate, with Ms. Radhika Suri, Advocate, for the respondent. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 4. Learned counsel for the Revenue relied upon the judgment of Kerala High Court in Framatone Connector OEN Limited s case (supra), to contend that the corporate membership is a capital expenditure. Such membership has long term advantage to the assessee and, therefore, such expenditure is to the capital field and not to the revenue field. 5. On the other hand, learned counsel for the assessee relied upon Assam Bengal Cement Co. Ltd. Vs. Commissioner of Income Tax, West Bengal (1955) 27 ITR 34, Empire Jute Co. Ltd. Vs. Commissioner of Income Tax 124 ITR 1, Commissioner of Income Tax, Bombay Cit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it. 9. In Empire Jute Co. Ltd. case (supra), the Supreme Court was examining the consequences of a time agreement in which the Mills shall be entitled to work their looms. The agreement in question was transfer of allotment of hours of work per week, commonly referred to as sale of loom hours by one member to another. The question examined was; whether the sum paid by the assessee to purchase loom hours represents capital expenditure or revenue expenditure. It was observed that whether it is capital expenditure or revenue expenditure would have to be determined having regard to the nature of the transaction and other relevant factors. It was observed as under: .There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... habad Municipality and hence it was not as if the expenditure resulted in bringing into existence any capital asset for the company. The only advantage derived by the assessee by incurring the expenditure was that it obtained an absolution or immunity, under normal conditions, from levy of certain municipal rates and taxes and charges . 11. In Madras Auto Service (P) Ltd. case (supra), the Supreme Court observed that in order to decide; whether the expenditure is a revenue or a capital, one has to look at the expenditure from a commercial point of view. In the said case, the assessee had a lease of 39 years and also right to demolish the existing premises and construct a new building thereon to suit the purpose of their business. The lessee was not entitled to any compensation whatsoever on account of its putting up new construction in the place of the old. It was held that the expenditure was made in order to secure a long lease of new and more suitable business premises at a lower rent. The saving in expenditure was a saving in revenue expenditure in the form of rent and that assessee did not get any capital asset by spending such amounts. Quoting from Assam Bengal Cement Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Income Tax Vs. Nestle India Ltd. (2008) 296 ITR 682 in respect of membership of a club and in Commissioner of Income Tax Vs. Samtel Color Ltd. (2010) 326 ITR 425, wherein the judgment of judgment of Kerala High Court in Framatone Connector OEN Ltd. case (supra) was dissented. 13. The Gujarat High Court in a judgment reported as Gujarat State Export Corporation Limited Vs. Commissioner of Income Tax (1994) 209 ITR 649 examined the payment of fee to the Sports Club of Gujarat Limited. It was held that if expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. But if it is made for running the business or working it with a view to produce the profits, it is a revenue expenditure. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. In view of the tests laid down, it was held that payment of entrance fee for becoming a member of the sports club cannot be termed as a capital expenditure. 14. The Kerala High Court in Framatone Connector ..... X X X X Extracts X X X X X X X X Extracts X X X X
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