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Intervalve (India) Ltd. Versus Addl. Commissioner of Income Tax, Range – 1, Pune

2015 (5) TMI 786 - ITAT PUNE

Disallowance of entrance fee for membership of ‘business club’ - revenue v/s capital exoenditure - Held that:- When two divergent views are available on the same issue, the view favourable to the assessee has to be followed in view of the decision of the Hon’ble Supreme Court in the case of Vegetable Products Ltd. reported in [1973 (1) TMI 1 - SUPREME Court]. In view of the above, we are of considered opinion that entrance fee for membership of business club is revenue expenditure. The order of .....

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ars 2005-06 and 2006-07 respectively. Since identical grounds have been taken by the assessee in both the appeals, therefore, for the sake of convenience both were heard together and are being disposed of by this common order. ITA No.1812/PN/2013 (A.Y. 2005-06) : 2. The assessee in this appeal has challenged the order of the CIT(A) in confirming the order of the Assessing Officer in disallowing the entrance fee of ₹ 5,00,000/- for membership of business club . 3. The facts of the case, in .....

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the Assessing Officer on the ground that it is nothing but a non-refundable deposit, which provides an enduring benefit to the assessee till the expiry of the membership of the club and it is a capital expenditure. 4. In appeal the Ld. CIT(A) upheld the action of the Assessing Officer. On further appeal, the Tribunal vide ITA No.659/PN/2009 and other connected appeals vide orders dated 16.12.2010 for A.Y. 2005-06 restored the issue back to the file of the CIT(A) with the following observation :- .....

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r the proposition that the entrance fee paid is capital in nature. Ld. Counsel also mentioned when there are 2 divergent decisions, favourable to the assessee may be considered in favour of the assessee. We have heard the parties and perused the orders of the revenue and the decisions filed before us. On perusal, we find there is need for comparison of the facts of the present case to the facts of the both cases decided by the Hon ble High Courts of Kerla and Gujarat. For this limited exercise, .....

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hambers in Bombay, Delhi, Hyderabad and Calcutta and the Chambers at Bombay has various facilities as well as additional facilities which are in the nature of hiring premium accommodation with several facilities by making payment of initial deposit and annual rent. The fees of ₹ 5,00,000/- paid by the assessee is akin to initial deposit and not an annual fees paid and it was a one-time payment to facilitate membership of the assessee company in the Chambers. The payment of one-time entranc .....

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the assessee referred to the decision of the Mumbai Bench of the Tribunal in the case of DCIT vs. M/s Bank of America Securities (India) Pvt. Ltd. vide ITA No.6611/Mum/2008 order dated 09.09.2010 for A.Y. 2004-05 and submitted that the Tribunal after considering the decision of Hon ble Kerala High Court in the case of Framatone Connector Oen Ltd. (supra) has held that admission fees paid towards corporate membership of the club is an expenditure incurred wholly and exclusively for the purposes o .....

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for business purposes. He accordingly submitted that the order of the Ld. CIT(A) be set-aside and the ground raised by the assessee be allowed. 7. The Ld. Departmental Representative, on the other hand, strongly supported the order of the CIT(A). He submitted that the Ld. CIT(A) following the decision of the Hon ble Kerala High Court in the case of Framatone Connector Oen Ltd. (supra) and distinguishing the decision of the Hon ble Delhi High Court in the case of Samtel Color Ltd. (supra) has de .....

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e impugned appeal is regarding the allowability of entrance fee of ₹ 5,00,000/- as revenue expenditure or capital expenditure. 8.1 We find the Mumbai Bench of the Tribunal in the case of M/s Bank of America Securities (India) Pvt. Ltd. (supra) while deciding an identical issue has allowed the admission fee paid towards corporate membership of the club as an expenditure incurred wholly and exclusively for the purpose of business and not towards capital account. It was held that such expendi .....

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e expenditure of Club Membership fees ₹ 16.00 lacs has been incurred by the assessee wholly and exclusively for the purpose of business of the assessee. Further we find no merit in the plea of the Id. DR that the decision in Alembic Chemical Works Co. Ltd. (supra), is not applicable to the facts of the assessee's case. In fact, Their Lordships referred to various decisions particularly the decision in the case of City of London Contract Corporation vs. Styles (1987) 2 Tax Cases 239 whe .....

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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. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure." The aforesaid principle of law has been appl .....

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ibunal, we must accept the facts as found by the AAC. Consequently, the payments must be allowed as business expenditure not falling within the mischief of s 40(a)(v)". 10. In Samtel Colour Ltd. supra, Their Lordships after considering the various decisions including the decision in Framatone Connector OEN Ltd. supra, relied on by the Id. DR have observed and held as under: "5.3 To support the revenue's contention that the impugned expenditure is on capital account the Id. Counsel, .....

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capital, that is, whether such an expense was in the nature of revenue or capital expenditure. The Supreme Court came to the conclusion that since the fee was paid to the RoC for increase in the capital base of the assessee it was in the nature of capital expenditure. According to us the ratio of the aforementioned Supreme Court judgment is not applicable to the expenses incurred on an admission fee for corporate membership. We respectfully disagree with the ratio of the judgment of the Kerala H .....

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and considered the rival contentions carefully. The dispute is regarding allowability of expenditure on account of entree fees towards membership of a club as a revenue expenditure. No doubt, the payment made is one time lumpsum payment but this criteria of lumpsum payment is not decisive in understanding the true nature of an expenditure as held by Hon'ble Supreme Court in case of Empire Jute Co. (124 ITR Page 1) Similarly test of enduring benefit is also not conclusive. Hon'ble Supreme .....

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ulted into creation of any capital asset or acquisition of any new sources of income. The expenditure has been incurred for the efficient conduct of the business and therefore the expenditure will be of the nature of revenue expenditure. This view is also supported by the judgment of Hon'ble High Court of Gujarat in case of Gujarat State Export Corporation Ltd. (209 ITR 649) in which the lumpsum entrance fees paid towards membership of the club has been held to be allowable as revenue expend .....

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en held as under: "Tribunal has to follow the decision of the Jurisdictional High Court without making any comment upon the said decision; it is not permissible for the Tribunal to sidetrack and/or ignore the decision of the Jurisdictional High Court on the ground that it did not take into consideration a particular provision of law." 13. Respectfully following the above decisions of the Hon'ble Jurisdictional High Court and the Tribunal in the assessee's own case and for the r .....

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ng the disallowance of ₹ 16.00 lacs made by the Assessing Officer. The grounds taken by the revenue are, therefore, rejected. 9. We find the Hon ble Delhi High Court in the case of Samtel Color Ltd. (supra) while deciding an identical issue has distinguished the decision of the Hon ble Kerala High Court in the case of Framatone Connector Oen Ltd. (supra) and decided the issue in favour of the assessee and against the Revenue. In that case assessee had paid corporate membership fee to India .....

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he products of the assessee; and (iv) lastly, the expenditure resulted in benefit of an enduring nature. 10. The Ld. CIT(A) held that the clubs had various facilities for conference, business meetings, as well as, provision for multimedia exhibition for the directors and senior executives could also use the club facilities for their private purposes for which they would have to incur extra expenditure out of their own pockets. He accordingly concluded that while the membership of the clubs did p .....

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did not confer any enduring benefit on the assessee and it allowed the expenditure as revenue in nature. On further appeal, the Hon ble High Court observed as under :- 5. Having heard the learned counsel for the Revenue as well as the assessee we are of the view that the impugned judgment of the Tribunal deserves to be upheld for the following reasons: 5.1 The expenditure incurred towards admission fee, admittedly, was towards corporate membership. As correctly held by the Tribunal, the nature o .....

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apital account. The AO came to the conclusion that the expenditure was of a capital nature based on a fallacious reasoning that the expenditure was of an enduring nature and hence on a capital account. It is well settled that an expenditure which gives enduring benefit is by itself not conclusive as regards the nature of the expenditure. We may add that even lump sum payment, which was the case in the instant matter, is not decisive as regards the nature of the payment. See observations in Empir .....

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is an expenditure incurred wholly and exclusively for the purposes of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus of a business enterprise. 5.3 To support the Revenue s contention that the impugned expenditure is on capital account the learned counsel, Ms. Prem Lata Bansal has cited the judgment of the Framatone Connector OEN Ltd. vs. Dy. CIT (2006) 205 CTR (Ker) 250 : (2006 .....

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conclusion that since the fee was paid to the RoC for increase in the capital base of the assessee it was in the nature of capital expenditure. According to us the ratio of the aforementioned Supreme Court judgment is not applicable to the expenses incurred on an admission fee for corporate membership. We respectfully disagree with the ratio of the judgment of the Kerala High Court. In turn, we respectfully follow the ratio of the judgment of the Division Bench of this Court in CIT vs. Nestle In .....

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