TMI Blog2016 (5) TMI 353X X X X Extracts X X X X X X X X Extracts X X X X ..... unreasonable shall not be allowed as a deduction. However, keeping in view that the services rendered by Sunil Kumar resulted in the business worth ₹ 614.86 lakhs, we find ourselves in agreement with the ld. CIT(A) that the remuneration paid to him cannot be considered as excessive or unreasonable to attract the provision of section 40A(2)(b). - Decided in favour of assessee Disallowance of expenditure incurred towards club memberships - Held that:- The expenditure paid to club and did not bring into existence an asset or advantage for the enduring benefit of the business of assessee to treat the same as capital expenditure. The club expenditure, it only facilitates smooth and efficient running of a business of the assessee. Therefore, club expenditure paid for staff is an allowable expenditure.- Decided in favour of assessee Addition on account of cesstion of the liability u/s 41(1) - Held that:- In the present the AO noted that the assessee admitted that the amount of ₹ 43,571/- has remained as unclaimed by creditors for a considerable period of time. Therefore the fact remains undisputed that the liability carried forward for many years and there was no cessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The CIT-A, in first appeal, was of the view that it is assessee s decision as to who is the key man to be protected against any risk and found satisfied by the educational qualifications of such directors being studied in USA in MS Plastics and PhD thereafter and having several years of experience in marketing and business development. The CIT-A relied on the case law of Bilaspur Bench of Tribunal and Hon ble Bombay High Court and held that the key man s insurance premium is as an allowable business deduction, thereby, directed the AO to allow the deduction. 5. In support of the ground no-1 raised by the revenue the learned DR relied on A.O. s order. The learned AR submits that the insurance premium under keyman policy paid for five years and it is taxable on maturity and relied on the CIT-A order. 6. Heard both parties, perused the relevant material on record and carefully considered the judgement of Hon ble High of Bombay. It is noticed from the order of CIT-A that it has taken into consideration the clarification issued by the CBDT vide its circular No.762 dated 18-2-1998 where in it is categorically explained at paragraph 14.1 that the insurance premium towards directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of the death of a partner. The object and purpose of a keyman insurance policy is to protect the business against a financial set back which may occur, as a result of a premature death, to the business or professional organization. There is no rational basis to confine the allowability of the expenditure incurred on the premium paid towards such a policy only to a situation where the policy is in respect of the life of an employee. A keyman insurance policy is obtained on the life of a partner to safeguard the firm against a disruption of the business that may result due to the premature death of a partner. Therefore, the expenditure which is laid out for the payment of premium on such a policy is incurred wholly and exclusively for the purposes of business. 8. In the present case, the assessee s case is that its policy to protect the company from any risk that it may sustain by losing the valuable services of their directors and its senior staff from any eventuality by any accident or death. The Hon ble High Court taken into consideration the clarification issued by the CBDT vide its circular No.762 dated 18-2-1998 that the premium paid for a keyman insurance policy is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial on record. The question before us is as to whether the CIT-A is justified in holding the disallowance u/s 40A(2)(a) as unsustainable. For the sake of better understanding let us examine the said provision (2) (a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the [Assessing Officer] is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction 13. A plain reading of the above provision suggests that any payment made to any person falling under clause (b) of this sub-section, that if the AO opines that such expenditure is excessive or unreasonable having regard to the fair market value of the goods etc shall not be allowed as a deduction. In present case, the assessee states that the said Sunil Kumar is on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Habitat Centre and Sports Cultural Club, Noida amounting to ₹ 5 lakhs and ₹ 1 lakh respectively. The AO disallowed the expenditure as it does not bear any nexus with the business carried on by the assessee and the CIT(A), on appeal, directed the AO to disallow 20% of ₹ 6 lakhs and allow the balance amount as revenue expenditure on the ground that the entire expenditure was not incurred for business purposes. The Tribunal concluded that since membership allowed the employees to interact with its customers and the expenses were for business purposes. The Hon ble High Court held as follows: 5.1 The expenditure incurred towards admission fee, admittedly, was towards corporate membership. As correctly held by the Tribunal, the nature of the expenditure was one for the benefit of the assessee. The 'business purpose basis adopted for eligibility of expenditure under s. 37 of the Act was the correct approach. This is more so in view of the Tribunal s findings that it was the assessee which nominated the employee who would avail the benefit of the corporate membership given to the assessee. 18. In the instant case, the expenditure paid to various clubs, thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure. 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. 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 reasons as mentioned in para 5.3 in the case of Samtel Color Ltd. (supra), we are of the view that admission fees paid towards corporate membership of the club is an expenditure incurred wholly and exclusively for the purpose 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 and accordingly we are inclined to uphold the finding of the learned CIT(A) in deleting the disallowance of ₹ 16 lacs made by the AO. The grounds taken by the Revenue are, therefore, rejected. 20. In the present case, the assessee contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dmittedly coming from earlier years being opening balance. We also find from the record that the assessee has not written-off the liability or liability has not ceased or remitted. In such circumstances, now we have to go to the provisions of section 41 (l) of the Act and see the legal possession. Section 41 (1) would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during the previous year relevant to the assessment year under consideration. In the present case, both elements are missing. There was nothing on record to suggest there was remission or cessation of liability that too during the previous year 2007-08 relevant to the assessment year 2008-09 which was the year under consideration. It is undoubtedly a curious Case. Even the liability itself seems under serious doubt. The AO undertook the exercise to verify the records of the so called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealing with the assessee. In one or two cases, the respo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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