2009 (7) TMI 903 - AT - Income Tax

Tribunal decision: Entrance fee revenue expenditure, pre-op expenses capital, software costs re-evaluated, commission remitted

The Tribunal allowed the appeal in part, holding that the entrance fee paid to Delhi Golf Club was a revenue expenditure, not a capital one. However, ... Business expenditure Issues Involved:1. Disallowance of entrance fee paid to Delhi Golf Club.2. Disallowance of pre-operative expenses.3. Disallowance of cost of software.4. Disallowance of commission paid to Direct Selling Agent (DSA).Summary:1. Disallowance of Entrance Fee Paid to Delhi Golf Club:The first ground of appeal concerns the disallowance of Rs. 60,000 as entrance fee paid to Delhi Golf Club. The Assessing Officer (AO) considered this a capital expenditure, providing enduring advantage. The CIT(A) upheld this view, deeming the expenditure personal. However, the Tribunal, referencing the Delhi High Court's decision in CIT v. Samtel Color Ltd., held that the expenditure on corporate membership is revenue in nature and thus allowable.2. Disallowance of Pre-Operative Expenses:The second issue involves the disallowance of Rs. 1,11,70,464 as pre-operative expenses. The AO noted that the assessee was incorporated on 1-5-1997 but received NBFC registration from RBI on 25-9-1997. Expenses prior to this date were treated as capital in nature and only allowable u/s 35D. The CIT(A) agreed, stating the business could not generate income before RBI registration. The Tribunal upheld this view, emphasizing that expenses incurred before the business was carried on are not allowable u/s 37.3. Disallowance of Cost of Software:The third issue is the disallowance of Rs. 35,91,227 for software costs, treated as capital expenditure by the AO with depreciation allowed at 25%. Both counsels agreed that the nature of this expenditure should be examined per the guidelines in Amway India Enterprises v. Dy. CIT. The Tribunal restored the matter to the AO for re-examination.4. Disallowance of Commission Paid to Direct Selling Agent (DSA):The fourth issue involves the disallowance of Rs. 48,38,636 as commission paid to DSAs. The AO treated this as deferred revenue expenditure, not allowable in one year, referencing Madras Industrial Investment Corpn. Ltd. v. CIT. The CIT(A) upheld this view. The Tribunal noted that the commission is based on sourcing hirers and not directly linked to the period of financing. However, due to insufficient material, the Tribunal remitted the matter back to the AO to examine the facts afresh and determine the allowability based on the nature of income receivable by the assessee.Conclusion:The appeal is partly allowed, with specific issues remitted back to the AO for further examination.