2013 (2) TMI 629 - HC - Income Tax

High Court rules club memberships & ISO-9001 cert costs as revenue expenses, benefiting trading operations.

The High Court of Karnataka upheld the decisions of the Income-tax Appellate Tribunal, ruling that the amount spent on acquiring club memberships and ... Revenue or capital expenditure - amount spent for acquisition of membership of the clubs - held that:- the concurrent finding arrived at by the appellate authority and the Income-tax Appellate Tribunal that the expenditure incurred for acquisition of membership of the club is revenue expenditure, is justified and cannot at all said to be perverse or arbitrary so as to call for interference in this appeal. - Decision of Apex Court in Empire Jute Co. Ltd.'s case [1980 (5) TMI 1 - SUPREME COURT] and decision of HC in CIT v. Wipro Systems [2009 (11) TMI 402 - KARNATAKA HIGH COURT] followed. - Decided in favor of assessee. Expenditure on ISO-9001 certificate - held that:- the certificate would only certify that the procedure followed by the assessee in the manufacture and the quality maintained during manufacture is in accordance with the standard prescribed. - held as revenue in nature - Decision in CIT v. Perot Systems TSI (India) Ltd. [2010 (9) TMI 108 - DELHI HIGH COURT] followed - Decided in favor of assessee. Issues:1. Treatment of amount spent for acquisition of club memberships as revenue or capital expenditure.2. Treatment of amount spent for obtaining ISO-9001 certificate as revenue or capital expenditure.Analysis:Issue 1: Treatment of amount spent for acquisition of club membershipsThe Revenue challenged the order of the Income-tax Appellate Tribunal (ITAT) regarding the treatment of the amount spent for acquiring club memberships as revenue expenditure. The Revenue argued that since the membership conferred enduring benefits, it should be considered capital expenditure. However, the appellate authority and the ITAT held that the expenditure should be treated as revenue in nature. The respondent-assessee supported this view, citing the decision in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), which emphasized that enduring benefit alone does not determine if an expenditure is revenue or capital. The court, following the principles laid down in Empire Jute Co. Ltd.'s case, upheld the concurrent findings that the club membership expenditure is revenue in nature, as it facilitates trading operations without affecting fixed capital. The court referred to various precedents, including CIT v. Wipro Systems [2010] 325 ITR 234 (Karn), to support this conclusion. Therefore, the court dismissed the appeal, ruling in favor of the assessee.Issue 2: Treatment of amount spent for obtaining ISO-9001 certificateThe second issue revolved around the treatment of the expenditure incurred for obtaining an ISO-9001 certificate. The Revenue contended that this expense should be considered capital expenditure due to the enduring benefit it provided. However, the appellate authority and the ITAT deemed this expenditure as revenue in nature. The court analyzed the nature of the ISO certificate, emphasizing that it certifies existing quality standards without creating a new enduring asset. Citing the decision in CIT v. Perot Systems TSI (India) Ltd., the court affirmed that the certificate only guarantees quality and does not confer enduring credibility. Following the legal principles and precedents, the court upheld the findings that the ISO-9001 certificate expenditure is revenue in nature. Consequently, the court dismissed the appeal related to this issue as well.In conclusion, the High Court of Karnataka dismissed all appeals (I. T. A. Nos. 2975 of 2005, 2976 of 2005, and 3011 of 2005) based on the aforementioned analysis and rulings on the treatment of expenditures related to club memberships and ISO-9001 certification.