2007 (4) TMI 180 - HC - Income Tax

Deductibility of club membership fee as business expense confirmed by Delhi High Court

COMMISSIONER OF INCOME TAX Versus NESTLE INDIA LTD.

The High Court of Delhi upheld the Tribunal's decision that a membership fee paid to a club by the assessee was deductible as a business expense under ... Business expenditure – AO disallow the 50% of claim in respect to the club membership fees paid by assessee u/s 37(2) of the ITA,1961- Tribunal allowed the deduction in respect of full amount considering the whole as business expenditure – HC upheld the order of tribunal Issues:1. Interpretation of Section 37(2) of the Income Tax Act, 1961 regarding disallowance of expenses.2. Determining whether membership fee paid to a club is a business expenditure or entertainment expense.Analysis:The High Court of Delhi addressed the appeal concerning an order passed by the Income Tax Appellate Tribunal regarding the assessment years 1995-96 and 1996-97. The key issue was whether the Tribunal should have opined on the purpose of the membership of Madras Gymkhana Club taken by the assessee to promote its business. The assessment order revealed that a membership fee of Rs.2 lakhs was paid by the assessee to the club, with expenses towards food being subject to disallowance under Section 37(2) of the Act.The Assessing Officer allowed a deduction of Rs.1 lakh (50% of the membership fee) under Section 37(2), indicating that the expense was for business purposes. The Commissioner of Income Tax (Appeals) upheld this view, but the Tribunal considered admission fee as a business expenditure based on certain decisions, leading to the Revenue's appeal. The Revenue argued for a specific finding on the purpose of expenditure, citing precedents like Commissioner of Income Tax v. Sundaram Industries Ltd. and Otis Elevator Co. (India) Ltd. v. Commissioner of Income Tax.Although no explicit finding was made on whether the payment improved the business, the High Court inferred that the Assessing Officer's allowance of 50% deduction implied a business purpose. Despite the absence of an explicit finding, the implicit acknowledgment of the expense being for business purposes led the Court to uphold the Tribunal's decision that the membership fee was deductible as claimed by the assessee. The Court concluded that no substantial question of law arose and dismissed the appeal.