2009 (1) TMI 26 - HC - Income Tax

Appeal dismissed: Corporate club admission fees treated as revenue expenditure deductible under Section 37 when for business purposes

COMMISSIONER OF INCOME-TAX Versus SAMTEL COLOR LIMITED

HC upheld the Tribunal and dismissed the appeal, holding that admission fees for corporate club membership are revenue expenditure deductible under ... Depreciation on the enhanced cost of the asset - fluctuation in the rate of exchange on the last date of the accounting year - deduction in respect of money paid towards admission fee of clubs - towards corporate membership - Nature of expenditure - Revenue Or Capital - HELD THAT:- 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 Section 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. The true test for qualification of expenditure under Section 37 of the Act is that it should be incurred wholly and exclusively for the purposes of business and the expenditure should not be towards capital account. In the instant case, as discussed above, the admission fee paid towards corporate membership 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. We respectfully follow the ratio of the judgment of the Division Bench of this Court in CIT vs. Nestle India Ltd; [2007 (4) TMI 180 - DELHI HIGH COURT] and that of the Bombay High Court in the case of Otis Elevator Co (India) Ltd vs. CIT [1991 (4) TMI 53 - BOMBAY HIGH COURT]. In the result, the appeal is dismissed. Issues:1. Allowance of depreciation on enhanced cost of asset due to fluctuation in exchange rate.2. Allowance of deduction for money paid towards admission fee of clubs as revenue expenditure.Issue 1: Allowance of DepreciationThe High Court dealt with the Revenue's appeal concerning the allowance of depreciation to the assessee on the enhanced cost of the asset due to fluctuation in the rate of exchange on the last date of the accounting year. The Court referenced a Division Bench judgment in CIT vs. Woodward Governor India P. Ltd, establishing that this issue was covered. The judgment reserved on 03.12.2008 after hearing the submissions from both parties. The Court ultimately upheld the Tribunal's decision, stating that the expenditure was incurred wholly and exclusively for business purposes, not towards capital account. It emphasized that enduring benefit alone does not determine the nature of expenditure, citing relevant case laws such as Empire Jute Co Ltd vs. CIT and CIT vs. J.K. Synthetics. The Court disagreed with the Revenue's argument that the expenditure was on capital account, distinguishing it from the judgment in Framatone Connector OEN Ltd vs. DCIT.Issue 2: Allowance of Deduction for Club Admission FeeThe second issue revolved around the allowance of deduction for money paid towards admission fee of clubs as revenue expenditure. The assessee had paid corporate membership fees to certain clubs. The Assessing Officer disallowed the expenditure, citing reasons like lack of nexus with business, benefit to employees, and enduring nature of benefit. The CIT(A) partially allowed the expenditure, directing the Assessing Officer to disallow only 20% of the total amount. Both the Revenue and the assessee appealed against this decision. The Tribunal found that the membership did not confer an enduring benefit on the assessee and was for business purposes, allowing the entire expenditure. The High Court upheld the Tribunal's decision, emphasizing that the expenditure was for the benefit of the assessee and fulfilled the business purpose test. It also clarified that the expenditure was not on capital account, as it facilitated the smooth running of the business without adding to the profit-earning apparatus.In conclusion, the High Court dismissed the appeal, upholding the Tribunal's decision on both issues. The judgment provided detailed analysis and legal reasoning for allowing the depreciation and deduction for club admission fee as revenue expenditure, emphasizing the business purpose and non-capital nature of the expenditures.