2012 (2) TMI 748 - AT - Income Tax

Deduction allowed for annual club membership under section 37(1); section 50 income treated as short-term capital gain, section 112(1) denied

SKF India Ltd. (Formerly SKF Bearing India Ltd) Versus The Addl. Commr. of Income Tax Range 4 (3), Mumbai

ITAT MUMBAI allowed the deduction of annual club membership fees under section 37(1), following a favorable decision of the jurisdictional HC and prior ... Disallowance being annual membership fees paid to the clubs - HELD THAT:- It is clear that the issue is covered in favour of the assessee by the decision of the Hon’ble jurisdictional High Court in the case of Otis Elevators Co Ltd [1991 (4) TMI 53 - BOMBAY HIGH COURT] held that club membership fee is an allowable expenditure u/s 37(1), which has been followed by the Tribunal in assessee’s own cased for the earlier assessment years. Accordingly, respectfully following the earlier order of the Tribunal, we decide this issue in favour of the assessee and against the revenue. Capital gain charging to tax by applying provisions of sec. 50 - HELD THAT:- The ld. AR has fairly conceded that this issue has been considered and decided by the Tribunal against the assessee for the AYs 2001-02 to 2004-05 held that When section 50 deems that income earned from a depreciable asset has to be deemed as short term capital gain, the question of applying the rate of tax specified in section 112(1) does not arise. Accordingly, respectfully following the order of the Tribunal in assesse’s own case for the AY 2001-02, we deicide this issue against the assessee. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the addition for proportionate element of CENVAT under Section 145A should be pressed by the appellant (issue not pressed). 2. Whether annual membership fees paid to clubs are allowable expenditure under Section 37(1) of the Income-tax Act. 3. Whether capital gains arising on sale of a depreciable asset, computed under Section 50, are to be treated (for taxation rate purposes) as short-term capital gains such that the rate applicable to short-term capital gains applies rather than the rate applicable to long-term capital gains and related provisions (including applicability of Sections 54EC, 74 and 112). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether addition under Section 145A (proportionate element of CENVAT) is pressed Legal framework: Procedural posture rather than substantive tax law; an appellant may abandon or not press a ground of appeal at hearing. Precedent treatment: Not applicable; the Tribunal treated the ground as not pressed by the appellant and dismissed it accordingly. Interpretation and reasoning: The appellant's representative expressly informed the Tribunal that the ground was not pressed; the Revenue had no objection to dismissal as not pressed. There was therefore no adjudication on the substantive merits. Ratio vs. Obiter: Procedural ratio - the Tribunal will dismiss grounds not pressed at hearing and will not decide them on merits. Conclusion: Ground relating to Section 145A/CENVAT was dismissed as not pressed; no substantive decision rendered. Issue 2: Deductibility of annual club membership fees under Section 37(1) Legal framework: Section 37(1) permits deduction of expenditures incurred wholly and exclusively for the purposes of business or profession, subject to exceptions. Precedent treatment (followed): The Tribunal followed binding decision(s) of the jurisdictional High Court and earlier Tribunal orders in the assessee's own case for earlier assessment years, which held that club membership fees are allowable under Section 37(1) (referenced by the Tribunal as covered by Otis Elevators decision). Interpretation and reasoning: The Tribunal observed that the issue was squarely covered in favour of the taxpayer by the jurisdictional High Court's authority and that the Tribunal had already applied that decision in the assessee's earlier years. In absence of contrary material, the Tribunal adhered to the precedent and declined to disturb the deductibility treatment. Ratio vs. Obiter: Ratio - where a jurisdictional High Court has held club membership fees to be allowable under Section 37(1), the Tribunal is bound to follow that view; prior Tribunal decisions in the same assessee's case were treated as applying that ratio. Conclusion: Annual membership fees paid to clubs (Rs. 99,200 in the year under appeal) were allowed as business expenditure under Section 37(1); the Tribunal decided the issue in favour of the assessee following the High Court precedent and earlier Tribunal orders. Issue 3: Applicability of Section 50 - characterization of capital gain as short-term for taxation rate purposes Legal framework: Section 50 is a special provision for computation of capital gains in case of depreciable assets, modifying the operation of Sections 48 and 49; it contains deeming provisions that, where certain conditions are met, treat the excess of consideration over specified amounts as capital gains arising from transfer of short-term capital assets. Sections 54EC and 74 deal with exemption/adjustment for long-term capital gains; Section 112 prescribes tax rates for long-term capital gains. Precedent treatment (followed): The Tribunal followed the jurisdictional High Court's decision (as applied in Ace Builders) and earlier Tribunal decisions in the assessee's own case, which held that Section 50 creates a legal fiction deeming the computed capital gain to be short-term in character for the purpose of taxation, and that this does not convert the underlying asset into a short-term capital asset nor preclude application of exemption provisions where applicable. Interpretation and reasoning: The Tribunal examined the text of Section 50 and concluded that when Section 50 applies, the resulting capital gain is deemed to be arising from short-term capital assets; therefore, the tax treatment (rate) applicable to short-term capital gains is to be applied. The Tribunal noted that Sections 54EC and 74 and Section 112 concern long-term capital gains but do not negate the deeming provision in Section 50; the High Court reasoning was cited to emphasize that Section 50 limits computation and creates a fiction for the character of the gain, not an actual conversion of the asset's status, and that availability of certain exemptions (e.g., investment under Section 54EC) may remain unaffected even if computation is under Section 50. Ratio vs. Obiter: Ratio - where Section 50 applies to depreciable assets, the excess determined thereunder is deemed to be short-term capital gain for purposes of taxation and appropriate tax rates for short-term gains apply; this is a binding interpretative ratio followed by the Tribunal. Obiter - remarks explaining that exemption provisions may still apply despite the deeming fiction (while influential, application depends on facts and specific statutory language). Conclusion: The Tribunal upheld the Assessing Officer's application of Section 50 resulting in capital gains being charged at rates applicable to short-term capital gains; the appeal on this ground was dismissed and the prior Tribunal orders in the assessee's case were followed. Disposition The appeal was partly allowed: the disallowance of club membership fees was reversed in favour of the taxpayer; the Section 50 issue was decided against the taxpayer; the Section 145A ground was dismissed as not pressed. The Tribunal adhered to binding High Court authority and earlier orders in the assessee's own case in reaching these conclusions.