TaxTMI 
TaxTMI 
2012 (6) TMI 229
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....e year under dispute had claimed Rs.15 lakhs as revenue expenditure having paid to Bangalore Club as corporate membership fee. The AO was, however, of the view that the amounts paid to a club membership which was a payment once and for all, resulting in an enduring benefit to the assessee and, thus, treated the same as capital expenditure, brushing aside the assessee's strong reliance on the finding of the Hon'ble Bombay High Court reported in Otis Elevator Co. (India) Ltd. v. CIT [1992] 195 ITR 682/60 Taxman 215, terming it as not on the facts and circumstances comparable to the case on hand. 4. Aggrieved, the assessee took up the issue with the CIT(A) for relief. The Ld. CIT(A), relying on the jurisdictional Tribunal's finding in the case of Infosys Technologies Ltd. v. Jt. CIT [2008] 19 SOT 7 (Bang.) (URO), favoured the assessee. 5. Disillusioned with the treatment of the issue by the CIT(A), the Revenue has come before us with the present appeal. 6. During the course of hearing, the brief submission of the Ld D.R was revolved around the fact that the first appellate authority has grossly erred in allowing the payment made to the Club as revenue expenditure without appr....
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..... v. CIT (41 ITR 751) and CIT v. Kusum Products Ltd. (149 ITR 250). (vi) To treat the expenditure incurred for obtaining corporate membership of a club as pre-paid expenses is incorrect in law (vii) Courts in India have repeatedly held that the expenditure incurred on account of technical know-how fees is revenue in nature and fully allowable in the year in which it is incurred in spite of the fact that the relevant technical know-how agreements were entered into for a substantial period of time. 7. The Ld. AR, Mr. Cyrus Jal Bharucha agreed with the concept of prepaid expenses, however, restricted its application to expenditure in the nature of rent advance, insurance premium. Ld. AR agreed that the prepaid expenses are to be disclosed in the balance sheet on the asset side of the Balance Sheet and the portion of expenditure attributable to the relevant financial year is to be charged to the profit & loss account. Ld. AR cited the example of insurance premium to explain the concept of 'Prepaid Expenses'. He explained that the premium is paid over the period of the insurance policy and accounted as stated above. In case the insurance policy is terminated before ....
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.... any expenditure incurred wholly and exclusively for the purpose of business or profession but not provided under sections 30 to 36 of the Act and which are not in the nature of capital expenditure, personal expenses or any expenditure prohibited by law. Thus, it is evident that any revenue expenditure expended wholly and exclusively for the purpose of business or profession barring certain expenditure specifically provided by the Act shall be allowed as deduction. Therefore, the moot question before us is to determine the nature of expenditure with regard to payments made for obtaining corporate membership in a club. At this stage it is very relevant for us to examine as to what revenue, capital and prepaid expenditure are. Revenue expenditure 10.1 It is an expenditure incurred for the purpose of earning the income for the previous year. The benefits derived from this expense are exhausted during the previous year and does not overflow to the subsequent year. In certain cases the benefits derived from the expenses incurred during the previous year overflow to the subsequent years. For example, expenditure incurred on advertising and publicity, training and education to staff....
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....stments have to be made in order to give true and fair view of the balance sheet of the entity. 11. Now let us examine as to what corporate membership of Bangalore Club means. The extract of the Bangalore Club's recent-bye laws are reproduced herebelow for reference: "Corporate Membership: (a) A Public or Private Limited Company incorporated in India, Nationalised Banks, State Bank of India and its subsidiaries, Private Banks, Financial Institutions, Foreign Banks, Insurance Companies and Public Sector Undertakings having an office or factory in the State of Karnataka with a paid up capital of not less than Rs.10 Crores, or a wholly owned subsidiary Company incorporated in India of a holding Company incorporated overseas with a paid up capital of not less than US $ 10 million or its equivalent shall be eligible upon the proposal of a Permanent Member, duly seconded and accompanied by a Statement of Particulars relating to such Corporate Organisation, furnished by the Chief Executive thereof to be elected as a Corporate Member of the Club. Any such entity can opt for more than one Corporate Membership by being the last in the waiting list, if any, as on the date....
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....ry shall not affect the Membership of the existing Members in this category. (c) Fee: Non-refundable Corporate Membership Fee - Rs.45 Lakhs + 10.30% of Service Tax. 12. Thus, on payment of the stipulated amount (in the appellant's case Rs.15 lakhs, however it is relevant to note that as on date any fresh applicants are charged by the Club Rs.45 lakhs, further certain other clubs charge twice the fold or more) and compliance of the other terms and conditions of the Club corporate membership is granted to Corporate. The corporate member is entitled to nominate a specified number of their directors or semi-executives for the use of the facilities provided by the club for a period of ten years. They do not have voting power or right for participation in the management of the club. It is only a right given for the usage of the club on compliance with the rules and regulations of the club. This right of usage is given for a period of ten years from the date on which the corporate membership is granted. Therefore it is apparent that the benefit derived out of the payment of Rs.15 lakhs in the instant case, according to the submission of ld. AR, falls for fifteen years, a....
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....earnings made for the previous year. Thus apportionment of revenue and expenditure to the concerned previous year plays a vital role. i.e., All receipts received for the previous year has to be classified as accrued for the previous year and advance receipts. Only the receipts accrued for the previous year has to be booked as revenue receipts for the previous year and the balance has to be carried forward for the subsequent years. A similar treatment has to be met out for the payments made for expenses. At times difficulty arises due to certain deferred revenue expenses which cannot be apportioned correctly over a period of previous years. However primarily these expenses are incurred for a previous year and therefore several courts have held that such expenses have to be written off in the year in which it is incurred. However when an expense is incurred for a definite period and where the benefits derived in each previous year are even, such expenditure has to be apportioned proportionately. Unless such expenses are apportioned, the correct income of the previous year cannot be determined. In some cases, the period for which payment is done may be too long say 25, 30 years etc. D....
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....such an event happens because only during that period the expenses crystallizes. 16. The recent introduction of Section14A in the Income Tax Act, Accounting Standards and GAAP in particular AS1 and AS26 has further strengthened these concepts. The principles of Accounting standards and GAAP are applicable for "general purpose financial statements" which are prepared solely for tax purpose or for the use of lenders. Further the adherence to Accounting Standards is mandatory for all companies commencing from 7th December, 2006. Section 642 of the Companies Act, 1956 read with section 2(11), 217(2AA) and 227(3)(d) mandates the compliance of Accounting Standards. Further section 115J of the Income-tax Act, 1961 makes it mandatory for every assessee being a company for the purpose of this section to prepare its profit & loss account, balance sheet, etc. in accordance with the relevant provisions of the Companies Act, 1956. The introduction of Section14A in the Income Tax w.e.f.1/4/2007 by Finance Act 2006 solidifies the concept of matching concept which provides that for the purpose of computing total income no deduction shall be allowed in respect of expenditure incurred by the asse....
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....let us examine the issue before us. In the case on hand, the gross income of the assessee is Rs.90,00,000. The assessee has claimed Rs.15 lakhs as expenses for obtaining corporate membership in the club thereby declaring a net income of Rs.75 lakhs in its return of income. It amounts to approx. 16.67% of the gross income of the assessee which is on a higher side thereby distorting the correct income of the assessee for the previous year. Following the matching concept, the materiality concept and Accounting Standard AS 26 in the assessee's case before us, the amount of Rs.15 lakhs claimed as expenses towards corporate membership for a period of 15 years has to be apportioned in ten years proportionately from the date of obtaining the membership. It is ordered accordingly. We have held so in this case keeping in view of the facts of the case. However, if the amount paid is negligible, it will be appropriate to write off the expense in the year in which such expense is incurred. We further make it clear that the expenditure incurred by way of fees for obtaining corporate membership in a club is revenue and prepaid in nature and has to be written off in the year in which it is incurre....