TaxTMI 
TaxTMI 
2013 (2) TMI 375
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....igarh on payment of Rs.6 lacs. Rs.16,945/- was paid towards services and facilities used during the relevant assessment year. The Assessing Officer declined such expenses for the reason that the same are personal expenses of the Managing Director and other employees and, thus, added back to the income of the assessee. In appeal before the Commissioner of Income Tax (Appeals), the said disallowance was set aside holding that club membership is in the nature of an advantage in the commercial sense and not in the capital field. The Commissioner of Income Tax (Appeals) also considered the remand report dated 17.11.2005, wherein it was observed that the payment is for acquisition of Club Membership, therefore, it is a capital expenditure. The learned Income Tax Appellate Tribunal, Chandigarh Bench - A, (for short 'the Tribunal') affirmed the findings recorded by the Commissioner of Income Tax (Appeals) by observing to the following effect: "5. We have considered the rival submissions. Ostensibly, the membership of the club has been acquired by the assessee for the use of its personnel. The CIT(A) has accepted the plea of the assessee that the membership of club was obtained for busines....
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....not to the revenue field. 5. On the other hand, learned counsel for the assessee relied upon Assam Bengal Cement Co. Ltd. Vs. Commissioner of Income Tax, West Bengal (1955) 27 ITR 34, Empire Jute Co. Ltd. Vs. Commissioner of Income Tax 124 ITR 1, Commissioner of Income Tax, Bombay City-I Vs. Associated Cement Companies Ltd. (1988) 172 ITR 257 (S.C), Commissioner of Income Tax Vs. Madras Auto Service (P) Ltd. (1998) 233 ITR 468 apart from the judgments of Delhi High Court in Commissioner of Income Tax Vs. Engineers India Ltd. (1999) 239 ITR 237 and of Bombay High Court in Otis Elevator Co. (India) Ltd. Vs. Commissioner of Income Tax (1992) 195 ITR 682. 6. Having heard learned counsel for the parties, we find that the judgment of this court in M/s Majestic Auto Limited's case (supra) is not a correct law for the reasons recorded herein after. 7. Section 37 of the Income Tax Act, 1961 provides that "Any expenditure (not being expenditure of the nature described in Sections 30 to 36) and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in co....
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....diture. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure...." 8. The Court culled down the following tests to determine the nature of expenditure: "1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment: vide Lord Sands in IRC v. Granite City Steamship Co. (1927) 13 Tax Cases 1 at p. 14. In City of London Contract Corporation v. Styles (1887) 2 Tax Cases 239 at p. 243, Bowen L.J. observed as to the capital expenditure as follows: You do not use it 'for the purpose of your concern, w....
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....l expenditure or revenue expenditure would have to be determined having regard to the nature of the transaction and other relevant factors. It was observed as under: "....There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically withou....
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....rder to secure a long lease of new and more suitable business premises at a lower rent. The saving in expenditure was a saving in revenue expenditure in the form of rent and that assessee did not get any capital asset by spending such amounts. Quoting from Assam Bengal Cement Co. Ltd. case (supra) and in respect of second test of "any advantage of an enduring nature", the Court held that by spending money on the construction of new building, the assessee did not acquire any capital asset. The only advantage by spending money was of a low rent. From the business point of view, the assessee got the benefit of reduced rent, which was a business advantage and has to be treated as revenue expenditure. After considering number of judgments, the Court concluded to the following effect: "All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked....
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....nditure whether it is a capital expenditure or a revenue expenditure. In view of the tests laid down, it was held that payment of entrance fee for becoming a member of the sports club cannot be termed as a capital expenditure. 14. The Kerala High Court in Framatone Connector OEN Ltd. case (supra) has referred to a judgment rendered by the Supreme Court in Punjab State Industrial Development Corporation Ltd. Vs. Commissioner of Income Tax (1997) 225 ITR 792 to return a finding that payment of membership, is a payment once and for all, resulting in an enduring benefit to the institution. None of the earlier judgments, referred to above, in respect of nature of capital expenditure were brought to the notice of the Court. The judgment in Punjab State Industrial Development Corporation Ltd. case (supra) is, in fact, in respect of expenses incurred for enhancement of capital. The assessee claimed such expenses as revenue expenditure. Since the expenses were incurred for expansion of capital base of the company, it was found to be directly related to capital expenditure. It was held that it would still retains the character of a capital expenditure. The said judgment is in respect of anc....