Lower Parel, Mumbai 400 013 v. Deputy Commissioner Of Income Tax

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTIONWRIT PETITION NO. 1323 OF 2012 Swiss Re Services India Pvt Ltd.)Unit 701-702, Peninsula Corporate Park, )Tower A, Ganpatrao Kadam Marg,)Lower Parel, Mumbai 400 013) )))..Petitioner Vs.1. Deputy Commissioner of Income Tax)Circle 2(3), Room No.555, Aaykar Bhavan,)M. K. Road, Mumbai 400 020) 2. Additional Commissioner of Income Tax)Transfer Pricing – II (4), Room No.19)Ground floor, Scindia House, Ballard Estate)Mumbai 400 001) ))))))..Respondents 3. The Union of India through the Secretary, Department of Revenue,Ministry of Finance, North Block,New Delhi 110 001 ---- Mr. Niraj Sheth a/w Mr. Gunjan Kakad i/b Mr. Atul K Jasani for Petitioner.Mr. Suresh Kumar for Respondents. ---- CORAM : K.R. SHRIRAM & RAJESH S. PATIL, JJDATED : 13[th] OCTOBER 2023 ORAL JUDGMENT (PER K. R. SHRIRAM J.) : 1Rule is issued on 30[th] July 2014 and respondents were restrained fromacting upon the impugned notice dated 29[th] March 2010. 2The petitioner is impugning a notice dated 29[th] March 2010 issuedunder section 148 of Income Tax Act 1961 (the Act) for A.Y.-2008-2009. 3Petitioner filed a return of income on 1[st] October 2008 for A.Y.-2008-2009 and disclosed a total income of Rs.1,95,75,329/-. The return was accompanied by a computation of income and profit and loss account alongwith schedule thereto. Schedule 9 of the profit and loss account enumeratesvarious operative and administrative expenses, which, inter alia, include therent of Rs.1,18,80,722/- and membership and subscription of Rs.1,98,326/-.The return was accepted and an intimation under section 143 (1) of the actdated 10th May 2009 came to be issued. 4Petitioner, thereafter, received a notice dated 29[th] March 2010 underSection 148 of the Act, which is impugned in this petition, in which it wasstated that there were reasons to believe that petitioner’s income chargeableto tax for A.Y.-2008-2009 had escaped assessment within the meaning ofSection 147 of the Act. Petitioner was directed file return of income, whichpetitioner did. Petitioner was provided with reasons to believe why therewas escapement of income. The reasons to believe provided related to twoitems: 1) deducting rent received at Rs.1.04 in profit and loss account and2) towards entrance and subscription fees to Willington Sports Club (WSC).The first item that is rent of Rs.1.04 crores, the assessing officer by an orderdated 10[th] October 2011 rejecting petitioner’s objection, has dropped thesame. That would lead us to consider only the second item that is entranceand subscription fees paid to WSC. The relevant portion of the reasons readas under: “The assessee company has paid Rs.1,98,326/- towards Entrance andSubscription fees to WSC. The benefit of the above payment is longterm in nature and should have been considered as CapitalExpenditure and should not have been claimed as Revenueexpenditure in P & L account.” Subscription fees to WSC. The benefit of the above payment is longterm in nature and should have been considered as CapitalExpenditure and should not have been claimed as Revenueexpenditure in P & L account.” “The assessee company has paid Rs.1,98,326/- towards Entrance andSubscription fees to WSC. The benefit of the above payment is longterm in nature and should have been considered as CapitalExpenditure and should not have been claimed as Revenueexpenditure in P & L account.” Subscription fees to WSC. The benefit of the above payment is longterm in nature and should have been considered as CapitalExpenditure and should not have been claimed as Revenueexpenditure in P & L account.” 5Petitioner filed its objection through its chartered accountant’s letterdated 30[th] June 2010, in which it was explained that expenditure incurred istowards short term membership renewal fees, i.e., entrance fees Rs.12,360/-and annual subscription fees Rs.1,85,077/- for 1 year and it is incurred forthe purpose of the business and hence the same is allowable as claimed.It was submitted that as per the provisions of Section 37 (1) of the Act, anyexpenditure (not being capital or personal in nature) incurred ‘wholly andexclusively’ for the purpose of the business of the assessee will be allowed asdeduction while computing taxable income of the assessee. It was submittedthat expenditure having been incurred wholly and exclusively for thebusiness of the company is revenue in nature and it has been rightly claimedas deduction. Various decisions of various High Courts and Tribunals werealso submitted. 6These objections were rejected by the order dated 10[th] October 2011.The only basis for rejection is because the benefit of the payment to WSCwas long term in nature. How it becomes long term in nature when paymentis annual payment, is not even discussed. It is also recorded in the orderdisposing the objections that the assessee did not produce any bill tosubstantiate the claim that the expenses were on account of entrance andsubscription fees to WSC. 7The question we are asking is, then how did the assessing officerknow that it was towards entrance and subscription fees to WSC as recordedin the reasons to believe because Schedule 9 of the profit and loss account only mentions membership and subscription of Rs.1,98,326/-. It does noteven disclose the name of the club. There is nothing in the reasons toindicate how the assessing officer formed an opinion that those expendituresare long term in nature and should be considered as capital expenditure andcould not have been claimed as revenue expenditure on the profit and lossaccount. 8Mr Suresh Kumar submitted that the said expenditure cannot betermed as revenue expenditure because it has enduring effect and theassessee is to get the benefits of membership for years to come. Mr SureshKumar also submitted that it has been incurred to bring into existence anadvantage of enduring benefit of the business and it should be thereforeappropriately attriibutable to capital and is in the nature of capitalexpenditure. 9We are unable to accept the submissions of the revenue because firstof all there is no basis on which the assessing officer has formed a reason tobelieve that amount of Rs. 1,98,326/- was paid towards entrance andsubscription fees to WSC. Schedule 9 of the profit and loss account onlyenumerates membership and subscription of Rs.1,98,326/- and does notdisclose anywhere which club it was. 10Moreover, petitioner has, in its reply to the notice under Section 148of the Act, given a breakup of the amount being Rs.12,360/- towardsentrance fees and Rs.1,85,077/- towards subscription fees for 1 year and itis incurred for the purpose of business. Even if, we accept what has been stated in the order disposing objection that petitioner did not produce thebill to substantiate its claim, schedule 9 of the profit and loss account itselfdiscloses that membership and subscription is recurring annual expenditure.In the schedule, it is mentioned for the year ended 31[st] March 2007 theamount was Rs.2,05,639/- and for the year ended 31[st] March 2006 theamount was Rs.1,98,326/-. It, therefore, shows that it was an annualexpenditure and certainly of a recurring nature and has to be allowed asrevenue expenditure. stated in the order disposing objection that petitioner did not produce thebill to substantiate its claim, schedule 9 of the profit and loss account itselfdiscloses that membership and subscription is recurring annual expenditure.In the schedule, it is mentioned for the year ended 31[st] March 2007 theamount was Rs.2,05,639/- and for the year ended 31[st] March 2006 theamount was Rs.1,98,326/-. It, therefore, shows that it was an annualexpenditure and certainly of a recurring nature and has to be allowed asrevenue expenditure. 11In CIT (Large Tax Payer Unit), Centre-1, Mumbai Vs. Lubrizol IndiaLtd.1 , a question that came up for consideration was whether the Tribunalwas right in holding that expenses incurred in obtaining club membership isrevenue in nature as held by the assessing officer and confirmed by CIT(A).The court was pleased to answer the same and held that it is allowable asrevenue expenditure. Paragraph 2 of the order in Lubrizol India Ltd. (Supra)reads as under: “2. So far as question A is concerned, the dispute relates to paymentof entrace fees for club memberships. The case of the revenue is thatthe entrance fees is of capital nature while the respondent contendsthat it is revenue and should be allowed as expenses. The Tribunal inthe impugned order has followed the decision of this Court in the caseof Otis Elavator Co. Ltd. (India) reported in I95 ITR 682) holding thatthe entrance fees for the membership of a club would be consideredas revenue expenditure. The Tribunal observed that though theentrance fee would have an enduring benefit, it cannot be consideredto be capital in nature as no asset was created. Mr. Vimal Gupta,senior counsel on behalf of the revenue submits that the decision ofthis Court in the matter of Otis Elavator Co. Ltd. (India) (supra)would not be applicable as it did not deal with the payment ofentrance fees for membership of the club. However, it is not in disputethat various decisions of the Tribunal had followed the decision of thisCourt in the matter of Otis Elavator Co. Ltd. (India) (supra) andallowed entrace fees of club as revenue expenditure. Further, this Court has also in numerous matters applied the decision of OtisElavator Co. Ltd.(India) (supra) to the cases were entrance fees ofclub membership was an issue in dispute and held that the same isallowable as as revenue expenditure. In view of the above, we do notentertain the question as formulated.” 2 concluded that Club 12The Apex Court in United Glass Mgf Co. Ltd.2 membership fee of the employees is pure business expense and deductionsallowable under Section 37 of the Act. The question that came up forconsideration before the Apex Court was whether club membership foremployees incurred by the assessee is a business expense and is liable to bededucted under Section 37 of the Act. The Apex Court also referred tovarious High Court rulings which have held that club membership fee ofemployee is business expenditure. While answering the question, the ApexCourt stated as under: “As far as Question No.2 is concerned, we find that a series ofjudgments have been passed by High Courts holding that clubmembership fees for employees incurred by the assessee is businessexpense under Section 37 of the Income Tax Act 1961. We also findthat none of the decisions hae been challenged in this court. Evenotherwise, we are of the view that it is a pure business expense.” 13Hon’ble Gujarat High Court in Gujarat State Export Corporation Ltd. Vs. Commissioner of Income Tax3 held that it would be difficult to accept thecontention of the revenue that the entrance fees paid by the assessee forgetting the membership of the sports club can be termed as capitalexpenditure. Paragraphs 9 and 10 of Gujarat State Export Corporation Ltd.(Supra) read as under: Vs. Commissioner of Income Tax 2. (TS-798-SC-2021) 3. (1994) 209 ITR 649 (Guj) 13Hon’ble Gujarat High Court in Gujarat State Export Corporation Ltd. Vs. Commissioner of Income Tax3 held that it would be difficult to accept thecontention of the revenue that the entrance fees paid by the assessee forgetting the membership of the sports club can be termed as capitalexpenditure. Paragraphs 9 and 10 of Gujarat State Export Corporation Ltd.(Supra) read as under: Vs. Commissioner of Income Tax 2. (TS-798-SC-2021) 3. (1994) 209 ITR 649 (Guj) 9. Applying the aforesaid test, in our view, it is apparent that, bypaying the entrance fee for a sports club, the assessee had nointention to acquire any capital asset or take advantage for theenduring benefit of the business. By commonsense standard, it can bestated that it is for running the business or for bettering the conductof its business. In the case of Alembic Chemical Works Co. Ltd.(supra), the Court further observed that whether a particular outlay iscapital or revenue is required to be determined after taking intoconsideration various aspects and the relevant criterion is the purposeof the outlay and its intended object and effect, considered in acommonsense way having regard to the business realities. Further,with regard to the test of enduring benefit, the Court observed that ina given case, the test of 'enduring benefit' might break down. For thispurpose, the Court relied upon the following observations in the caseof CIT vs. Associated Cement Companies Ltd. (1980) 172 ITR 257(SC) : "There may be cases where expenditure, even if incurred for obtainingan advantage of enduring benefit, may, nonetheless, be on revenueaccount and the test of enduring benefit may break down." 10. Applying the aforesaid criterion, in our view, it is apparent thatthe payment of entrance fee for becoming member of the sports clubcannot be termed as a capital expenditure. It is in the nature of anadvantage in the commercial sense but it is not an advantage in thecapital field. Hence, the Tribunal erred in law in rejecting the claim ofthe assessee that payment of entrance fee to the Sports Club ofGujarat Ltd. is expenditure of revenue nature and holding that thepayment conferred upon the assessee a benefit or an advantage ofenduring nature and, therefore, it is expenditure of capital nature.Therefore, question No. 2 requires to be answered in the affirmativefor the asst. yr. 1974-75 in favour of the assessee and against theRevenue. 14Similarly, the Hon’ble Delhi High Court in Commissioner of Income 4 Tax Vs. Samtel Color Ltd.held that admission fees paid to the club towards corporate membership is wholly and exclusively for business purpose and is revenue in nature. Paragraphs 5 to 5.3 of Samtel Color Ltd. (Supra) read as under: “5. Having heard the learned counsel for the Revenue as well as theassessee we are of the view that the impugned judgment of theTribunal deserves to be upheld for the following reasons:- 5.1 The expenditure incurred towards admission fee, admittedly, wastowards corporate membership. 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 underSection 37 of the Act was the correct approach. This is more so in viewof the Tribunal's findings that it was the assessee which nominated theemployee who would avail the benefit of the corporate membershipgiven to the assessee. revenue in nature. Paragraphs 5 to 5.3 of Samtel Color Ltd. (Supra) read as under: “5. Having heard the learned counsel for the Revenue as well as theassessee we are of the view that the impugned judgment of theTribunal deserves to be upheld for the following reasons:- 5.1 The expenditure incurred towards admission fee, admittedly, wastowards corporate membership. 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 underSection 37 of the Act was the correct approach. This is more so in viewof the Tribunal's findings that it was the assessee which nominated theemployee who would avail the benefit of the corporate membershipgiven to the assessee. 5.2 The other hurdle for qualification of the expenditure under Section37 of the Act is that expenditure incurred should not be on capitalaccount. The Assessing Officer came to the conclusion that theexpenditure was of a capital nature based on a fallacious reasoningthat the expenditure was of an enduring nature and hence on a capitalaccount. It is well settled that an expenditure which gives enduringbenefit is by itself not conclusive as regards the nature of theexpenditure. We may add that even lump sum payment, which was thecase in the instant matter, is not decisive as regards the nature of thepayment. See observations in Empire Jute Co Ltd vs. CIT; (1980) 124ITR 1 (SC) as also the judgment of the Division Bench of this Court inCIT vs. J.K.Synthetics; ITR Nos.139/1988 & 202/1989. The true testfor qualification of expenditure under Section 37 of the Act is that itshould be incurred wholly and exclusively for the purposes of businessand the expenditure should not be towards capital account. In theinstant case, as discussed above, the admission fee paid towardscorporate membership is an expenditure incurred wholly andexclusively for the purposes of business and not towards capitalaccount as it only facilitates smooth and efficient running of a businessenterprise and does not add to the profit earning apparatus of abusiness enterprise. 5.3 To support the Revenue's contention that the impugnedexpenditure is on capital account the Learned counsel, Ms Prem LataBansal has cited the judgment of the Framatone Connector OEN Ltdvs. DCIT; (2006) 157 Taxmann 116. The said judgment is based on theSupreme Court judgment in the case of Punjab State IndustrialDevelopment Corporation Ltd vs. CIT; (1997) 225 ITR 792. Thejudgment of the Supreme Court on which the Kerala High Court hasrelied heavily dealt with the issue with regard to fee paid to theRegistrar of Companies for increase of authorised capital, that is,whether such an expense was in the nature of revenue or capitalexpenditure. The Supreme Court came to the conclusion that since thefee was paid to the Registrar of Companies for increase in the capitalbase of the assessee it was in the nature of capital expenditure.According to us the ratio of the afore-mentioned Supreme Courtjudgment is not applicable to the expenses incurred on an admissionfee for corporate membership. We respectfully disagree with the ratioof the judgment of the Kerala High Court. In turn, we respectfullyfollow the ratio of the judgment of the Division Bench of this Court inCIT vs. Nestle India Ltd; (2008) 296 ITR 682 and that of the BombayHigh Court in the case of Otis Elevator Co (India) Ltd vs. CIT;(1992)195 ITR 682.” 15In our view also the expenditure incurred towards entrance fees and annual membership would be a revenue expenditure because it has beenincurred wholly and exclusively for the purposes of business and nottowards capital account. Such expenditure only facilitates the smooth andefficient running of the business enterprise and does not add to the profitearning apparatus of the business enterprise. Therefore, Rule issued on 30[th]July 2014 is made absolute. The impugned notice dated 29[th] March 2010 isquashed and set aside, 16Petition disposed with no order as to costs. (RAJESH S. PATIL, J.) 15In our view also the expenditure incurred towards entrance fees and annual membership would be a revenue expenditure because it has beenincurred wholly and exclusively for the purposes of business and nottowards capital account. Such expenditure only facilitates the smooth andefficient running of the business enterprise and does not add to the profitearning apparatus of the business enterprise. Therefore, Rule issued on 30[th]July 2014 is made absolute. The impugned notice dated 29[th] March 2010 isquashed and set aside, 16Petition disposed with no order as to costs. (RAJESH S. PATIL, J.) (K.R. SHRIRAM, J.)