Full Judgment Text
* THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on : 30.01.2009
ITA 1152/2008
COMMISSIONER OF INCOME TAX .....APPELLANT
versus
SAMTEL COLOR LIMITED ..... RESPONDENT
Advocates who appeared in this case:
For the Appellant : Ms. Prem Lata Bansal, Mr.Mohan Prasad Gupta and
Mr.Sanjeev Rajpal
For the Respondent : Mr Ajay Vohra & Ms Kavita Jha
CORAM :-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE RAJIV SHAKDHER
1. Whether the Reporters of local papers may
be allowed to see the judgment ? Yes
2. To be referred to Reporters or not ? Yes
3. Whether the judgment should be reported
in the Digest ? Yes
RAJIV SHAKDHER, J
1. This is an appeal preferred by the Revenue under Section 260A of
the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) against
the judgment dated 06.07.07 passed by the Income Tax Appellate
Tribunal (hereinafter referred to as the ‘Tribunal’) in ITA
No.4037/Del/1999 in respect of assessment year 1996-97
2. The Revenue’s appeal to this Court pertains to two issues. The
first issue is related to allowance of depreciation to the assessee on the
ITA 1152-2007 Page 1 of 7
enhanced cost of the asset on account of fluctuation in the rate of
exchange on the last date of the accounting year. The second issue
pertains to allowance of deduction in respect of money paid towards
admission fee of clubs as revenue expenditure.
2.1 In our order dated 30.09.2008, we had concluded that insofar as the
first issue was concerned it was covered by a judgment of a Division
Bench of this Court in CIT vs. Woodward Governor India P. Ltd;
(2007) 294 ITR 451 (Delhi). As regards the second issue we had fixed
the matter for final disposal and directed the counsel for the parties to
file synopsis containing brief submissions pertaining to the said issue.
Accordingly, the counsel for the parties did the needful; whereupon they
were heard and judgment was reserved in the matter on 03.12.2008.
3. The assessee has admittedly paid corporate membership fee to
Indian Habitat Centre and Sports & Cultural Club, Noida amounting to
Rs 5 lakhs and Rs 1 lakh respectively. The Assessing Officer disallowed
the expenditure on the following grounds:-
(i) the expenditure did not bear any nexus with the business
carried on by the assessee;
(ii) the expenditure was incurred for the benefit of employees or
its Directors;
ITA 1152-2007 Page 2 of 7
(iii) the expenditure did not enhance the image of the assessee or
its products as its membership could not be used to advertise the
products of the assessee; and
(iv) lastly, the expenditure resulted in benefit of an enduring
nature.
3.2 Aggrieved by the same the assessee preferred an appeal to the
Commissioner of Income Tax (Appeals) [hereinafter referred to as the
‘CIT(A)’].
3.3 It is pertinent to point out at this stage that the CIT(A); while
recording the submission of the learned counsel for the assessee, that the,
clubs had various facilities for conferences, business meetings, as well
as, provision for multimedia exhibition also noted the fact that the
Director and senior executives could also use the club facilities for their
private purposes for which they would have to incur extra expenditure
out of their own pockets. Thus based on the material placed before him
the CIT(A) concluded that while the membership of the clubs did
provide assessee a benefit which fulfilled the business purpose test, it
also resulted in benefits to the Directors and executives in their personal
capacity.
3.4 Accordingly, the CIT(A) directed the Assessing Officer to disallow
20% of Rs 6 lakhs and allow the balance amount as revenue expenditure
ITA 1152-2007 Page 3 of 7
on the ground that the entire expenditure was not incurred for business
purposes.
4. Since both the Revenue and the assessee were aggrieved by the
order of the CIT(A) cross appeals were preferred against his order. The
Tribunal after considering the submissions made as well as authorities
cited before it returned a finding of fact that the expenditure incurred by
the assessee was to obtain corporate membership of the clubs which
entitled it to sponsor specified number of employees to enjoy the benefits
of the clubs for which separate payments had to be made. It further
concluded that the membership by itself did not confer any enduring
benefit on the assessee. The Tribunal noted the fact that corporate
membership itself meant it was for the benefit of the assessee and not for
any particular employee as it had a right to nominate and substitute an
employee at any point of time. In these circumstances it concluded that
since membership allowed the employees to interact with its customers
the expenses were for business purposes and, therefore, there was no
reason to disallow the expenditure either wholly or in part.
5. Having heard the learned counsel for the Revenue as well as the
assessee we are of the view that the impugned judgment of the Tribunal
deserves to be upheld for the following reasons:-
5.1 The expenditure incurred towards admission fee, admittedly, was
towards corporate membership. As correctly held by the Tribunal, the
nature of the expenditure was one for the benefit of the assessee. The
ITA 1152-2007 Page 4 of 7
‘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.
5.2 The other hurdle for qualification of the expenditure under Section
37 of the Act is that expenditure incurred should not be on capital
account. The Assessing Officer came to the conclusion that the
expenditure was of a capital nature based on a fallacious reasoning that
the expenditure was of an enduring nature and hence on a capital
account. It is well settled that an expenditure which gives enduring
benefit is by itself not conclusive as regards the nature of the
expenditure. We may add that even lump sum payment, which was the
case in the instant matter, is not decisive as regards the nature of the
payment. See observations in Empire Jute Co Ltd vs. CIT; (1980) 124 ITR
1 (SC) as also the judgment of the Division Bench of this Court in CIT
vs. J.K.Synthetics; ITR Nos.139/1988 & 202/1989. 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
ITA 1152-2007 Page 5 of 7
efficient running of a business enterprise and does not add to the profit
earning apparatus of a business enterprise.
5.3 To support the Revenue’s contention that the impugned
expenditure is on capital account the Learned counsel, Ms Prem Lata
Bansal has cited the judgment of the Framatone Connector OEN Ltd vs.
DCIT ; (2006) 157 Taxmann 116 . The said judgment is based on the
Supreme Court judgment in the case of Punjab State Industrial
Development Corporation Ltd vs. CIT; (1997) 225 ITR 792. The
judgment of the Supreme Court on which the Kerala High Court has
relied heavily dealt with the issue with regard to fee paid to the Registrar
of Companies for increase of authorised capital, that is, whether such an
expense was in the nature of revenue or capital expenditure. The
Supreme Court came to the conclusion that since the fee was paid to the
Registrar of Companies for increase in the capital base of the assessee it
was in the nature of capital expenditure. According to us the ratio of the
afore-mentioned Supreme Court judgment is not applicable to the
expenses incurred on an admission fee for corporate membership. We
respectfully disagree with the ratio of the judgment of the Kerala High
Court. In turn, we respectfully follow the ratio of the judgment of the
Division Bench of this Court in CIT vs. Nestle India Ltd; (2008) 296
ITR 682 and that of the Bombay High Court in the case of Otis Elevator
Co (India) Ltd vs. CIT; (1992)195 ITR 682 .
ITA 1152-2007 Page 6 of 7
6. In view of the above, in the aforesaid circumstances we are of the
opinion that the impugned judgment as indicated above, deserves to be
upheld. In the result, the appeal is dismissed.
RAJIV SHAKDHER, J
January 30, 2009 BADAR DURREZ AHMED, J
da
ITA 1152-2007 Page 7 of 7
% Judgment delivered on : 30.01.2009
ITA 1152/2008
COMMISSIONER OF INCOME TAX .....APPELLANT
versus
SAMTEL COLOR LIMITED ..... RESPONDENT
Advocates who appeared in this case:
For the Appellant : Ms. Prem Lata Bansal, Mr.Mohan Prasad Gupta and
Mr.Sanjeev Rajpal
For the Respondent : Mr Ajay Vohra & Ms Kavita Jha
CORAM :-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE RAJIV SHAKDHER
1. Whether the Reporters of local papers may
be allowed to see the judgment ? Yes
2. To be referred to Reporters or not ? Yes
3. Whether the judgment should be reported
in the Digest ? Yes
RAJIV SHAKDHER, J
1. This is an appeal preferred by the Revenue under Section 260A of
the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) against
the judgment dated 06.07.07 passed by the Income Tax Appellate
Tribunal (hereinafter referred to as the ‘Tribunal’) in ITA
No.4037/Del/1999 in respect of assessment year 1996-97
2. The Revenue’s appeal to this Court pertains to two issues. The
first issue is related to allowance of depreciation to the assessee on the
ITA 1152-2007 Page 1 of 7
enhanced cost of the asset on account of fluctuation in the rate of
exchange on the last date of the accounting year. The second issue
pertains to allowance of deduction in respect of money paid towards
admission fee of clubs as revenue expenditure.
2.1 In our order dated 30.09.2008, we had concluded that insofar as the
first issue was concerned it was covered by a judgment of a Division
Bench of this Court in CIT vs. Woodward Governor India P. Ltd;
(2007) 294 ITR 451 (Delhi). As regards the second issue we had fixed
the matter for final disposal and directed the counsel for the parties to
file synopsis containing brief submissions pertaining to the said issue.
Accordingly, the counsel for the parties did the needful; whereupon they
were heard and judgment was reserved in the matter on 03.12.2008.
3. The assessee has admittedly paid corporate membership fee to
Indian Habitat Centre and Sports & Cultural Club, Noida amounting to
Rs 5 lakhs and Rs 1 lakh respectively. The Assessing Officer disallowed
the expenditure on the following grounds:-
(i) the expenditure did not bear any nexus with the business
carried on by the assessee;
(ii) the expenditure was incurred for the benefit of employees or
its Directors;
ITA 1152-2007 Page 2 of 7
(iii) the expenditure did not enhance the image of the assessee or
its products as its membership could not be used to advertise the
products of the assessee; and
(iv) lastly, the expenditure resulted in benefit of an enduring
nature.
3.2 Aggrieved by the same the assessee preferred an appeal to the
Commissioner of Income Tax (Appeals) [hereinafter referred to as the
‘CIT(A)’].
3.3 It is pertinent to point out at this stage that the CIT(A); while
recording the submission of the learned counsel for the assessee, that the,
clubs had various facilities for conferences, business meetings, as well
as, provision for multimedia exhibition also noted the fact that the
Director and senior executives could also use the club facilities for their
private purposes for which they would have to incur extra expenditure
out of their own pockets. Thus based on the material placed before him
the CIT(A) concluded that while the membership of the clubs did
provide assessee a benefit which fulfilled the business purpose test, it
also resulted in benefits to the Directors and executives in their personal
capacity.
3.4 Accordingly, the CIT(A) directed the Assessing Officer to disallow
20% of Rs 6 lakhs and allow the balance amount as revenue expenditure
ITA 1152-2007 Page 3 of 7
on the ground that the entire expenditure was not incurred for business
purposes.
4. Since both the Revenue and the assessee were aggrieved by the
order of the CIT(A) cross appeals were preferred against his order. The
Tribunal after considering the submissions made as well as authorities
cited before it returned a finding of fact that the expenditure incurred by
the assessee was to obtain corporate membership of the clubs which
entitled it to sponsor specified number of employees to enjoy the benefits
of the clubs for which separate payments had to be made. It further
concluded that the membership by itself did not confer any enduring
benefit on the assessee. The Tribunal noted the fact that corporate
membership itself meant it was for the benefit of the assessee and not for
any particular employee as it had a right to nominate and substitute an
employee at any point of time. In these circumstances it concluded that
since membership allowed the employees to interact with its customers
the expenses were for business purposes and, therefore, there was no
reason to disallow the expenditure either wholly or in part.
5. Having heard the learned counsel for the Revenue as well as the
assessee we are of the view that the impugned judgment of the Tribunal
deserves to be upheld for the following reasons:-
5.1 The expenditure incurred towards admission fee, admittedly, was
towards corporate membership. As correctly held by the Tribunal, the
nature of the expenditure was one for the benefit of the assessee. The
ITA 1152-2007 Page 4 of 7
‘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.
5.2 The other hurdle for qualification of the expenditure under Section
37 of the Act is that expenditure incurred should not be on capital
account. The Assessing Officer came to the conclusion that the
expenditure was of a capital nature based on a fallacious reasoning that
the expenditure was of an enduring nature and hence on a capital
account. It is well settled that an expenditure which gives enduring
benefit is by itself not conclusive as regards the nature of the
expenditure. We may add that even lump sum payment, which was the
case in the instant matter, is not decisive as regards the nature of the
payment. See observations in Empire Jute Co Ltd vs. CIT; (1980) 124 ITR
1 (SC) as also the judgment of the Division Bench of this Court in CIT
vs. J.K.Synthetics; ITR Nos.139/1988 & 202/1989. 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
ITA 1152-2007 Page 5 of 7
efficient running of a business enterprise and does not add to the profit
earning apparatus of a business enterprise.
5.3 To support the Revenue’s contention that the impugned
expenditure is on capital account the Learned counsel, Ms Prem Lata
Bansal has cited the judgment of the Framatone Connector OEN Ltd vs.
DCIT ; (2006) 157 Taxmann 116 . The said judgment is based on the
Supreme Court judgment in the case of Punjab State Industrial
Development Corporation Ltd vs. CIT; (1997) 225 ITR 792. The
judgment of the Supreme Court on which the Kerala High Court has
relied heavily dealt with the issue with regard to fee paid to the Registrar
of Companies for increase of authorised capital, that is, whether such an
expense was in the nature of revenue or capital expenditure. The
Supreme Court came to the conclusion that since the fee was paid to the
Registrar of Companies for increase in the capital base of the assessee it
was in the nature of capital expenditure. According to us the ratio of the
afore-mentioned Supreme Court judgment is not applicable to the
expenses incurred on an admission fee for corporate membership. We
respectfully disagree with the ratio of the judgment of the Kerala High
Court. In turn, we respectfully follow the ratio of the judgment of the
Division Bench of this Court in CIT vs. Nestle India Ltd; (2008) 296
ITR 682 and that of the Bombay High Court in the case of Otis Elevator
Co (India) Ltd vs. CIT; (1992)195 ITR 682 .
ITA 1152-2007 Page 6 of 7
6. In view of the above, in the aforesaid circumstances we are of the
opinion that the impugned judgment as indicated above, deserves to be
upheld. In the result, the appeal is dismissed.
RAJIV SHAKDHER, J
January 30, 2009 BADAR DURREZ AHMED, J
da
ITA 1152-2007 Page 7 of 7