Commissioner Of Income Tax vs Samtel Colour Limited
2009 Latest Caselaw 316 Del

*           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

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;

(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

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

'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

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.

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
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