Whether when assessee acquires corporate membership of a Golf Club for limited period, any payment made in this regard brings any 'enduring benefits' to be treated as capital expenditure - NO: HC Larger Bench

THE questions before the Full Bench of the HC are - Whether when assessee acquires corporate membership of a Golf Club for a limited period, any payment made in this regard brings any 'enduring benefits' to be treated as capital expenditure; Whether merely because such payments do not create any capital asset, it cannot be treated as capital in nature and Whether the real test to treat an expenditure as capital or revenue is to consider the nature of the advantage in a commercial sense. And the verdict goes in favour of the assessee.

Facts of the case

Assessee had obtained corporate membership of Golf Club, Chandigarh on payment of Rs.6 lacs. Rs.16,945/- was paid towards services and facilities used during the relevant AY. During assessment, the AO disallowed such expenses for the reason that the same were personal

expenses of the MD and other employees and, thus, added back to the income of the assessee. On appeal, CIT(A) set aside the said disallowance holding that club membership was in the nature of an advantage in the commercial sense and not in the capital field. The CIT(A) also considered the remand report, wherein it was observed that the payment was for acquisition of Club Membership, therefore, it was a capital expenditure. On further appeal, the Tribunal affirmed the findings recorded by the CIT(A) and observed that the membership of the club had been acquired by the assessee for the use of its personnel. The CIT(A) had accepted the plea of the assessee that the membership of club was obtained for business purposes in as much as it facilitated interaction with business associates etc. The decision of the CIT(A) was in consonance with the judgment of the HC in the case of Otis Elevator Company (I) Limited. The plea of the Revenue that the membership of the club provided an enduring benefit and therefore the expenditure incurred was of capital nature was unsustainable. No doubt, payment of membership fee results in obtaining of club membership for a period beyond the year of payment but the benefit remained in the revenue field and not in the capital field. Resultantly, the expenditure incurred on acquiring an enduring benefit in the revenue field was liable to be treated as a revenue expenditure. Further, it was noted that the HC of Gujarat in the case of Gujarat State Export Corporation had held that the acquisition of club membership resulted in an advantage in the commercial sense and not in the capital field. On the basis of the aforesaid discussion, the Trinunal did not find any justifiable reason to interfere with the decision of the CIT(A) on this issue.

On appeal to the HC, the Revenue's counsel relied upon the judgment of Kerala HC in Framatone Connector OEN Limited’s case, to contend that the corporate membership was a capital expenditure. Such membership had long term advantage to the assessee and, therefore, such expenditure was to the capital field and not to the revenue field. On the other hand, the assessee relied upon Assam Bengal Cement Co. Ltd. Vs. CIT, Empire Jute Co. Ltd. Vs. CIT.

Held that:

++ section 37 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 computing the income chargeable under the head 'Profits and gains of business or profession". The expression ‘capital expenditure’ has been interpreted by the various judgments, starting from Assam Bengal Cement Co. Ltd. case, wherein the SC approved the opinion of the Full Bench of Lahore HC in Benarsidas Jagannath and held that it is not easy to define the term ‘capital expenditure’ in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Some of the broad principles deduced were that, 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 and; expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence as asset or an advantage for the enduring benefit of a trade. The expression ‘enduring benefit’ or ‘of a permanent character’ were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset;

++ in Empire Jute Co. Ltd. case, the SC was examining the consequences of a time agreement in which the Mills shall be entitled to work their looms. The agreement in question was transfer of allotment of hours of work per week, commonly referred to as sale of loom hours by one member to another. The question examined was; whether the sum paid by the assessee to purchase loom hours represents capital expenditure or revenue expenditure. It was observed that whether it is capital expenditure or revenue expenditure would have to be determined having regard to the nature of the transaction and other relevant factors. It was also observed that 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. 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 without regard to the particular facts and circumstances of a given case. But even if this test were applied in the present case, it does not yield a conclusion in favour of the revenue. Here, by purchase of loom hours no new asset has been created. There is no addition to or expansion of the profit-making apparatus of the assessee. The income earning machine remains what it was prior to the purchase of loom hours. The assessee is merely enabled to operate the profit making structure for a longer number of hours. And this advantage is clearly not of an enduring nature;

++ in Madras Auto Service (P) Ltd., the SC observed that in order to decide; whether the expenditure is a revenue or a capital, one has to look at the expenditure from a commercial point of view. In the said case, the assessee had a lease of 39 years and also right to demolish the existing premises and construct a new building thereon to suit the purpose of their business. The lessee was not entitled to any compensation whatsoever on account of its putting up new construction in the place of the old. It was held that the expenditure was made in order 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. 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;

++ applying the principles laid down in the aforesaid judgments, the Bombay HC in Otis Elevator Co. (India) Ltd., allowed the payment of club fee as a business expenditure. Similar view was taken by the Delhi HC in a judgment reported as Engineers India Ltd. case in respect of membership fee of a club. Referring to the judgment in Assam Bengal Cement Co. Ltd. case, it was observed that if expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made only for running the business or working it with a view to produce the benefits, it is a revenue expenditure. It was held that payment of membership fee has to be allowed as revenue expenditure. The same view was followed later by Delhi HC in CIT Vs. Nestle India Ltd. (2008) 296 ITR 682 in respect of membership of a club and in CIT Vs. Samtel Color Ltd. (2009-TIOL-58-HC-DEL-IT), wherein the judgment of judgment of Kerala HC in Framatone Connector OEN Ltd. case was dissented;

++ the Kerala High Court in Framatone Connector OEN Ltd. case, has referred to a judgment rendered by the SC in Punjab State Industrial Development Corporation Ltd. Vs. CIT (2002-TIOL-377-SC-IT) 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 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 ancillary expenses incurred for expansion of capital. Therefore, the said case does not support the argument in respect of membership of a club. In M/s Majestic Auto Limited’s case, this Court has followed the judgment of Kerala HC in Framatone Connector OEN Limited case in preference to the judgment of Bombay HC in OTIS Elevator Company (India) Limited case. None of the judgments of SC, as mentioned above, were brought to the notice of the Bench;

++ in the present case, the nature of the expenditure incurred by the assessee cannot be said to be a capital expenditure. The second test culled down in Assam Bengal Cement Co. Ltd.’s case is that expenditure should bring into existence an asset or an advantage for the enduring benefit of a trade. In the present case, the corporate membership of Rs.6 lacs was for a limited period of 5 years. The corporate membership was obtained for running the business with a view to produce profit. Such membership does not bring into existence an asset or an advantage for the enduring benefit of the business. It is an expenditure incurred for the period of membership and is not long lasting. By subscribing to the membership of a club, no capital asset is created or comes into existence. By such membership, a privilege to use facilities of a club alone, are conferred on the assessee and that too for a limited period. Such expenses are for running the business with a view to produce the benefits to the assessee. Consequently, it cannot be treated as capital asset. Therefore, the reasoning given by Delhi, Bombay and Gujarat High Courts in respect of members of Clubs is based upon correct enunciations of the principles of law as delineated above in the judgments of the Supreme Court. In view of the above, we find that the judgment of HC in M/s Majestic Auto Limited’s case is not a correct interpretation of expression "capital expenditure". Consequently, the said judgment is overruled. Having answered the question of law, in the manner above, the matter be placed before the appropriate Bench as per roster for decision on the other questions of law.