Club Membership Fees

 

Is club membership fees is a capital or revenue expenditure?  

Provisions of the Income Tax Act, 1961

As per section 37(1), “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".

Judicial Precedents

The Supreme Court in CIT vs United Glass Mfg Co. Ltd reported in 28 taxmann.com 429 (SC) has held that, “As far as Question No. 2 is concerned, we find that a series of judgements have been passed by High Courts holding that club membership fees for employees incurred by the assessee is business expense under Section 37 of the Income Tax Act, 1961. We also find that none of the decisions have been challenged in this Court. Even otherwise, we are of the view that it is a pure business expense.”

The Hon'ble Madras high Court in the case of CIT Vs. Sundaram Industries Ltd 240 ITR 335 (MAD) held as under: “Section 37 postulates that any expenditure laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income of the assessee. The essential requirement for claiming the deduction of the expenditure is that the expenditure should have been incurred wholly and exclusively for the purposes of business of the assessee in the instant case, the assessee was a company and it was found by the Appellate Tribunal that the expenditure by way of subscription to the clubs was incurred for the. purpose of promoting the business of the company and in view of the finding of the Tribunal, it must be held that the expenditure incurred was an allowable business expenditure. In the case of subscription to clubs, in so far as the assessee was concerned, the expenditure was incurred to promote and foster its business relationship. The object of the assessee was that its directors by remaining as members in some of the city clubs would give them certain social status, and it was obvious that by being members of the club, they would be able to meet various kinds of people in a calm and cool atmosphere of the club and because of the meeting they would develop business relationship, benefiting the assessee. Therefore, it could not be said that the possible advantage to the assessee was remote and far fetched. No doubt, there might be a personal benefit enjoyed by the director by the various types of amenities afforded at the club. But the personal benefit that went to the director was incidental to the membership of the club. The question whether a particular expenditure is allowable or not has to be tested from the point of view of the person expending the same and the object with which he incurred the expenditure. The assessee had not spent the money with the object of providing a personal relaxation to the director, but it was incurred to promote its business. In the commercial world, the contact with the right person is vital for an efficient business organisation. The expenditure incurred could not be regarded as having been incurred for the personal benefit of the director. In each case, it has to be seen whether the object of the expenditure was to promote the business of the assessee. In view of the finding by the Tribunal, the assessee-company had incurred the expenditure wholly and exclusively for the purpose of its business and therefore the expenditure incurred by way of subscription to the club was an allowable expenditure.”

Similar judgements have been passed in the following cases:

·         Commissioner of Income tax V/s Groz Beckert Asia Limited ITA No 366 of 2008 (P&H HC)

·         Deputy Commissioner of Income Tax V/s Deloitte Touche Tohmatsu ITA NO.3017/MUM/2016 MUM-TRIB order dt.27/04/2018

·         Commissioner of Income Tax V/s Nestle India Ltd. 296ITR682 (DEL)

·         Commissioner of Income Tax V/s Samtel Color Ltd. 180 taxmann.com 82 (DEL)

·         ISGEC Heavy Engineering Ltd V/s DCIT ITA No. 798/CHD/2019 (Chandigarh Tribunal)

 

Conclusion:

As per the prevailing judicial precedents, it is held that the expenditure incurred for membership of clubs for employees is an allowable revenue expenditure, if the expenditure is for the purpose of the business of the assessee.