DCIT, Bangalore v. M/s G. Corp Private Ltd.,, Bangalore

ITA 465/BANG/2010 | 2005-2006
Pronouncement Date: 10-03-2011 | Result: Partly Allowed

Appeal Details

RSA Number 46521114 RSA 2010
Assessee PAN NJULY2009P
Bench Bangalore
Appeal Number ITA 465/BANG/2010
Duration Of Justice 11 month(s) 3 day(s)
Appellant DCIT, Bangalore
Respondent M/s G. Corp Private Ltd.,, Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 10-03-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 10-03-2011
Date Of Final Hearing 27-10-2010
Next Hearing Date 27-10-2010
Assessment Year 2005-2006
Appeal Filed On 06-04-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K. JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY ACCOUNTANT MEMBER ITA NO.465/BANG/2010 ASSESSMENT YEAR : 2005-06 THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 11(3) BANGALORE. : APPELLANT VS. M/S. G. CORP PRIVATE LTD. NO.21/19 CRAIG PARK LAYOUT OFF M.G. ROAD BANGALORE 560 001. : RESPONDENT APPELLANT BY : SHRI P.H. NARAGUNDKAR ADDL.CIT(DR) RESPONDENT BY : SHRI CYRUS JAL BHARUCHA C.A. O R D E R PER A. MOHAN ALANKAMONY ACCOUNTANT MEMBER THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORD ER OF LD. CIT (A) I BANGALORE IN ITA NO: 21/DC 11(3)/ CIT ( A)-I/ 07-08 DATED: 22.1.2010 FOR THE ASSESSMENT YEAR 2005-06 IN THE CA SE OF M/S. G. CORP PRIVATE LIMITED BANGALORE. 2. THE REVENUE RAISED FIVE GROUNDS IN WHICH GROUND NOS: 1 4 AND 5 BEING GENERAL AND NO SPECIFIC ISSUES INVOLVED THEY HAVE BECOME ITA NO.465/BANG/10 PAGE 2 OF 17 NON-CONSEQUENTIAL. IN THE REMAINING GROUNDS THE C RUX OF THE LONE ISSUE IS CONFINED TO THAT THE CIT (A) WAS NOT JUSTIFIED IN DELETING TH E ADDITION OF RS.15 LAKHS BEING CORPORATE MEMBERSHIP FEE PAID TO BANGAL ORE CLUB. 3. BRIEFLY STATED THE ASSESSEE A PRIVATE LIMITE D COMPANY AND ITS NATURE OF BUSINESS BEING PROPERTY DEVELOPMENT/R EAL ESTATE MANAGEMENT DURING THE YEAR UNDER DISPUTE HAD CLAIMED RS.15 L AKHS AS REVENUE EXPENDITURE HAVING PAID TO BANGALORE CLUB AS CORPOR ATE MEMBERSHIP FEE. THE AO WAS HOWEVER OF THE VIEW THAT THE AMOUNTS P AID TO A CLUB MEMBERSHIP WHICH WAS A PAYMENT ONCE AND FOR ALL RE SULTING IN AN ENDURING BENEFIT TO THE ASSESSEE AND THUS TREATED THE SAME AS CAPITAL EXPENDITURE BRUSHING ASIDE THE ASSESSEES STRONG RELIANCE ON TH E FINDING OF THE HONBLE BOMBAY HIGH COURT REPORTED IN 195 ITR 682 (BOM) TE RMING IT AS NOT ON THE FACTS AND CIRCUMSTANCES COMPARABLE TO THE CASE ON H AND. 4. AGGRIEVED THE ASSESSEE TOOK UP THE ISSUE WITH THE CIT (A) FOR RELIEF. THE LD. CIT (A) RELYING ON THE JURISD ICTIONAL TRIBUNALS FINDING IN THE CASE OF INFOSYS TECHNOLOGIES LTD. V. JCIT REPOR TED IN (2007) 109 TTJ 0631 FAVOURED THE ASSESSEE. 5. DISILLUSIONED WITH THE TREATMENT OF THE ISSUE B Y THE CIT (A) THE REVENUE HAS COME BEFORE US WITH THE PRESENT APP EAL. 6. DURING THE COURSE OF HEARING THE BRIEF SUBMISS ION OF THE LD D.R WAS REVOLVED AROUND THE FACT THAT THE FIRST APP ELLATE AUTHORITY HAS GROSSLY ERRED IN ALLOWING THE PAYMENT MADE TO THE C LUB AS REVENUE EXPENDITURE WITHOUT APPRECIATING THE FACT THAT THE PAYMENT GIVES RISE TO AN ITA NO.465/BANG/10 PAGE 3 OF 17 ENDURING BENEFIT TO THE ASSESSEE AND WAS THEREFORE IN THE NATURE OF A CAPITAL EXPENDITURE. 6.1. ON THE OTHER HAND THE ARGUMENT OF THE LD. A R WAS THAT (I) THE PAYMENT WAS MADE OUT OF BUSINESS EXPEDIENCY AND ENABLES THE ASSESSEE TO IMPROVE ITS BUSINESS RELATIONS AND PROS PECTS. NOT ONLY DOES IT PROVIDE ITS EXECUTIVES/OFFICERS BETTER CONT ACTS AND ASSOCIATIONS WITH PERSONS IN GOOD POSITION RELATIN G IN FAVOURABLE PUBLICITY FOR THE ASSESSEE BUT THE CLUB PROVIDES A CONVENIENT PLACE FOR HOLDING MEETINGS AND DISCUSSIONS. THE PU RPOSE BEHIND THE MEMBERSHIP WAS TO ESTABLISH CONTACTS WHICH WAS IN THE LONG TERM INTEREST OF THE ASSESSEE; - THE CLUB FORMS A FERTILE GROUND FOR MEETINGS BUT ALSO CONSTITUTE A RELATIVELY CHEAP PLACE TO ENTERTAIN ON ES CLIENTS AND CUSTOMERS; - BY INCURRING THE EXPENDITURE THE ASSESSEE HAD NOT ACQUIRED ANY CAPITAL ASSET NOR WAS THERE ANY ENDURING BENEF IT TO THE BUSINESS BUT IT WAS A NORMAL EXPENDITURE INCURRED IN THE DAY- TO-DAY RUNNING OF THE BUSINESS; (II) THE FEE PAID IS NON-REFUNDABLE. EVEN IF THE ASSES SEE DECIDES AFTER A PERIOD OF TIME THAT IT DOES NOT WANT THE MEMBERSH IP THE MONEY IS NOT REFUNDABLE AND THUS THERE WAS BOTH ACCRUAL AND PAYMENT DURING THE YEAR UNDER CONSIDERATION (III) RELIES ON THE FOLLOWING CASE LAWS (A) OTIS ELEVATOR COMPANY (INDIA) LTD. V. CIT 195 ITR 6 82 (BOM) (B) GUJARAT STATE EXPORT CORPORATION LTD. V. CIT 209 IT R 649 (GUJ) (C) CIT V. SUNDARAM INDUSTRIES LTD. 240 ITR 335 (MAD) (D) JCIT V. M/S. CABOT INDIA LTD. IN ITA NO:5043/MUM/20 01 DT:25.7.2005 OF THE ITAT MUMBAI BENCH H (E) DCIT V. KODAK INDIA LTD. IN ITA NO.934/M/.07 DATED: 16.2.2009 OF THE ITAT MUMBAI BENCH A (F) ENGINEERS INDIA LTD. 239 ITR (DEL) 237 (IV) NEITHER THE ASSESSEE HAS ACQUIRED ANY CAPITAL ASSET WITH RESPECT TO THE PAYMENT MADE NOR THERE IS ANY ENDURING BENEFIT ACCRUING TO THE BUSINESS OF THE ASSESSEE. (V) THERE IS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE DEFINED IN THE INCOME TAX PROCEEDINGS. EXPENDITURE HAS TO BE EITH ER CONSIDERED ITA NO.465/BANG/10 PAGE 4 OF 17 AS REVENUE OR CAPITAL IN NATURE. ONCE THE EXPENDIT URE IS HELD TO BE REVENUE THE SAME HAS TO BE FULLY ALLOWED AS HEL D IN THE CASE OF TRAVANCORE RUBBER & TEA CO. LTD. V. CIT (41 ITR 751 ) AND CIT V. KUSUM PRODUCTS LTD. (149 ITR 250). (VI) TO TREAT THE EXPENDITURE INCURRED FOR OBTAINING COR PORATE MEMBERSHIP OF A CLUB AS PRE-PAID EXPENSES IS INCORR ECT IN LAW (VII) COURTS IN INDIA HAVE REPEATEDLY HELD THAT THE EXPEN DITURE INCURRED ON ACCOUNT OF TECHNICAL KNOW-HOW FEES IS REVENUE IN NATURE AND FULLY ALLOWABLE IN THE YEAR IN WHICH IT IS INCURRED IN SPITE OF THE FACT THAT THE RELEVANT TECHNICAL KNOW-HOW AGREEMENT S WERE ENTERED INTO FOR A SUBSTANTIAL PERIOD OF TIME. 7. THE LD. AR MR. CYRUS JAL BHARUCHA AGREED WITH T HE CONCEPT OF PREPAID EXPENSES HOWEVER RESTRICTED ITS APPLICATION TO EXPENDITUR E IN THE NATURE OF RENT ADVANCE INSURANCE PREMIUM. LD. AR AGREED THAT THE PREPAID EXPENSES ARE TO BE DISCLOSED IN THE BALANCE SHEET ON THE AS SET SIDE OF THE BALANCE SHEET AND THE PORTION OF EXPEND ITURE ATTRIBUTABLE TO THE RELEVANT FINANCIAL YEAR IS TO BE CHARGED TO THE PRO FIT & LOSS ACCOUNT. LD. AR CITED THE EXAMPLE OF INSURANCE PREMIUM TO EXPLAIN T HE CONCEPT OF PREPAID EXPENSES. HE EXPLAINED THAT THE PREMIUM IS PAID O VER THE PERIOD OF THE INSURANCE POLICY AND ACCOUNTED AS STATED ABOVE. IN CASE THE INSURANCE POLICY IS TERMINATED BEFORE THE EXPIRY OF THE TERM THEN THE PREMIUM PAID FOR THE NEXT QUARTER IS REFUNDED TO THE POLICY HOLDER. THE STANDARD FIRE AND SPECIAL PERILS POLICY CLAUSE (MATERIAL DAMAGE) OF T HE NEW INDIA ASSURANCE CO. LTD. WAS QUOTED AS AN EXAMPLE WHEREIN THE CLAU SE GENERAL CONDITIONS ITEM NO.5 IT IS STATED THAT THIS INSUR ANCE MAY ALSO AT ANY TIME BE TERMINATED AT THE OPTION OF THE COMPANY ON 15 D AYS NOTICE TO THAT EFFECT BEING GIVEN TO THE INSURED IN WHICH CASE THE COMPA NY SHALL BE LIABLE TO REPAY ON DEMAND A RATEABLE PORTION OF THE PREMIUM F OR THE UNEXPIRED TERM ITA NO.465/BANG/10 PAGE 5 OF 17 FROM THE DATE OF THE CANCELLATION. LD. AR FURTHER EXPLAINED THAT SIMILARLY IF RENT IS PAID IN ADVANCE AND THE LESSEE DECIDES TO T ERMINATE THE LEASE THE RENT PAID FOR THE UNEXPIRED PERIOD OF THE LEASE IS REFUNDED TO THE ASSESSEE. LD. AR ARGUED THAT THE CONCEPT OF PREPAID EXPENSES CANNOT BE EXTENDED IN THE CASE OF CORPORATE MEMBERSHIP BECAUSE IF THE APPELLANT DECIDES TO DISCONTINUE WITH THE CORPORATE MEMBERSHIP THE FEES PAID FOR THE UNEXPIRED PERIOD OF MEMBERSHIP IS NOT REFUNDED. THEREFORE T HE ENTIRE EXPENDITURE HAS TO BE CONSIDERED AS REVENUE EXPENDITURE IN THE YEAR IN WHICH IT IS INCURRED. 8. ON THE OTHER HAND LD. DR EMPHASIZED THAT THE PA YMENT MADE FOR CORPORATE MEMBERSHIP IS FOR A BENEFIT OF ENDURING N ATURE AND THEREFORE THE EXPENDITURE IS PURELY A CAPITAL EXPENDITURE. AT NO STRETCH OF IMAGINATION THIS LUMP SUM PAYMENT OF RS.15 LAKHS COULD BE CONSI DERED AS REVENUE EXPENDITURE FOR THE BENEFIT DERIVED OUT OF THIS PAY MENT SUBSISTS OVER A PERIOD OF 15 YEARS. LD. DR PRAYED FOR UPHOLDING TH E ORDER OF LD. AO. 9. WE HAVE DULY CONSIDERED THE RIVAL SUBMISSIONS AN D CAREFULLY PERUSED THE RELEVANT RECORDS AND ALSO THE AIDE MEMOIR FURNISHED BY THE LD. A R DURING THE COURSE OF HEARING TO DRIVE HOME HIS POINT. 10. LET US FIRST ADVERT TO ANALYZE THE PROVISION S OF THE ACT RELEVANT TO DECIDE THE ISSUE. SECTION 28 OF THE ACT IS THE CHA RGING SECTION BRINGING UNDER ITS FOLD THE CHARGEABILITY OF INCOME UNDER TH E HEAD PROFITS OR GAINS OF BUSINESS OR PROFESSION. SECTION 29 OF THE ACT PRO VIDES THE MANNER IN WHICH THE INCOME UNDER THE HEAD PROFITS OR GAINS O F BUSINESS OR PROFESSION IS TO BE COMPUTED I.E. IN ACCORDANCE WITH SECTIONS 30 TO 43D OF THE ACT. ITA NO.465/BANG/10 PAGE 6 OF 17 SECTIONS 30 TO 36 PROVIDE EXCLUSIVELY FOR CERTAIN D EDUCTIONS IN THE NATURE OF EXPENDITURE ALLOWANCE REBATE RESERVES ETC. SECTION 37 PROVIDES FOR DEDUCTION OF ANY EXPENDITURE INCURRED WHOLLY AND EX CLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION BUT NOT PROVIDED UNDER SECTIONS 30 TO 36 OF THE ACT AND WHICH ARE NOT IN THE NATURE OF CAPITAL EXPENDITURE PERSONAL EXPENSES OR ANY EXPENDITURE PROHIBITED BY LAW. THUS IT IS EVIDENT THAT ANY REVENUE EXPENDITURE EXPENDED WHOLL Y AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION BARRING CERTA IN EXPENDITURE SPECIFICALLY PROVIDED BY THE ACT SHALL BE ALLOWED A S DEDUCTION. THEREFORE THE MOOT QUESTION BEFORE US IS TO DETERMINE THE NAT URE OF EXPENDITURE WITH REGARD TO PAYMENTS MADE FOR OBTAINING CORPORATE MEM BERSHIP IN A CLUB. AT THIS STAGE IT IS VERY RELEVANT FOR US TO EXAMINE AS TO WHAT REVENUE CAPITAL AND PREPAID EXPENDITURE ARE. 10.1 REVENUE EXPENDITURE : IT IS AN EXPENDITURE INCURRED FOR THE PURPOSE OF EARNING THE INCOME FOR THE PREVIOUS YEAR . THE BENEFITS DERIVED FROM THIS EXPENSE ARE EXHAUSTED DURING THE PREVIOUS YEAR AND DOES NOT OVERFLOW TO THE SUBSEQUENT YEAR. IN CERTAIN CASES THE BENEFITS DERIVED FROM THE EXPENSES INCURRED DURING THE PREVIOUS YEAR OVER FLOW TO THE SUBSEQUENT YEARS. FOR EXAMPLE EXPENDITURE INCURRED ON ADVERT ISING AND PUBLICITY TRAINING AND EDUCATION TO STAFF SALES PROMOTION EX PENSE ETC. DEFINITE PERIOD FOR WHICH THE BENEFITS OVERFLOW CANNOT BE DE TERMINED. THIS KIND OF EXPENDITURE IS TERMED AS DEFERRED REVENUE EXPENDITURE . THERE ARE NO SPECIAL TREATMENTS PROVIDED UNDER THE ACT FOR DEFER RED REVENUE EXPENDITURE. THEREFORE DUE TO THE COMPLEXITIES IN VOLVED IN APPORTIONING THE RELEVANT EXPENSE FOR THE RELEVANT PREVIOUS YEAR THE COURTS HAVE OFTEN ITA NO.465/BANG/10 PAGE 7 OF 17 HELD THESE KINDS OF EXPENSES TO BE REVENUE IN NATUR E AND THE ENTIRE EXPENDITURE INCURRED DURING THE PREVIOUS YEAR IS AL LOWED AS DEDUCTION FOR THE PREVIOUS YEAR OVERLOOKING THE PRINCIPLES OF MATCHING CONCEPT PERHAPS ALSO FOR THE REASON THAT THESE EXPENSES ARE PRIMARILY INCURRED FOR DERIVING BENEFIT DURING THE PREVIOUS YEAR; AS IN TH E CASE OF ADVERTISEMENT AND PUBLICITY EXPENSES IT IS VERY ESSENTIAL TO INC UR THESE EXPENSES IN ORDER TO EARN REVENUE DURING THE PREVIOUS YEAR THOUGH BE NEFITS DERIVED OVERFLOW FOR THE SUBSEQUENT YEARS WHICH ARE ONLY CONSEQUENTI AL AND TO WHAT EXTENT THE BENEFITS ARE DERIVED IN THE SUBSEQUENT YEARS AR E NOT MEASURABLE. 10.2. CAPITAL EXPENDITURE : IT IS AN EXPENDITURE INCURRED FOR BRINGING INTO EXISTENCE AN ASSET OR AN ADVANTAGE OF ENDURING BENE FIT. THE WORD CAPITAL REFERS TO PERMANENCY. HENCE SUCH EXPENDITURE REVO LVES AROUND TO BRING IN A TANGIBLE OR INTANGIBLE ASSET. SUCH ASSET EITHER DELIVERS INCOME OR ASSISTS IN EARNING INCOME YEAR AFTER YEAR. 10.3. PREPAID EXPENDITURE : IT IS AN EXPENDITURE INCURRED FOR DERIVING A BENEFIT OR SERVICE FOR A PREDETERMINED PERIOD CONSI STING OF SEVERAL PREVIOUS YEARS; HOWEVER THE ENTIRE EXPENDITURE IS PAID IN A PREVIOUS YEAR. FOR EXAMPLE (I) RENT PAID IN ADVANCE SAY FOR FIVE YEA RS (II) HIRE CHARGES PAID IN ADVANCE SAY FOR 3 YEARS (III) PREMIUM PAID FOR SEC URING WARRANTY BENEFITS SAY FOR 3 YEARS ETC. THUS A LUMP SUM AMOUNT IS D ETERMINED AND PAID BY AN ENTITY FOR THE SERVICE TO BE OBTAINED FOR A DEFI NITE PERIOD OF TIME. IT IS AN ADVANCE PAYMENT MADE FOR THE SERVICE TO BE RENDERED FOR THE CURRENT PREVIOUS YEAR AND ALSO FOR LATER YEARS. THEREFORE IT IS APPROPRIATE NOT TO CHARGE THE ADVANCE PORTION OF PAYMENT MADE AS REVEN UE EXPENDITURE FOR ITA NO.465/BANG/10 PAGE 8 OF 17 THE PREVIOUS YEAR. THE ADVANCE PORTION HAS TO BE R EFLECTED IN THE BALANCE SHEET UNDER THE HEAD CURRENT ASSET AND THE PORTIO N PERTAINING TO THE RELEVANT PREVIOUS YEAR HAS TO BE CHARGED IN THE PRO FIT & LOSS ACCOUNT AS REVENUE EXPENDITURE. IN EVERY PREVIOUS YEAR ADJUST MENTS HAVE TO BE MADE IN ORDER TO GIVE TRUE AND FAIR VIEW OF THE BALANCE SHEET OF THE ENTITY. 11. NOW LET US EXAMINE AS TO WHAT CORPORATE MEMBERS HIP OF BANGALORE CLUB MEANS. THE EXTRACT OF THE BANGALORE CLUBS RE CENT-BYE LAWS ARE REPRODUCED HEREBELOW FOR REFERENCE: CORPORATE MEMBERSHIP: (A) A PUBLIC OR PRIVATE LIMITED COMPANY INCORPORATE D IN INDIA NATIONALISED BANKS STATE BANK OF INDIA AND ITS SUB SIDIARIES PRIVATE BANKS FINANCIAL INSTITUTIONS FOREIGN BANKS INSUR ANCE COMPANIES AND PUBLIC SECTOR UNDERTAKINGS HAVING AN OFFICE OR FACTORY IN THE STATE OF KARNATAKA WITH A PAID UP CAPITAL OF NOT LE SS THAN RS. 10 CRORES OR A WHOLLY OWNED SUBSIDIARY COMPANY INCORPORATED IN INDIA OF A HOLDING COMPANY INCORPORATED OVERSEAS WITH A P AID UP CAPITAL OF NOT LESS THAN US $ 10 MILLION OR ITS EQUIVALENT SHA LL BE ELIGIBLE UPON THE PROPOSAL OF A PERMANENT MEMBER DULY SECONDED A ND ACCOMPANIED BY A STATEMENT OF PARTICULARS RELATING TO SUCH CORPORATE ORGANISATION FURNISHED BY THE CHIEF EXECUTIVE THER EOF TO BE ELECTED AS A CORPORATE MEMBER OF THE CLUB. ANY SUCH ENTITY CAN OPT FOR MORE THAN ONE CORPORATE MEMBERSHIP BY BEING THE LAS T IN THE WAITING LIST IF ANY AS ON THE DATE OF REGISTRATION OF APP LICATION PROVIDED THERE ARE NO VACANCIES. SUCH MEMBERSHIP SHALL ENTITLE TH E CORPORATE MEMBER TO NOMINATE THREE OF ITS FULL TIME DIRECTORS / SENIOR EXECUTIVES FOR USE OF THE FACILITIES PROVIDED BY THE CLUB. NOTWITHSTANDING A NOMINATION NOT BEING MADE THE CO RPORATE MEMBER SHALL BE LIABLE TO EFFECT IMMEDIATE PAYMENT OF THE PRESCRIBED FEES FOR THE USE OF THE FACILITIES PROVIDED BY THE THREE OF ITS FULL TIME DIRECTORS / SENIOR EXECUTIVES FOR USE OF THE FACILITIES PROVIDED BY THE CLUB. NOTWITHSTANDING A NOMINATION NOT BEING MADE THE CORPORATE MEMBER SHALL BE LIABLE TO EFFECT IMMEDIATE PAYMENT OF THE PRESCRIBED FEES FOR THE USE OF THE FACILITIES OF THE CLUB BY S UCH NOMINEES. EACH OF THE CORPORATES NOMINEES SHALL FURNISH A CER TIFICATE FROM THEIR AUDITOR/S CONFIRMING THAT THE INTENDED NOMINEE IS A FULL TIME DIRECTOR / SENIOR EXECUTIVE OF THE AFORESAID CORPORATE ORGANISATION HOLDING THE POSITION STATED IN ITS NOMINATION FORM. SUCH A CERTIFICATE ITA NO.465/BANG/10 PAGE 9 OF 17 SHALL BE SUBMITTED EVERY YEAR AS ON 31 ST MARCH IN THE ABSENCE THEREOF THE NOMINEE/S WILL NOT BE ALLOWED USE OF T HE CLUB FACILITIES. THE CLUB SHALL HAVE AUTHORITY TO REJECT A NOMINEE I F IT CONSIDERS HIM/HER UNSUITABLE. THE TOTAL NUMBER OF CORPORATE M EMBERS SHALL AT NO TIME EXCEED ONE HUNDRED AND SEVENTY FIVE. (B) A CORPORATE MEMBER SHALL ENSURE PROMPT PAYMENT OF CLUB DUES BY ITS NOMINEES AND SHALL LOSE ITS MEMBERSHIP IN THE EVENT ANY OR ALL OF ITS NOMINEES AFTER BEING DENOTED A DEFAUL TER FAILS TO PAY THEIR/HIS/HER DUES TO THE CLUB WITHIN THE PERIOD PR ESCRIBED IN THESE RULES. PROVIDED THAT THE CORPORATE MEMBERSHIP OF SUCH COMPANY/ORGANISATION SHALL STAND AUTOMATICALLY TERM INATED UPON THE EXPIRY OF 10 YEARS FROM THE DATE OF ELECTION OR EARLIER IN THE EVENT OF A CHANGE IN STATUS OF THE COMPANY/ORGANISATION UND ER WHICH IT CEASES TO EXIST BY REASON OF ITS AMALGAMATION WITH ANOTHER ORGANISATION ITS LIQUIDATION OR OTHERWISE AND UPON SUCH TERMINATION ALL NOMINATIONS OF SUCH CORPORATE MEMBER SHALL IPSO FACTO DETERMINE. CORPORATE MEMBER MAY HOWEVER APPLY FOR RE-ELECTION IF THEY ARE ELIGIBLE TO DO SO AND THEIR SAID APPLICATION FOR RE -ELECTION SHALL BE CONSIDERED IMMEDIATELY IF THEY APPLY FOR SUCH MEMB ERSHIP NOT LESS THAN SIX MONTHS BEFORE THE DATE ON WHICH THEIR EXIS TING MEMBERSHIP CEASES. TRANSITORY PROVISIONS: THE ENHANCEMENT IN THE CAPITAL BASE AND AUTOMATIC CLAUSE UNDER THIS CATEGORY SHALL NOT AFFE CT THE MEMBERSHIP OF THE EXISTING MEMBERS IN THIS CATEGORY. (C) FEE: NON-REFUNDABLE CORPORATE MEMBERSHIP FEE RS.45 LAKHS + 10.30% OF SERVICE TAX. 12. THUS ON PAYMENT OF THE STIPULATED AMOUNT (IN THE APPELLANTS CASE RS.15 LAKHS HOWEVER IT IS RELEVANT TO NOTE THAT AS ON DATE ANY FRESH APPLICANTS ARE CHARGED BY THE CLUB RS.45 LAKHS FUR THER CERTAIN OTHER CLUBS CHARGE TWICE THE FOLD OR MORE) AND COMPLIANCE OF THE OTHER TERMS AND CONDITIONS OF THE CLUB CORPORATE MEMBERSHIP IS GRANTED TO CORPORATE. THE CORPORATE MEMBER IS ENTITLED TO NOMINATE A SPEC IFIED NUMBER OF THEIR ITA NO.465/BANG/10 PAGE 10 OF 17 DIRECTORS OR SEMI-EXECUTIVES FOR THE USE OF THE FAC ILITIES PROVIDED BY THE CLUB FOR A PERIOD OF TEN YEARS. THEY DO NOT HAVE VOTING POWER OR RIGHT FOR PARTICIPATION IN THE MANAGEMENT OF THE CLUB. IT IS ONLY A RIGHT GIVEN FOR THE USAGE OF THE CLUB ON COMPLIANCE WITH THE RULES AND REGULATIONS OF THE CLUB. THIS RIGHT OF USAGE IS GIVEN FOR A PERIOD OF TEN YE ARS FROM THE DATE ON WHICH THE CORPORATE MEMBERSHIP IS GRANTED. THEREFORE IT IS APPARENT THAT THE BENEFIT DERIVED OUT OF THE PAYMEN T OF RS.15 LAKHS IN THE INSTANT CASE ACCORDING TO THE SUBMISSION OF LD. AR FALLS FOR FIFTEEN YEARS AS A RESULT ONLY THE RELEVANT PROPORTIONATE PORTION ATTRIBUTABLE TO THE PREVIOUS YEAR CAN BE CONSIDERED AS REVENUE EXPENDIT URE AND THE BALANCE WILL BE IN THE NATURE OF PREPAID EXPENDITURE. THIS ASPECT IS VERY CRUCIAL IN DETERMINING THE INCOME FOR THE PREVIOUS YEAR OF AN ASSESSEE. 13. THE FOLLOWING ACCOUNTING CONCEPTS ARE VERY RELE VANT FOR DETERMINING THE CORRECT AND ACTUAL INCOME EARNED DURING THE PRE VIOUS YEAR: (I) REVENUE RECOGNITION CONCEPT: IN THE CASE OF RENDERING SERVICES REVENUE IS RECOGNIZED PROPORTIONATELY WITH THE DEGR EE OF COMPLETION OF SERVICE. DIAGONALLY REVENUE EXPENDITURE HAS ALSO T O BE RECOGNIZED PROPORTIONATELY WITH THE DEGREE OF DERIVING THE SER VICES. (II) MATCHING CONCEPTS : AFTER HAVING RECOGNIZED THE REVENUE RECEIPTS FOR A PERIOD ALL THE COSTS RELATING TO THAT PERIOD SHOULD BE IDENTIFIED AND CHARGED TO THAT PERIOD IN ORDER TO DETERMINE THE NE T INCOME OF THAT PERIOD. THIS IS THE ESSENCE OF MATCHING CONCEPT. TO MEASUR E THE INCOME OF A PERIOD IT IS VERY ESSENTIAL TO ARRIVE AT THE EXPEN DITURE OF THAT PERIOD AND AFTER ARRIVING AT SUCH EXPENDITURE IT SHOULD BE TA KEN OFF FROM THE TOTAL ITA NO.465/BANG/10 PAGE 11 OF 17 INCOME EARNED FOR THE PERIOD. THE NET RESULT WILL BE THE ACTUAL INCOME OF THE PERIOD. THE CAPITAL EXPENDITURE WHICH BRINGS I NTO EXISTENCE A CAPITAL ASSET CANNOT BE FULLY CHARGED TO THE PROFIT & LOSS ACCOUNT IN THE YEAR IN WHICH SUCH EXPENDITURE IS INCURRED BECAUSE THE BENE FIT DERIVED FROM THE ASSET EXTENDS TILL THE LIFETIME OF THE ASSET. THE ACT HAS RECOGNIZED THE CONCEPT OF DEPRECIATION BEING A NOTIONAL EXPENDITURE ALLOWABLE UNDER THE ACT WITH SPECIFIC RATES WITH RESPECT TO SUCH EXPEND ITURE INCURRED FOR ACQUIRING ASSETS. THIS CONCEPT OF DEPRECIATION IS AIMED AT FOR ABSORBING THE COST OF THE ASSET RATIONALLY OVER A PERIOD OF Y EARS TO DETERMINE THE CORRECT INCOME EARNED FOR THE PREVIOUS YEAR. AS PE R SECTION 4 OF THE ACT INCOME TAX SHALL BE CHARGED FOR ANY ASSESSMENT YEAR AT ANY RATE OR RATES PRESCRIBED IN RESPECT OF THE TOTAL INCOME OF THE PR EVIOUS YEAR. PREVIOUS YEAR IS DEFINED IN THE ACT AS THE FINANCIAL YEAR IM MEDIATELY PRECEDING THE ASSESSMENT YEAR. THEREFORE IT IS ESSENTIAL TO DET ERMINE THE ACTUAL INCOME OF THE PREVIOUS YEAR CONSIDERING ALL FACTORS FOR LE VY OF TAX. FOR ARRIVING AT THE ACTUAL INCOME OF THE PREVIOUS YEAR IT IS VERY I MPORTANT TO IDENTIFY THE INCOME EARNED DURING THE PREVIOUS YEAR AND THE EXPE NSE ATTRIBUTABLE TO THE EARNINGS MADE FOR THE PREVIOUS YEAR. THUS APPORTIO NMENT OF REVENUE AND EXPENDITURE TO THE CONCERNED PREVIOUS YEAR PLAYS A VITAL ROLE. I.E. ALL RECEIPTS RECEIVED FOR THE PREVIOUS YEAR HAS TO BE C LASSIFIED AS ACCRUED FOR THE PREVIOUS YEAR AND ADVANCE RECEIPTS. ONLY THE RE CEIPTS ACCRUED FOR THE PREVIOUS YEAR HAS TO BE BOOKED AS REVENUE RECEIPTS FOR THE PREVIOUS YEAR AND THE BALANCE HAS TO BE CARRIED FORWARD FOR THE S UBSEQUENT YEARS. A SIMILAR TREATMENT HAS TO BE MET OUT FOR THE PAYMENT S MADE FOR EXPENSES. AT TIMES DIFFICULTY ARISES DUE TO CERTAIN DEFERRED REVENUE EXPENSES WHICH ITA NO.465/BANG/10 PAGE 12 OF 17 CANNOT BE APPORTIONED CORRECTLY OVER A PERIOD OF PR EVIOUS YEARS. HOWEVER PRIMARILY THESE EXPENSES ARE INCURRED FOR A PREVIOU S YEAR AND THEREFORE SEVERAL COURTS HAVE HELD THAT SUCH EXPENSES HAVE TO BE WRITTEN OFF IN THE YEAR IN WHICH IT IS INCURRED. HOWEVER WHEN AN EXPE NSE IS INCURRED FOR A DEFINITE PERIOD AND WHERE THE BENEFITS DERIVED IN E ACH PREVIOUS YEAR ARE EVEN SUCH EXPENDITURE HAS TO BE APPORTIONED PROPOR TIONATELY. UNLESS SUCH EXPENSES ARE APPORTIONED THE CORRECT INCOME O F THE PREVIOUS YEAR CANNOT BE DETERMINED. IN SOME CASES THE PERIOD FO R WHICH PAYMENT IS DONE MAY BE TOO LONG SAY 25 30 YEARS ETC. DIFFICU LTY MAY ARISE IN SUCH CASE TO APPORTION SUCH EXPENSES FOR SUCH A LONG PER IOD. WITH RESPECT TO THE ASPECTS OF CLUB MEMBERSHIP REV. AUTHOR DORPHY DSOUZA IN HIS BOOK ON INDIAN ACCOUNTING STANDARDS AND GAAP VOL. 1 6 TH EDN. REPRINT IN JULY 2009 PAGE 778 HAS CLARIFIED AS UNDER: CLUB MEMBERSHIP : NON-REFUNDABLE CLUB MEMBERSHIP DEPOSIT SHOULD BE SH OWN AS AN INTANGIBLE ASSET AND AMORTISED OVER THE PERIOD OF MEMBERSHIP. IN T HE CASE OF CORPORATE LIFE MEMBERSHIP AMORTISATION MAY EXCEED 10 YEARS AS THE RE IS PERSUASIVE EVIDENCE THAT BENEFITS WOULD FLOW EVEN BEYOND THAT PERIOD. HOWEVER IT WOULD BE PRUDENT AND CONSERVATIVE NOT TO EXTEND THEIR LIFE BEYOND 10 YEARS FOR THE PURPOSE OF AMORTIZATION CONSIDERING AS 26. 14. IT IS VERY RELEVANT TO NOTE CLAUSE 63 OF AS 26 WHICH HOLDS AS UNDER: AMORTIZATION PERIOD: THE DEPRECIABLE AMOUNT OF AN INTANGIBLE ASSET SHOULD BE ALLOCATED ON A SYSTEMATIC BASIS OVER THE BEST ESTIMATE OF ITS USEFUL LIFE. THERE IS A REBUTTABLE PRESUMPTION THA T THE USEFUL LIFE OF AN INTANGIBLE ASSET WILL NOT EXCEED TEN YEARS FROM THE DATE WHEN THE ASSET IS AVAILABLE FOR USE. AMORTIZATION SHOULD COMMENCE WH EN THE ASSET IS AVAILABLE FOR USE. THE OBJECTS OF AS26 ARE TO PRES CRIBE THE ACCOUNTING ITA NO.465/BANG/10 PAGE 13 OF 17 TREATMENT FOR INTANGIBLE ASSETS THAT ARE NOT DEALT WITH SPECIFICALLY IN OTHER ACCOUNTING STANDARDS. THE STATEMENT REQUIRES AN ENT ERPRISE TO RECOGNISE AN INTANGIBLE ASSET IF CERTAIN CRITERIA ARE MET. TH E STATEMENT ALSO SPECIFIES HOW TO MEASURE THE CARRYING AMOUNT OF INTANGIBLE AS SETS AND REQUIRES CERTAIN DISCLOSURES ABOUT INTANGIBLE ASSETS. IT ALS O LAYS NORMS FOR AMORTISATION OF THE ASSETS. 15. FROM THE NATURE OF EXPENSE INCURRED AND THE BEN EFITS DERIVED CLUB MEMBERSHIP CAN BE CONSTRUED AS AN INTANGIBLE ASSET . BY FOLLOWING THE GUIDELINES OF AS 26 IT CAN BE JUDICIOUSLY CONCLUDED THAT THIS EXPENSE HAS TO BE WRITTEN OFF IN PROPORTION TO THE LIFE TERM OF TH E MEMBERSHIP AND IF THE LIFE TERM EXTENDS BEYOND TEN YEARS IT SHOULD BE RESTRIC TED TO TEN YEARS. WITH REGARD TO THE ARGUMENT PUT FORTH BY THE LD.AR THAT THE CLUB MEMBERSHIP FEES IS NOT REFUNDABLE IF THE APPELLANT DECIDED TO CEDE THE MEMBERSHIP AND THEREFORE THE ENTIRE AMOUNT HAS TO BE WRITTEN OFF I N THE YEAR IN WHICH THE AMOUNT IS PAID; WE HOLD THAT IN SUCH SITUATION THE APPELLANT WILL BE ENTITLED TO WRITE OFF THE ENTIRE BALANCE AMOUNT SHOWN AS PRE PAID EXPENSE IN THE BALANCE SHEET IN THE YEAR IN WHICH SUCH AN EVENT HA PPENS BECAUSE ONLY DURING THAT PERIOD THE EXPENSES CRYSTALLIZES. 16. THE RECENT INTRODUCTION OF SECTION14A IN THE IN COME TAX ACT ACCOUNTING STANDARDS AND GAAP IN PARTICULAR AS1 AND AS26 HAS FURTHER STRENGTHENED THESE CONCEPTS. THE PRINCIPLES OF ACCO UNTING STANDARDS AND GAAP ARE APPLICABLE FOR GENERAL PURPOSE FINANCIAL STATEMENTS WHICH ARE PREPARED SOLELY FOR TAX PURPOSE OR FOR THE USE OF L ENDERS. FURTHER THE ADHERENCE TO ACCOUNTING STANDARDS IS MANDATORY FOR ALL COMPANIES ITA NO.465/BANG/10 PAGE 14 OF 17 COMMENCING FROM 7 TH DECEMBER 2006. SECTION 642 OF THE COMPANIES ACT 1956 READ WITH SECTION 2(11) 217(2AA) AND 227(3)(D ) MANDATES THE COMPLIANCE OF ACCOUNTING STANDARDS. FURTHER SECTIO N 115J OF THE INCOME- TAX ACT 1961 MAKES IT MANDATORY FOR EVERY ASSESSEE BEING A COMPANY FOR THE PURPOSE OF THIS SECTION TO PREPARE ITS PROFIT & LOSS ACCOUNT BALANCE SHEET ETC. IN ACCORDANCE WITH THE RELEVANT PROVISI ONS OF THE COMPANIES ACT 1956. THE INTRODUCTION OF SECTION14A IN THE IN COME TAX W.E.F.1/4/2007 BY FINANCE ACT 2006 SOLIDIFIES THE CONCEPT OF MATCH ING CONCEPT WHICH PROVIDES THAT FOR THE PURPOSE OF COMPUTING TOTAL IN COME NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY TH E ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . AS1 ALSO RECOGNISE AND GIVE VITAL IMPORTANCE TO THIS CONCEPT. THOUGH T HE INTRODUCTION OF SECTION14A OF THE ACT AND AMENDMENTS OF THE COMPANI ES ACT ARE RECENT DEVELOPMENTS NOT AFFECTING THE ASSESSEES CASE AS I T FALLS IN THE ASSESSMENT YEAR 2005-06 COMPLIANCE OF AS1 AND AS26 IS VERY RELEVANT BECAUSE IT IS A TOOL OR A METHODOLOGY TO DETERMINE THE CORRECT STATE OF AFFAIRS OF AN ENTERPRISE. THE ACCOUNTING STANDARDS ARE PRESCRIBED TO ESTABLISH RULES RELATING TO RECOGNITION MEASUREMEN T AND DISCLOSURE TO ENSURE THAT ALL ENTERPRISES FOLLOW A UNIFORM AND CO RRECT APPROACH IN PREPARING THEIR FINANCIAL STATEMENTS IN ORDER TO AR RIVE AT THE ACCURATE STATE OF AFFAIRS. FURTHER IT IS WORTHWHILE TO MENTION TH AT ACCOUNTING STANDARD-1 HAS BEEN NOTIFIED BY THE CENTRAL GOVERNMENT IN ACCO RDANCE WITH THE POWERS CONFERRED BY SECTION 145(2) OF THE ACT TO BE MANDATORY FOR ALL ASSESSEES FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING VIDE NOTIFICATION NO.9949[F.NO.132/7/95-TPL DATED 25.1.1996 WHEREIN T HE ACCOUNTING ITA NO.465/BANG/10 PAGE 15 OF 17 POLICIES SUCH AS PRUDENCE SUBSTANCE OVER FORM MATERIALITY AND CONCEPT OF ACCRUAL GOING CONCERN ETC. ARE EMBE DDED WHICH ARE VERY RELEVANT TO DECIDE THE ISSUE BEFORE US. 17. NOW AFTER DETERMINING THE NATURE OF ASSET IT IS VERY ESSENTIAL TO COMPLY WITH THE CONVENTION OF MATERIALITY I.E. IF THE COST INCURRED ON THE ASSET IS NEGLIGIBLE OR SMALL IN VALUE THOUGH TECHNI CALLY THE EXPENSE HAS TO BE APPORTIONED FOR THE NUMBER OF YEARS OF THE LIFE OF THE ASSET IT HAS TO BE WRITTEN OFF IN THE YEAR IN WHICH THE COST IS INCURR ED. AS PER THIS CONVENTION ONE MUST ATTACH IMPORTANCE TO MATERIAL DETAILS AND IGNORE INSIGNIFICANT DETAILS IN THE FINANCIAL STATEMENTS. UNNECESSARILY INSIGNIFICANT DETAILS SHOULD NOT BE BURDENED IN THE FINANCIAL STATEMENTS. ACCORDING TO INDIAN ACCOUNTING STANDARDS-1 MATERIALITY SHOULD GOVERN THE SELECTION AND APPLICATION OF ACCOUNTING POLICIES. BY THIS CONCEPT IN THE CASE OF THE CORPORATE CLUB MEMBERSHIP IF THE FEE PAID IS INSIGN IFICANT COMPARING WITH THE PROFIT/LOSS OR TURNOVER OF THE ASSESSEE TH E SAME HAS TO BE WRITTEN OFF IN THE SAME YEAR. 18. HAVING BRIEFLY DISCUSSED WITH THE INDIAN ACCOUN TING STANDARDS GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND CONCEP TS WHICH ARE SOLELY EXISTENT FOR PRESENTING A TRUE AND FAIR DISCLOSURE OF STATEMENT OF AFFAIRS IN BUSINESS ENVIRONMENTS LET US EXAMINE THE ISSUE BEF ORE US. IN THE CASE ON HAND THE GROSS INCOME OF THE ASSESSEE IS RS.90 00 000. THE ASSESSEE HAS CLAIMED RS.15 LAKHS AS EXPENSES FOR OBTAINING C ORPORATE MEMBERSHIP IN THE CLUB THEREBY DECLARING A NET INCOME OF RS.75 LAKHS IN ITS RETURN OF INCOME. IT AMOUNTS TO APPROX. 16.67% OF THE GROSS INCOME OF THE ASSESSEE ITA NO.465/BANG/10 PAGE 16 OF 17 WHICH IS ON A HIGHER SIDE THEREBY DISTORTING THE CO RRECT INCOME OF THE ASSESSEE FOR THE PREVIOUS YEAR. FOLLOWING THE MATCHING CONCEPT THE MATERIALITY CONCEPT AND ACCOUNTING STANDARD AS 26 I N THE ASSESSEES CASE BEFORE US THE AMOUNT OF RS.15 LAKHS CLAIMED A S EXPENSES TOWARDS CORPORATE MEMBERSHIP FOR A PERIOD OF 15 YEA RS HAS TO BE APPORTIONED IN TEN YEARS PROPORTIONATELY FROM THE D ATE OF OBTAINING THE MEMBERSHIP. IT IS ORDERED ACCORDINGLY. WE HAVE HELD SO IN THIS CASE KEEPING IN VIEW OF THE FACTS OF THE CASE. HOWEVER IF THE AMOUNT PAID IS NEGLIGIBLE IT WILL BE APPROPRIATE TO WRITE OFF THE EXPENSE IN THE YEAR IN WHICH SUCH EXPENSE IS INCURRED. WE FURTHER MAKE IT CLEAR THAT THE EXPENDITURE INCURRED BY WAY OF FEES FOR OBTAINING CORPORATE MEM BERSHIP IN A CLUB IS REVENUE AND PREPAID IN NATURE AND HAS TO BE WRITTEN OFF IN THE YEAR IN WHICH IT IS INCURRED OR TO BE APPORTIONED FOR A PER IOD NOT EXCEEDING TEN YEARS AS THE CASE MAY BE FOLLOWING THE PRINCIPLES LAID DOWN HEREINABOVE. 19. WE HAVE CONSIDERED ALL THE CASE LAWS REFERRED T O BY THE ASSESSEE HOWEVER WE FIND THAT IN CERTAIN CASES THE CATEGORY OF MEMBERSHIP WERE DISTINGUISHABLE AND ALL THESE TECHNICAL FACTORS INV OLVED WERE NOT PUT FORTH FOR CONSIDERATION. 20. WE HAVE ALSO RELIED ON THE RECENT DECISION REND ERED IN THE CASE OF ORCHID CHEMICALS & PHARMACEUTICALS LTD. V. ACIT [20 11] 7 ITR (TRIB) 601 (CHENNAI) WHEREIN IT IS HELD THAT THE NON-COMPETE FEES PAID FOR A PERIOD OF FOUR YEARS HAS TO BE SPREAD OVER FOR THE PERIOD OF FOUR YEARS AND IN THE CASE OF TECHNO SHARES AND STOCKS LTD. VS. CIT [2010 ] 327 ITR 323 (SC) WHEREIN IT IS HELD THAT MEMBERSHIP OF BOMBAY STOCK EXCHANGE IS AN ITA NO.465/BANG/10 PAGE 17 OF 17 INTANGIBLE ASSET AND DEPRECIATION CAN BE CLAIMED TH EREON. IN THE INSTANT CASE CORPORATE MEMBERSHIP IS HELD TO BE AN INTANGIB LE ASSET HOWEVER IT IS WRITTEN OFF IN TEN YEARS FOLLOWING THE PRINCIPLES L AID DOWN IN AS6 BECAUSE THE DEFINITE PERIOD FOR WHICH THE BENEFIT DERIVED I S PREDETERMINED UNLIKE IN THE CASE OF MEMBERSHIP IN STOCK EXCHANGE WHERE THE MEMBERSHIP CEASES TO BE AN ASSET ONLY WHEN THE MEMBER COMMITS A DEFAU LT. 21. WE WOULD ALSO LIKE TO PLACE ON RECORD OUR APPR ECIATION FOR THE STRENUOUS AND ELABORATE ARGUMENTS PUT FORTH BY THE LD.DR. AND THE LD.AR. 22. IN THE RESULT THE APPEAL OF THE REVENU E IS PARTLY ALLOWED AS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF MARCH 2011. SD/- SD/- ( GEORGE GEOREGE K. ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE DATED THE 10 TH MARCH 2011. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. C IT(A) 5. DR ITAT BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT BANGALORE.