The case of Klaxon Trading (P) Ltd. vs DCIT revolves around the deductibility of membership fees paid to a club as a business expense for the Assessment Year 2016-17. The Income Tax Appellate Tribunal (ITAT) deliberated on whether this expenditure, initially disallowed by the Assessing Officer (AO) as a personal expense, should be recognized as a legitimate business expense.
Klaxon Trading (P) Ltd., a private limited company engaged in the trading of metal scrap, filed its return of income on 17th October 2016, declaring a total income of Rs. 29,86,230/-. During the assessment under section 143(3) completed on 31st October 2018, the AO disallowed Rs. 1,23,375/- debited as membership fees, considering it a personal expense.
Aggrieved by the AO’s decision, Klaxon Trading appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the AO’s order. This led the company to further appeal to the ITAT.
The primary contention from Klaxon Trading’s counsel was that the membership fees were incurred for business purposes. The company argued that their business premises, located in a crowded and dusty locality, were unsuitable for client meetings. Hence, obtaining a club membership provided a better environment for conducting business activities.
On the other hand, the Departmental Representative (DR) supported the AO’s and CIT(A)’s view, arguing that the expenditure was personal in nature and should not be allowed as a business expense.
Upon reviewing the arguments and relevant case laws, the ITAT found merit in Klaxon Trading’s argument. The tribunal noted that the expenditure was genuinely incurred to facilitate business activities, aligning with the principle laid down in the case of CIT vs. Samtel Colour Ltd. by the Delhi High Court, which held that corporate membership fees paid to a club are revenue expenditures and therefore allowable.
The tribunal also considered other similar rulings by coordinate benches that consistently treated such membership fees as allowable business expenses. Given the facts and circumstances, and the absence of any dispute regarding the genuineness of the payment, the ITAT decided to set aside the CIT(A)’s order.
Thus, the tribunal directed the AO to delete the addition of Rs. 1,23,375/- and allowed Klaxon Trading’s appeal.
The ITAT’s decision in the case of Klaxon Trading (P) Ltd. vs DCIT underscores the importance of understanding the nature and purpose of business expenditures. This ruling reiterates that expenditures, even those that might appear personal at first glance, can be deductible if they serve a legitimate business purpose. The decision provides valuable insights for businesses on how to substantiate their claims for deductions, ensuring they align with judicial precedents and statutory provisions.
The final order, pronounced on 19th January 2021, not only provided relief to Klaxon Trading but also set a precedent for similar cases where the nature of business expenses is contested.
Klaxon Trading vs DCIT: Membership Fee Dispute for AY 2016-17
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