ASSAM BROOK LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) This is a reference under Section 256(1) of the Income-tax Act, 1961, wherein two questions were referred to this court by the Income-tax Appellate Tribunal. The facts of the case are that the assessee filed its return in respect of the assessment year 1989-90. The assessee is a limited company and the method of accounting is the mercantile system. The assessment, by the authority concerned, was made under Section 143(3) of the Income-tax Act, 1961. The Assessing Officer did not entertain the claim of the assessee in respect of certain items amongst which the disallowance of deduction claimed under Section 32AB of the Income-tax Act, 1961, and the disallowance of Rs. 5,93,126 under Section 37(2A) of the Income-tax Act, 1961, are relevant so far as the present hearing is concerned. Being aggrieved by the decision of the Assessing Officer in respect of those two items, the assessee preferred appeal before the Commissioner of Income-tax (Appeals) and thereafter the matter finally came before the learned Income-tax Appellate Tribunal for decision. The learned Tribunal allowed Rs. 78,135 in favour of the asses-see-company treating it as expenditure for business purposes. However, the claim in respect of the expenditure of Rs. 5,00,000 on this head was not allowed by the Tribunal. As such, being asked by the assessee the learned Tribunal referred the question before this court which is as follows :

(2.) Another question was referred by the Tribunal on the facts that the Assessing Officer while making the assessment took the view that the assessee acquired certain new plant and machinery or deposited certain funds in the investment deposit account and he did not allow the deduction in favour of the assessee as per the provisions of Section 32AB(3) of the Income-tax Act. The matter was heard in appeal by the Commissioner of Income-tax (Appeals) and he accepted the argument of the assessee-company and directed the Assessing Officer to make out the deduction claimed under Section 32AB holding that deduction under the above mentioned provision is allowable to the assessee-company. Being aggrieved and dissatisfied with the said order, the assessee-company preferred an appeal challenging the procedure to be adopted as per the direction of the Commissioner of Income-tax (Appeals). The learned Tribunal, after hearing the parties, allowed the appeal of the assessee-company by setting aside the order of the Commissioner of Income-tax (Appeals) and directed the Assessing Officer to compute 20 per cent, of the eligible profit inclusive of rental income, interest, dividend, profit on sale of assets, replantation subsidy along with other income as found in the Sixth Schedule, Parts II and III of the Companies Act subject to such adjustment as found prescribed therein. As the Revenue was dissatisfied with the said finding of the Tribunal, the following question was referred to this court:

(3.) On the basis of those two questions, the present hearing took place and we heard the submissions made at length by the learned advocates for both the sides. Let us now answer those two questions one after another. So far as the first question is concerned, it appears that the assessee claimed deduction to the extent of Rs. 5,93,126 on account of expenditure pertaining to various clubs. While the learned Tribunal allowed the subscription fees of the clubs as paid by the assessee-company, still the Tribunal rejected the prayer of deduction in respect of the subscription of Rs. 5,00,000 which was paid by the assessee-company to the concerned club for repairs, renovation and extension of the club building, on the ground that such repair could not be allowed as the club building was not owned by the assessee-company. The learned advocate for the assessee-company argued that the learned Tribunal was not at all justified in rejecting this prayer for deduction of Rs. 5,00,000. It appears that as per the provisions of Section 37 of the Income-tax Act in respect of such an expenditure this type of deduction is allowable. It appears from the facts, which have been considered by the Assessing Officer, the Commissioner of Income-tax (Appeals) as well as the learned Tribunal, that the assessee-company claimed that the payments were made in favour of the club for paying subscription of the assessee's employees who are members of the club and also in respect of the renovation and repairing of the said club building which had been damaged. In this respect, the learned advocate for the assessee cited various decisions in order to prove that those payments should be considered as business expenditure as per the provisions of the Income-tax Act and necessary deduction should be allowed. In the case reported in CIT v. Sunda-ram Industries Ltd. , the hon'ble Madras High Court was of the opinion that the expenditure so incurred in favour of the club, if it is incurred to promote and foster the business interest of the assessee-com-pany, then the said expenditure should be treated to be a business expenditure- The hon'ble Supreme Court in the decision reported in CIT v. Madras Auto Service (P.) Ltd. also expressed the same opinion. The decision as cited in CIT v. Engineers India Ltd. also expressed the view to the effect (headnote): "Hence, the Tribunal was right in holding that the expenditure incurred by the assessee on account of initial membership fee paid to the said organisation could not to be said to be capital expenditure." In the case reported in Gujarat State Export Corporation Ltd. v. CIT, the hon'ble Gujarat High Court has discussed the relevant provisions in detail and thereafter was pleased to hold such expenditure to be business expenditure of the assessee. In this decision it has been stated therein (at page 653) :