Facts of the Case

The assessee, Veedol Corporation Limited, filed its return of income for Assessment Year 2017-18. During assessment proceedings, the Assessing Officer observed that the assessee had debited club subscription and related charges amounting to ₹5,81,098 in the profit and loss account and treated the same as personal in nature, making disallowance. Further, the Assessing Officer made a disallowance of ₹1,33,25,000 under Section 14A read with Rule 8D in respect of dividend income earned during the year. The CIT(A) partly deleted the disallowance of club expenses but sustained 50 percent of certain club facility expenses on an adhoc basis and confirmed the disallowance under Section 14A. Aggrieved, the assessee preferred an appeal before the Tribunal.

Issues Involved

Whether club subscription and facility expenses incurred by a corporate assessee can be treated as personal expenditure and disallowed on an adhoc basis, whether disallowance under Section 14A read with Rule 8D was correctly computed, and whether additions based on estimation and presumption are sustainable in law.

Petitioner’s Arguments

The assessee contended that being a corporate entity, it cannot incur personal expenditure and that club expenses were incurred wholly and exclusively for business purposes. It was argued that the Assessing Officer never raised any specific query during assessment regarding allowability of such expenses and that the CIT(A) sustained partial disallowance purely on estimation without any evidence. With regard to Section 14A, the assessee submitted that the disallowance was excessive and not in accordance with law.

Respondent’s Arguments

The Revenue supported the order of the CIT(A) and contended that club facilities could be used by directors and shareholders for personal purposes and therefore partial disallowance was justified. The Revenue also supported the disallowance made under Section 14A read with Rule 8D.

Court Order / Findings

The ITAT Kolkata held that disallowance of club expenses on an adhoc and presumptive basis is not permissible in law. Relying on the decisions of the Supreme Court in CIT vs. Daulat Ram Rawatmull and Omar Salay Mohamed Sait vs. CIT, the Tribunal held that additions cannot be made on estimation without material evidence. The Tribunal further held that club expenses incurred by a corporate assessee are allowable business expenditure, following the Supreme Court decision in CIT vs. United Glass Manufacturing Co. Ltd. and the Calcutta High Court decision in CIT vs. Johnston Pumps (India) Ltd. Accordingly, the Tribunal directed deletion of the entire disallowance relating to club expenses. On the issue of Section 14A, the Tribunal examined the facts and restricted the disallowance in accordance with settled judicial principles.

Important Clarification

The Tribunal clarified that in the case of a corporate assessee, club subscription and related expenses cannot be treated as personal expenditure. Disallowances based purely on assumptions or adhoc estimation without evidence are unsustainable. Further, disallowance under Section 14A must strictly follow the statutory framework and judicial precedents.

Final Outcome

The appeal filed by the assessee was allowed. The entire disallowance of club expenses was deleted, and the addition made under Section 14A read with Rule 8D was suitably restricted in accordance with law.

Source Link-https://itat.gov.in/public/files/upload/1768291991-P6eWga-1-TO.pdf

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