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September 6, 2022

ITAT partially disallows golf club membership fees

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

ITAT partially disallows golf club membership fees

Facts and Issue of the Case

The facts in brief are that the assessee had filed a return declaring income of Rs. 2,33,94,820/- and the case was taken up for scrutiny. The assessee company is engaged in the business of real estate development and related activities and is following the percentage completion method. Ld. AO observed that a sum of Rs. 1,90,529/- was incurred at club being cost for club services and facilities. The Ld. AO considered the same to be in the nature of personal expenses and the amount was disallowed.

Further, Ld. AO observed that the assessee had paid external development charges (EDC) to HUDA for which advance tax has not been deducted. The Ld. AO observed that HUDA is a taxable entity carrying out activities to acquire, develop and dispose of land for residential, commercial and institutional purposes in urban states of Haryana. It is not a part of Government or Corporation established under a Central Act which is exempted u/s 196 for deduction of TDS and accordingly 30% of Rs. 4,95,24,157/- was added back to the income of assessee.

Further, Ld. AO had disallowed a sum of Rs. 45,501 /- on account of expenses relating to previous years under the head ‘Welfare Expenses, internal excess charges, deposited charges, business promotion’.

The assessee has raising following grounds :-

1. “On the facts and circumstances of the case, the LA/- CIT(A) has erred both in facts and law in rejecting the contention of the appellant that the payments of EDO have been made to comply with the terms and conditions of the agreement executed between the appellant and the Governor of Haryana, acting through Director Town and Control Planning, Haryana and thus provisions of TDS are not applicable on such payments, and therefore disallowance ofRs. 1,48,57,247/- made u/s 40(a)(ia) of the Act is highly unjustified, uncalled for and bad in law.

2. On the facts and circumstances of the case, the Ed/- CIT(A) has erred both in facts and law in rejecting the contention of the appellant that the payments ofEDC made by the appellant company are not in the nature of payments specified under section 194C of the Act.

3. The Ed/- CIT(A) has erred in law and facts of the case in confirming the action of the Ed/- AO in disallowing the club expenses of Rs. 1,90,529/- incurred for promoting the business of the appellant company, alleging it to be of personal nature and brushing aside the justification and explanation given by the appellant, which is highly unjustified, uncalled for and bad in law.

4. The appellant company craves the right to leave, add, amend or modify any ground of appeal.”

Observation by the Court

At the time of arguments, Ld. Counsel for the assessee stated at Bar, that ground no. 3 is not pressed and submitted that ground no. 1 is covered by judgments of Co-ordinate Benches. In regard to ground no. 2 it was submitted that Ld. Tax Authorities have failed to appreciate that the expenditures were made by the Managing Director of the company for promotion of the business and conducting of business meetings. It was submitted that no personal benefit was derived by the Managing Director.

On the other hand, Ld. DR submitted that the notification which is relied to give benefit to the assessee in regard to external development charges is of year 2018 while the matter concerns assessment year 2017- 18. It was submitted that no evidence was produced that expenditures incurred on club had any concern whatsoever with the business activity.

Further in case of TDI Infrastructure Ltd Versus Addl CIT, , the Bench, to which one of us was in quorum, had taken into consideration a clarification issued by the Directorate of Town and Country Planning, Haryana which made it very obvious that receipts on account of EDC are being deposited in the Consolidated Fund of the State, accordingly directions were issued to colonizer like present assessee, to not deduct TDS. Once the fact of receipt of amounts received by HUDA being deposited in Consolidated Fund of State is established, there can be no second opinion that Assessee was rightly directed by DTCP, Haryana to not deduct the TDS. Even otherwise no intentional default is attributed to assessee and the default, if any, was on account of ambiguity which had arisen out of a direction contained in a statutory document, so no penalty can be justified u/s 271C of the Act, which is meant to address contumacious conduct. Ground is allowed in favour of assessee/appellant.

In regard to ground no. 2 it can be observed that as far as the subscription fee to Clubs is concerned the nature of business activity of the assessee company is such that for procurement of business the Managing Director may have to attend the clients and entertain them occasionally at clubs. However, the four clubs to which the payments have been made are all ‘Golf Clubs’ and how only their membership would benefit the company is not ascertainable. Thus, there is every possibility that the expenditure incurred on subscription or food and beverage, with these Golf Clubs, have traits of personal benefits to the Managing Director, as well. Thus, there is justification to restrict, the disallowance proportionally to Rs. 50,000/-on total disallowance of Rs. 1,90,529/-. Accordingly the ground is decided partly in favour of the assessee/appellant.


The appeal of the assessee is allowed by the court.


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