ITAT Ruling on Club Expenses, Section 14A Disallowance, and MAT Computation (AY 2017-18)

In a significant decision for Assessment Year 2017-18, the Income Tax Appellate Tribunal (ITAT) provided clarity on the deductibility of corporate club expenses and the refined computation of disallowances related to exempt income.

I. Corporate Club Expenses as Business Expenditure (Section 37)

The primary dispute involved the allowability of club subscription and facility usage fees paid by a corporate entity.

The Issue: The Assessing Officer (AO) disallowed these expenses, labeling them “personal.” The CIT(A) allowed only subscription fees while sustaining a 50% ad-hoc disallowance on usage charges, presuming personal use by directors.
The Ruling: The ITAT held that for a corporate entity, club memberships are essential for fostering business relationships and networking. Since a company has no “personal” life, expenses incurred for its business associates or employees at clubs are considered wholly and exclusively for business purposes.
Key Principle: Disallowances cannot be made on an estimation or presumption basis. If the AO fails to prove specific non-business use during the assessment, the entire expenditure must be allowed as a revenue deduction under Section 37(1).

II. Section 14A Disallowance Restricted to Income-Yielding Investments

The second issue addressed the scope of expenditure disallowance under Section 14A read with Rule 8D.

The Issue: The AO calculated the disallowance by taking the average of all investments appearing on the balance sheet, regardless of whether they yielded exempt income.
The Ruling: Reaffirming established judicial precedents (such as the Supreme Court in Maxopp Investment Ltd and the Special Bench in Vireet Investment), the ITAT ruled that disallowance should only be computed based on the average value of investments that actually yielded exempt income during the relevant year.
Impact: Strategic investments in group companies or subsidiaries that did not pay dividends in the current year must be excluded from the disallowance formula.

III. Section 14A vs. MAT Book Profit (Section 115JB)

The final point resolved whether Section 14A disallowances could be added back to compute “Book Profit” for Minimum Alternate Tax (MAT).

The Issue: The Revenue attempted to increase the Book Profit by adding the disallowance calculated under Section 14A.
The Ruling: The ITAT ruled that Section 115JB is a self-contained code. The “Explanation” to Section 115JB(2) provides an exhaustive list of items to be added back, and Section 14A is not among them.
Precedent: Following the Special Bench ruling in ACIT v. Vireet Investment (P.) Ltd., it was confirmed that the AO has no power to add back Section 14A disallowances while calculating Book Profit under MAT provisions.

Summary of Findings

Club Subscription/Usage: Fully Allowed (No ad-hoc personal disallowance for corporate entities).
Rule 8D Calculation: Restricted (Only for investments that actually yielded exempt income).
Addition to MAT Profit: Deleted (Normal disallowances under Section 14A do not apply to MAT).

IN THE ITAT KOLKATA BENCH ‘D’

Veedol Corporation Ltd.

Deputy Commissioner of Income-tax^*

PRADIP KUMAR CHOUBEY, Judicial Member
and Rajesh Kumar, Accountant Member

IT Appeal No.1945 (KOL) of 2025
[Assessment year 2017-18]

JANUARY 13, 2026

Anup Sinha, AR for the Appellant. Bonnie Debbarma, DR for the Respondent.

ORDER

Rajesh Kumar, Accountant Member.- This is an appeal preferred by the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 01.07.2025 for the AY 2017-18.

2. The issue raised in ground no.1 is against the order of ld. CIT (A) partly deleting the addition to the extent of Rs. 2,13,957/-, being 50% of Rs. 4,27,914/- in respect of club expenses as against the total addition made by the Id. AO of Rs. 5,81,098/- incurred by the assessee in respect of club subscription charges.

2.1. The facts in brief are that the ld. AO during the course of assessment proceedings found that the assessee has debited to the profit and loss account a sum of Rs. 5,85,098/- on account of club subscription charges. According to the ld. AO these expenses are personal in nature and not expended wholly and exclusively for the purpose of business and therefore, not allowable. Consequently, these were added to the income of the assessee.

2.2. During the appellate proceedings, the ld. CIT (A) deleting the disallowance of subscription and entry fees to the tune of Rs. 1,53,184/-on the ground that the assessee being a corporate person and the expenses cannot be said to have been incurred for the personal purposes. However, the ld. CIT (A) in respect of remaining expenses of Rs. 4,27,914/- which are in respect of club services and facility use, sustained the addition which is equal to 50% on adhoc basis thereby sustaining the addition to the tune of Rs. 2,13,937/- on the ground that director/ shareholders of the assessee might have utilized the club facility for their personal visits and entertainment.

2.3. After hearing the rival contentions and perusing the materials available on record, we find that during the course of assessment proceedings the ld. AO has never raised any query qua the allowability of club expenses and therefore, the assessee did not have any occasion to furnish any explanation qua the admissibility of these expenses. We note that the ld. CIT (A) upheld the disallowance to the tune of Rs. 50% of the club expenses and facility on adhoc basis without giving any reasoning/ justification for the same. In our opinion, the disallowance cannot be made on estimation and presumption basis as has been held in the case of CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC)vide order dated 12-09-1972 andOmar Salay Mohamed Sait v. CIT [1959] 37 ITR 151 (SC) dated 05-031959. We also note that in our opinion, the club expenses incurred by the assessee which is a corporate entity is wholly and exclusively admissible as has been held in the case of CIT v. United Glass Mfg. Co. Ltd. (SC) dated 12-09-2012 andCIT v. Johnston Pumps (India) Ltd. [1988] 172 ITR 333 (Calcutta) dated 24-07-1986. Therefore, we modify the finding of the ld. CIT (A) and direct the ld. AO to delete the entire addition. The ground no.1 is allowed.

3. The issue raised in ground no.2 is against the order of ld. CIT (A) confirming the addition of Rs. 1,33,25,000/-u/s 14A read with Rule 8D of the Rules.

3.1. The facts in brief are that the ld. AO during the course of assessment proceedings, noted that the assessee has earned dividend income of Rs. 7.47 crores during the year which was also disclosed by the assessee in note no. 21 of the audited balance sheet. Out of the said dividend, the assessee earned dividend to the tune of Rs. 1,91,30,687/- from foreign subsidiary company and it was duly offered to tax in the return of income, the remaining dividend of Rs. 5,82,75,000/- was received from Indian Company and same was exempt from tax u/s 10(34) of the Act. The assessee submitted before the ld. AO that it had not incurred any expenses for earning the exempt income. However, the plea of the assessee was not accepted by the ld. AO and he invoked the provisions of Section 14A read with Rule 8D of the IT Rules, 1962 and computed the disallowance at Rs. 1,33,25,000/- by taking into account the total balance of investments as per the balance sheet as on 31.03.2016 and 31.03.2017 by excluding the investments in M/s Price Thomas Holdings Ltd. by placing reliance on CBDT notification No.43/2016/F No. 370142/7/2016-TPL dated 02.06.2016. The ld. AO also not accepted the without prejudice submission made by the assessee, to restrict the disallowance to Rs. 59,40,500/-, which is based upon the average value of investments, which yielded the exempt income during the year.

3.2. In the appellate proceedings, the ld. CIT (A) also dismissed the appeal of the assessee.

3.3. After hearing the rival contentions and perusing the materials available on record, we find that the undisputed facts are that the assessee has investments as on 31^st March, 2016 and 31^st March, 2017, in the balance sheets which included the investments which yielded the exempt income as well as the investments which did not yield any exempt income during the year. We note that the assessee has made before the ld. AO without prejudice submission that if the main plea of the assessee is not accepted which is qua the fact that the assessee has not incurred any expenses towards earning of exempt income and even if the provisions of Section 14A read with Rule 8D is invoked even then the disallowance works out to Rs. 59,40,500/- based upon the average value of investments which yielded exempt income during the year. The assessee has made a very detailed arguments before us corroborating all these facts and in the light of various case laws/ decisions, we hold that the disallowance is to be restricted to the extent of the amount which is based upon the average value of investments which yielded only exempt income during the year. Therefore, we find merit in the plea of the assessee that if at all the disallowance u/s 14A is to be made that has to be restricted to an amount calculated on the basis of these investments which yielded exempt income only. The case of the assessee find support from the decisions of the Hon’ble Jurisdictional High Court in case of Kesoram Industries Ltd. v. Pr. CIT (Calcutta)/[2022] 441 ITR 648 (Calcutta), Pr. CIT v. REI Agro Ltd. (Calcutta)[07-03-2022], Pr. CIT v. Shalimar Pellet Feeds Ltd. (Calcutta)/[2023] 453 ITR 547 (Calcutta) [22-02-2022], Asstt. CIT v. Vireet Investment (P.) Ltd. (Delhi – Trib.)/[2017] 165 ITD 27 (Delhi – Trib.)/[2017] 58 ITR(T) 313 (Delhi – Trib.) (SB)[16-06-2017], Electrosteel Castings Ltd. v. Dy. CIT (Kolkata – Trib.)/[2021] 189 ITD 183 (Kolkata – Trib.) [28-02-2019]. We, therefore respectfully following the ratio laid down in the above decisions, are not in concurrence with the conclusion drawn by the ld. CIT (A). Consequently, we set aside the order of ld. CIT (A) on this issue and direct the ld. AO to restrict the disallowance to Rs. 59,40,500/-. The ground no.2 is partly is allowed.

4. The issue raised in ground no.3 is against the order of ld. CIT (A) confirming the addition of Rs. 1,33,25,000/- as made by the Id. AO u/s 14A read with Rule 8D of the Rules to the book profit u/s 115JB of the Act.

4.1. After hearing the rival contentions and perusing the materials available on record, we find that the ld. AO has added the amount of disallowance of Rs. 1,33,25,000/- to the book profit as computed u/s 115JB of the Act which in our opinion is wrong and cannot be sustained. The ld. CIT (A) confirmed the order of the lower authorities AO on this issue. The case of the assessee is squarely covered by the decision of Hon’ble Apex Court in the case of Apollo Tyres Ltd. v. CIT (SC)/[2002] 255 ITR 273 (SC)/[2002] 174 CTR 521 (SC)[02-05-2002], wherein the Hon’ble Apex Court had held that adjustment are not provided in section 115J of the Act cannot be made to increase book profit for the purpose of Section 115J of the Act. The case of the assessee also squarely covered by the decision of Hon’ble Apex Court in the case of Malayala Manorama Co. Ltd. v. CIT (SC)/[2008] 300 ITR 251 (SC)/[2008] 216 CTR 102 (SC)[10-04-2008], wherein the Hon’ble Apex Court has held that the explanation to Section 115JB (2) of the Act has not provided any provision for addition of disallowance u/s 14A read with Rule 8D of the rules and the ld. AO is not empowered to add back the disallowance under the provision while calculating the book profit u/s 115Jb of the Act. Similar raito has been laid bySobha Developers Ltd. v. Dy. CIT (Karnataka)/[2021] 434 ITR 266 (Karnataka)[04-01-2021] and Pr. CIT v. J.J. Glastronics (P.) Ltd. (Karnataka)/[2022] 446 ITR 712 (Karnataka)[13-04-2022]. The case of the assessee is also covered by the decision of the Special Bench in the case of Vireet Investment (P.) Ltd.(supra). Considering the ratio laid down in the above decisions, we are inclined to set aside the order of ld. CIT (A) and direct the AO to delete the addition. The ground no. 3 is allowed.

5. In the Result, the appeal of the assessee is partly allowed.