The Income Tax Appellate Tribunal (ITAT) ruled that the payment of membership and subscription charges are preliminary expenditure which is incurred by Philips and after the setting up of business it will be paid by the clients.

The ITAT said that expenditure incurred by the assessee can be treated as preliminary expenditure for the purpose of business and therefore this transaction may increase the business or trade for the assessee in the subsequent year.

The assessee, Phillip (India) Private Limited filed its return of income declaring a total income under normal provision of Income Tax Act and declared book profit under Section 115JB. The return was processed under Section 143(1) of the Income Tax Act, resulting in a refund. Thereafter, the case was selected for scrutiny and notices u/s 143(2) and 142(1) were served upon the assessee.

During the assessment proceeding, Assessing Officer (AO) observed that assessee has debited an amount under the head service fees and membership & subscription fees respectively. Consequently, an assessee was issued a show-cause notice to explain as to why this expenditure cannot be treated as capital expenditure.

The assessee submitted that the expenditure debit to profit and loss account is wholly and exclusively for the purpose of business and these expenditures do not provide any enduring benefit to the assessee and it does not fall in any of the nature of expenditure described in Section 32 & 36 of the Act.

The tribunal consists of a Judicial Member SaktijitDey and an Accountant Member, S. Rifaur Rahman held that expenditure incurred by the assessee can be treated as preliminary expenditure for the purpose of business and therefore this transaction may increase the business or trade for the assessee in the subsequent year.

“It was agreed between the parties i.e. group concern and Indian customers, the assessee will bear the cost relating to membership and subscription charges for trading terminals and the related software installed and used by the overseas capital market and Indian customers. These expenses are renewable and recurring in nature and only in this assessment year, the assessee has borne the above-said expenditure for its business purposes,” the tribunal said.

The tribunal while partly allowing the ground directed the  Assessing Officer (AO) to allow one-fifth of the expenditure in this assessment year and balance in the next 4 assessment years treating this similar to the treatment as a preliminary expenditure. To Read the full text of the Order CLICK HERE