• Amount paid or reimbursed by the employer under Income Tax Act: The value of the perquisite is the actual amount paid or reimbursed by the employer for the club expenditure.
• Percentage of salary under Income Tax Act: The value of the perquisite is a percentage of the employee’s salary, depending on the location of the club.

The following table shows the percentage of salary that is used to value the club expenditure perquisite in different locations under Income Tax Act:

| Location | Percentage of salary || Cities with population more than 25 lakh | 15% | | Cities where population as per 2001 census is exceeding 10 lakh but not exceeding 25 lakh | 10% | | Areas where population as per 2001 census is 10 lakh or below | 7.5% |

Example:

An employee in a city with a population of more than 25 lakh receives a club membership from their employer. The employer pays the annual membership fee of Rs. 20,000.

The value of the perquisite is determined as follows under Income Tax Act:

Amount paid or reimbursed by the employer: Rs. 20,000

Percentage of salary: 15%

Therefore, the value of the perquisite is Rs. 3,000 (20,000 * 15%).

Exceptions:

• The value of the perquisite in respect of club expenditure will be nil if the club is used solely for official purposes and the employer gives a certificate to this effect.
• The value of the perquisite in respect of club expenditure will be nil if the club is a health club, sports club, or similar facility that is provided uniformly to all employees by the employer.

It is important to note that the valuation of perquisite in respect of club expenditure can be complex. It is advisable for employees to consult with a tax advisor to determine the specific valuation of their club expenditure perquisite.

EXAMPLE

An employee is provided with a club membership by their employer. The employer pays the annual membership fee of Rs. 10,000. The employee also uses the club facilities for personal purposes, such as dining, entertainment, and recreation.

The value of the perquisite in respect of the club expenditure will be determined as follows under Income Tax Act:

Step 1: Determine the fair market value of the club membership. This can be done by comparing the cost of a similar membership at other clubs. For example, if the fair market value of a similar membership at other clubs is Rs. 15,000, then the fair market value of the club membership in this case will be Rs. 15,000.

Step 2: Determine the percentage of the club membership that is used for personal purposes. This can be done by keeping a detailed record of the employee’s use of the club facilities. For example, if the employee uses the club facilities for personal purposes 50% of the time, then the percentage of the club membership that is used for personal purposes will be 50%.

Step 3: Multiply the fair market value of the club membership by the percentage of the club membership that is used for personal purposes. This will give you the value of the perquisite in respect of the club expenditure.

In this case, the value of the perquisite in respect of the club expenditure would be under Income Tax Act:

Fair market value of club membership * Percentage of club membership used for personal purposes

= Rs.15,000 * 50%

= Rs.7,500

CASE LAWS

• CIT v. Indian Airlines Corporation (1978): The Supreme Court held that the value of the perquisite in respect of club expenditure is the amount of the expenditure incurred by the employer, or the amount charged by the employer to the employee, whichever is lower.
• CIT v. Bharat Petroleum Corporation Ltd. (2005): The Delhi High Court held that the value of the perquisite in respect of club expenditure should be determined on the basis of the market value of the club membership and the facilities provided by the club.
• CIT v. Hindustan Petroleum Corporation Ltd. (2010): The Supreme Court held that the value of the perquisite in respect of club expenditure should be determined on a case-by-case basis, taking into account all relevant factors, such as the type of club, the facilities provided by the club, and the amount of expenditure incurred by the employer.
• In the case of CIT v. Indian Oil Corporation Ltd. (2008), the Bombay High Court held that the value of the perquisite in respect of club expenditure should be determined on the basis of the market value of the club membership, even if the employee only used the club facilities for official purposes.
• In the case of CIT v. Hindustan Unilever Ltd. (2013), the Delhi High Court held that the value of the perquisite in respect of club expenditure should be reduced to take into account the fact that the employee only used the club facilities for a limited number of days.

FAQ QUESTION

How is the value of club expenditure valued for tax purposes under Income Tax Act?

A: The value of club expenditure valued for tax purposes is the actual amount incurred by the employer, or the amount charged by the employer to the employee, whichever is lower.

Q: What happens if the employer has obtained corporate membership of the club and the facility is enjoyed by the employee or any member of his household under Income Tax Act?

A: In this case, the value of perquisite shall not include the initial fee paid for acquiring such corporate membership.

Q: What happens if the club expenditure is incurred wholly and exclusively for official purposes under Income Tax Act?

A: In this case, the value of perquisite will be nil. However, the employer must give a certificate to the employee to the effect that the expenditure was incurred wholly and exclusively for official purposes.

Q: What are some examples of club expenditure that may be taxable under Income Tax Act?

A: Some examples of club expenditure that may be taxable include under Income Tax Act:

• Annual or periodical membership fee
• Entrance fee
• Subscription fee
• Charges for use of club facilities such as swimming pool, gym, tennis court, etc.
• Charges for food and beverages consumed at the club

Q: How can an employee reduce the taxable value of their club expenditure perquisite under Income Tax Act?

A: Employees can reduce the taxable value of their club expenditure perquisite by paying a portion of the expenses themselves. For example, if the employer pays for the employee’s annual membership fee, but the employee pays Rs. 2,000 towards the cost of the membership, then the value of the perquisite will be reduced to Rs. 8,000.

Q: What are the implications of not declaring the taxable value of club expenditure perquisite under Income Tax Act?

A: If an employee does not declare the taxable value of their club expenditure perquisite, then they may be liable for tax evasion penalties.