2005 (2) TMI 452 - AT - Income Tax

Business Expenditure - business of share stock brokerage - Nature of expenditure - Whether, the expenditure incurred by the assessee towards development fee and fees for operating on the floor paid to Calcutta Stock Exchange Association, towards admission fee and technology cost paid to OTC Exchange of India and towards Non-adjustable deposit for Membership subscription and deposit for Very Small Aperture Terminal (VSAT) paid to National Stock Exchange of India could be treated as revenue or capital expenditure? - HELD THAT - There is no doubt that with a view to carry on business of share trading and share brokerage more efficiently and profitably in the present scenario of the Stock Market and working of Stock Exchanges, the operating on the floor of Stock Exchange is very much essential without which it would be difficult to manage and conduct the business of share trading and share brokerage more efficiently or more profitably. The payment is not related or connected to any capital asset which might have acquired by the assessee. It is closely linked to the business of share-trading or share-brokerage carried on by the assessee during the year under consideration. The payment is not of the same nature as of the development fee paid to Calcutta Stock Exchange to become a member thereof by acquiring one or more share of the said Calcutta Stock Exchange Corporation Ltd. The member as defined in Article 1 of the Articles of Association of the Calcutta Stock Exchange Association Ltd. means any individual or a company or a Financial Corporation registered in the Register as the owner of the one or more shares in the Association. Thus, the payment of development fee to become a member of the Association and to acquire one or more shares in the Calcutta Stock is on different footing than that of making payment to operate on the floor of the Stock Exchange. Applying the cumulative effect of all the decisions referred to above in foregoing papers and the principles emerging therefrom to th e facts of the present case, and having regard to the nature and object of the payment of fee for operating on the floor of the Stock Exchange, we hold that the payment of Rs. 1,50,000 made to Calcutta Stock Exchange for operating on the floor of the Exchange is allowable as being of revenue in nature. Payment of admission fee and technology cost to OTC Exchange of India It is not in dispute that the said dealership was not transferable and neither the admission fee was refundable in any case. Even if the assessee decides or force to terminate the dealership or if the OTC Exchange of India terminates the dealership, the fee as admission fee was not refundable to the assessee as is clearly evident from the terms and conditions of appointment as a dealer of OTC Exchange of India. Similarly the payment of technology cost for providing training to the assessee's employees for the purpose of making them qualified as per OTC Exchange of India's qualification procedure is found to be necessary or condition precedent for carrying on day-to-day business as a dealer on OTC Exchange of India and to operate the counter thereof. The aim and object of the aforesaid expenditures are thus for carrying on the assessee's business and as such these are of revenue in nature. On the facts of this case, we find no reason to hold that the assessee has derived an advantage of enduring nature on capital field or otherwise has acquired any capital asset. Deposit for Very Small Aperture Terminals (VSATs) - On perusal of the details of the deposit for installation of VSATs equipments, it is thus clear that an amount towards charges for VSATs services and facilities availed by the assessee is related to the period relevant to the assessment year under consideration. Therefore, the assessee's claim being revenue expenditure is only found to be allowable in the present assessment year under consideration and rest of the amount are allowable in subsequent years to the extent of such amount as relatable to the respective years. We order accordingly. In the result, we answer the question referred to the Special Bench in the manner as indicated above, and thus held as under (i) The expenditure towards development fee paid to Calcutta Stock Exchange Association Limited is of capital in nature. (ii) The expenditure towards fee for operating on the floor paid to Calcutta Stock Exchange Association is of revenue in nature. (iii) The expenditure towards admission fee as a dealer on OTC Exchange of India, and payment of technology cost for providing training to the assessee's employees paid to OTC Exchange of India are of revenue in nature. (iv) The expenditure towards non-adjustable deposit for admission as a Trading Member of the wholesale Debt market of National Stock Exchange of India and the expenditure towards Very Small Aperture Terminals (VSATs) paid to NSEIL are of revenue in nature. Since there are other grounds of appeal in this case, the records will now be placed before the Division Bench for disposal in accordance with law.

Summary

Issues Involved:
1. Whether the expenditure incurred by the assessee towards development fee and fees for operating on the floor paid to Calcutta Stock Exchange Association, admission fee, and technology cost paid to OTC Exchange of India, and non-adjustable deposit for membership subscription and deposit for Very Small Aperture Terminal (VSAT) paid to National Stock Exchange of India could be treated as revenue or capital expenditure.

Detailed Analysis:

Development Fee Paid to Calcutta Stock Exchange Association:
The assessee paid Rs. 70,00,000 as a development fee to the Calcutta Stock Exchange Association. The Assessing Officer and the CIT(A) treated this expenditure as capital in nature. The Tribunal referred to the decision of the Hon'ble jurisdictional Calcutta High Court in the case of Rajendra Kumar Bachhawat v. CIT, where it was held that the development fee paid to Calcutta Stock Exchange is a capital expenditure. Thus, the Tribunal upheld the decision that the development fee is of capital nature.

Fees for Operating on the Floor Paid to Calcutta Stock Exchange Association:
The assessee paid Rs. 1,50,000 to operate on the floor of the Calcutta Stock Exchange. The Tribunal held that this payment was for the use of the system or facilities made available to the assessee for operating share transactions on the floor of the Stock Exchange. It facilitated the assessee's business operations and enabled the management to conduct business more efficiently and profitably. The Tribunal concluded that this expenditure is of revenue nature, as it does not bring into existence a capital asset but facilitates the trading operations.

Admission Fee and Technology Cost Paid to OTC Exchange of India:
The assessee paid Rs. 6,00,000 as an admission fee and Rs. 2,00,000 as technology cost to OTC Exchange of India. The Tribunal observed that the admission fee was necessary for becoming a dealer on the OTC Exchange of India and was neither refundable nor transferable. The technology cost was for training the assessee's employees for operating as a dealer. The Tribunal held that these payments were for the purpose of carrying on the assessee's business and did not create any capital asset or advantage of enduring benefit in the capital field. Therefore, these expenditures were treated as revenue in nature.

Non-Adjustable Deposit for Membership Subscription Paid to National Stock Exchange of India:
The assessee paid Rs. 30,00,000 as a non-adjustable deposit for Trading Membership Subscription of the Wholesale Debt Market of the National Stock Exchange of India. The Tribunal noted that this membership was not transferable for a minimum period of five years and did not entitle the assessee to acquire any share in the NSEIL. The Tribunal concluded that this payment facilitated the assessee's trading operations and was an integral part of the profit-earning process. Hence, it was considered a revenue expenditure.

Deposit for Very Small Aperture Terminals (VSATs) Paid to National Stock Exchange of India:
The assessee paid Rs. 10,00,000 for the installation of VSATs to facilitate on-line screen-based trading. The Tribunal noted that these VSATs did not belong to the assessee but were used for establishing a communication link for trading operations. The Tribunal held that this expenditure was directly related to the business operations and did not create any capital asset. Therefore, it was treated as a revenue expenditure. However, the Tribunal allowed the claim to the extent of Rs. 1,23,000 for the assessment year under consideration, with the rest allowed in subsequent years.

Conclusion:
1. The expenditure towards the development fee paid to Calcutta Stock Exchange Association is of capital nature.
2. The expenditure towards the fee for operating on the floor paid to Calcutta Stock Exchange Association is of revenue nature.
3. The expenditure towards the admission fee as a dealer on OTC Exchange of India and payment of technology cost for providing training to the assessee's employees paid to OTC Exchange of India are of revenue nature.
4. The expenditure towards the non-adjustable deposit for admission as a Trading Member of the Wholesale Debt Market of National Stock Exchange of India and the expenditure towards Very Small Aperture Terminals (VSATs) paid to NSEIL are of revenue nature.