2005 (5) TMI 31 - HC - Income Tax

Section 37 - expenses on account of OTC membership and annual fee - Whether, having due regard to the facts of the case, the expenditure on payment of one-time non-refundable fee for dealership of OTC had resulted in a direct and substantial personal benefit to the assessee in his existing business of trading in shares/securities was allowable as revenue expenditure? - expenditure incurred in the present case cannot be termed as one of an enduring nature - we answer the question framed in the affirmative, the expenditure in question ought to be treated a revenue expenditure, since it cannot be termed as one that results in an enduring benefit . appeal allowed

Summary

Issues:
Whether the expenditure on payment of one-time non-refundable fee for dealership of OTC resulted in a direct and substantial personal benefit to the assessee in his existing business of trading in shares/securities and was allowable as revenue expenditure.

Analysis:
The judgment pertains to an appeal under section 260A of the Income-tax Act, 1961, challenging an order passed by the Income-tax Appellate Tribunal. The assessee claimed expenses of Rs. 4,27,500 on OTC membership and annual fee as revenue expenditure. The Assessing Officer treated a portion of the expenditure as capital expenditure, leading to an appeal before the Commissioner of Income-tax (Appeals) and subsequently to the Tribunal.

The main issue revolved around whether the expenses incurred by the assessee for obtaining dealership rights with the OTC Exchange should be treated as capital or revenue expenditure. The Assessing Officer contended that the expenditure facilitated trading operations and conferred an enduring benefit, thus being capital in nature. However, the Commissioner of Income-tax (Appeals) held that the expenditure was essential for trading and allowed a portion as revenue expenditure.

The arguments presented by the appellant's counsel emphasized that the membership fees were akin to entry fees and did not result in the creation of an enduring asset. Reference was made to a Division Bench judgment to support the contention that membership fees did not constitute enduring benefits. Conversely, the Revenue's counsel argued that the expenditure led to the acquisition of a right to trade on permitted securities, constituting an enduring benefit and thus capital in nature.

The judgment extensively analyzed the distinction between capital and revenue expenditure based on various legal precedents. Citing the Supreme Court's decision in Empire Jute Co. Ltd. v. CIT, the court highlighted that not all enduring benefits lead to capital expenditure. It emphasized that the nature of the advantage in a commercial sense determines the categorization of expenditure. The court also referred to previous cases to support its conclusion on the enduring nature of the benefits derived from the expenditure.

Ultimately, the court held that the expenditure in question did not result in an enduring benefit and should be treated as revenue expenditure. Relying on the legal principles discussed and the specific circumstances of the case, the court allowed the appeal, emphasizing that the expenditure did not lead to the creation of an enduring asset.