ACQUISITION OF ASSET WITH ENDURING BENEFIT – CAPITAL EXPENDITURE

[Mr. M. GOVINDARAJAN]

In ‘Abhipra Capital Limited V. Deputy Commissioner of Income Tax (Investigation)’ – 2018 (2) TMI 1294 - DELHI HIGH COURT the appellant had acquired membership of National Stock Exchange by paying an amount of ₹ 5 lakhs as a non adjustable deposit. The appellant had also paid amount towards interest free security deposit, annual subscription for the first year and as margin deposit. The appellant treated the payment of ₹ 5 lakhs as revenue expenditure. The Revenue took the different view and held that the payment was non recurring in nature and had given rise to an enduring benefit as it was the initial payment for membership of the National Stock Exchange. Therefore it would qualify as capital expenditure. However the Assessing Officer allowed a deduction equal to 1/10 th of the total expenditure in10 equal installments, and accordingly ₹ 50,000 was allowed as deduction and the balance amount of ₹ 4,50,000 was disallowed.

The appellant filed appeal before Commissioner (Appeals). The Commissioner (Appeals) accepted the contention of the appellant. The Commissioner (Appeals) referred to the circulars issued by CBDT on payments/deposit made under the Own Your Telephone (OYT) scheme. The Commissioner (Appeals) further held that the expenditure incurred by the appellant towards the membership was for expansion of the business and therefore would not be treated as capital expenditure.

The Revenue filed appeal before the Tribunal against the order of Commissioner (Appeals). The Tribunal reversed the findings of Commissioner (Appeals) and restored the order of the Assessing Officer. The Tribunal observed that the expenditure was for addition to the capital assets held by the assessee. It has been incurred to acquire full right to trade as a member, as without acquiring membership of the National Stock Exchange, the assessee could not have acted as a broker.

The appellant, therefore, filed the present appeal before the High Court. The High Court framed the substantial question of law as-

“Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that the members’ fee of ₹ 5 lakhs paid by the appellant to the National Stock Exchange was in the nature of a capital expenditure?’

The appellant put forth the following arguments before the High Court-

• The Central Board of Direct Taxes have issued different instructions/circulars issued on the question of deductibility of security deposits paid with the Department of Telecom under OYT schemes or other schemes to state that the said deposits have been treated as revenue expenditure under section 37 of the Act.
• The card/membership was non transferrable.

The Revenue contended the card/membership could be transferred as held by Supreme Court in ‘Premium Global Securities Private Limited V. Securities and Exchange Board of India’ – 2015 (12) TMI 465 - SUPREME COURT.

The High Court considered the submissions of both the sides. The High Court did not perceive and believe that the circular relied on by the appellant postulate and hold that all cases where security or other deposit is made, they have to be treated as revenue expenditure and not capital in nature. Similarly the circular to treat the membership subscription paid to the Indian Institute of Packaging as revenue in nature, would not imply and mean that all subscriptions and membership fees have to be treated as revenue, notwithstanding the nature of benefit and other aspects. The circular in question states that the members of the Institute were already in manufacturing and trading business and would derive continues benefits from the activities of the Institute and therefore, expenditure by way of membership fee was wholly and exclusively for the purpose of business of the members.

The judgment of Supreme Court in ‘Techno Shares and Stocks Limited V. Commissioner of Income Tax’ – 2010 (9) TMI 6 - SUPREME COURT OF INDIA was relied. In that case the Supreme Court held that membership of a stock exchange was a business or commercial right conferred by the rules of the exchange. The membership right is owned by the member and used for the purpose of business. It is an intangible asset. The assessee is entitled to claim depreciation on the same being the owner and the asset is used for the purpose of business. The appellant submitted that the said decision of the Supreme Court did not decide the issue whether the expenditure incurred to acquire the membership was capital or revenue expenditure. The High Court observed that the Supreme Court in that case had examined the nature and character of the membership card, which enables an assessee to trade on the floor or as a broker of the stock exchange. It is in the nature of licence under section 32(1)(ii) of the Act. It was a right or a licence owned and used by him as an asset i.e., the capital asset.

The High Court analyzed the definition of capital asset. According to this definition the capital asset is the property of any kind held by the assessee, whether or not connected with the business or profession, but does not include any stock-in-trade, consumable stores or raw materials held for the purpose of business or profession. The High Court found that it is not the case of the appellant that the membership deposit was stock-in-trade, consumable of raw material for the purpose of business. The membership card was an asset or a property which the appellant had acquired on non refundable payment of ₹ 5 lakhs. The High Court held that there cannot be any doubt that a one time and lump sum payment made to acquire membership rights by a company or person engaged in the business of trading in stocks, brings into existence an asset or an advantage of enduring nature. The membership card is not an addition to the stock-in-trade or consumable stock. This expenditure would not be revenue but capital in nature.

The High Court further observed that even if it is accepted that the appellant was earlier a sub broker it would not make any difference. Business as a broker is different from that of a sub broker. The payment made was an expense incurred to acquire a new right and source of earning. This cannot be treated as mere ‘improvement’ of the earlier business. Business can also be extended and expanded by making additional capital investment.

The High Court held that in the context of the present case, the ‘enduring benefit’ test and ‘once and for all’ payment test would be the most appropriate and proper tests to apply, though one can accept that there are exceptions to the said principles and these tests might break down a given case. The enduring advantage was in the capital field. The High Court answered the substantial question of law against the appellant and in favor of the Revenue.