2018 (2) TMI 1294 - HC - Income Tax

Nature of expenditure - members fee paid by the appellant to the National Stock Exchange - revenue or capital expenditure - Held that - Alembic Chemical Works Co. Ltd. Vs. Commissioner of Income Tax, Gujarat (1989 (3) TMI 5 - SUPREME Court), elucidates and affirms that a once and for all payment , when it brings into existence an asset or advantage of enduring benefit, in the absence of special circumstances leading to an opposite conclusion, is capital expenditure and not attributable to revenue. This is the primary and basic test. The appellant-assessee has not been able to show and establish any special circumstances for an opposite conclusion in the present matter. Further, the expenditure made was for acquiring and bringing into existence an asset or advantage of enduring benefit and not for running business to produce more profits. The question raised, it was observed, should be answered by adopting common sense and not legalistic and theoretical approach. In the context of the present case, enduring benefit test and once and for all payment test would be the most appropriate and proper tests to apply, though we would accept that there are exceptions to the said principles and these tests might break down in a given case. The expenditure incurred was for acquisition of property and rights of a permanent character. The enduring advantage was in the capital field. - Decided in favour of revenue

Summary

Issues:
1. Classification of payment made to the National Stock Exchange as capital or revenue expenditure.

Analysis:
The case involved a dispute regarding a payment of ?5,00,000 made by the appellant to the National Stock Exchange for acquiring membership during the assessment year 1996-97. The main issue was whether this payment should be considered as capital or revenue expenditure by the appellant-assessee. The Assessing Officer initially disallowed a major portion of the payment, treating it as capital expenditure due to the enduring benefit it provided in acquiring membership. However, the Commissioner of Income Tax (Appeals) disagreed, considering it as revenue expenditure, akin to a subscription fee, based on circulars issued by the Central Board of Direct Taxes. The Tribunal later sided with the Assessing Officer, emphasizing that the payment was for adding to the capital assets of the assessee, enabling them to trade as a broker.

The appellant argued that previous circulars by the Board treated similar security deposits as revenue expenditure, but the court clarified that not all deposits should be treated as such. The court also referenced a Supreme Court case regarding the ownership of membership rights in a stock exchange, stating that membership was an intangible asset to be depreciated. The court noted that the payment was a one-time, non-refundable deposit essential for acquiring membership, granting the right to trade and act as a broker. This membership was considered a capital asset under Section 2(14) of the Income Tax Act, as it enabled the appellant to conduct business as a stock-broker, not falling under stock-in-trade or consumable materials.

Furthermore, the court rejected the argument that the membership was non-transferable, stating that transferability was not the decisive factor in determining the nature of the asset. The court emphasized that the payment created an enduring advantage for the appellant, qualifying it as capital expenditure. It was highlighted that becoming a broker was a distinct business from being a sub-broker, and the payment facilitated acquiring a new asset and source of income. The court distinguished this case from instances of technical know-how acquisition and highlighted that the payment was for establishing and sustaining a business, constituting capital expenditure.

Considering various legal precedents, including the Supreme Court's rulings in similar cases, the court concluded that the payment for acquiring membership was a capital expenditure, bringing into existence an enduring asset with lasting benefits. The court applied the "enduring benefit" and "once and for all payment" tests to determine the nature of the expenditure, ultimately ruling in favor of the Revenue. The appeal was dismissed, affirming the Tribunal's decision on the substantial question of law, with no order as to costs.