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TMI Blog2005 (2) TMI 452X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gy 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. - HON'BLE G.C. GUPTA, J.M., C.L. SETHI, J.M. AND K.K. GUPTA, A.M. For the Appellant : S.K. Tulsiyan, S. De and B.K. Ghosh, Advs. For the Respondent : V.K. Saxena, Adv. ORDER Shri C.L. Sethi, Judicial Member. 1. Under section 255(3) of the Income-tax Act, 1961 (hereinafter called the Act), the Hon'ble President of the Income-tax Appellate Tribunal has constituted this Special Bench to consider the following question:- Whether, on the facts and in the circumstances of the case, 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ai Bench of the Tribunal in the case of Dy. CIT v. Ashwin C. Shah [82 ITD 573] in which it has been held that Stock Exchange Card of BSE is not an asset under section 2(e) of W.T. Act, 1957 as also the decision of the ITAT, Mumbai Bench in the case of Videsh Sanchar Nigam Ltd v. Jt. CIT [118 Taxman 104] in which it has been held that licence fee paid to the DOT amounting to Rs. 282.60 crores would not amount to capital expenditure and that the same has to be allowed as business expenditure, the reasons being that the facilities provided by DOT and the payment for the same was inextricably bound up with the main business of the assessee and directly related to the actual user of the actual net work, etc. Ld. Authorized Representative also referred to the decision of the Apex Court in the case of Stock Exchange, Ahmedabad v. Asstt. CIT reported in 248 ITR 209 (SC) in which it has been held that Stock Exchange Card is not a right of property. Such being the case, we find that there are divergent views on the issue as to whether the payment made to different Stock Exchanges as development fee or for operating on the floor or deposits for VSAT would amount to capital expenditure or reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption of Rs. 30 lakhs has been paid for obtaining the right of trading membership of the wholesale debt market of the National Stock Exchange the above deposit is not transferable for a minimum period of 5 years. In this context, it was also submitted on behalf of the assessee that it does not intend to withdraw the security deposit in future as such the amount of deposit made, can be considered to have been incurred wholly exclusively for the purpose of assessee's business. Deposit of Rs. 10 lakhs for VSAT (Very Small Aperture Terminal) was paid by the assessee in order to get such facility. National Stock Exchange will provide computerized on-line based trading facilities on equal access basis to all the trading members thus payment does not bring into existence any capital asset to the assessee. As such, the payment has been claimed as revenue expenditure in the return. As per the terms conditions of appointment as a dealer on OTCEI an admission fees of Rs. 8 lakhs is required to be paid, which is neither refundable nor transferable. It was submitted on behalf of the assessee that even if it results into a benefit of enduring nature, such benefit is not on the capital field, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eet under the head Loans Advances). It may be clarified here that it is over and above the sum of Rs. 1,19,50,000 paid as discussed in Para 3 above. (c) In view of the facts and circumstances stated above, the sum of Rs. 1,19,50,000 was paid by the assessee without which it could not have become member of the Stock Exchanges, cannot be allowed to the assessee as revenue expenditure. I place reliance on the decision of (i) Andhra Pradesh High Court in the case of Hylam Ltd v. CIT (87 ITR 310), (ii) Madras High Court in the case of Anna Transport Corporation Limited v. CIT(215 ITR 800), (iii) Himachal Pradesh High Court in the case of Mohan Meakin Breweries Ltd. 227 ITR 878 . 3.1 Being aggrieved with the Assessing Officer's order in rejecting assessee's claim of abovementioned deductions, the assessee appealed to the CIT(A) and raised several contentions which were reproduced in paragraph 4 of the order of the CIT(A) as under:- ... In support of this ground of appeal the appellant has filed written submission as under:- (a) Development fee Rs. 70,00,000 and fees for operating on the floor Rs. 1,50,000 paid to the Calcutta Stock Exchange Association Ltd. The appellant's ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As per para 19 of such terms and conditions, the dealership of OTCEI is not transferable. The appellant gave one undertaking to OTCEI on 31-8-1995 that it would not transfer the dealership at any point of time. A copy of the undertaking is enclosed for your perusal. Thus the right of dealership is not alienable. Therefore, there is no property in dealership in OTCEI. Therefore, the admission fee of Rs. 6,00,000 paid to OTCEI should not be considered as capital expenditure. Technology cost of Rs. 2 lakhs was paid to OTCEI towards training imparted by the institution to the employees of the appellant company in the operation of the institution. As per para 17(A) of the terms and conditions for admission as dealer OTCEI may require two or more operating personnel of the dealer to undergo such qualification procedure, as may be prescribed. Such training was necessary for the employees of the appellant Co. in order to become familiar with the operation of OTCEI. Such training also includes training on software of OTCEI. Thus you would kindly appreciate that the technology cost did not being into existence any capital asset. Moreover, software programme changes fast. Thus, the test of en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 10 lakhs can be allowed as revenue expenditure under section 37(1) in the financial year 1995-96 (assessment year 1996-97). Alternatively, the deduction may be allowed on actual recovery basis i.e., Rs. 1,23,000 in financial year 1995-96, Rs. 2,72,785 in financial year 1996-97, Rs. 2,67,874 in financial year 1997-98 and Rs. 2,96,962 in financial year 1998-99. In respect of Ground No. 1 without prejudice to the appellant's right to claim Rs. 1,19,50,000 as revenue expenditure the following alternative submission is made on behalf of the appellant. In case the expenditure is considered as capital expenditure by considering that the appellant acquired a permanent right and by considering Stock Exchange Membership Card as a capital asset, it should be treated as 'plant' within the meaning of section 43(3) of the I.T. Act, section 43(3) contains an inclusive definition of 'plant'. Plant is defined to include a variety of items, very diverse in character, such as ships, vehicles, books, scientific apparatus and surgical equipment, used for the purpose of business or profession. The Finance Act, 1995 amended the definition with retrospective effect from 1-4-1962 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral rate of 25%. Therefore, if the expenditure in question is not allowed revenue expenditure, the appellant should be allowed depreciation at 25% by trading stock exchange membership card as 'plant'. 3.2 After considering the assessee's submission and going through all the material with regard to the issue involved, the ld. CIT(A) uphold the Assessing Officer's action by deciding the issue as under:- 5. I have gone through the case laws cited above, and the written submission of the appellant and after going through all the material with regard to this ground of appeal, I am of the opinion that all the expenses referred to above are of capital in nature and, therefore, do not fall within the purview of section 37(1). The appellant's alternative view that the membership card should be treated as a 'plant' and depreciation @ 25% should be allowed cannot be accepted. Membership of Stock Exchange and their expenses are no doubt capital expenses but they are of intangible nature. It is not the value of card but it is the value of membership that can be brought or sold and the value of the membership is not a tangible asset but an intangible assets. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment Fee and Entrance Fee were necessary conditions for becoming a Member of Stock Exchanges and that by making these payments, the assessee acquires a right to carry on the business on the floor of the Exchange. It is thus clear that the Tribunal actually acknowledged the fact that payments under consideration were made for the purpose of carrying on business as a Stock Broker. Hence, it has got to be argued that on the basis of these findings, the payments should be considered as revenue expenditure. 2.3 It however appears that in coming to the conclusion that payments were of capital nature, the Tribunal was swayed by the consideration that by making the payments, the assessee acquired a benefit of enduring nature. Emphasis was laid on this particular aspect of acquisition of a benefit of enduring nature and the entire decision of the Tribunal seems to hinge on this particular consideration alone. In trying to arrive at the above conclusion, the Tribunal relied on some decisions. It would, however, be shown below that the ratio residendi of those decisions rather tend to help the assessee's case of the payments being of revenue nature. 2.4 The Tribunal firstly relied on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct the capital structure as a result of which certain incidental advantage flows, the expenditure will be of capital nature. The Supreme Court affirmed this decision in 225 ITR 792. 3.1 So far as the present case is concerned, by making payment of Development Fee or Admission Fee, the assessee-company merely acquired the right to become a member of the respective Stock Exchange Association. This right being of personal nature and also being non-transferable, it cannot be considered that the assessee acquired any asset thereby. The Supreme Court also held in the case of Stock Exchange, Ahmedabad [248 ITR 209] that membership of a Stock Exchange is merely a permission and does not ensure to acquisition of any right to property and hence this right is not subject to attachment. It is thus clear that membership of any Stock Exchange is not at all any asset. The payer merely gets a right to conduct its business of trading in Stock Exchange. By making the said payment, the payer neither acquires any capital asset nor is its capital base or structure affected by the payment. The enduring benefit is merely incidental and is not of the nature of acquisition of an asset of enduring nature. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 595] that sums paid for training of employees are revenue in nature. Hence, this expense is clearly allowable as revenue expenditure. 6.1 ** 6.2 The amount of Rs. 30,00,000 was of the nature of non-adjustable deposit for Membership Subscription of National Stock Exchange of India (NSEI). Under the terms and conditions, the deposit amount could not be withdrawn for a minimum period of 5 years even if the trading member would cease or discontinue in trading in the Exchange. The deposit for Very Small Aperture Terminal (VSAT) of Rs. 10,00,000 was made to NSE in order to facilitate the assessee-company to have access to on-line trading facility. The VSAT does not belong to the assessee-company and the ownership lies with its supplier. One of the conditions prescribed by the Government for installation and operation of the network was that the Exchange should install, operate and maintain the system on no-profit and no-loss basis. It may be mentioned in this connection that out of the above mentioned deposit of Rs. 10,00,000, NSE made appropriations/recoveries towards the charges on year to year basis as per details given below: Financial Year VSAT charges recovered 1995-96 1,23,000 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .D.T. in the matter of allowing deduction of deposit for obtaining new telephone connection, in the year of payment and if money is paid back it will be charged to tax under section 41(1) of the Act. (v) Board's F. No. 9/23/67-IT(AI) dated 6-7-1967 stating that since the members of the Indian Institute of Packaging comprising manufacturing and trading enterprises will derive continuous benefits from the activities of the Institute, the expenditure by way of membership fee can be said to be wholly and exclusively incurred for the purpose of business of the members, and thus the Board have decided that such expenditure may be allowed as admissible deduction under section 37(1) of the Act in the hand of the payers in computing their total income from business. (vi) Board's F. No. 9/56/66-IT(AI) dated 17-1-1967 stating that increased membership fee of Rs. 1,000 and life membership fee of Rs. 10,000 paid for being a member of the Indian Institute of Foreign trade may be allowed as a deduction whenever paid. (vii) Board's F. No, 10/67/65-IT(AI) dated 26-8-1965 stating that as the advantages accruing to a Company as a result of getting its shares listed on a Stock Exchange con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst year of business as share stock broker. 4. Expenses incurred are therefore in the nature of pre-operative expenses before commencement of the business of share broking. Without acquiring the membership etc. of the various exchanges, assessee could not have commenced his business as share stock broker. Mining Machinery Explosives [202 ITR 710 (Cal.)], Cochin Refineries Ltd. [173 ITR 461 (Ker.)] at pages 13 14 and extract at page 10 of the paper book refers. Therefore, under no circumstances can these expenses be allowed as a revenue expenditure in the assessment year 1996-97. 5. These expenses have resulted in a benefit of enduring nature (4th para on page-3 of CIT(A)'s order shows that this has been admitted by the assessee). They have gone towards building the structure of the business. This clearly makes them capital in nature. 6. The expenses are not recurring expenses to be incurred on day-today basis. These have been incurred once and for all. These relate to fixed capital and not to circulating capital. 7. Recent commentary of Kanga, Palkhiwala Vyas makes a point about the relevance of commercial practice in contrast to the straitjacket of judicial interpretations ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty? However, the question before us in quite different viz. whether expenses incurred for this purpose are revenue or capital in nature? Therefore, we are concerned with the question of nature of expenses, which has not been considered at all in this decision. In fact, this question has also neither been considered or decided by the Hon'ble Mumbai Bench in 82 ITD 573. 13. Assessee has relied upon certain cases before the Assessing Officer, but these eases are not apposite: (i) Aquapump Industries 218 ITR 427 (Mad): Facts are quite different. It involved transfer of technical know-how and that too for a limited period of 5 years. In our case no such transfer is involved and also period of the membership is not defined. (ii) Similarly in Alembic Chemicals 177 ITR 377 (SC) the Co. was already manufacturing penicillin. Subsequently, it acquired licence from a Japanese Company for manufacture of penicillin by a different process. Thus this was in the same line of business activity. In our case the assessee was going to do broker's business for the first time. 14. Training to employees by OTCEI for making them familiar with the operations of the institution is akin to training ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and of 'enduring benefit' must respond to the charging economic realities of business. He submitted that 'once for all' payment or enduring benefit test is inconclusive as in a given case, the test of enduring benefit might break down. (iii) He reiterated that decisions relied on by him are relevant and applicable to the facts and circumstances of the present case. Our decisions and the reasons thereof: 7. We have considered the rival contentions of the parties in the light of the facts and circumstances of the present case. The orders of the authorities below have been perused. We have gone through the papers and materials placed on record. We have deliberated upon the applicable provisions of law and various decisions cited at the Bar. None of tests or principle or criterion is final or conclusive or of universal application 7.1 It is now well settled that none of the tests or principle or criterion is paramount or conclusive or of universal application to decide the question of expenditure being of capital nature or of revenue nature. It will depend on the facts and circumstances of the case. The various tests or principle or criterion formulated by various decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion that 'in a rough way' it was 'not a bad criterion of what is capital expenditure is against what is income expenditure to way that capital expenditure is a thing that is going to be spent once and for all and income expenditure is a thing which is going to recur every year'; and no doubt this is often a material consideration. But the criterion suggested is not, and was obviously not intended by Lord Dunedin to be, a decisive one in every case; for it is easy to imagine many cases in which a payment, though made 'once and for all', would be properly chargeable against the receipts for the year.... But when an expenditure is made, not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. The parenthetical clause in the Viscount Cave's test should be given its due significance. The Viscount Cave's test, as the parenthetical clause shows, must yield where there are special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporation v. Styles [1887] 2 Tax Cas. 239 at p. 243; Bowen, L.J. observed as to the capital expenditure as follows: You do not use it 'for the purpose of your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern. 2. Expenditure may be treated as properly attributable to capital, when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade: vide Viscount Cave, L.C., in Atherton v. British Insulated and Helsby Cables Ltd. [1926] 10 Tax Cas. 155. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be deducted out of the profits by claiming that it relieves the annual labour bill, the business, has acquired a new asset, that is, machinery. The expressions 'enduring benefit' or 'of a permanent character' were introduce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has therefore got to apply these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of whether the business yields any profits or not, it would be difficult to say that the annual payments were made solely for the purpose of earning the profits of the business.' The expression 'once and for all' is used to denote an expenditure which is made once and for all for procuring an enduring benefit to the business as distinguished from a recurring expenditure in the nature of operational expenses. The expression 'enduring benefit' also has been judicially interpreted. Romer, L.J., in Anglo-Persian Oil Co. Ltd. v. Dale [1932] 1 K.B. 124 at 146, agreed with Rowlatt, J., that by enduring benefit is meant enduring in the way that fixed capital endures. 'An expenditure on acquiring floating capital is not made with a view to acquiring an enduring asset. It is made with a view to acquiring an asset that may be turned over in the course of trade at a comparatively early date.' Latham, C.J. observed in Sun Newspapers Ltd. Associated Newspapers Ltd v. Federal Commissioner of Taxation (61 CLR 337 at 355):- When the words 'permanent' or 'enduring' are used in this connection it is not meant that the advantage which will be obtained will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Helsby Cables Ltd [1925] 10 TC 155, 192 (HL), where the learned Law Lord stated: '............when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. This test, as the parenthetical clause shows, must yield where there are special circumstances lading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nachanga Consolidated Copper Mines Ltd [1965] 58 ITR 241 (PC), it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure 'so long as the benefit is not so transitory as to have no endurance at all'. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is a condition of carrying on its trade at all'. It is clear from the above discussion that the payment made by the assessee for purchase of loom hours was expenditure laid out as part of the process of profit earning. It was, to use Lord Summer's words, an outlay of a business 'in order to carry it on and to earn a profit out of this expense as an expense of carrying it on'. [John Smith and Son v. Moore [1921] 12 TC 266, 296 (HL)]. It was part of the cost of operating the profit-earning apparatus and was clearly in the nature of revenue expenditure. (iv) Hon'ble Supreme Court in the case of CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257, 261, 262 referred to the decision in the cases of Empire Jute Co. Ltd., Assam Bengal Cement Co. Ltd., Atherton and Benarsidas Jagannath, In re [1947] 15 ITR 185 (Lahore) (FB) and thus observed:- In the judgment appealed against, the learned judges have referred to the dictum of Viscount Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd [1925] 10 TC 155, 192 (HL), which runs as follows:- 'But when an expenditure is made, not only once and for all, but with a view to bringing into existence an as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377 the Hon'ble Supreme Court after applying the principle laid down by Supreme Court in the cases of Empire Jute Co. Ltd. Associated Cement Companies Ltd. and Assam Bengal Cement Co. Ltd. has observed as under:- Head Notes (i) It would be unrealistic to ignore the rapid advances in research in antibiotic medical microbilogy and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast changing area of medical seicence. The state of the art in some of these areas of high priorty research is constantly updated so that the know-how could not be said to bear the element of the requisite degree of durability and nonephemerability to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holding an outlay, such as this, as capital. (ii) In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid in this test, provided by Lord Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd [1925] 10 TC 155 (HL). If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditue would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. (vii) In the case of Bikaner Gypsums Ltd. v. CIT [1991] 187 ITR 39, 49, Their Lordships of Supreme Court held that where the assessee, has an existing right to carry on a business, any expenditure made by it during the cousre of business for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure. (ix) In the case of Minoo F. Mehta v. CIT [1996] 217 ITR 578 the Hon'ble Bombay High Court has held as under:- We have carefully considered the rival submissions. Under section 37(1) of the Act any expenditure incurred wholly and exclusively for the purpose of the business or profession is allowed in computing the income chargeable under the head profits and gains of business or profession , provided it is not in the nature of capital expenditure or personal expenses of the assessee. The line that divides revenue expenditure from capital expenditure is often very thin and hazy. None of the tests evolved from time to time to determine what is attributable to capital and what to revenue is either exchaustive or of universal application. Each case depends on its own facts. To decide, therefore, on which side of the line the expenditure falls, it is necessary to look at the nature of the business, the nature of the expenditure and the nature of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue expenditure incurred for the purposes of the business must be determined on a consideration of all the facts and circumstances and by the application of the principle of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of, the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character the possession of which is a condition for the carrying on of the business, the expenditure should be regarded as a revenue expenditure incurred wholly and exclusively for the purposes of the business. In the facts of that case, it was further held as under:- Held , that, in view of the admitted position that serving of hot drinks to stewards, etc., by the race club on race days was an age-old custom in the field of racing and such drinks were served in order to enable the employees to put forth their best efforts in making all the arrangements to ensure the smooth conduct of the race, such as expenditure is incidental to the trade and as such the expenditure was incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the agreement with CW Co. under which the respondent became entitled to the benefits of using the registered trade marks and of disclosure of know-how, the sum of Rs. 50,000 was a part of the consideration for the receipt of the benefits and had to be considered to be a revenue expenditure. (xiii) In the case of CIT v. Coal Shipments (P.) Ltd. [1971] 82 ITR 902, 909, the Supreme Court held that although 'enduring benefit' need not be of an everlasting character for the expenditure to be held as of capital character, it should not be so transitory and ephemeral that it can be terminated at any time at the volition of any of the parties. The Hon'ble Supreme Court further held in this case that payment made to ward off competition in business to a rival would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time; the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. How long the period of contemplated advantage should be, in order to constitute enduring benefit, would depend on the circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. On the contrary, payment made in the course of and for the purpose of carrying on business of trading activity would be revenue expenditure even though the payment is of a large amount and has not to be made periodically - M.K. Bros. (P.) Ltd. v. CIT [1972] 86 ITR 38, 42-43 (SC) and CIT v. India Tobacco Co. Ltd. [1978] 114 ITR 182, 196 (Cal.). (xvii) It is the true nature of the expenditure that is relevant and not the name or description given to it by the assessee in his books of account or other documents - Minoo F. Mehta v. CIT [1996] 217 ITR 578, 581 (Bom.). (xviii) In the case of CIT v. Berger Paints (India) Ltd. (No. 2) [2002] 254 ITR 503, the Hon'ble Calcutta High Court has held that it is now settled law that if according to the revenue laws the assessee is entitled to treat a sum as a revenue expenditure, then that legal right of the assessee is not self-estopped by the treatment given by the assessee to it in its own books of account. (xix) The nature of a receipt as capital or revenue is not always determinative of the nature of the outgoing in the hands of the person who pays for it. It is said, and truly said, that whether payment is a revenue payment or a cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;once for all' payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities. In a given case, the test of 'enduring benefit' might break down; 7. Outgoing on account of capital or revenue depends on effectively on practical and business point of view rather than upon juristic classification of the legal rights, if any, secured employed or exhasuted in the process and the question must be viewed in the larger context of business necessity or expediency. 8. The idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statutory conditions; nor are the notions of 'capital' or 'revenue' a judicial fetish. What is capital expenditure and what is revenue are not eternal varieties but needs be flexible so as to respond to the changing economic realities of business. The expression 'asset or advantage of an enduring nature' was evolved to emphasise the element of a sufficient degree of durability appropriate to the context. 9. By 'enduring' is meant enduring in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set of an enduring nature is settled, the mere fact that the amount so settled is chalked out into various small amounts or periodic instalments, the capital nature of expenditure would not cease to be so or alter into the nature of a revenue expenditure. 17. A lump sum amount for liquidating recurring claims would not cease to be revenue expenditure or get converted into capital expenditure merely because its payment is spread over a number of years. It is the intention and object with which the asset is acquired, that determines the nature of the expenditure incurred over it, and not the method or the manner in which the payment is made, or the source of such payment. 18. If the expenditure is recurring and is incurred during the course of business or manufacture, it would be revenue expenditure. 19. Simply because the payment in the hands of the recipient has been considered as capital receipts, it is not necessary that in all cases it will have the same character in the hands of the person who has made the payment and vice versa. Whether a payment is a revenue payment or a capital payment is depend upon the angle from which one looks at it. 20. It is true nature of the expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It was further observed by the Court in this case as under:- It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has therefore got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fixed capital of the assessee. The permanent structure of which the income is to be the produce or fruit remains the same, it is not enlarged. We are not sure whether loom hours can be regarded as part of circulating capital like labour, raw material, power, etc., but it is clear beyond doubt that they are not part of fixed capital and hence even the application of this test does not compel the conclusion that the payment for purchase of loom hours was in the nature of capital expenditure. 7.9 The test of fixed and circulating capital also sometimes breaks down because there are many forms of expenditure which do not fall easily within these two categories. Moreover, there may be cases where expenditure, though referable to or in connection with fixed capital, is nevertheless allowable as revenue expenditure, e.g., an expenditure for preserving and maintaining capital asset as pointed out in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, at page 11 (SC). Similarly, interest paid on the unpaid purchase price of a capital asset after the commencement of business is allowable as business expenditure. Likewise, a guarantee commission paid to a bank for guaranteeing deferr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of CIT v. Kamal Co. [1993] 203 ITR 1038 (Raj.), the expenditure incurred on the construction of a fountain resulting in beautification of a traffic island was held deductible as the property so constructed did not belong to the assessee and such expenditure was incurred to advertise the name of the assessee and the line of the business it carried on. (iii) Where the assessee changed over from direct to alternating current, the cost of laying new cables which became the property of the Municipal Authority was held to be on revenue account in the case of Hindustan Times Ltd. v. CIT [1980] 122 ITR 977 (Delhi). (iv) To the assessee, who set up a new manufacturing unit and paid the Electricity Board, the cost of providing an overhead service line which was to remain the property of the Board, the payment was allowed as revenue expenditure - CIT v. Excel Industries Ltd. [1980] 122 ITR 995 (Bom.) SLP rejected 133 ITR (St.) 54; CIT v. Gujarat Mineral Development Corpn. [2001] 249 ITR 787 (SC). (v) The premium paid by the assessee to a Government Corporation to enable the Corporation to lay pipe line for supplying water to the assessee's factory was held to be a revenue expenditure - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be applied to decide whether the items involved in this case are of capital or revenue in nature. 7.13 Whether expenses were incurred before the business was set up With regard to preliminary contention raised by the Learned CIT(DR) appearing for the Department that expenses claimed by the assessee are in the nature of pre-operative expenses before commencement of the business of share broking, we find that no such case is made out by the Assessing Officer as is evident from Assessing Officer's observation and discussion made in the assessment order. The reason for rejecting the assessee's claim as given by the Assessing Officer and CIT(A) is that the expenses incurred were of capital in nature. Admitedly, there is a finding by the Assessing Officer that this is the first year of assessee's business and the assessee is engaged in the business of share-trading and share-brokerage, but there is no such allegation by the Assessing Officer that expenses claimed by the assessee were incurred before set-up or commencement of assessee's business of share-trading and share-brokerage during the year. As stated by the Assessing Officer himself, the assessee was engaged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d.). In the case of CIT v. Stones Mineral Associated Ltd. [2002] 257 ITR 479 (Raj.), it was held that expenditure incurred for procuring materials for export should ordinarily be business expenditure, even if the assessee had not started his export business. In this case, the Hon'ble Rajasthan High Court endorsed the finding of the Tribunal, that the business should have been treated as having been set up during the year, so as to make the assessee eligible for the deduction, though there were no purchases nor export during the year, but only expenditure for procurement of the materials. 7.14 In this connection, certain guidelines approved by the Hon'ble Supreme Court in the case of CIT v. Sarabhai Management Corpn. Ltd. [1991] 192 ITR 151 are useful to be taken note of. It was held therein that, However, the High Court has pointed out rightly, in our opinion, that in this case, the Tribunal has proceeded on a misapprehension regarding the nature of the assessee's business. It has analysed the various component activities of the assessee's business and pointed out that two categories of the activities of the business had been carried on during the previous year in q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1922. The Bombay High Court pointed out that there was a clear distinction between a person commencing a business and a person setting up a business. The relevant question which would fall for consideration under section 2(11) of the Act was the setting up of the business and not the commencement of the business and it was only when a business was established and was ready to commence business then it could be said that the business was set up, but before it was ready to commence business it could not be said to have been set up. The following observation in this case is noteworthy:- That is why it is important to consider whether the expression used in the Indian statute for setting up a business is different from the expression Mr. Justice Rowlatt was considering, viz., 'commencing of the business'. It seems to us that the expression 'setting up' means, as is defined in the Oxford English Dictionary, 'to place on foot' or 'to establish', and in contradistinction to 'commence'. The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vious that the business activity of this company started from the day of its incorporation and not from the day when the production of aluminum conductors commenced. As pointed out in Sarabhai Management Corpn. Ltd. v. CIT [1976] 102 ITR 25 (Guj.), what was material was the date when the company went into one or the other business activity and started one or other component business activities of the company. 7.19 Further, the Hon'ble Gujarat High Court in the case of CIT v. Western India Seafood (P.) Ltd. [1993] 199 ITR 777 held that when a business is established and is ready to commence business then it can be said of that business that it is set up. The words 'ready to commence' would not necessarily mean that all the integrated activities are fully carried out and/or wholly completed. The requirement is also complied with in a given case where an assessee had undertaken the first of the kind of integrated activities which the business is overall comprised of. It is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up. The test to be appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -dealing and share-brokerage was not set up or was not ready to commence before the expenditure were incurred. 7.21 In this view of the matter and having regard to the fact that it was not the Assessing Officer's case that the assessee had incurred the expenditures in question before the business was set up, we find no force in this contention advanced by the Learned CIT(D.R.), who has failed to point out any material or evidence in support of his contention. In his written note, he has not referred to any evidence or material to show that the expenditures were incurred before the business was set up or the business was ready to commence except by stating that this is the first year of assessee's business of share-dealing and share-brokerage. Claim with regard to the payment of development fee paid to Calcutta Stock Exchange 7.22 An amount of Rs. 70,00,000 on account of development fee paid to Calcutta Stock Exchange was claimed as an expenditure of revenue in nature. The Assessing Officer disallowed the same as of capital in nature. The CIT(A) upheld the Assessing Officer's action. 7.23 We have considered the rival contentions of both the parties. At this stage, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s claim. 7.26 We have considered the rival contentions of both the parties. We have perused the materials on record. 7.27 It is an admitted position that payment of Rs. 1,50,000 for enabling the assessee to operate on the floor of the Exchange is in addition to Rs. 70,00,000 paid as development fee to the Stock Exchange. It is the payment for the use of the system or facilities or services made available to the assessee for the purpose of operating share transaction on the floor of the Stock Exchange. There is no doubt that having an advantage to operate on the floor of the Exchange would certainly facilitate the assessee's business operations of share trading or share-brokerage or enable the management and conduct of assessee's business of share-dealing and share brokerage to be carried on more efficiently or more profitably while leaving the fixed capital untouched. Though this advantage to operate on floor of the Stock Exchange may endure for an indefinite future, but it is related or connected to the assessee's day-to-day business operations and activities and it help the assessee in profit making. This expenditure cannot be held to acquire a capital asset or endu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofitably 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 operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange of India. The terms and conditions of appointment as a dealer on the OTC Exchange of India are enumerated as under:- 1. Your appointment as a dealer and continuation thereof is subject to all information furnished and statements/representations made by you in your application for dealership being found valid and true. 2. Only the applicant or the authorized signatories on the form will be allowed to operate the counter. Documents issued by persons other than the authorized signatories will not be recognized by the OTCEI. 3. OTCEI will prescribe a limit upto which (as a multiple of the networth committed by you) the total business exposure allowed to be carried out by you on the OTCEI. OTCEI reserves the right to demand security deposit in a manner satisfactory to OTCEI for permitting any business on OTCEI. 4. OTCEI reserves the right to review, from time to time your operations on the exchange as to the level of business and the manner in which the business is conducted. 5. OTCEI, at its absolute and unfettered discretion, reserves the right to review dealership if your dealership or your operations are found to contravene any of provisions of its Bye-Laws, Rules and Regulati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aler, to undergo such qualification procedure as may be prescribed. The dealer shall ensure the continuance of such employees, who have qualified through OTCEI's qualification procedure, for the purpose of continuation of such dealership. Such employees shall be in full time employment with the dealer. (B) In the event of such employees ceasing to be associated with the dealer in respect of the OTC operations, the dealer shall inform OTCEI immediately and employ suitable personnel to operate the counter. Such personnel shall be required to undergo and qualify within a period of 3 months or such other period as may be deemed fit by OTCEI, such qualification procedures as may be prescribed by OTCEI in this regard time to time, for the purpose of operating the counter. (C) OTCEI reserves the right to suspend trading by the counter till fresh appointments are made to the satisfaction of OTCEI. (D) In the event of the dealer failing to employ a qualified person within a further period of three months from the date of the operating personnel leaving the employment or such other period as deemed fit by OTCEI. OTCEI reserves the right to review/ suspend the Dealership on the expiry of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o operate as a dealer on the counter of the OTC Exchange of India by or through employee or employees of the assessee, who had to undergone such a qualification procedure as may be prescribed by the OTC Exchange of India. For the purpose of continuation of such dealership, the assessee was required to employ qualified persons, who have qualified through OTC Exchange of India's qualification procedure. Such employees were required to be in full time employment with the dealer. It is further seen that the admission fee of Rs. 6,00,000 was neither refundable nor was the dealership transferable. If the assessee decides or force to terminate the dealership or if the OTC Exchange of India terminates the dealership, this fee of Rs. 6,00,000 was not returnable by the OTC Exchange of India. A limit upto which the total business exposure allowed to be carried out by the assessee on the OTC Exchange of India has been prescribed by the OTCEI, and OTCEI reserves their right to demand security deposit in a manner satisfactory to OTCEI for permitting any business on OTCEI. There is no doubt that the security deposit so demanded by OTCEI for permitting any business on OTCEI is on separate foot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or more share in his favour. Getting appointment as a dealer on the OTC Exchange of India only enables one to do trading of securities through a network of computers of OTCEI dealers, located in different cities, which are connected to the Central Computer of the OTCEI through a satellite link up. In this sense, it thus helps the dealer in carrying on or running or managing the business of share dealer/dealings or share brokerage efficiently and profitably without creating in his favour any advantage of enduring benefit on capital field. 7.31 It is not in dispute that the said dealership was not transferable and neither the admission fee of Rs. 6,00,000 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 of Rs. 6,00,000 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of the payment. Here, the purport and object of becoming dealer on OTC Exchange of India Ltd. is to facilitate the assessee's trading operations or to enable the assessee to carry on its business more efficiently, extensively and profitably in the background of rapidly changing and advancing economic realities of stock business. 7.33 Be it stated here that with regard to non-interest bearing deposit for telex connection and telephone connection, expenditure incurred by a sugar factory on cane development programme, membership fee to be a member of Indian Institute of Packaging, membership fee for being a member of the Indian Institute of Foreign Trade and expenses incurred by a Company for getting its shares listed on a Stock Exchange, the Board has taken a view that these expenditures may be considered as laid out wholly and exclusively for the purposes of the business and are as such allowable as business expenditure under section 37(1) of the Act as stated in the Board's Circular/Notifications, which have already stated above in paragraph 4.1 hereto. 7.34 Applying the various principles and test as discussed in foregoing paras and in the light of the cumulative effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fulfilling conditions specified by the National Stock Exchange of India Ltd. The letter dated December 26, 1994 given by National Stock Exchange of India Limited to Mr. P.K. Jain, D.G.M. Company Secretary of the assessee-company is quoted as under: National Stock Exchange of India Limited Mahindra Towers, 'A' Wing, 1st floor, RBC Worli, Bombay - 400016 R.H. Patil Managing Director Ref. No NSE/WDM-CM/MEM/3732 December 26, 1994 Mr. P.K. Jain, DGM Company Secretary, The Peerless General Finance Investment Co. Ltd., Park Centre, 24, Park Street, Calcutta -700 016. Dear Sir, Please refer to your application for Trading Membership of the Wholesale Debt Market of the NSEIL. We are pleased to inform you that based on the written test and the interview held thereafter, it has been decided to grant you membership subject to your fulfilling the conditions as given in Annexure A on or before the dates as stipulated. You are requested to confirm to us in writing that you accept the offer of admission as a Trading Member alongwith the first instalment of Rs. 55 lakhs (Rs. Fifty five lakhs) towards the Advance Annual Subscription fee, Non Adjustable deposit and a part of the Interest Free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time. The Security deposit will be included in determining the networth of the member. 7.38 The controversy that falls for our consideration is with regard to the payment of Rs. 30 lakhs towards non-adjustable deposit for Trading Membership Subscription of the Wholesale Debt Market of the NSEIL. On reading the terms and conditions for granting Trading Membership of the Wholesale Debt Market of the NSEIL as prescribed by NSEIL, it is seen that the right of Trading Membership on the Wholesale Debt Market of the NSEIL is not transferable for a minimum period of five years. The membership granted by NSEIL is a Trading Membership of the Wholesale Debt Market of NSEIL and not a Corporate Membership in the equity of NSEIL. The person holding Trading Membership of the Wholesale Debt Market of NSEIL does not acquire or get any share in the NSEIL. The NSEIL as a company has been promoted by the consortium of financial institutions. It is envisaged as pioneer institution to promote retail trade for debt securities. The NSE has two segments for trading in securities: (1) Capital market segment (equity, debentures and hybrids), and (2) Wholesale Debt Market (WDM) or Money Market Segment (T-bill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sy before us is to be viewed from the practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency. It would be unrealistic to ignore the rapid changes and advancement brought in the business of dealing in shares, stocks, debts, etc. This area of dealing or operating in shares and securities has undergone vast changes to protect and safeguard the interests of investors, dealers or brokers. The Trading Membership granted to the assessee enables the assessee to use and utilize the network of NSEIL for its trading operations at a nationwide level so as to facilitate it to carry on business smoothly, extensively, efficiently and profitably. The dealership is also not transferable within first five years. Even if it is allowed to be transferred at a later stage, it is to be made in accordance with the terms and conditions provided by NSEIL. In this process, the assessee has not acquired any capital asset or an advantage of enduring benefit in capital field. 7.39 Considering the totality of the facts and cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rning process and trading operations of the assessee. The reasons given by us while deciding the issue related to the payment of fee for operating on the floor at Calcutta Stock Exchange, payment made to OTC Exchange of India and payment of non-adjustable deposit for Membership subscription holding them as of revenue in nature are equally applicable to this item also. Therefore, on the facts so found, it cannot be said by any stretch of imagination that by making payment for availing VSATs facilities and services the assessee has acquired any capital asset or advantage of enduring benefit in capital field. However, it is noticed by us that out of the deposit of Rs. 10,00,000 for installation of VSATs equipments, the NSE has appropriated or adjusted the following amount towards the charges on year to year basis as pointed out by the assessee himself:- Financial Year VSAT charges recovered 1995-96 1,23,000 1996-97 2,72,785 1997-98 2,67,874 1998-99 2,96,962 9,60,621 On perusal of the said details, it is thus clear that an amount of Rs. 1,23,000 towards charges for VSATs services and facilities availed by the assessee is related to the period relevant to the assessment year under consi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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