TMI Blog2008 (2) TMI 653X X X X Extracts X X X X X X X X Extracts X X X X ..... e stores or raw materials held for the purposes of the business or profession or in the nature of personal effects and, hence, it cannot be excluded from the purview of being called a capital asset within the meaning of section 2( 14 ). Membership of a stock exchange not only has an element of permanency but also has the element of being a source of income and, therefore, it must be held to be in the nature of a capital asset. We hold accordingly. Whether the deposits placed by the assessee with the Stock Exchange constitute expenditure u/s 37? - For claiming deduction as expenditure the amount should have been spent by the assessee as an amount paid out or paid away and should be something which is gone irretrievably. To be a payment which is made irretrievably, there should not be any possibility of the money forming once again a part of the funds of the assessee. If this condition is not fulfilled and there is a possibility of there being a resulting trust in favour of the assessee, the money cannot be considered to have been spent by the assessee. In such a case, the assessee cannot claim that he had spent out or paid away the amount which he seeks to get deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be allowed as revenue expenditure. To this limited extent (annual subscription of Rs. 5 lakhs paid for wholesale debt market), the matter goes back to the file of the Assessing Officer for a fresh decision in terms of the aforesaid directions after giving a reasonable opportunity of hearing to the assessee. Appeal filed by the Department is partly allowed in terms of the aforesaid directions. - K.P.T. THANGAL AND D.K. SRIVASTAVA, JJ. U.K. Shukla for the Appellant. P.J. Pardiwala for the Respondent. ORDER Per D.K. Srivastava, Accountant Member. - The appeal filed by the department is directed against the order passed by the learned CIT(A) on 1-10-2002 for the assessment year 1995-96 on the following ground : "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that the membership fee paid by the assessee at Rs. 65,50,000 towards non-refundable security deposit and permanent cash deposit as revenue expenditure." 2. Briefly stated, the facts of the case are that the respondent-assessee, namely, M/s. Khandwala Finance Ltd., a subsidiary company of M/s. Khandwala Securities Pvt. Ltd., was engag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 65.50 lakhs as deferred revenue expenditure in its books of account but claimed the deduction thereof as revenue expenditure in the computation of total income filed along with the return of income before the Assessing Officer. The Assessing Officer, however, treated it as capital expenditure and disallowed the same. Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the CIT(A), who decided the issue in favour of the assessee against which the revenue is now in appeal before this Tribunal. 4. In support of appeal, Shri Shukla, the learned Commissioner for the Department (DR) took us through page 5 of the assessment order and submitted that cash deposits placed by the assessee with the Stock Exchange were not in the nature of expenditure incurred by the assessee but in the nature of deposits placed by the assessee and, hence, were not allowable as expenditure in terms of the plain language of section 37(1) of the Income-tax Act regardless of whether they were in the capital field or revenue field. He further submitted that the Assessing Officer has also held that the Instructions issued by the Central Board of Direct Taxes for allowing ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d payments were, therefore, correctly treated by the Assessing Officer as capital expenditure and that his action was also in conformity with the aforesaid provisions of law. 8. In reply, Shri Pardiwala, the learned counsel for the assessee-company, invited our attention to the conditions stipulated under section 37(1) and contended that the impugned payments squarely fell within the four corners of section 37(1) inasmuch as the impugned expenditure was not only incurred wholly and exclusively for the purposes of the business but was also not in the nature of personal expenditure or capital expenditure. According to him, the impugned expenditure simply enabled the assessee to carry on its trading activity. He further submitted that the payments made to NSE were non-refundable or non-adjustable and, hence, was an integral part of the profit-earning process. He contended that the assessee had not acquired any asset or advantage of enduring nature in lieu of the impugned expenditure. In this connection, he relied heavily on the decision of a Special Bench of this Tribunal in Peerless Securities Ltd. v. Jt. CIT [2005] 94 ITD 89 (Kol.) and decisions of the Division Benches of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k Exchange acquired by the assessee is a capital asset. Let us first have a look at the rules notified by the National Stock Exchange in this behalf. Rule 18( a ) reads thus : 18( a ). Every trading member of the Exchange shall, upon being admitted as a trading member of the Exchange be issued a certificate or entitlement slip as proof of having been admitted to the benefits and privileges of the trading membership of the Exchange. Such a certificate or entitlement slip shall not be transferable or transmittable except as herein mentioned . As per Rule 18( b ) of the said Rules, a certificate or entitlement slip is transferable by nomination subject to requisite approvals. Rule 20 prohibits a trading member from assigning, mortgaging, pledging, hypothecating or charging his right of membership or any rights or privileges attached thereto. The said Rules make it quite clear that the acquisition of membership in the National Stock Exchange by the assessee created an intangible right in its favour which was also transferable by nomination. It is this membership of the Stock Exchange which enabled the assessee to enjoy the benefits and privileges of a trading member of the Stock Excha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the nature of stock-in-trade, consumable stores or raw materials held for the purposes of the business or profession or in the nature of personal effects and, hence, it cannot be excluded from the purview of being called a capital asset within the meaning of section 2( 14 ). Membership of a stock exchange not only has an element of permanency but also has the element of being a source of income and, therefore, it must be held to be in the nature of a capital asset. We hold accordingly. 13. Learned CIT-DR is right in his submissions that section 47( xi ) inserted with effect from assessment year 1998-99 and section 47( xiiia ) inserted with effect from the assessment year 2002-03 also bring out very clearly that a membership right held by a member of a recognised stock exchange has been treated by the Legislature as a capital asset . Section 47 enumerates certain transactions and provides that they shall not be regarded as transfer for the purposes of section 45 of the Income-tax Act. One of such transactions is transfer made on or before 31-12-1998 by a person not being a company of a capital asset being membership of a recognised stock exchange ... . [Section 47( xi )] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1887] 2 TC 239, 243 (CA) in the context of capital expenditure in these words: "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". Following the aforesaid principles, we hold that the membership card of a stock exchange is a capital asset and, therefore, any expenditure incurred to acquire the said card is capital in nature and, hence, not allowable under section 37(1) of the Income-tax Act. 16. Reliance placed by the learned counsel for the assessee on the Instructions issued by the Central Board of Direct Taxes for treating OYT deposits for telephone and security deposit paid to secure telex connection as revenue expenditure is completely out of context. The said instructions would operate in the fields which they cover and not in other fields. They are not at all relevant for deciding the issue under appeal. Issue No. 2: Whether the deposits placed by the assessee with the Stock Exchange constitute expenditure ? 17. The focus of section 37 is to allow deduction in respect of any expenditure incurred by the assessee wholly and exclusively for the purposes of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounting to Rs. 10.50 lakhs paid to Vadodara Stock Exchange is also not allowable as it is in the nature of capital expenditure. In this view of the matter, the order of the learned CIT(A) allowing deduction for the aforesaid sum of Rs. 60.50 lakhs is reversed and that of the Assessing Officer disallowing the same is restored. 20. We shall now take up the allowability of Rs. 5 lakhs being annual subscription for 1994-95 for wholesale debt market. There is no doubt that annual subscription being recurring in nature can be claimed as revenue expenditure. However, there are certain factual aspects which need enquiry at the level of the Assessing Officer before it can be allowed or disallowed. It is not clear as to why the assessee has treated the annual subscription for the financial year 1994-95 amounting to Rs. 5 lakhs paid for wholesale debt market as deferred revenue expenditure in contradiction to its own treatment of annual subscription paid for capital market segment as revenue expenditure. It is also not clear as to whether the licence for wholesale debt market was first allotted to M/s. Khandwala Securities Pvt. Ltd. or the assessee-company, namely, M/s. Khandwala Finan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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