TMI Blog2005 (2) TMI 452X X X X Extracts X X X X X X X X Extracts X X X X ..... d to get deduction in computing the total income of the assessee. The payment of Rs. 70,00,000 and Rs. 1,50,000 on account of development fee and fee for operating on the floor to Calcutta Stock Exchange, the payment of admission fee of Rs. 6,00,000 and technology cost of Rs. 2,00,000 paid to O.T.C. Exchange of India and payment of non-adjustable deposit for membership subscription of Rs. 30,00,000 and deposit for Very Small Apperatus Terminal (VSAT) of Rs. 10,00,000 paid to National Exchange of India. When the matter was placed before the Division Bench, the Bench felt that the question should be considered and decided by a Special Bench for the following reasons recorded in the referreal order:- "Reference under section 255(3) of the I.T. Act, 1961 by Kolkata Bench "C" to the President, Income Tax Appellate Tribunal for constituting a Special Bench. We, the Members of "C" Bench at Kolkata are of the view that the appeal of M/s. Peerless Securities Ltd., 3, Esplanade East, Kolkata, for assessment year 1996-97 in ITA No. 251/Cal. of 2000 is a fit case for reference to the Special Bench. The facts of the case are that the assessee-company made the following payments to different S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to capital expenditure or revenue expenditure. We are, therefore, of the view that this issue with the case record in question should be sent to the Hon'ble President, ITAT for constituting a larger Bench to consider the conflicting views and come to a final decision on this issue. The statement of the case and the terms of reference are separately enclosed." 2.2 The Hon'ble President of the Tribunal was then pleased to constitute a Special Bench consisting of three members to decide the above-referred question set out in paragraph 1 hereto above. Facts of the case 3. The assessee's claim for deduction of Rs. 1,19,50,000 was rejected by the Assessing Officer in the assessment completed under section 143(3) of the Act on 15-3-1999 by stating and observing as under:- "The assessee-company is engaged in the business of share stock brokerage. In the computation of income furnished alongwith the return of income, the assessee has claimed deduction of Rs. 1,19,50,000 under the head Deferred Revenue Expenditure shown in the Balance-sheet. The related details were furnished on behalf of the assessee, the perusal of which reveals that the following payments were made:- Calcutta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital 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, but on the revenue field. Accordingly, the said admission fees has been treated as revenue expenditure claimed in the return. The technology cost of Rs. 2 lakhs paid to OTCEI represents payment towards training imparted by the Institution to the employee of the assessee-company in the operation of the Institution such training was necessary for the assessee-company in order to become familiar with the operation of OTCEI. Hence, the said technology cost has been treated as revenue expenditure. In connection with the aforementioned items included in deferred revenue expenditure, reliance was placed upon the decisions of the Madras High Court in the case of CIT v. Aquapump Industries 218 ITR 427 of the Supreme Court in the case of Alembic Chemical Works Co. Ltd v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 application for corporate membership of Calcutta Stock Exchange (CSE) was approved by CSE in their committee meeting held on 6-7-1995 and the appellant admitted as corporate member subject to payment of certain fees which include, inter alia, development fee Rs. 70,00,000 and fees for operating on the floor Rs. 1,50,000 vide CSE's letter dated 11-7-1995 (copy enclosed). Thus the above two payments were made to become corporate member of CSE and carry on operation on the floor. These two payments have direct nexus to the nature of business carried on by the assessee. Hence, the same can be allowed under section 37(1). The ld. Assessing Officer considered that the aforesaid payments were made for initial outlay or for acquiring or bringing to the business and acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 enduring benefit is not applicable in this case. Therefore, technology cost of Rs. 2 lakhs should not be treated as capital expenditure. (c) Non-adjustable deposit for membership subscription Rs. 30,00,000 and deposit for VSAT Rs. 10,00,000 paid to National Stock Exchange (NSE) The non-adjustable deposit of Rs. 30 lakhs cannot be withdrawn for a minimum period of 5 years even if the trading member ceases or discontinues trading in the exchange. Since the appellant company follows going concern concept, it does not intend to discontinue its operation in the forceable future and it does not intend to withdraw the deposit in future. Thus in substance the amount of deposit should be considered as revenue expenditure incurred wholly and exclusively for the purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant 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 to state that the work 'plant' does not include tea bushes or live stock. The very fact that the definition is inclusive and not exhaustive means that the items mentioned therein are only illustrative and any article can be a plant if it satisfies the tests laid down by the courts from time to time. The delivery of the subjects chosen and the marked extremities to which the definition has extended itself makes the legislative intent much too clear and audible to need any emphasis, namely, that it has given the term 'plant' the widest meaning possible. The work 'plant' in its ordinary meaning is a work of wide import and it must be broadly construed having r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant'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, the question of allowable depreciation on the same for the assessment year 1996-97 does not arise. The alternative plea of the appellant is also rejected." 3.3 Still aggrieved, the assessee is in further appeal before the Tribunal. Ground No. 1 raised in this appeal is as under:- "That on law and facts of the case the learned Commissioner of Income Tax (Appeals) has erred in confirming the addition made by the Assessing Officer on account of development fee of Rs. 70,00,000 and fees for operating on the floor Rs. 1,50,000 paid to Calcutta Stock Exchange Association, admission fee of Rs. 6,00,000 and technology cost of Rs. 2,00,000 paid to OTC Exchange of India and non-adjustable deposit for membership subscription of Rs. 30,00,000 and deposit for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade 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 the judgment of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd [124 ITR 1]. However, in that particular case itself, the Supreme Court held that the test of enduring benefit is not a certain of conclusive test and also cannot be applied blindly or mechanically without regard to the particular facts and circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ember 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. Hence, by applying the tests as laid down in the above mentioned decisions, it has got to be concluded that by making payment of Admission Fee or Development Fee, the assessee has not acquired any capital asset but has merely acquired the right to conduct its business. Hence, the payments are required to be treated as revenue expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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: 6.3 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 --------- 6.4 The C.B.D.T. itself allows Security Deposit for Telex connection and under Tatkal Telephone Deposit Scheme as revenue expenditure under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 contain substantial advantages pertaining to its day-to-day business, it has been decided that such expenses should be considered as laid out wholly and exclusively for the purposes of the business and, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 based on technicalities. The commercial practice, which is to treat the membership card as a commercial right which is transferable, has been taken note at page 96 of the assessee's paper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 wass 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 imparted to employees for learning the operation of a new machinery. Here the training cost has to be capitalized. In this context, I rely upon McGraw Ravindra Labs 132 ITR 401 (Guj.) where ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during 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 decisions must be applied with proper regard to the facts of each case. No strict norms can be settled to decide the issue in a particular case. The same is to be decided in the peculiarities and circumstances of that c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 circumstances leading to a contrary conclusion. The test of enduring benefits is 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset. 3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure 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 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 expenditure or revenue expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 last for ever. The distinction which is drawn is that between more or less recurrent expenses involved in running a business and an expenditure for the benefit of the business as a whole'... e.g. ... 'enlargement of the goodwill company' - 'permanent improvement in the material or immateria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's tradi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 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 Division Bench further pointed out that this dictum was stated with approval by this Court in Assam Bengal Cement Co. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reasonably comprehensive, to draw any clear line of demarcation. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants; but as masters they tend to be overexacting. (iii) The question in each case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the business, but that by itself would not acquire any capital asset. (viii) Their Lordships of Supreme Court in the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 the right acquired. If it is incurred by the assessee for the purpose of creating, curing or completing his title to capital, it must be regarded as capital expenditure. But, if it is for the purpose of protecting his business, it would be considered as revenue expenditure. Moreover, it is the true nature of the expenditure that is relevant and not the description given to it by the assessee in his books of account or other doc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt 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 wholly and exclusively for the purposes of the business. The disallowance of Rs. 40,000 could not be sustained." (xii) In the case of CIT v. British India Corpn. Ltd. [1987] 165 ITR 51, the Hon'ble Supreme Court on the facts of that case has held that the payment of Rs. 50,000 for meeting initial expenses for establishing the distributorship had to be considered to be a revenue expenditure by observing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 circumstances and the fact of each individual case. It was further held that although an enduring benefit need not be of an everlasting 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. (xiv) A long line of decisions have laid down that when an expenditure is made with a view to bringing into existence an asset or an advantage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 capital payment may depend upon the angle from which one looks at it - the payment may be a revenue payment from the point of view of the payer and a capital payment from the point of view of the receiver and vice versa - CIT v. Ciba of India Ltd. [1968] 69 ITR 692, 700 (SC); Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, 7 (SC). 7.6 From these abovereferred decisions, we may draw the following g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the way that fixed capital endures and it does not connote a benefit that endures in the sense that for a good number of years it relieves the assessee of a revenue payment or a disadvantage. A payment made by the assessee to free himself from a capital liability, is capital expenditure, while a payment which frees an assessee from the liability to make recurring revenue payments or annual revenue payments is revenue expenditure. 10. Where the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber 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 expenditure that is relevant and not the name or description or treatment given to it by the assessee in his books of account or other documents. Fixed and circulating capital test 7.7 From foregoing discussion it is clear that the test of enduring benefit is not a ceratin or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. Thus, in those cases, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de 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 expenditure or revenue expenditure in which latter event only it would be a deductible allowance under section 10(2)(xv) of the Income-tax Act. The question has all along been considered to be a question of fact to be determined by the Income Tax authorities on an application of the broad principles laid down above and the Courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 deferred payment of the purchase price of a capital asset is revenue expenditure as held by Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802, 808 and by Bombay High Court in the case of Taparia Tools Ltd. v. Jt. CIT [2003] 260 ITR 1O2 (Bom.). Initial expenditure 7.10 Broadly speaking, if the expenditure is for the initial outlay or for acquiring or bringing into existence an asset or ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 - CIT v. National Machinery Mfrs. Ltd. [1991] 191 ITR 483 (Bom.); CIT v. Bharat Commerce Industries Ltd. [1990] 184 ITR 90 (Delhi). (vi) The contribution made by a sugar mill towards the boring of wells and construction of godown on the land belonging to cane growers was held to be on revenue account in the case of R.B. Narayan Singh Sugar Mills (P.) Ltd. v. CIT [1981] 129 ITR 698 (Delhi). (vii) In Madras Auto Service (P.) L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the business of share-trading and share-brokerage in this year. The certificate for commencement of business granted by Registrar of Companies to the assessee on 14-2-1995 reveals that the assessee was entitled to commence business on 14-2-1995. The assessee effected purchase and sales of shares amounting to Rs. 3,82,76,905 and Rs. 3,93,62,811 respectively during the year in question. The assessee's business of share trading had already set up o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gible 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 question. The assessee had purchased a property; it was on the look out for persons to whom it could be let out; it had been able to get a customer; and it had carried out repairs, rewiring, installation of lift and other steps in the process of getting the premises converted from a residential house into a business and storage accommodation conforming to the requirements of the customer. Even, if, as submitted by Dr. Gauri Shankar, the first category of activity re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions under section 10(2)." 7.17 The Hon'ble Bombay High Court in the case of CIT v. Piem Hotel (P.) Ltd. [1994] 209 ITR 616 has held as under:- "In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od (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 applied is as to when a businessman would regard a business as having commenced and the approach must be from a common sense point of view. The question whether a business has been set up or not is always a question of fact which has to be decided on the facts and in the circumstances of each case." In the light of the settled legal position, the Hon'ble High Court decided the question before them as under:- "In the light of the aforesaid settled legal position, therefore, it is easy to visualise that for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dence 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 pertinent to note that a similar issue as to whether the development fee paid to Calcutta Stock Exchange is to be regarded as capital or revenue in nature, had come for consideration before the Hon'ble jurisdictional Calcutta High Court in the case of Rajendra Kumar Bachhawat v. CIT [IT Appeal No. 44 of 2002], where the Hon'ble High Court vide their order dated 14th August, 2002 has held as under:- "The assessee paid a sum of Rs. 25 lakhs for development purposes for the purpose of becoming a member of the Calcutta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvantage 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 enduring advantage but is to be held to have incurred for the purpose of carrying on business of share trading and share-broker. By making the said lump sum payment towards fees for operating on the floor of the Stock Exchange, the assessee has got rid of annual or recurring business expenses. It does not bring into existence a capital asset. The payment made by the assessee to enable itself to operate on the floor of Stock Exchange is for making use of system of share trading owned and controlled by the Stock Exchange and for services utilised by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the 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 hold that the payment of Rs. 1,50,000 made to Calcutta Stock Exchange for operating on the floor of the Exchange is allowable as being of revenue in nature. Payment of admission fee and technology cost to OTC Exchange of India 7.28 With re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Regulations. 6. OTCEI will prescribe, from time to time, such code of conduct as it may deem fit and necessary for the smooth operations on the OTC Exchange of India. You will abide by such code of conduct and non-compliance of the same may result in review of your dealership. 7. You will be required to comply with Securities Contracts (Regulations) Act Rules Multiple Membership Rules. In addition you will also be required to comply with the Guidelines/ Enactments, Notification issued/modified by SEBI Ministry of Finance from time to time. 8. OTCEI r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired 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 the said period. (E) OTCEI may permit the personnel to operate the counter before the completion of the qualification procedure, at the sole risk of the dealer for all such failures/mistakes that may arise from counter. 18. (A) You will pay the balance of Rs. 5,00,000 towards the Admission Fee on or before September 15, 1995. (B) You will pay the Annual Dealership Fee of Rs. 25,000 in advance for the period September, 1995 - September, 1996 by September 15, 1995. (C) OTCEI reserves the right to increase the Annual Dealersh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 footing. The dealer is required to abide by such code of conduct, various Rules and Regulations, guidelines, enactments and notifications, etc. as prescribed from time to time by OTCEI or under other laws for time being in force, in defiance thereof the dealership may result in for review by OTCEI. It is also seen that holders or donees of the Power of Attorney given by the assessee are not allowed to operate the OTC counter, except with the prior written consent of the OTC Exchange of India. To allow holders or donees of P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal 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 to be necessary or condition precedent for carrying on day-to-day business as a dealer on OTC Exchange of India and to operate the counter thereof. The aim and object of the aforesaid expenditures are thus for carrying on the assessee's business and as such these are of revenue in nature. On the facts of this case, we find no reason to hold that the assessee has derived an advantage of enduring nature on capital field or otherwise has acquired any capital asset. 7.32 The contention of the learned CIT(DR) contending that the expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber 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 effect of all the decisions, we are of the considered view that the payment of admission fee to become a dealer on OTC Exchange of India and to operate the counter, and the payment for imparting training to assessee's employees so as to make them qualified as per guidelines laid down by OTC Exchange of India, are to be held as revenue expenditure. We, therefore, set aside the orders of the authorities below on this issue and alow the assessee's claim of deduction of the aforesaid amount as a revenue expenditure while computing the profit and gains of busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reet, 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 Security Deposit by a Demand Draft favouring National Stock Exchange of India Ltd. payable at Bombay. The balance amount of Rs. 55 lakhs (Rupees fifty five lakhs) towards the interest Free Security Deposit and the VSAT installation and equipment cost will be payable as indicated in the payment schedule in Annexure B. NSE will provide computerized on line screen based trading facilities on equal access basis to all the trading Members. The communication link between a PC workstation at your end and mainframe computer located at NSE will b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IL 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-bills, CPs, CDs, PSU bonds etc.). The assessee in the present case has been granted Trading Membership of the Wholesale Debt Market (WDM), with the help of which the assessee can carry on its business smoothly and efficiently by using the network of computers, which is connected to the Central Computer of the NSE through a Satellite link up. It has facilitated the assessee to do business transactions elec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 circumstances of the case as discussed above and having regard to the nature of Trading Membership of the Wholesale Debt Market of the NSEIL and nature and character of the payment towards non-adjustable deposit for said Trading Membership and applying the cumulative effect of all tests and criterians, and of various decisions referred to in foregoing paras in the light of rapidly changing and advancin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 consideration. Therefore, the assessee's claim to the extent of Rs. 1,23,000 being revenue expenditure is only found to be allowable in the present assessment year under consideration and rest of the amount are allowable in subsequent years to the extent o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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