TMI Blog2003 (5) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... in the business of dealing in shares, securities and stock brokering. In the assessment year relevant to assessment year 1995-96, the assessee became a member of the National Stock Exchange. In the accounting year under reference, the assessee became member of Ludhiana Stock Exchange and OTCEI. As per the conditions for becoming members of the aforesaid stock exchanges, the assessee paid non-refundable admission fee of Rs. 10 lakhs and infrastructure fund of Rs. 7.11 lakhs, both aggregating to Rs. 17.11 lakhs to Ludhiana Stock Exchange. The assessee also paid non-refundable membership fees of Rs. 20 lakhs to OTCEI. In the return of income filed, the assessee claimed deduction of Rs. 37.11 lakhs of the aforesaid payments as revenue expenditure. The Assessing Officer called upon the assessee to explain why the said expenditure should not be treated as capital in nature. The assessee replied that the said expenditure was incurred with a view to earn profits and not for acquiring or bringing into existence a new capital asset and benefit of enduring nature. Therefore, the said expenditure was allowable as revenue expenditure. Reliance was also placed on the judgment of Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trading on the OTCEI. The relevant findings recorded by ld. CIT(A) in paras 3 and 4 of his appellate order are reproduced as under: "3. The matter has been considered by me. It is observed that there are numerous case laws on the question of an expenditure being considered to be of revenue nature or capital in nature. Some case laws have been relied upon by the counsel for the appellant also. The basic principle which is now universally applied is whether any capital asset of an enduring nature has been brought into existence by virtue of this expenditure. If such an expenditure leads to the acquisition of an asset of an enduring nature then the expenditure would have to be considered to be capital in nature and if the expenditure has been incurred only to facilitate and promote the business of the assessee then it would necessarily have to be considered revenue in nature and allowed as a deduction. Even in this behalf a very pertinent observation has been made by the Madras High Court in the case of CIT v. Pioneer Engineering Syndicate reported at 175 ITR 93". Quoting from the head notes, the decision laid down the following ratio: 'The test of acquisition of enduring benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital asset which could be traded in the market that is it can be sold at a market determined fee to another person. It can even be auction by the Ludhiana Stock Exchange on certain defaults of the appellant in its functioning. Therefore this was a capital asset which had been acquired by the appellant and such a capital asset, even though it had facilitated its trading in the Ludhiana Stock Exchange was an asset which could be disposed of at a subsequent date. Accordingly it is held that the Assessing Officer had correctly disallowed this claim of the appellant for deduction under section 37(1). 4. As far as appellant's claim for deduction under section 37(1) in respect of payment made to become member of OTCEI is concerned, the picture is somewhat different. This membership only facilitated the appellant's carrying on business at the OTCEI Exchange of India and the membership was not transferable or could be traded in any manner in the future. Once the payment was made the amount could never be realised back by the appellant in the form of refund or sale of its membership. The terms and conditions totally prohibit such a transfer. Accordingly it is held that this payment had n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness. Relying on the judgment of Bombay High Court in the case of CIT v. Tata Chemicals Ltd. [2002] 256 ITR 395, the ld. Counsel submitted that expenditure incurred by way of interest on the borrowed capital utilized for purchase of new machinery when the assessee was already in business was held to be an allowable expenditure. He further submitted that by incurring such expenditure, the assessee has not acquired any capital asset. He relied on the decision of ITAT, MumbaiBench in the case of Dy. CWT v. Ashwin C. Shah [2002] 82 ITO 573, where the Tribunal has held that right of m~mbership of the stock exchange is a personal privilege granted to a member by a stock exchange and the same does not amount to 'property' within the meaning of section 2(e) of the Income-tax Act. He further relied on the judgment of Delhi High Court in the case of CIT v. Engineers India Ltd. [1999] 239 ITR 237, where it has been held that amount paid initially for acquiring membership of an organization entitling the assessee to receive latest technical information and such membership was to be renewed annually, the assessee did not acquire an asset of enduring benefit by paying initial subscription. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee by becoming a member of Ludhiana Stock Exchange has acquired a capital asset, which could be traded in the market and sold at a market determined fee to another person. Thus, ld. CIT(A) has held that the assessee has acquired capital asset by incurring such expenditure in respect of Ludhiana Stock Exchange and, therefore, such expenditure is capital in nature. However, ld. CIT(A) has held that the membership acquired in respect of OTCEI could not be exchanged for any monetary value and, therefore, the same was a revenue expenditure. However,the ld. Counsel submitted that the terms and conditions in respect of membership of both the exchanges are the same. But the papers placed before us show that only members of both the stock exchanges are authorized to operate on floor of the exchange but other terms and conditions regarding the transfer of membership fee etc. have not been placed before us. In other words, there is no material placed before us by either side to controvert the finding recorded by ld. CIT(A) that why the membership of Ludhiana Stock Exchange could be transferred or traded or even auctioned, but the membership of OTCEI could not be exchanged for any monet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure is revenue expenditure, the court has to consider the nature and the ordinary course of business and the objects for which the expenditure is incurred. The question whether a particular expenditure is revenue expenditure incurred for the purpose of the business 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 to the carrying on of the business, the expenditure may be regarded as revenue expenditure." 6.3 This issue also came to be considered by the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, where the Hon'ble Supreme Court has held as under: "There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may nevertheless, be on revenue account and the test of enduring benefit, may break down. What is material to consider is the nature of the advantage in a commercial sense and it is only where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock-in-trade or to obtain the stock-in-trade itself. If the payment was to ensure the source of stock-in-trade, then the expenditure incurred for that purpose would be capital expenditure. If, on the other hand, payments are made to obtain stock-in-trade under a source arranged for, such payments would be payments for the supply of stock-in-trade and for carrying on the business. Now in the present case, the assessee has not incurred the expenditure for acquiring stock-in-trade.On the contrary, by incurring such expenditure, the assessee has acquired a right to trade on the floor of the exchanges which amounts to source of stock-in-trade. Therefore, the expenditure would fall in the capital field. 6.5 The ld. Counsel for the assessee has relied on the decision of ITAT, Bombay Bench in the case of Ashwin C. Shah, where the Tribunal has held that right of membership is merely a personal privilege granted to a member by stock exchange and, therefore, it does not amount to 'property' within the meaning of section 2(e) of the Wealth-tax Act. On the other hand, the ld. D.R. has relied on the decision of ITAT, Delhi (Special Bench) in the case of Jagan Nath Syal, where the Tribunal h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition for allowing deduction in respect of interest as laid down under section 36(1)(iii) are altogether different as the section itself provides for deduction for interest paid in respect of the capital borrowed and utilized for acquisition of capital asset in view of the fact that the same has been utilized for the purpose of assessee's business and profession. But the facts of the present case are clearly distinguishable. In this case, the assessee has incurred expenditure on acquisition of membership of the stock exchanges without which the assessee could have not carried on/commenced the business of trading in shares, securities etc. from these stock exchanges. Thus, it was a condition precedent for carrying on the business. This was not the case before the Bombay High Court. Therefore, this judgment is not applicable to the facts of the present case. 6.7 In the case of Punjab State Industrial Development Corpn. Ltd. v. CIT [1997] 225 ITR 792, the Hon'ble Supreme Court has held that when an expenditure is made not only once and for all, but with a view to bringing into existence an asset or an advantage of enduring benefit of a trade, there is very good reason for treating s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pg., Wvg. Mfg. Ltd., the assessee had incurred the expenditure on first registration of 'old trade mark' under the Trade Marks Act, 1940. The Bombay High Court had held that by incurring such expenditure, the assessee had neither acquired any capital asset nor advantage of enduring nature. 7. In the case of Finlay Mills Ltd. the assessee had again incurred similar expenditure on the first registration of trade marks under the Indian Trade Marks Act, 1940. The same trade marks were in use prior to 1937. On these facts, the Hon'ble Supreme Court held that by incurring such expenditure, the assessee had neither acquired any capital asset nor benefit of enduring nature and the judgment of Bombay High Court in the case of Century Spg., Wvg. Mfg. Ltd. was approved. But in the present case, the assessee by incurring such expenditure has acquired a right to carryon the business on the floor of the exchanges, which was a condition precedent for commencement of such business and, therefore, such expenditure is capital in nature. 7.1 In the case of CIT v. Hindustan Steel General Electrical Corpn. Ltd. [1971] 81 ITR 243, the Calcutta High Court has held that if the expenditure is so re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was a condition precedent for commencement of such business and such right is of enduring in nature and, therefore, such expenditure is capital in nature. The nature of right acquired is the source of stock-in-trade and not stock-in-trade itself. Even if the expenditure incurred was non-refundable, the same would not make any difference as it relates to the capital field. We, therefore, set aside the order of the CIT(A) in regard to disallowance of expenditure of Rs. 20 lakhs being payment made to OTCEI and restore that of the Assessing Officer. This ground of appeal of the revenue is allowed. The order of the CIT(A) in sustaining the disallowance of Rs. 17.11 lakhs in regard to payments made to Ludhiana Stock Exchange is upheld and the ground of assessee's appeal is dismissed. 8. The next effective issue raised in revenue's appeal relates to the fact that the CIT(A) was not justified in allowing depreciation @ 100% on wooden structures/partitions as against depreciation @ 10% allowed by the Assessing Officer. The facts of the case are that during the accounting year under reference, the assessee had incurred an expenditure of Rs. 3,50,000 on providing and fixing wooden structu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nature of purely temporary erection or by incurring such expenditure the assessee has derived benefit for reasonably a longer period and, therefore, the expenditure could not be considered in the nature of temporary wooden structure. The expenditure incurred is also of a sizeable amount. The assessee has not produced any evidence before us to show that the benefit of such expenditure was only for a limited period and the assessee was required to demolish the wooden partitions etc. in a period of one or two years. In other words, the assessee has not placed any material to show that the said expenditure was purely on temporary wooden structures. Even the Revenue has not placed any material or facts on record, i.e. the number of years for which the premises were taken on rent and whether there was any condition that on vacation, the assessee shall hand over the free and vacant possession of the same. As regards the judgment of Madras High Court in the case of Kisenchand Chellaram (India) P. Ltd., we find that the assessee had incurred expenditure on partitions, wall panelling, construction of show windows etc., in respect of rented premises. The assessee was not the owner of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of ITAT, Bangalore Bench in the case of Sangam Enterprises v. Asstt. CIT [2002] 80 ITD 288, where the expenditure incurred on account of registration fees and other charges in connection with execution of lease agreement for period up to 2047 was held to be capital in nature since it resulted in an enduring advantage to assessee, in the form of interest in the property for a long period. In the case of Hotel Raj Mahal v. CIT [1985] 152 ITR 218, the Karnataka High Court has held the expenditure incurred by way of stamp duty, registration charges and legal fees for securing leasehold rights for an initial period of ten years with option to renew for another ten years was a capital expenditure. In the case of East India Commercial Co. Pvt. Ltd. v. CIT [1964] 54 ITR 81, Calcutta High Court has held that stamp duty paid in respect of ineffective lease deed for the purpose of renewing the lease for a further period of five years was in the nature of capital expenditure and hence not allowable. Therefore, the matter required to be examined in the light of these facts and the ratio laid down by the abovementioned courts. If the premises taken on rent were for a limited period ..... X X X X Extracts X X X X X X X X Extracts X X X X
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