Income Tax Appellate Tribunal - Chandigarh
J.C.I.T., Spl. Range vs Master Capital Services Ltd. on 8 May, 2003
ORDER
Joginder Pall, Accountant Member
1. These are cross appeals - one by the Revenue and the other by the assessee, filed against the order of the CIT(A), Ludhiana for the assessment year 96-97. Since the issues involved in both the appeals are common and interrelated, these were heard together and are being disposed of by this consolidated order for the sake of convenience.
2. The first ground of appeal of the Revenue is that the CIT(A) as not justified in deleting the disallowance made by the AO by treating the expenditure on account of non-refundable membership fees paid to OTCEI (Over the Counter Exchange of India) as a capital expenditure. Relating to this is the ground of appeal of the assessee i.e. the CIT (A) was not justified in sustaining the disallowance of Rs. 17,11,000 being non-refundable admission fee and infrastructure fund paid to Ludhiana Stock Exchange. The facts of the case are that the assessee is engaged in the business of dealing in shares, securities and stock brokering. In the assessment year relevant to assessment year 95-96, 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 AO 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 the case of Alembic Chemical Works Co. Ltd. v. CIT, 177 ITR 377, where the Supreme Court has held that a lumpsum payment made once for all did not amount to a capital expenditure. However, the AO was not satisfied with the explanation of the assessee. He observed that the expenditure incurred by the assessee was a pre-requisite and condition precedent to the commencement of the business of the Company. He further observed that but for incurring such expenditure, the assessee would have not been able to carry on its business and, therefore, the expenditure was capital in nature. Reliance was also placed on the two judgments of Calcutta High Court in the cases of CIT v. Hindustan Genl. Electrical Corporation Ltd., 81 ITR 243, and CIT v. Aluminium Corpn. of India, 92 ITR 563. He also observed that the judgments relied upon by the assessee were not applicable to the facts of the present case. Thus, the AO disallowed the expenditure as capital in nature.
3. Being aggrieved, the assessee impugned the disallowance in appeal before ld. CIT(A). It was contended before the CIT(A) that payments had been made to facilitate the running of business and earn profits and, therefore, the said expenditure was revenue in nature. Reliance was placed on the judgment of Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT, 177 ITR 377, and the judgment of Bombay High Court in the case of CIT v. Ashok Ley Land Ltd., 72 ITR 137, and unreported judgment of Calcutta High Court in the case of Naskarpara Jute Mills Co. Ltd v. CIT. The ld. CIT(A) upheld the disallowance of expenditure of Rs. 17.11 lakhs being payments made to Ludhiana Stock Exchange on the ground that by becoming a member of Ludhiana Stock Exchange the assessee has acquired a capital asset which could be could be traded in the market i.e. it can be sold in the market at pre-determined fee to another person. It can ever be auctioned by the Ludhiana Stock Exchange on certain defaults of the assessee. Therefore, the said expenditure was capital in nature. However, the payment made to OTCEI was held to be revenue in nature on the ground that by incurring such expenditure, the assessee had not acquired any capital asset. Besides, such membership could not be exchanged for any monetary value in future. He observed that by incurring such expenditure, the assessee had also facilitated its 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-093. Quoting from the head notes the decision laid down the following ratio:
"The rest of acquisition of enduring benefit or advantage cannot be applied mechanically or blindly. There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be a 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 be considered 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 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 expenditure 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 circumstance of a given case.".
It would be observed from the above that even where an advantage of enduring benefit had been acquired, the expenditure could be of revenue account in case the expenditure had been incurred only to facilitate the business of an assessee. In this case the appellant had sought deductions on account of two payments made namely Rs. 7,11,000/- to Ludhiana Stock Exchange which was stated to be for non-refundable admission fee and Rs. 10 lac paid as infrastructure fee to the same exchange. Besides this, a sum of Rs. 20 lacs had been paid to OTCEI on account of non-refundable membership fee. It may be noted that the appellant was already carrying on the business of a stock broker by virtue of being a member of the National Stock exchange and this membership had been taken in October, 1994. The learned counsel argued that by virtue of this membership to the Ludhiana Stock Exchange and the OTCEI, the appellant had only facilitated the smooth functioning of its business as such business could now also be carried out on these two Exchanges instead of limiting the brokerage income from the National Stock exchange. However, I find that as far as Ludhiana Stock Exchange is concerned, the appellant by becoming a member had acquired a capital asset which could be traded in the market that is it can be sold at a marker determined fee to another person. It can even be auctioned by the Ludhiana Stock Exchange on certain defaults of the 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 AO 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. According it is held that this payment had not created any capital asset in the hands of the appellant and had only facilitated its trading on the OTCEI. This membership could not be exchanged for any monetary value in the future. Being a broker already carrying on business in the field, the appellant had only facilitated its business by becoming a member of the OTCEI. Hence the amount would have to be allowed as deduction.
Both the revenue and the assessee are aggrieved by the order of the CIT(A) and have now come in the present cross appeals before us.
4. Arguing its appeal, the ld. Counsel for the assessee, Shri Ashwani Kumar, drew our attention to pages 1 to 6 of the paper book, which is a copy of written submissions filed before ld. CIT(A). He submitted that the assessee is engaged in the business of dealing in shares, securities and stock broking. The assessee became member of National Stock Exchange in the assessment year relevant to assessment year 95-96. But in the assessment year under reference. Ludhiana Stock Exchange Association invited applications from corporates and public financial institutions for being enrolled and admitted as members of the stock exchange. The persons desirous of becoming a member were to comply with the terms and conditions laid down by the Ludhiana Stock exchange on payment of share money of Rs. 2. lakhs. However, for enrolling as a member of the stock exchange, it was mandatory that assessee must pay a non-refundable membership fee of Rs. 10 lakhs and Rs. 7.11 lakhs by way of infrastructure development funds. Thus, the payments aggregating to Rs. 17.11 lakhs (10,00,000 + 7,11,000) were made to Ludhiana Stock Exchange for enrolling the assessee as a member. He further submitted that similarly, in the accounting year under reference, the assessee became a member of OTCEI on payment of non-refundable/non-transferable admission fee of Rs. 20 lakhs. He drew our attention to page 21 of the paper book, which is a copy of the terms and conditions for becoming member of OTECI and as per Clause 19, admission fee of Rs. 20 lakhs was neither refundable nor transferable. He submitted that the assessee was already in the business from assessment year 95-96. Therefore, the expenditure incurred on becoming member of the above mentioned two stock exchanges was only an extension of the existing business. Relying on the judgment of Bombay High Court in the case of CIT v. Tata Chemicals Ltd., 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, Mumbai Bench in the case of DCWT v. Ashwin C. Shah, 82 ITD 573, where the tribunal has held that right of membership 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., 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. Therefore, the amount was held to be allowable as revenue expenditure. He submitted that the terms and conditions of becoming members of both the stock exchanges, i.e. Ludhiana Stock Exchange and OTCEI were the same and the expenditure incurred in both the cases was non-refundable and, therefore, the CIT(A) was not justified in sustaining the disallowance of Rs. 17.11 lakhs. He contended that the assessee was also entitled to the deduction of the same. As regards payment of Rs. 20 lakhs made to OTCEI, the ld. Counsel relied on the order of ld. CIT(A).
5. The ld. D.R., Shri D.P. Dhankar, on the other hand, relied on the order of the AO. He drew our attention to page 2 of the assessment order where the AO has observed that but for incurring such expenditure, the assessee would have not carried on the business in Ludhiana and OTCEI exchanges. Thus, he contended that by incurring such expenditure, the assessee has acquired a benefit of enduring nature. Relying on the decision of ITAT, Delhi (Special Bench) in the case of Jagan Nath Syal v. ACGT, 72 ITD 1, the ld. D.R. submitted that membership card entitling a person to transact business after entering the trading circle in the exchange building at New Delhi constitutes a wealth. Thus, he submitted that the ld. Counsel was not justified in treating the expenditure of Rs. 20 lakhs paid to OTCEI as revenue in nature.
6. We have heard both the parties at some length and given our utmost consideration to the rival submissions with reference to the facts, evidence and material on record. We have also gone through the orders of the authorities below. From the facts discussed above, it is quite clear that assessee became member of the Ludhiana Stock Exchange and OTCEI in the accounting year reference. It is also clear that as per terms and conditions for becoming the members of the aforesaid stock exchanges, it was necessary to make payment of the membership fee and infrastructure development fund. It was also admitted before us that the stock exchanges allowed only their members the right to carry on business on floor of the exchanges. It is clear from the assessment order that the payments made in question were non-refundable. In any case, the revenue has not placed any material before us to show that the amounts in question were refundable. According to ld. CIT(A), the 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 monetary value. However, the ld. Counsel was fair enough to concede that assessee is a shareholder of Ludhiana Stock Exchange and the same could be transferred and sold in the marker.
6.1 Now, the question that requires to be decided is whither the expenditure incurred by the assessee amounting to Rs. 37.11 lakhs is capital or revenue in nature as Section 37 of the Income-tax Act does not allow deduction in respect of capital expenditure. 'Capital expenditure' has not been defined in the Income-tax Act and, therefore, the nature of such expenditure is required to be determined with reference to facts and circumstances of each case in the light of guidelines laid down by the various courts, including the Supreme Court. However, for determining the nature of expenditure, it is not necessary that such expenditure must result in acquisition of a capital asset. The expenditure would be considered capital in nature if it results in acquiring a benefit of enduring nature. The difficulty that arises in deciding the case is as to what is the meaning of benefit arises in deciding the case is as to what is the meaning of benefit of enduring nature. There is no straight jacket formula by which we can identify as to whether the expenditure incurred results in benefit of enduring in nature or (SIC) not. Therefore, one has to take assistance of the various decisions of the courts to see whether the expenditure incurred by the assessee is a capital or revenue in nature and also whether it resulted in benefit of enduring in nature or not. This issue came to be considered by their Lordships of the House of Lords in the case Hinton (Inspector of Taxes) v. Maden & Ireland Ltd. (1960) 39 ITR 357, where it was observed as under:
"There is no principle of accountancy or law which requires that the expenditure which is charged to P&L a/c should get exhausted in the same year. Expenditure on all consumable used in industry does not always mean that the fallout by way of benefit would not overstep the accounting year. For that reason, it cannot be said that it is not chargeable against revenue of the year. An example of this category of expenditure is repairs to premises and machinery where the benefit certainly overruns the year."
6.2 This issue also came to be considered by Hon'ble Supreme Court in the case of Bombay Steak Navigation Co. (P) Ltd. v. CIT, 56 ITR 52, where the Supreme Court has held as under:
"In considering whether expenditure 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, 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 advantage is in the capital field that the expenditure would be disallowable on an application of the above test. 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 expenditure would be on revenue account, even though the advantage may endure for an indefinite future."
Thus, from the above it is clear that the benefit derived from the expenditure may run more than one year but that does not mean that the expenditure so incurred is capital expenditure. The deciding factor is whether the expenditure incurred for obtaining advantage of enduring benefit relates to a capital field or not. The lumpsum payment made for the same is also not the deciding factor. This issue also came to be considered by the Hon'ble Supreme Court in the case of CIT v. Madras Auto Service (P) Ltd., 233 ITR 468. The facts of that case were that assessee had taken the premises on lease for 39 years. The premises were demolished and new building was constructed by the assessee at its own expense. New building belonged to the lessor but assessee acquired user of it at a very low rent. But the one important fact in this case was that the lease rent paid by the assessee was deductible as revenue expenditure. On these facts, the Supreme Court has held that by incurring expenditure on construction of the building the assessee had acquired only a business advantage and not a capital asset. Therefore, the expenditure was held to be revenue in nature. However, the Supreme Court further observed that expenditure is deemed to be capital when it is made for initiation of a business, for expansion of a business or for a substantial replacement of equipment. Thus, the very fact that assessee had incurred expenditure in lumpsum would not be sole determinant factor for deciding whether the expenditure was capital or revenue in nature.
6.4 In the case of CIT v. Rishabh Investment Ltd., 117 ITR 962, the Calcutta High Court by referring to the judgment of Supreme Court in the case of Bombay Steam Navigation Co. (P) Ltd. v. CIT, supra, has held that for deciding as to whether the expenditure was revenue or capital nature, one ha to bear in mind whether the payment was incurred in order to ensure the source of 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 DCWT v. Ashwin C. Shah, 82 ITD 573, 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 v. ACGT, 72 ITD 1, where the Tribunal has held that a share in the Delhi Stock Exchange and the membership of Delhi Stock Exchange are capital assets within the meaning of Section 2(e) of the Wealth-tax Act. This decision was rendered by referring to terms and conditions of membership of Delhi Stock Exchange. This decision was also referred to by the ITAT, Bombay Bench in the case of Ashwin C. Shah (supra) but was distinguished on the ground that terms and conditions for grant of membership of Bombay Stock Exchange was different from the terms and conditions of membership of Delhi Stock Exchange. The ITAT, Bombay Bench had also referred to the judgment of Hon'ble Supreme Court in the case of Stock Exchange, Ahmedabad v. ACIT, 248 ITR 209, where it was held that right of a member was personal privilege and inalienable and, therefore, the same could not be attached on death of the member. Both the decisions of ITAT, Delhi and Bombay Benches are with reference to the provisions of the Wealth-tax Act and not with reference to the fact whether the said expenditure is capital or revenue in nature. Section 37 of the Income-tax Act does not say that only such expenditure incurred for acquisition of capital asset would alone be capital in nature and all other expenditure would be revenue in nature. What is required to be seen is whether the expenditure incurred results in acquisition of capital asset or benefit of enduring in nature. As mentioned above, even such expenditure, which results in acquiring a benefit of enduring nature may be treated as capital expenditure even though the same may not result in acquisition of capital asset. Therefore, both the decisions relied upon by both the parties are not applicable to the facts of the present case.
6.6 The ld. Counsel for the assessee by relying on the judgment of Bombay High Court in the case of CIT v. Tata Chemicals Ltd., 256 ITR 395, has contended that the assessee was already in the business from the assessment year 95-96 and, therefore, the expenditure incurred in respect of existing business was allowable as revenue expenditure. We have referred to this judgment of the Bombay High Court. The same relates to the issue of allowing interest on capital borrowed for the purpose of fertilizer unit. Considering the fact of unity of control and interlacing of funds, it was held that interest paid was in respect of already existing business and hence allowable. The condition 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 (SIC) has been utilized for the purpose of assessee's business and profession. But the facts of the present case 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 Corporation Ltd. v. CIT, 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 or enduring benefit of a trade, there is very good reason for treating such an expenditure as properly attributable not to revenue but to capital. But this is not a straight-jacket formula and the question will have to be determined in the backdrop of the facts of each case. The test laid down can at best be a guide for determining whether a particular expenditure forms part of revenue expenditure or capital expenditure. This judgment was delivered with reference to the fees paid to the Registrar of Companies for expansion of capital base of a company, which was held to be directly related to the capital field, although that would certainly help in the business of the company and may also help in profit making. The Hon'ble Supreme Court observed that it still retained the character of capital expenditure. Thus, even if the assessee has been in existence in the same business for the earlier year and the expenditure incurred relates to the capital field, the same would not be allowable as revenue expenditure.
6.8 The ld. Counsel for the assessee has relied on the unreported decision of Calcutta High Court in the case of Naskarpara Jute Mills Co. Ltd., Calcutta v. CIT, where admission fee of Rs. 2000 for membership in East India Jute and Hessian Exchange Ltd. was held to be an allowable expenditure. Such membership fee was paid for one year and the same was recurring in nature. However, there is nothing on record to suggest that in that case payment of such fee was a condition precedent for the commencement of the business. But in the case under consideration, the fees now paid by the assessee to both the exchanges was a condition precedent for carrying on the business of trading in shares, securities and stock brokering. In the subsequent year, the assessee was required to pay a very nominal fee of Rs. 5000/- or so for renewal of the membership, It was not the case that amount equal to the payments made in the year was to be repeated in all the subsequent years. Therefore, the ratio of this decision is also not applicable to the facts of the present case.
6.9 Similar is the position in regard to the judgment of Hon'ble Supreme Court in the case of CIT, Bombay v. Finlay Mills Ltd., 20 ITR 475, and the judgment of Bombay High Court in the case of CIT v. Century Spinning, Wvg. and Mfg Ltd., 15 ITR 105, which were also referred to by the Calcutta High Court in the case of Naskarpara Jute Mills Co. Ltd., Calcutta v. CIT, In the case of CIT v. Century Spinning, Wvg. & Mfg Ltd., supra, 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 CIT v. Finlay Mills Ltd., supra, the assessee had again incurred similar expenditure on the first registration of trade mark under the Indian Trade Marks Act, 1940. The same trade mark were in use prior to 1937. On there 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 CIT v. Centuries Spinning, Wvg. and Mfg Ltd., supra, was approved. But in the present case, the assessee by incurring such expenditure has acquired a right to carry on 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 Genl. Electrical Corpn. Ltd., 81 ITR 243, the Calcutta High Court has held that if the expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit earning process, it should be held to be a revenue expenditure. But if such expenditure has been incurred for the purpose of acquisition of an asset or a right of a permanent character, the possession hereof is the condition precedent or the prerequisite to the commencement or the continuance of the business, the expenditure should be a capital expenditure. Same view was expressed by the Calcutta High Court in the case of CIT v. Aluminium Corporation of India Ltd., 92 ITR 563.
7.2 This issue also came to be considered by ITAT, Calcutta Bench in the case of ACIT v. Ajoy Bheuwala, 80 ITD, 79. In that case also, the assessee was dealing in shares. The assessment year was 92-93. The facts of the case were that consequent upon assessee's admission to membership of Calcutta Stock Exchange in previous year relevant to assessment year 91-92, the assessee had paid a sum of Rs. 5 lakhs to Calcutta Stock Exchange Association by way of development fee. The AO held that payment made by the assessee to CSE by way of development fee was for acquiring membership thereof and, therefore, expenditure was capital in nature. On these facts, ITAT, Calcutta Bench held that according to Articles of Association of Calcutta Stock Exchange, payments of development fee and entrance fee were necessary conditions for becoming a member of the stock exchange association whereby one acquired a right to carry on business on floor of the exchange and in such circumstances, it had to be held to be capital expenditure irrespective of the fact that such expenditure was incidental and would help in assessee's business and might also help in profit making. This decision is directly applicable to the facts of the present case. While taking such view, the ITAT, Calcutta Bench has also referred to several other judgments of Supreme Court and various High Courts, some of these have already been referred to above.
7.3 In the light of these facts and circumstances of the case, the legal position discussed above and by relying on the various judgments/decisions referred to above, we are of the considered opinion that by incurring such expenditure, the assessee has acquired a right of trading in shares, securities and stock brokering on the floor of both the stock exchanges, which 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 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 AO. 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 nest 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 AO. 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 structures/partitions/work stations at its office situated at Shreeji Chambers, Janambhumi Marg, Fort, Bombay, which was a rented office. In the block of assets, the assessee claimed depreciation @ 100% on the ground that expenditure was incurred on temporary wooden structures. However, the AO observed that expenditure incurred was not on temporary wooden structures as the same would not involve expenditure of Rs. 3.50 lakhs. He further observed that the assessee was not entitled to claim depreciation @ 100% as the same was not a temporary wooden structure. Referring to the rates of depreciation as provided in the Income-tax Rules, the AO held that the assessee was entitled to depreciation @ 10%.
9. Aggrieved, the assessee carried the matter in appeal before ld. CIT(A). The submissions made before the AO were reiterated. It was submitted that the expenditure was incurred in respect of rented premises and the same was only a temporary wooden structure. Therefore, the assessee was entitled to depreciation @ 100%. Accepting the contentions of the assessee, the CIT(A) allowed the depreciation @ 100%. While doing so, the ld. CIT(A) has not passed a speaking order. Revenue is aggrieved by the order of the CIT(A).
10. The ld. D.R. heavily relied on the order of the AO.
11. The ld. Counsel for the assessee, on the other hand, heavily relied on the order of the CIT(A). He further relied on the judgment of Madras High Court in the case of CIT v. Kisenchand Chellaram (India) P. Ltd., 130 ITR 385, where the expenditure incurred on construction of partition walls, wall panelling, show windows etc. in respect of rented premises was held to be revenue expenditure.
12. We have heard both the parties and given out thoughtful consideration to their rival submissions. From the facts discussed above, it is obvious that the impugned expenditure has been incurred on providing and fixing wooden structures/partitions/work-stations at the office, which was taken on rent. As per rates given in the Income-tax Rules, the assessee is entitled to depreciation @ 100% in respect of purely temporary erections such as wooden structures. Otherwise, the assessee is entitled to normal rate of depreciation i.e. 10%. Now the issue that requires to be considered by the Bench is whether, the nature of expenditure incurred was in the 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 tent 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 CIT v. Kisenchand Chellaram (India) P. Ltd., 130 ITR 385, 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 building and hence was not entitled to claim depreciation in respect of the same. In the light of these facts, the Hon'ble High Court has held that the expenditure incurred was for the purpose of assessee's business and there was no material to show that assessee had derived benefit for a reasonably longer period of time and hence the assessee was entitled to deduction of the same as revenue expenditure. The said judgment was delivered on 16th Oct., 1979 and, therefore, related to assessment years prior to 1979. However, provisions of Section 32 were amended by way of inserting Explanation 1 w.e.f. 1.4.88, which proceeded that in case the assessee was carrying on the business or profession in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purpose of business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, improvement to the building, then the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee. Thus, the difficulty being faced by the assessees who were not the owners of the building but had incurred expenditure of capital in nature was removed by inserting such Explanation, which now allowed such assessees to claim such expenditure as revenue in nature. Thus, the ratio of the judgment of Madras High Court in the case of CIT v. Kisenchand Chellaram (India) P. Ltd., supra related to the earlier assessment years when amended provisions had not come into being. therefore, the issue required to be decided in the light of amended provisions.
12.1 We find that ld. CIT(A) has decided this issue in a summary manner. he has not placed full facts as to the period for which the premises were taken on rent. If the premises were taken on rent for a limited period of one year, it could be held that the said expenditure was incurred for erection of temporary wooden structures/partitions/work-stations and the assessee was not to derive any benefit of reasonably a longer period. In case the premises were taken on lease for a period of ten years or more, it could be held that by incurring such expenditure, the assessee has obtained the benefit for reasonably longer period. Reliance is also placed on the decision of ITAT, Banglore Bench in the case of Sangam Enterprises v. ACIT, 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, 152 ITR 218, the Karnataka High Court has held that 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, 54 ITR 85, 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 above mentioned courts. If the premises taken on rent were for a limited period and there was no provision to renew the lease deed, it could be held that expenditure incurred was on purely temporary wooden structures and hence entitled to depreciation @ 100%. Otherwise it would not be an expenditure on temporary wooden structure and hence entitled to depreciation at normal rate. Since full facts in regard to this issue are not on record and these have also not been placed before us during the course of hearing, we consider it fair and reasonable to set aside the order of the CIT(A) and restore the issue to his file with a direction to redecide the matter in accordance with law and keeping in view our observations made hereinabove by passing a speaking order. Needless to say, both the parties shall be allowed a reasonable opportunity before deciding the issue afresh. This ground of revenue's appeal is treated as allowed for statistical purposes.
13. In the result, whereas the appeal of the revenue is partly allowed for statistical purposes, the appeal of the assessee is dismissed.