Income Tax Appellate Tribunal - Mumbai
Manoj M. Shah vs Jt. Cit on 26 July, 2007
ORDER
D.K. Srivastava, A.M.
1. These are cross appeals filed by the assessee and the department, against the order passed by the Commissioner (Appeals) on 2-5-2001. The appeal relates to assessment year 1994-95. We find it convenient to dispose of both of them by a consolidated order.
ITA No. 5478/Mum/2001: Assessee's Appeal2. The assessee has taken the following ground of appeal:
On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in not allowing a sum of Rs. 56,00,000 paid as entrancefees and admission fees to the Stock Exchange, Mumbai, as revenueexpenses.
3. The short question in this appeal is whether expenditure of Rs. 56 lakhs incurred by the assessee towards acquisition of membership of Bombay Stock Exchange by way of entrance fee and admission fee is capital expenditure or revenue expenditure. The assessing officer and the Commissioner (Appeals) have held that the impugned expenditure is capital expenditure.
4. In support of appeal, the learned Counsel for the assessee has reiterated the submissions which were earlier made before the Commissioner (Appeals). According to him, the membership card issued by the Bombay Stock Exchange is a personal privilege and not the property as defined under Section 12 of the Transfer of Property Act. He has relied upon the decisions of Hon'ble Bombay High Court in Vinay Bubna v. Stock Exchange, Mumbai v. [W.T. No. 1117 of 1997, dated 23-12-1999], Ms. Sejal R. Dalal v. Stock Exchange, Mumbai , Vinay Bubna v. Stock Exchange, Mumbai (1999) 21 SCL 216 (SC), Dy. CIT v. Ashwin C. Shah 82 ITD 570 (Bom) (sic) and the Stock Exchange v. Custodian [MA No. 710 of 1999 - Special Court] to support the aforesaid submission. His second submission was that the expenditure towards entrance fee and admission fee amounting to Rs. 56 lakhs was in the nature of revenue expenditure in view of the decision in Fearless Securities Ltd. v. Jt. CIT(2005) 94 ITD 89 (Kol-Trib) (SB) and the decision of Hon'ble Calcutta High Court in CIT v. Naskapara Jute Mills Co. Ltd. . Without prejudice to the aforesaid submissions, the alternative submission of the assessee was that the expenditure towards admission fee was in any case in the nature of revenue expenditure in view of the decisions of this Tribunal in Dy. CIT v. Shaunak J. Shah [IT Appeal No. III (Mum.) of 1998, dated 23-4-2003] and in Dy. CIT v. Magnum Equity Broking Ltd. (IT Appeal No. 1765 [Mum.) of 2000, dated 4-3-2002].
5. In reply, the learned Departmental Representative has relied upon the decision of a Special Bench of this Tribunal in R.M. Valliappanv. Asstt. CIT (2006) 103 ITD 63 (Chen) and submitted that the membership rights obtained from a Stock Exchange were in the nature of capital asset and, therefore, the order passed by the learned Commissioner (Appeals) treating the membership card as capital asset should be upheld.
6. We have heard the parties. It is by virtue of the membership card issued by the Bombay Stock Exchange that the assessee is authorized to carry on his business. It is by virtue of holding the membership card that the assessee could exercise the rights and privileges attached thereto. The membership card is transferable on fulfilment of the conditions stipulated under the rules of the Stock Exchange. All these facts have been examined in detail by a Special Bench of this Tribunal in R.M. Valliappan s case (supra). It has been held by the Special Bench that membership card is a capital asset. We are in respectful agreement with the aforesaid decision. The impugned expenditure has been incurred for acquiring or bringing into existence an asset or advantage of an enduring nature to the business, which is evident from the fact that it would not have been possible for the assessee to carry on his business without acquiring the membership card. The membership card is intrinsically in the nature of a capital asset. In this view of the matter, we have no hesitation to hold that the impugned expenditure is in the nature of capital expenditure. The appeal filed by the assessee is dismissed.
ITA No. 5139/Mum : Department's Appeal
7. The department has taken the following grounds of appeal:
1. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in allowing depreciation on membership card acquired for Rs. 55,00,000.
2. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in treating the BSE membership card, as"plant" within the meaning of Section 32 of the Income Tax Act and allowing depreciation on the same.
3. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in allowing depreciation on BSE Membership Card as the same being intangible asset acquired before 1-4-1998 against express provisions of Section 32(1)(n) which allowdepreciation on intangible assets acquired on or after 1-4-1998.
8. In support of appeal, the learned Departmental Representative submitted that the assessee was not entitled to depreciation, as he has not satisfied the requisite conditions of Section 32. According to him, the membership cards were neither depreciable nor were they owned by the assessee and hence the assessee was not entitled to depreciation under Section 32.
9. Per contra, the learned Authorized Representative for the assessee supported the order of the learned Commissioner (Appeals) and submitted that the order passed by the Commissioner (Appeals) was in conformity with the decision of this Tribunal in Techno Shares & Stocks Ltd. v. ITO (2006) 101 TTJ (Mum-Trib) 349. He further submitted that the order of the learned Commissioner (Appeals) holding that the membership card was capital asset was in conformity with the decision of this Tribunal in R.M. Valliappans case (supra) and V.G. Gajar v. Dy. CWT (2005) 93 ITD 624 (Ahd-Trib) and, therefore, the assessee was entitled to claim depreciation on the said capital asset.
10. We have heard the parties. Section 32 provides for the conditions required to be satisfied for claiming depreciation. Sub-section (1) of Section 32, insofar as it is relevant to us in the present case, reads as under:
32. Depreciation.(1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of Section 34, be allowed -....
11. It is evident on bare perusal of the aforesaid provisions that allowance under Section 32 is given to the assessee to compensate him for the depreciation suffered in respect of buildings, machinery, plant or furniture owned, wholly or partly, by the assessee and used for the purposes of business or profession. The allowance under Section 32 of the Income Tax Act is given to compensate the assessee for the depreciation suffered by him in respect of the specified assets. If the assessee does not suffer any depreciation by way of decrease in the value of property through wear, deterioration or obsolescence, the assessee cannot claim depreciation for the reason that nothing would be available in respect of which the assessee would need compensation by way of allowance under Section 32 of the Income Tax Act. Like every other animate and inanimate object, business premises, machinery, plant, furniture and other specified assets employed by the assessee in the course of his business, profession etc., have a limited effective life. The vigor, strength, capability, etc. of every such asset gradually exhaust by the factors of use and time. They undoubtedly aid the assessee to earn the "income" from such business or profession, which is subjected to the levy of tax. Section 32 incorporates a provision for proper recompense of such diminution in the vigor, strength, capability, etc., in order to give a correct picture of the profits from the business, profession etc. Depreciation is thus a measure of the effective life of an asset owing to use or obsolescence during the given period. The object of providing for depreciation is to spread the expenditure incurred on the asset over its effective lifetime, and the amount written off during an accounted period is intended to represent the proportion of such expenditure which has expired during the year. As held by the Hon'ble Madras High Court in G.R. Govindamjulu Naidu v. CIT , allowable depreciation amount is a capital loss to the depreciable asset which must be replaced first to give a true or correct picture as otherwise there is bound to be a distorted picture in the Profit & Loss Account. The depreciation, in essence, represents an allowance to compensate for the assets capable of depreciating over a given period. If the assets are not capable of depreciating, the question of allowance in such a case will not arise. In taking this view, we are supported by the following observations made by the Hon'ble Gujarat High Court in CIT v. Elecon Engg. Co. Ltd. . [Affirmed by the Supreme Court in 166 ITR 66 (SC)]:
The allowance can be claimed if the asset in question is shown to be capable of diminishing in value on account of any factor known to the prevailing accounting or commercial practice. It is now a recognised fact that the principal factors responsible for the retirement of capital asset and, therefore, responsible for depreciation are : (i) ordinary wear and tear, (it) unusual damage, (Hi) inadequacy, and (iv) obsolescence. The factors listed above include not only those relating to physical deterioration but also those referring to the suitability of the asset as an economically productive unit after a period of time. In depreciation accounting, the cost of the asset is spread over the years of its usefulness in a systematic and sensible manner and in so doing all the aforesaid agents or causes of depreciation are taken into account before the true profits are ascertained (vide Accountancy by William Pickles, third edition, page 168, Accountant's Hand Book by Dickson, fourth edition, Section 17.2 and principles of accountancy by Filney and Miller, fifth edition, pages 282-90).
12. It is quite clear from the aforesaid observations which have since been affirmed by the Supreme Court that depreciation is admissible only when the asset in question is shown to be capable of diminishing in value on account of any factor mentioned above. Mere existence of a capital asset is not sufficient to claim the allowance for depreciation. Allowance under Section 32 is for depreciation of the specified assets. What is important for claiming depreciation is the fact that the asset in question is capable of diminishing in value over a given period of time, i.e., the life-time of the asset. The assessee has placed no material before us to show as to how there can be any depreciation in respect of the Membership Card issued by the Stock Exchange or that the Membership Card is at all depreciable. The Membership Card has no fixed life either. We, therefore, hold that the membership card issued by the Stock Exchange is not at all depreciable and, therefore, there is no question of granting any allowance under Section 32 on such cards. The principles laid down in the aforesaid authorities as also in CIT v. Alps Theatre , CIT v. Indian Oil Corpn. (1996) 218 ITR 511 (Bom), CIT v. Herdiallia Chemicals Ltd. and Herdiallia Chemicals Ltd. v. CIT (1996) 218 ITR 5983 (Bom), 604-605 are quite apposite. In this view of the matter, the order of the Commissioner (Appeals) in this behalf is vacated.
13. We are conscious of the decision taken by a co-ordinate Bench of this Tribunal in Techno Shares & Stocks Ltd.'s case (supra) in which it has been held that BSE card is an "intangible asset" within the meaning of Section 32(1)(ii) and hence eligible for depreciation under Section 32 of the Income Tax Act. The aforesaid decision was rendered in the context of the provisions of Section 32(1)(ii). Clause (n) in Sub-section (1) of Section 32 was inserted by the Finance Act, 1998 with effect from 1-4-1999. The present case relates to assessment year 1994-95 when the aforesaid provisions namely Section 32(1)( ii) did not exist. Therefore, the decision in Techno Shares & Stocks Ltd.'s case (supra) would not be applicable to the case under appeal.
14. In view of the foregoing, the appeal filed by the revenue is allowed.