2016 (4) TMI 710 - AT - Income Tax

Tribunal decision: Capital vs. Revenue Expenditure, Statutory Penalties, Business Charges

The Tribunal partially allowed the appeal, upholding the capital nature of payments towards broker contingency fund and admission fees. It allowed charges ... Admission fees - nature of income - Held that:- Bombay Stock Exchange towards broker contingency fund and admission fees are capital in nature. Payment in the nature of penalty in terms of section 37 - Held that:- The assessee paid penalty for various defaults Bombay Stock Exchange like that of National Stock Exchange conducting their business control under SEBI during the course of its business transactions, therefore, we are of the opinion that the Bombay Stock Exchange is not a statutory body and any penalties or fines paid as the case may be under regulations and bye-laws can be considered as regulations for controlling the internal obligations and therefore the penalty charges cannot be said to be for infringement of any law. In the present case also the assessee paid penalty for various defaults during the course of business transactions. Issues Involved:1. Whether the payments made to Bombay Stock Exchange towards broker contingency fund and admission fees are capital expenditure or revenue expenditure.2. Whether the charges paid to Stock Exchanges, treated as a penalty for infringement of law, are allowable as a deduction.3. Whether the addition of Rs. 57,500/- as prior period expenses is justified.Issue-wise Detailed Analysis:1. Capital Expenditure vs. Revenue Expenditure:The primary issue was whether the payments made by the assessee to the Bombay Stock Exchange (BSE) towards broker contingency fund and admission fees, both non-refundable, should be treated as capital expenditure or revenue expenditure. The assessee argued that these payments were non-refundable and did not result in the creation of an asset of enduring nature, thus qualifying as revenue expenditure. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, treating the payments as capital expenditure, citing that these payments provided the assessee with additional trading rights and benefits, thus extending the business. The Tribunal upheld the CIT(A)'s decision, relying on precedents from the Hon’ble Jurisdictional Calcutta High Court and ITAT Kolkata, which consistently held that such payments are capital in nature as they secure a right to carry on business on the stock exchange floor.2. Charges Paid to Stock Exchanges as Penalty:The second issue was whether the charges of Rs. 36,336/- paid to stock exchanges, treated as a penalty for various defaults, should be allowed as a deduction. The AO and CIT(A) disallowed this amount, treating it as a penalty for infringement of law. The assessee contended that these penalties were not for any infringement of law but were charges for defaults in business transactions, citing case law to support the argument. The Tribunal agreed with the assessee, distinguishing between penalties for statutory violations and charges for business defaults. It held that the payments were for delays and other business-related defaults, not statutory infringements, thus allowable as deductions.3. Prior Period Expenses:The third issue was the addition of Rs. 57,500/- as prior period expenses. The AO and CIT(A) treated this amount as prior period expenses, disallowing it in the current assessment year. The assessee argued that the liability crystallized during the assessment period. However, this issue was not elaborated upon in the Tribunal's final decision, indicating that the primary focus was on the first two issues.Conclusion:The Tribunal's judgment partially allowed the appeal. It upheld the CIT(A)'s decision that the payments towards broker contingency fund and admission fees were capital expenditures. However, it overturned the disallowance of the charges paid to stock exchanges, treating them as allowable deductions since they were not penalties for statutory infringements but business-related defaults. The appeal concerning prior period expenses was not explicitly addressed in the final decision. The judgment emphasizes the distinction between capital and revenue expenditure and between statutory penalties and business-related charges.