2018 (2) TMI 1294 - HC - Income Tax

Court classifies payment to National Stock Exchange as capital expenditure, enabling broker trade

The court classified the payment made to the National Stock Exchange as capital expenditure, determining it created an enduring asset for the appellant ... Capital expenditure - revenue expenditure - once and for all payment - enduring benefit - membership of stock exchange as intangible capital asset - business or commercial right/licence as capital assetCapital expenditure - revenue expenditure - once and for all payment - enduring benefit - membership of stock exchange as intangible capital asset - Character of the payment of Rs. 5,00,000 paid to the National Stock Exchange for acquisition of membership - capital or revenue expenditure for AY 1996-97. - HELD THAT: - The payment was a one-time, lump-sum, non-adjustable deposit made as sine qua non for obtaining membership of the National Stock Exchange and thereby acquiring the right to trade as a broker. On acquisition, the assessee obtained a right or licence which enabled carrying on brokerage business and conferred enduring benefits beyond the year of payment. Section 2(14) defines capital asset as property of any kind; the membership card/membership right acquired by non-refundable payment was not stock-in-trade or consumable and constituted an asset/property in which the assessee had an interest. Transferability is not the determinative test since capital assets may be subject to restrictions on transfer; absence of free transferability does not convert an acquisition into revenue expenditure. The proper tests are whether the payment was a 'once and for all' payment and whether it brought into existence an advantage of enduring benefit. Applying those tests here, and having regard to authority in [Techno Shares and Stocks Limited Vs. Commissioner of Income Tax IV] and other precedents relied upon in the judgment, the payment created an asset/advantage of a permanent character and is therefore capital in nature. No special circumstances were shown to rebut the presumption that such a payment is capital. The Tribunal's conclusion that the expenditure was capital is accordingly affirmed. [Paras 11, 12, 13, 18, 19]The payment of Rs. 5,00,000 for acquisition of NSE membership is capital expenditure and not deductible as revenue expenditure.Final Conclusion: The substantial question of law is answered against the appellant: the lump-sum payment to acquire membership of the National Stock Exchange is capital expenditure; the Tribunal's decision is affirmed and the appeal is dismissed with no order as to costs. Issues:1. Classification of payment made to the National Stock Exchange as capital or revenue expenditure.Analysis:The case involved a dispute regarding a payment of Rs. 5,00,000 made by the appellant to the National Stock Exchange for acquiring membership during the assessment year 1996-97. The main issue was whether this payment should be considered as capital or revenue expenditure by the appellant-assessee. The Assessing Officer initially disallowed a major portion of the payment, treating it as capital expenditure due to the enduring benefit it provided in acquiring membership. However, the Commissioner of Income Tax (Appeals) disagreed, considering it as revenue expenditure, akin to a subscription fee, based on circulars issued by the Central Board of Direct Taxes. The Tribunal later sided with the Assessing Officer, emphasizing that the payment was for adding to the capital assets of the assessee, enabling them to trade as a broker.The appellant argued that previous circulars by the Board treated similar security deposits as revenue expenditure, but the court clarified that not all deposits should be treated as such. The court also referenced a Supreme Court case regarding the ownership of membership rights in a stock exchange, stating that membership was an intangible asset to be depreciated. The court noted that the payment was a one-time, non-refundable deposit essential for acquiring membership, granting the right to trade and act as a broker. This membership was considered a capital asset under Section 2(14) of the Income Tax Act, as it enabled the appellant to conduct business as a stock-broker, not falling under stock-in-trade or consumable materials.Furthermore, the court rejected the argument that the membership was non-transferable, stating that transferability was not the decisive factor in determining the nature of the asset. The court emphasized that the payment created an enduring advantage for the appellant, qualifying it as capital expenditure. It was highlighted that becoming a broker was a distinct business from being a sub-broker, and the payment facilitated acquiring a new asset and source of income. The court distinguished this case from instances of technical know-how acquisition and highlighted that the payment was for establishing and sustaining a business, constituting capital expenditure.Considering various legal precedents, including the Supreme Court's rulings in similar cases, the court concluded that the payment for acquiring membership was a capital expenditure, bringing into existence an enduring asset with lasting benefits. The court applied the 'enduring benefit' and 'once and for all payment' tests to determine the nature of the expenditure, ultimately ruling in favor of the Revenue. The appeal was dismissed, affirming the Tribunal's decision on the substantial question of law, with no order as to costs.