2003 (5) TMI 204 - AT - Income Tax

Capital Nature of Stock Exchange Membership Fees; OTCEI Payment Disallowance Upheld; Depreciation Issue Remanded

The Tribunal held that expenditure on non-refundable membership fees paid to stock exchanges is capital in nature as it provides a benefit of enduring ... Business Expenditure Issues Involved:1. Whether the expenditure on non-refundable membership fees paid to stock exchanges should be treated as capital or revenue expenditure.2. Whether depreciation on wooden structures/partitions should be allowed at 100% or 10%.Detailed Analysis:1. Treatment of Non-Refundable Membership Fees:Revenue's Appeal:The Revenue argued that the CIT(A) erred in deleting the disallowance made by the Assessing Officer (AO) by treating the expenditure on non-refundable membership fees paid to OTCEI as capital expenditure. The AO had disallowed the expenditure, asserting that it was a prerequisite for commencing business and hence capital in nature. The AO relied on judgments from the Calcutta High Court, which supported the view that such expenditure was capital in nature.Assessee's Appeal:The assessee contended that the CIT(A) was incorrect in sustaining the disallowance of Rs. 17,11,000 paid to Ludhiana Stock Exchange. The assessee argued that the expenditure was incurred to facilitate the running of business and earn profits, thus should be treated as revenue expenditure. The assessee relied on several judgments, including the Supreme Court's ruling in Alembic Chemical Works Co. Ltd. v. CIT, which supported the view that such lump sum payments did not amount to capital expenditure.CIT(A)'s Findings:The CIT(A) upheld the disallowance of Rs. 17.11 lakhs for Ludhiana Stock Exchange, reasoning that by becoming a member, the assessee acquired a capital asset that could be traded or auctioned, thus capital in nature. However, the payment to OTCEI was considered revenue in nature as it did not result in acquiring a capital asset and was non-transferable.Tribunal's Decision:The Tribunal examined whether the expenditure incurred resulted in acquiring a benefit of enduring nature. It was noted that the membership fees were non-refundable. The Tribunal referenced several judgments, including those from the Supreme Court and High Courts, to determine the nature of the expenditure. It was concluded that the expenditure incurred for acquiring membership of the stock exchanges was capital in nature as it provided a benefit of enduring nature and was a prerequisite for carrying on the business. The Tribunal set aside the CIT(A)'s order regarding the OTCEI payment, restoring the AO's disallowance, and upheld the CIT(A)'s disallowance for Ludhiana Stock Exchange.2. Depreciation on Wooden Structures/Partitions:Revenue's Appeal:The Revenue argued that the CIT(A) erred in allowing 100% depreciation on wooden structures/partitions. The AO had allowed only 10% depreciation, reasoning that the expenditure was not on purely temporary wooden structures.Assessee's Argument:The assessee contended that the expenditure was incurred on temporary wooden structures in rented premises and thus qualified for 100% depreciation. The assessee relied on the judgment of Madras High Court in CIT v. Kisenchand Chellaram (India) (P.) Ltd., where similar expenditure was treated as revenue expenditure.Tribunal's Decision:The Tribunal noted that the CIT(A) did not provide a detailed order. The Tribunal emphasized the need to determine whether the expenditure was for purely temporary structures or if it provided a benefit for a longer period. The Tribunal referenced various judgments, including those from the Karnataka High Court and Calcutta High Court, to assess the nature of the expenditure. It was concluded that the issue required further examination of the lease terms and the period for which the premises were taken on rent. The matter was remanded to the CIT(A) for a fresh decision, directing a thorough examination of the facts and a speaking order.Conclusion:The Tribunal allowed the Revenue's appeal regarding the OTCEI payment, upheld the CIT(A)'s disallowance for Ludhiana Stock Exchange, and remanded the issue of depreciation on wooden structures/partitions to the CIT(A) for further examination. The assessee's appeal was dismissed.