TaxTMI 
TaxTMI 
2005 (2) TMI 452
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....iture?" 2. The events leading upto the reference may be briefly noticed. 2.1 The appeal filed by the assessee before the Tribunal involved several issues, one of which was whether the assessee was entitled to get deduction in computing the total income of the assessee. The payment of Rs. 70,00,000 and Rs. 1,50,000 on account of development fee and fee for operating on the floor to Calcutta Stock Exchange, the payment of admission fee of Rs. 6,00,000 and technology cost of Rs. 2,00,000 paid to O.T.C. Exchange of India and payment of non-adjustable deposit for membership subscription of Rs. 30,00,000 and deposit for Very Small Apperatus Terminal (VSAT) of Rs. 10,00,000 paid to National Exchange of India. When the matter was placed before the Division Bench, the Bench felt that the question should be considered and decided by a Special Bench for the following reasons recorded in the referral order:- "Reference under section 255(3) of the I.T. Act, 1961 by Kolkata Bench "C" to the President, Income Tax Appellate Tribunal for constituting a Special Bench. We, the Members of "C" Bench at Kolkata are of the view that the appeal of M/s. Peerless Securities Ltd., 3, ....
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....e with the case record in question should be sent to the Hon'ble President, ITAT for constituting a larger Bench to consider the conflicting views and come to a final decision on this issue. The statement of the case and the terms of reference are separately enclosed." 2.2 The Hon'ble President of the Tribunal was then pleased to constitute a Special Bench consisting of three members to decide the above-referred question set out in paragraph 1 hereto above. 3. Facts of the case The assessee's claim for deduction of Rs. 1,19,50,000 was rejected by the Assessing Officer in the assessment completed under section 143(3) of the Act on 15-3-1999 by stating and observing as under:- "The assessee-company is engaged in the business of share & stock brokerage. In the computation of income furnished alongwith the return of income, the assessee has claimed deduction of Rs. 1,19,50,000 under the head Deferred Revenue Expenditure shown in the Balance-sheet. The related details were furnished on behalf of the assessee, the perusal of which reveals that the following payments were made:- Calcutta Stock Exchange Association: ....
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....paid, which is neither refundable nor transferable. It was submitted on behalf of the assessee that even if it results into a benefit of enduring nature, such benefit is not on the capital field, but on the revenue field. Accordingly, the said admission fees has been treated as revenue expenditure & claimed in the return. The technology cost of Rs. 2 lakhs paid to OTCEI represents payment towards training imparted by the Institution to the employee of the assessee-company in the operation of the Institution & such training was necessary for the assessee-company in order to become familiar with the operation of OTCEI. Hence, the said technology cost has been treated as revenue expenditure. In connection with the aforementioned items included in deferred revenue expenditure, reliance was placed upon the decisions of the Madras High Court in the case of CIT v. Aquapump Industries 218 ITR 427 & of the Supreme Court in the case of Alembic Chemical Works Co. Ltd v. CIT 177 ITR 377. After having considered the submissions made on behalf of the assessee, my findings are as under:- (a) It is very important to point out here that this is the first year of ....
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....T(A) as under:- "... In support of this ground of appeal the appellant has filed written submission as under:- (a) Development fee Rs. 70,00,000 and fees for operating on the floor Rs. 1,50,000 paid to the Calcutta Stock Exchange Association Ltd. The appellant's application for corporate membership of Calcutta Stock Exchange (CSE) was approved by CSE in their committee meeting held on 6-7-1995 and the appellant admitted as corporate member subject to payment of certain fees which include, inter alia, development fee Rs. 70,00,000 and fees for operating on the floor Rs. 1,50,000 vide CSE's letter dated 11-7-1995 (copy enclosed). Thus the above two payments were made to become corporate member of CSE and carry on operation on the floor. These two payments have direct nexus to the nature of business carried on by the assessee. Hence, the same can be allowed under section 37(1). The ld. Assessing Officer considered that the aforesaid payments were made for initial outlay or for acquiring or bringing to the business and accordingly considered the expenditure as capital expenditure. He also considered that the membership of Stock Excha....
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....ribed. Such training was necessary for the employees of the appellant Co. in order to become familiar with the operation of OTCEI. Such training also includes training on software of OTCEI. Thus you would kindly appreciate that the technology cost did not being into existence any capital asset. Moreover, software programme changes fast. Thus, the test of enduring benefit is not applicable in this case. Therefore, technology cost of Rs. 2 lakhs should not be treated as capital expenditure. (c) Non-adjustable deposit for membership subscription Rs. 30,00,000 and deposit for VSAT Rs. 10,00,000 paid to National Stock Exchange (NSE) The non-adjustable deposit of Rs. 30 lakhs cannot be withdrawn for a minimum period of 5 years even if the trading member ceases or discontinues trading in the exchange. Since the appellant company follows going concern concept, it does not intend to discontinue its operation in the forceable future and it does not intend to withdraw the deposit in future. Thus in substance the amount of deposit should be considered as revenue expenditure incurred wholly and exclusively for the purpose of business of the appellant and the same should be all....
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....ship Card as a capital asset, it should be treated as 'plant' within the meaning of section 43(3) of the I.T. Act, section 43(3) contains an inclusive definition of 'plant'. Plant is defined to include a variety of items, very diverse in character, such as ships, vehicles, books, scientific apparatus and surgical equipment, used for the purpose of business or profession. The Finance Act, 1995 amended the definition with retrospective effect from 1-4-1962 to state that the work 'plant' does not include tea bushes or live stock. The very fact that the definition is inclusive and not exhaustive means that the items mentioned therein are only illustrative and any article can be a plant if it satisfies the tests laid down by the courts from time to time. The delivery of the subjects chosen and the marked extremities to which the definition has extended itself makes the legislative intent much too clear and audible to need any emphasis, namely, that it has given the term 'plant' the widest meaning possible. The word 'plant' in its ordinary meaning is a work of wide import and it must be broadly construed having regard to ....
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....rred to above are of capital in nature and, therefore, do not fall within the purview of section 37(1). The appellant's alternative view that the membership card should be treated as a 'plant' and depreciation @ 25% should be allowed cannot be accepted. Membership of Stock Exchange and their expenses are no doubt capital expenses but they are of intangible nature. It is not the value of card but it is the value of membership that can be brought or sold and the value of the membership is not a tangible asset but an intangible assets. Therefore, the question of allowable depreciation on the same for the assessment year 1996-97 does not arise. The alternative plea of the appellant is also rejected." 3.3 Still aggrieved, the assessee is in further appeal before the Tribunal. Ground No. 1 raised in this appeal is as under:- "That on law and facts of the case the learned Commissioner of Income Tax (Appeals) has erred in confirming the addition made by the Assessing Officer on account of development fee of Rs. 70,00,000 and fees for operating on the floor Rs. 1,50,000 paid to Calcutta Stock Exchange Association, admission fee of Rs. 6,00,000 and technology cost ....
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....xpenditure. 2.3 It however appears that in coming to the conclusion that payments were of capital nature, the Tribunal was swayed by the consideration that by making the payments, the assessee acquired a benefit of enduring nature. Emphasis was laid on this particular aspect of acquisition of a benefit of enduring nature and the entire decision of the Tribunal seems to hinge on this particular consideration alone. In trying to arrive at the above conclusion, the Tribunal relied on some decisions. It would, however, be shown below that the ratio residendi of those decisions rather tend to help the assessee's case of the payments being of revenue nature. 2.4 The Tribunal firstly relied on the judgment of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd [124 ITR 1]. However, in that particular case itself, the Supreme Court held that the test of enduring benefit is not a certain of conclusive test and also cannot be applied blindly or mechanically without regard to the particular facts and circumstances of a case. 2.5 The Hon'ble Supreme Court discussed in that connection as below: 'There may be cases where expenditure, e....
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.... being non-transferable, it cannot be considered that the assessee acquired any asset thereby. The Supreme Court also held in the case of Stock Exchange, Ahmedabad [248 ITR 209] that membership of a Stock Exchange is merely a permission and does not ensure to acquisition of any right to property and hence this right is not subject to attachment. It is thus clear that membership of any Stock Exchange is not at all any asset. The payer merely gets a right to conduct its business of trading in Stock Exchange. By making the said payment, the payer neither acquires any capital asset nor is its capital base or structure affected by the payment. The enduring benefit is merely incidental and is not of the nature of acquisition of an asset of enduring nature. Hence, by applying the tests as laid down in the above mentioned decisions, it has got to be concluded that by making payment of Admission Fee or Development Fee, the assessee has not acquired any capital asset but has merely acquired the right to conduct its business. Hence, the payments are required to be treated as revenue expenditure. 3.2 In this connection, a reference may be made to the following cases where incurring of....
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....r a minimum period of 5 years even if the trading member would cease or discontinue in trading in the Exchange. The deposit for Very Small Aperture Terminal (VSAT) of Rs. 10,00,000 was made to NSE in order to facilitate the assessee-company to have access to on-line trading facility. The VSAT does not belong to the assessee-company and the ownership lies with its supplier. One of the conditions prescribed by the Government for installation and operation of the network was that the Exchange should install, operate and maintain the system on no-profit and no-loss basis. It may be mentioned in this connection that out of the above mentioned deposit of Rs. 10,00,000, NSE made appropriations/recoveries towards the charges on year to year basis as per details given below: Financial Year VSAT charges recovered 1995-96 1,23,000 1996-97 2,72,785 1997-98 2,67,874 1998-99 2,96,962 9,60,621 6.3 The C.B.D.T. itself allows Security Deposit for Telex connection and under Tatkal Telephone Deposit Scheme as revenue expenditure under section 37(1) vide Circular No. 420 dated 4-6-1985 and No. 671 dated 27-10-1993. Hence, it has got to be argued that....
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....tating that since the members of the Indian Institute of Packaging comprising manufacturing and trading enterprises will derive continuous benefits from the activities of the Institute, the expenditure by way of membership fee can be said to be wholly and exclusively incurred for the purpose of business of the members, and thus the Board have decided that such expenditure may be allowed as admissible deduction under section 37(1) of the Act in the hand of the payers in computing their total income from business. (vi) Board's F. No. 9/56/66-IT(AI) dated 17-1-1967 stating that increased membership fee of Rs. 1,000 and life membership fee of Rs. 10,000 paid for being a member of the Indian Institute of Foreign trade may be allowed as a deduction whenever paid. (vii) Board's F. No, 10/67/65-IT(AI) dated 26-8-1965 stating that as the advantages accruing to a Company as a result of getting its shares listed on a Stock Exchange contain substantial advantages pertaining to its day-to-day business, it has been decided that such expenses should be considered as laid out wholly and exclusively for the purposes of the business and, therefore, admissible as business ex....
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....e of pre-operative expenses before commencement of the business of share broking. Without acquiring the membership etc. of the various exchanges, assessee could not have commenced his business as share & stock broker. Mining Machinery & Explosives [202 ITR 710 (Cal.)], Cochin Refineries Ltd. [173 ITR 461 (Ker.)] at pages 13 & 14 and extract at page 10 of the paper book refers. Therefore, under no circumstances can these expenses be allowed as a revenue expenditure in the assessment year 1996-97. 5. These expenses have resulted in a benefit of enduring nature (4th para on page-3 of CIT(A)'s order shows that this has been admitted by the assessee). They have gone towards building the structure of the business. This clearly makes them capital in nature. 6. The expenses are not recurring expenses to be incurred on day-today basis. These have been incurred once and for all. These relate to fixed capital and not to circulating capital. 7. Recent commentary of Kanga, Palkhiwala & Vyas makes a point about the relevance of commercial practice in contrast to the straitjacket of judicial interpretations based on technicalities. The commercial practice, which is ....
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....s a property? However, the question before us in quite different viz. whether expenses incurred for this purpose are revenue or capital in nature? Therefore, we are concerned with the question of nature of expenses, which has not been considered at all in this decision. In fact, this question has also neither been considered or decided by the Hon'ble Mumbai Bench in 82 ITD 573. 13. Assessee has relied upon certain cases before the Assessing Officer, but these eases are not apposite: (i) Aquapump Industries 218 ITR 427 (Mad): Facts are quite different. It involved transfer of technical know-how and that too for a limited period of 5 years. In our case no such transfer is involved and also period of the membership is not defined. (ii) Similarly in Alembic Chemicals 177 ITR 377 (SC) the Co. was already manufacturing penicillin. Subsequently, it acquired licence from a Japanese Company for manufacture of penicillin by a different process. Thus this was in the same line of business activity. In our case the assessee was going to do broker's business for the first time. 14. Training to employees by OTCEI for making them familiar with the operat....
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....ture. He reiterated his contention that the concepts of payment made 'once and for all' and of 'enduring benefit' must respond to the charging economic realities of business. He submitted that 'once for all' payment or "enduring benefit" test is inconclusive as in a given case, the test of enduring benefit might break down. (iii) He reiterated that decisions relied on by him are relevant and applicable to the facts and circumstances of the present case. Our decisions and the reasons thereof: 7. We have considered the rival contentions of the parties in the light of the facts and circumstances of the present case. The orders of the authorities below have been perused. We have gone through the papers and materials placed on record. We have deliberated upon the applicable provisions of law and various decisions cited at the Bar. None of tests or principle or criterion is final or conclusive or of universal application 7.1 It is now well settled that none of the tests or principle or criterion is paramount or conclusive or of universal application to decide the question of expenditure being of capital nature or of revenue nature. It will dep....
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....ow, in Villambrosa Rubber Company v. Farmer (1910) SC 519; 5 Tax Cas. 529, Lord Dunedin, as Lord President of the Court of Session, expressed the opinion that 'in a rough way' it was 'not a bad criterion of what is capital expenditure is against what is income expenditure to way that capital expenditure is a thing that is going to be spent once and for all and income expenditure is a thing which is going to recur every year'; and no doubt this is often a material consideration. But the criterion suggested is not, and was obviously not intended by Lord Dunedin to be, a decisive one in every case; for it is easy to imagine many cases in which a payment, though made 'once and for all', would be properly chargeable against the receipts for the year.... But when an expenditure is made, not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." The parenthetical clause in the Viscount Cave....
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.... of a business, or for a substantial replacement of equipment; vide Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Company [1927] 13 Tax Cas. 1 at page 14. In City of London Contract Corporation v. Styles [1887] 2 Tax Cas. 239 at p. 243; Bowen, L.J. observed as to the capital expenditure as follows: "You do not use it 'for the purpose of your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern." 2. Expenditure may be treated as properly attributable to capital, when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade: vide Viscount Cave, L.C., in Atherton v. British Insulated and Helsby Cables Ltd. [1926] 10 Tax Cas. 155. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be deducte....
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....e any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the ....
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...., Bombay Presidency and Aden [1937] 64 I.A. 215, 5 ITR 202, affords another illustration of this principle. It was observed there:- If the purchaser of a business undertakes to the vendor as one of the terms of the purchase that he will pay a sum annually to a third party, irrespective of whether the business yields any profits or not, it would be difficult to say that the annual payments were made solely for the purpose of earning the profits of the business.' The expression 'once and for all' is used to denote an expenditure which is made once and for all for procuring an enduring benefit to the business as distinguished from a recurring expenditure in the nature of operational expenses. The expression 'enduring benefit' also has been judicially interpreted. Romer, L.J., in Anglo-Persian Oil Co. Ltd. v. Dale [1932] 1 K.B. 124 at 146, agreed with Rowlatt, J., that by enduring benefit is meant enduring in the way that fixed capital endures. 'An expenditure on acquiring floating capital is not made with a view to acquiring an enduring asset. It is made with a view to acquiring an asset that may be turned over in the course ....
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.... devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd [1925] 10 TC 155, 192 (HL), where the learned Law Lord stated: '............when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. This test, as the parenthetical clause shows, must yield where there are special circumstances lading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nachanga Consolidated Copper Mines Ltd [1965] 58 ITR 241 (PC), it would be misleading to suppose that in all case....
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....R 52 (SC), the same test was formulated by Lord Clyde in Robert Addie and Sons' Collieries Ltd v. IRC [1924] 8 TC 671, 676 (C Sess) in these words: Is it a part of the company's working expenses? - is it expenditure laid out as part of the process of profit earning? - or, on the other hand, is it a capital outlay? - is it expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all'. It is clear from the above discussion that the payment made by the assessee for purchase of loom hours was expenditure laid out as part of the process of profit earning. It was, to use Lord Summer's words, an outlay of a business 'in order to carry it on and to earn a profit out of this expense as an expense of carrying it on'. [John Smith and Son v. Moore [1921] 12 TC 266, 296 (HL)]. It was part of the cost of operating the profit-earning apparatus and was clearly in the nature of revenue expenditure. (iv) Hon'ble Supreme Court in the case of CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257, 261, 262 referred to the decision in the cases of Empire Jute C....
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....e 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 effectively 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. (v) In the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 the Hon'ble Supreme Court after applying the principle laid down by Supreme Court in the cases of Empire Jute Co. Ltd. Associated Cement Companies Ltd. and Assam Bengal Cement Co. Ltd. has observed as under:- Head Notes (i) "It would be unrealistic to ignore the rapid advances in research in antibiotic medical microbilogy and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast changing area of medical seicence. The state of the art in some of these areas of high priorty research is constantly updated so that the know-how could not be said to bear the element of the requisite degree of durabil....
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....93] 204 ITR 56, the Hon'ble Calcutta High Court has held as under:- "In the case of Empire Jute Co. Ltd v. CIT [1980] 124 ITR 1 (SC), following the decision of Lord Radcliffe in Commr. of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), it was held by the Supreme Court at page 10 of the said report (124 ITR 1) that it would be misleading to suppose that, in all cases, securing a benefit for the business would be, prima facie, capital expenditure "so long as the benefit is not so transitory as to have no endurance at all". There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on 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 principles laid in this test, provided by Lord Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd [1925] 10 TC 155 (HL). 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 profitabl....
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.... which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure." (ix) In the case of Minoo F. Mehta v. CIT [1996] 217 ITR 578 the Hon'ble Bombay High Court has held as under:- "We have carefully considered the rival submissions. Under section 37(1) of the Act any expenditure incurred wholly and exclusively for the purpose of the business or pro....
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.... 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 for the carrying on of the business, the expenditure may be regarded as revenue expenditure." (xi) In the case of Royal Calcutta Turf Club v. CIT [1991] 188 ITR 352, it has been held by the Hon'ble Calcutta High Court as under:- "The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purposes of keeping the trade going and of making it pay and not in any capacity other than that of a trader. The question whether a particular expenditure is a revenue expenditure incurred for the purposes of the business must be determined on a consideration of all the facts and circumstances and by the application of the principle of commercial trading. The question 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 proc....
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.... respondent's obligation to pay Rs. 50,000 to TGS. In computing its profits for the calendar year 1958, relevant to the assessment year 1959-60, the respondent claimed deduction of the sum of Rs. 50,000 paid to TGS as revenue expenditure. The Department and the Tribunal rejected the claim but, on a reference the High Court held that the expenditure was not of a capital nature and could be allowed as a deduction. On appeal to the Supreme Court: Held, affirming the decision of the High Court, on the facts, that having regard to the facts that the organisational setup under the distributorship agreement was to endure only for seven years and upon expiry of that period, the respondent had no relationship with that organization and that the period of agreement with the distributor was conterminous with the agreement with CW & Co. under which the respondent became entitled to the benefits of using the registered trade marks and of disclosure of know-how, the sum of Rs. 50,000 was a part of the consideration for the receipt of the benefits and had to be considered to be a revenue expenditure." (xiii) In the case of CIT v. Coal Shipments (P.) Ltd. [1971] 82 ITR 902, 9....
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....ions in the profit-earning structure of the company or the very structure of the company that could be considered to be bringing into existence an asset of an enduring nature. (xvi) The answer to the question as to whether the money paid is a revenue expenditure or capital expenditure depends not so much upon the fact as to whether the amount paid is large or small or whether it has been paid in lump sum or by instalments, as it does upon the purpose for which the payment has been made and expenditure incurred. It is the real nature and quality of the payment and not the quantum or the manner of the payment which would prove decisive. If the object of making the payment is to acquire a capital asset, the payment would partake of the character of a capital payment even though it is made not in lump sum but by instalments over a period of time. On the contrary, payment made in the course of and for the purpose of carrying on business of trading activity would be revenue expenditure even though the payment is of a large amount and has not to be made periodically - M.K. Bros. (P.) Ltd. v. CIT [1972] 86 ITR 38, 42-43 (SC) and CIT v. India Tobacco Co. Ltd. [1978] 114 ITR 182, 19....
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....le laid down in the enduring benefit test; what matters 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 on capital account. 4. There may be cases where expenditure; even if incurred for obtaining an advantage of enduring benefit, may, nevertheless, be on revenue account and the test of enduring benefit may break down; 5. If the advantage consists of merely in facilitating the assessee's trading operations or enabling the management or conduct of 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 the indefinite future. 6. There is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities. In a given case, the test of 'enduring ....
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.... of an existing business assets, it would be capital expenditure. 13. If, on the other hand, the expenditure, although for the purpose of acquiring an asset or advantage, is for running of the business or for working out that asset with a view to produce profit, it would be revenue expenditure. 14. If the outgoing 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 or operation, and not for the acquisition of an asset of a permanent character, the possession of which is a condition precedent for the running of the business, then it would be expenditure of revenue nature. 15. If it is intrinsically a capital asset, it is immaterial whether the price for it is paid once and for all, or periodically, or whether it is paid out of capital or income, or linked up with net sales, the outgoing, in such a case, would be of the nature of capital expenditure. 16. If the amount paid for the acquisition of an asset of an enduring nature is settled, the mere fact that the amount so settled is chalked out into various small amounts or periodic instalments, the capital nature o....
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.... In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it wi....
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....he acquisition of an asset which falls within one or the other of these two categories, such a test would be a critical one. But this test also sometimes breaks down because there are many forms of expenditure which do not fall easily within these two categories and not infrequently, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), the line of demarcation is difficult to draw and leads to subtle distinctions between profit that is made "out of" assets and profit that is made "upon" assets or "with" assets. Moreover, there may be cases where expenditure, though referable to or in connection with fixed capital, is nevertheless allowable as revenue expenditure. An illustrative example would be of expenditure incurred in preserving or maintaining capital assets. This test is, therefore, clearly not one of universal application. But even if we were to apply this test, it would not be possible to characterise the amount paid for purchase of loom hours as capital expenditure, because acquisition of additional loom hours does not add at all to the fixed capital of the assessee. The permanent structure of which the i....
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....be decided from the practical and business view point and needs in this age of rapidly changing and advancing economic realities of business. It is generally understood that initial expenditure is regarded as capital in nature because of the reason that it is incurred not in earning profits but in setting the profit-earning machinery in motion. Ordinarily, an expenditure incurred prior to the date of setting up or commencement of a business is not allowable. But if certain vital operations have already been started, the expenditure may be held allowable although full manufacture or sale might not yet have commenced. 7.11 Capital asset belongs to third party An amount spent by the assessee may be deductible as revenue expenditure even if it results in the acquisition of a capital asset by a third party. (i) In the case of Associated Cement Co. Ltd., whereunder an agreement which relieved the assessee of certain disadvantages for a period of 15 years, the assessee spent on installing pipelines etc., which then became the property of the Municipal Authority, the expenditure was held to be on revenue account. (ii) In the case of CIT v. Kamal & Co. [1993] 203 ITR....
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....as business expenditure. Similarly, the licence fee was held to be undisputedly paid for use of facilities provided by DOT, and the payment was found inextricably bound up with very business of assessee and directly related to actual utilzation of net work facilties and, therefore, the same was held as an allowable expenditure under section 37(1) of the Act by the ITAT, Mumbai Bench 'D' in the case of Videsh Sanchar Nigam Ltd.. 7.12 The various general tests, amongst others, to be applied to distinguish capital expenditure from revenue expenditure have been enumerated by us in foregoing paras in so far as they have material bearing on the items involved in this appeal before us. At this stage, it is significant to note that particular expenditure is revenue or capital depends upon various facts arising in a particular case. It does not depend upon any of the decisions enumerated for the purpose of ascertaining the nature of the expenditure. The cumulative effect of all the decisions enumerated for this purpose has got to be applied before deciding whether a particular expenditure is capital or revenue in nature. Therefore, the cumulative effect of all the decisions enume....
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....n this regard that the business is said to have been set up as soon as essential activities of the business are started is without much scope of controversy. In the case of a new trader, purchase of stock-in-trade would indicate that the business has been set up, though there may have been no sale. In the case of a manufacturer, the manufacture commences as soon as he undertakes the activity required for manufacture. Courts have found a difference between mere commencement of a business and setting up a business. What is required is that the business should have been set up, before any expenditure could be claimed as deduction. A business is set up when it is established or set on foot. There may be an interregnum between the setting up of a business and its actual commencement. Business expenditure incurred after the business is set up may be allowed even if it is incurred before the business has actually commenced. - CIT v. Sarabhai Management Corpn. Ltd. [1991] 192 ITR 151 (SC); Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 (Bom.); Prem Conductors (P.) Ltd. v. CIT [1977] 108 ITR 654 (Guj.); CIT v. Western India Seafood (P.) Ltd. [1993] 199 ITR 777 (Guj.); CIT v.....
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.... based on a misdirection in law." 7.15 After extensively discussing the case law on the subject of setting up and commencement of business, the Andhra Pradesh High Court in CIT v. Sponge Iron India Ltd. [1993] 201 ITR 770 has laid down the following propositions:- (i) Whether a business has been commenced or not is a question of fact. However, what activities constitute commencement of business is a mixed question of law and fact and it has to be decided on the facts of each case. (ii) There is a distinction between setting up of business and commencement of business. A business is said to be set up when it is ready to commence. (iii) Where the business consists of continuous course of activities, for commencement of business, all the activities which go to make up the business need not be started simultaneously. As soon as an activity which is the essential activity in the course of carrying on the business is started, the business must be said to have commenced. 7.16 In Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 (Bom.), the question before the Bombay High Court was as to when a business could be said to have been set up within ....
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....s, therefore, that the unit must be ready to start functioning for the purpose for which it is being set up. If the unit is ready to start functioning, it does not matter that it has not actually started its business on the relevant date. Once the business is set up, expenditure incurred concerned such business can be claimed as business expenditure subject to other applicable conditions of the Act being satisfied." 7.18 In the case of Prem Conductors (P.) Ltd. v. CIT [1977] 108 ITR 654, the Hon'ble Gujarat High Court has held that since selling the goods manufactured by the company is an important part of its business activity, it could be said that the assessee-company commenced its business and its business was set up when it started securing orders against further production. One business activity may precede the other. What is required to be seen is, whether one of the essential activities for the carrying on of the business of the assessee-company as a whole was or was not commenced. In this case, the company had commenced its business by securing orders first and going into production later on. In view of this particular special feature in this case, namely, that the ....
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....e monsoon, it can be said that that was the starting point of the setting up of the business of processing marine products. Actual arrival of fish later on would not postpone the setting up of such business. The Tribunal was, therefore, right in concurring with the view of the Appellate Assistant Commissioner that the expenditure incurred by the assessee after August 15, 1970, and before October 6, 1970, when collection of fish was to actually start, can be treated to be business expenditure and would get covered under section 37 of the Act." 7.20 In the case before us, there is no evidence or material on record to show and establish that the expenses in question were incurred before setting up of assessee's business of share-dealing and share-broking. The essential activity in the course of carrying on the business of share dealing and share-broking was already started. The activity to become a member of Stock Exchange is of continuance course of activities for carrying on assessee's business of share-trading and share broking, which had already set up. It is settled that all the activities which go to make up the business need not be started simultaneously. A business ....
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.... years, of which the two assessment years in question were the first two. We are of the opinion that this petition of appeal is quite hopeless. No doubt a very enduring benefit was accruing to the assessee on payment of the development charges. That would render the expenditure as a capital one. Moreover, we are quite unaware of any authority given in the Income-tax Act, for carrying forward revenue expenditure, after dividing it, as per the assessee's own wish, into subsequent assessment years. In this view of the matter no point of law worth the name arises out of the Tribunal's order dated 21st of September, 2001. The petition of appeal is dismissed." 7.24 Respectfully following the said binding decision of jurisdictional High Court, we hold that the payment of development fee to Calcutta Stock Exchange is of capital in nature. The orders of the authorities below on this count are, therefore, upheld. Fee for operating on the floor paid to Calcutta Stock Exchange Association 7.25 A sum of Rs. 1,50,000 was paid to the assessee to Calcutta Stock Exchange to carry on business on the floor. The assessee's case is that this payment is ma....
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....resent case inasmuch as the advantage to operate on the floor of the Exchange is not in the capital field but consists merely in facilitating the assessee's trading operations of share-trading and share-brokerage or enabling the management and conduct of the assessee's said business to be carried on more efficiently or more profitably. Having regard to the fast changing economic and business realities of share business and prevalent system of the Stock Exchange and viewed the matter in the larger context of business necessity or expediency, there is no doubt in saying that the payment in question has facilitated the business to go on more profitably or efficiently or to make earning of profit. The said payment can be said to have removed the possibility of a recurring disadvantage. The disadvantage which the assessee would have in case the assessees were not empowered to operate on floor of the Stock Exchange has been removed by making the said payment, which has resulted into business to be carried on more efficiently and profitably. In other words, the said payment made by the assessee during the course of its business of share-dealing and share-brokerage is for the purpo....
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.... which was neither refundable nor was the dealership transferable. It was further submitted that such payment to OTC Exchange of India was necessary in order to become a dealer on the OTC Exchange of India and as such the object of incurring such expenditure was for carrying on the assessee's business. It was further stated that it was in the nature of an advantage in the commercial sense but it is not an enduring advantage in the capital field. It was also submitted that the technology cost paid to OTC Exchange of India represents payment towards training imparted by the OTC Exchange of India to the employees of the assessee-company for the operation as a dealer on the OTC Exchange of India, and as such training was necessary for the assessee-company to carry on the business of dealing in shares in the capacity of a dealer on the OTC Exchange of India and thus it should be treated as an expenditure on revenue field. The Assessing Officer treated the same as of capital in nature. The ld. CIT(A) upheld the Assessing Officer's action. 7.29 We have considered the rival contentions of both the parties and have gone through the materials on record. On perusal of the terms and....
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....rom time to time, the number of its dealers to such levels in such manner as it may deem fit. 10. You will maintain such information and records, in the manner prescribed by OTCEI, and furnish the same as and when required by OTCEI. 11. You will submit periodic reports, statements, certificates and such other documents duly certified in the manner, as may be required by OTCEI. 12. You will, if and when declared defaulter as per the Bye-Laws, Rules and Regulations, follow the Rules framed by OTCEI and abide by the code of conduct prescribed and shall furnish documents pertaining to your OTC operations for inspection and, if and when, disciplinary action is initiated against you, shall not transact any business, in contravention of the provisions set out. 13. You will ensure that OTC business will be prudently conducted on sound business principles and on ethical standards and agree to ensure that it will not be detrimental/harmful to the OTC market in any manner whatsoever. 14. You will use such logo/identification/sign as prescribed by OTCEI at the place of business for identification purposes. 15. You will bear and pay costs, a....
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....ced to terminate, the Dealership or if OTCEI terminates the dealership, this fee of Rs. 6 lakhs is not returnable by OTCEI. 20. OTCEI will not allow the holders or donees of the Powers of Attorney to operate from the OTC counter, except with its prior written consent. Signatories not registered with the OTCEI will not be recognized. OTCEI reserves the right, as its sole discretion, to allow only such holders or donees of Powers of Attorney as it finds acceptable, to execute documents on OTC Exchange and at any time to withdraw its recognition of such holders or donees without assigning any reason whatsoever. 21. You will sign such an undertaking as may be required by OTCEI for becoming a Dealer of the OTCEI and any dispute arising thereof as to the interpretation meaning shall be subject to the procedures set out in this regard. 22. OTCEI on an ongoing process, reserves its right to revise modify, amend, alter, the terms and conditions of the appointment of Dealers, as it may deem necessary, and your continuance as a Dealer will be subject to the above." 7.30 On reading the aforesaid terms and conditions of appointment as a dealer on the OTC E....
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....he dealership granted by the OTC Exchange of India to the assessee and the terms and conditions related thereto, we are of the view that the advantage of being a dealer on the OTC Exchange of India and to operate the counter at the OTC Exchange of India is in the nature of an advantage in the commercial sense and not in the capital field. Considering the purpose for which admission fee and the technology cost was paid to OTC Exchange of India and its intended object and effect, and considering the same in a common sense having regard to the business realities or rapidly changing economic realities for being a share-dealer, we are of the view that the payment of admission fee for becoming a dealer on OTC Exchange of India and the technology cost paid by the assessee was for the purpose of carrying or running the assessee's business of share trading in a profitable manner. The said payment was necessary for carrying on the assessee's day-to-day business. No capital asset or advantage of enduring benefit on capital field has been acquired by the assessee. On perusal of the terms and conditions of appointment as a dealer on the OTC Exchange of India, it is clear that becoming a....
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....ircumstances so found in the present case. The appointment as a dealer on the OTC Exchange of India cannot be equated to the Stock Exchange membership of the Calcutta Stock Exchange of India Ltd. and thus the contention advanced by the learned CIT (DR.) is misconceived or misplaced. As already observed above in foregoing paras that the appointment of assessee as a dealer on the OTC Exchange of India is in continuance of the assessee's business of share-dealing and share-brokerage carried on or set up by the assessee, the argument advanced by the learned CIT (DR) that the decision of Hon'ble Supreme Court in the case of Associated Cement Companies Ltd. is not applicable to the present case deserve to be rejected. It is settled as pointed out above that 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 effectively 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 criteria of "once and for all" payment does not render the paymen....
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....hange of India 7.35 It was the case of the assessee that the amount of Rs. 30,00,000 was in the nature of non-adjustable deposit or trading membership subscription of National Stock Exchange of India. It was submitted that under the terms and conditions prescribed by National Stock Exchange of India, the said non-adjustable deposit could not be withdrawn for a minimum period of five years even if the trading member would cease or discontinue the trading in the Exchange. It was further stated that the right of trading membership on the Wholesale Debt Market (in short, WDM) of the National Stock Exchange of India Ltd. (In short NSEIL) was not transferable for a minimum period of five years. Under these circumstances as pointed out by the assessee, the assessee claimed the payment of Rs. 30,00,000 on account of non-adjustable deposit for trading membership on the Wholesale Debt Market of the National Stock Exchange was claimed as revenue expenditure. However, the Assessing Officer rejected the same by holding it as of capital in nature. The ld. CIT(A) uphold the Assessing Officer's order. 7.36 We have heard both the parties on this issue and have carefully gone through the p....
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....ll be established using Very Small Aperture Terminals (VSATs). These VSATs will be able to receive and transmit data to and from the NSE mainframe computer using a satellite link. The installation and equipment cost of VSATs alongwith other attachments is around Rs. 5 lakhs. After your site is ready, NSE will set up the VSATs alongwith their peripherals at your premises for which you would have to pay a security deposit of similar amounts. The NSEIL reserves the right to withdraw the offer of Trading Membership in case you are not able to comply with any of the conditions as stipulated in the time frame given in Annexure A. On complete compliance of the stipulations, Trading Membership would become effective. Thanking you, Yours faithfully, Sd/ R.H. Patil." 7.37 Fees and deposits structure for Trading Members on the WDM of NSEIL is as under:- Fees and deposits structure for trading members on the wholesale debt market (WDM) I. Advance annual Subscription for the first year Rs. 5 lakhs II. Non adjustable deposit for membership subscription and other dues to NSEIL Rs. 25 lakhs III. Interest Free Security Deposit ....
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....uters having Satellite Tele Communication links and providing a screen based automated Stock Exchange. The Trading Membership of the Wholesale Debt Market (WDM) of NSEIL enables the assessee to have access to the infrastructure or network provided by NSEIL for the purpose of trading in shares and securities at a nationwide level to be done electronically through a network of computers of dealers located in different cities It is thus clear that the infrastructure provided by NSEIL to its dealers facilitates and helps the dealer in carrying its business of trading in shares and securities at nationwide level smoothly, extensively and in a more profitable manner. The expenses incurred for getting Trading Membership of NSEIL may be properly attributable to revenue as it has been made for the purpose of carrying on business being an integral part of the profit-carrying process. It can be said to have incurred for the purpose of removing of restriction or obstruction or disability of carrying on trading operations electronically having nationwide coverage. The NSEIL and OTCEI has been established to transcend geographical and distance barriers by the use of telecommunication system as a....
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.... of business, we are of the considered view that the payment of non-adjustable deposit for Trading Membership of the Wholesale Debt Market of the NSEIL is to be regarded as of revenue in nature. The orders of the revenue authorities below on this issue are, therefore, set aside by holding that the assessee is entitled to claim the deduction thereof as revenue expenditure. 7.40 Deposit for Very Small Aperture Terminals (VSATs) This deposit is on account of providing by NSEIL the on-line screen based trading facilities on equal access basis to all the Trading Members. The communication link between a PC work-station at Trading Member's end and mainframe computer located at NSE is established using VSATs. These VSATs will be able to receive and transit data to and from the NSEIL mainframe computer using a satellite link. The amount has been paid to the NSEIL for the purpose of setting up the VSATs alongwith their peripherals at Trading Member's premises. The VSATs equipments are installed by NSE at Trading Member's premises subject to fulfilling the certain formalities. It is thus clear that VSATs equipments are installed at Trading Member's premises in order to ....