High Court Of Delhi
Neset Holdings (P) Ltd. vs. CIT
Section 37(1)
Swatanter Kumar & S. Ravindra Bhat, JJ.
IT Appeal No. 771 of 2004
26th May, 2005
Counsel Appeared
Abinash Mishra, for the Appellant : None, for the Respondent
JUDGMENT
S. RAVINDRA BHAT, J. :
This is an appeal under s. 260A of the IT Act, 1961; it is directed against order dt. 23rd Jan., 2004, passed by the Income-tax Appellate Tribunal, Delhi Bench (hereafter called “Tribunal”).
2. The question of law formulated in this appeal is as follows : “Whether, having due regard to the facts of the case, the expenditure on payment of one time nonrefundable fee for dealership of OTC had resulted in a direct and substantial personal benefit to the assessee in his existing business of trading in shares/securities was allowable as revenue expenditure ?”
3. The assessee incurred expenses of Rs. 4,27,500 on account of OTC membership and annual fee and claimed it to be revenue expenditure. The break-up of these expenses are as follows :
4. The AO issued a show-cause notice as to why these claims should not be disallowed. In response to the show- cause notice the assessee filed a reply stating that all the expenses are incurred for carrying on the business of shares; since they were of a revenue nature, they ought to be allowed. The AO examined the claim for exemption, and observed that spending a sum of Rs. 4,00,000 facilitated the assessee in trading operations at the OTC and, therefore, permitted it to conduct business of the OTC. This conferred an enduring benefit to the assessee, which accrued only after payment of Rs. 4,00,000. He accordingly treated the expenditure of Rs. 4,00,000 as capital expenditure and disallowed it.
5. The assessee preferred an appeal before the CIT(A), who, after re-examination of the issue held that the assessee could not have traded without payment of non-refundable admission fee and one time non-refundable fee for dealership. As such, the expenditure of Rs. 3,00,000 was held to be capital expenditure. The CIT(A), however, treated payment of Rs. 1,00,000 (one time nonrefundable fee for permitted securities) as revenue expenditure and restricted the addition to Rs. 3,00,000. Aggrieved with the order of the CIT(A) assessee as well as the Revenue preferred appeals before the Tribunal, which, by the impugned order rejected them.
6. The issue involved is whether the assessee can obtain the dealership or acquire a right to trade on the permitted securities with the OTC Exchange without depositing a non-refundable admission fee and a one time non- refundable admission fee for dealership.
7. Pursuant to the applications of the assessee, the OTC Exchange of India asked it to make the payment of permitted securities fees. An amount of Rs. 50,000 was payable along with the application; after completion of procedural formalities, and upon being found eligible, an applicant like the appellant-assessee was to deposit a non-refundable amount of Rs. 2,50,000; this membership is also non-transferrable.
8. The terms of OTC membership are that members are facilitated online screen based trading in securities, by permission to dealers/members the use of network and infrastructure.
9. Learned counsel for the appellant has urged that membership of the OTC merely enables the use of the facilities; the non-refundable deposits in question do not result in creation of an asset of enduring nature, so as to make the expenditure fall in “the capital field”. It has been urged that such deposits are merely in the nature of entry fees; the facilities could still be withheld and the membership could become “inactive” if the dealer/member did not pay annual and other charges for the facilities. Counsel for the appellant relied upon the Division Bench judgment of this Court in CIT vs. Engineers India Ltd. (1999) 155 CTR (Del) 394, where it was held that membership fee payable for access to facilities of an organization did not constitute an expenditure that resulted in “an enduring benefit”.
10. Learned counsel for the Revenue, on the other hand, defended the order of the assessing authority and the Tribunal. It was submitted that without obtaining the dealership the assessee cannot trade on “permitted securities” segments of the exchange. Hence the admission fee was paid to obtain a right to trade or to become a dealer of the OTC Exchange of India. As such, this expenditure is of capital nature, since it constituted an expenditure that resulted in creation of an asset of “an enduring nature”.
11. In the judgment reported as Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 4 SCC 25, the Supreme Court, after considering various aspects of the issue, held as follows : “The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been 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 vs. British Insulated and Halsby Cables Ltd. (1926) AC 205 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, 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 leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commr. of Taxes vs. Nchanga Consolidated Copper Mines Ltd. 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 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 principle laid down in this test. What is material to consider 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 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 efficiently 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 test of enduring benefit is therefore not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of given case. But even if this test were applied in the present case, it does not yield a conclusion in favour of the Revenue. Here, by purchase of loom hours no new asset has been created. There is no addition to or expansion of the profit-making apparatus of the assessee. The income-earning machine remains what it was prior to the purchase of loom hours. The assessee is merely enabled to operate the profit-making structure for a longer number of hours. And this advantage is clearly not of an enduring nature. It is limited in its duration to six months and, moreover, the additional working hours per week transferred to the assessee have to be utilised during the week and cannot be carried forward to the next week.”
The above decision was followed in subsequent decisions of the Supreme Court, reported as Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : 1989 (2) SCC 329 and Bikaner Gypsums vs. CIT (1990) 89 CTR (SC) 176 : 1991 (1) SCC 328.
12. The relevant portion of the judgment in the Engineers India Ltd. case (supra) reads as follows : “One rough and ready test, which is usually being followed, is to try to ascertain whether a particular expenditure brings about “enduring benefit” to the assessee. In Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC) : TC 16R,841, the Supreme Court observed that 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 only for running the business or working it with a view to produce the profits, it is a revenue expenditure. Judged by the standard of enduring benefit, we are of the opinion that the Tribunal has rightly come to the conclusion that initial membership fee paid by the assessee has to be allowed as revenue expenditure. By making payment of the initial fee, the assessee had just acquired the membership of M/s Fractionisation Research Inc. and became eligible to receive from them information regarding mathematical models for its further development. But a mere membership did not entitle the assessee to get the said information till the prescribed subscription was paid to them from year to year.” Membership and entry of a dealer in the OTC Exchange was upon payment of non-refundable deposits, which are in question here. Nevertheless access to the facilities was not dependant solely on the payment of such charges; it also presupposed clearance of other dues. The mere fact that the deposit was not refundable in nature, did not alter thiscircumstance. The assessee would have been termed as an “inactive” member if payment for those periodic charges/demands was not made.
In view of the above circumstances, and keeping in mind the law declared by the Supreme Court, in the Empire Jute Company case (supra), as also the decision of this Court, in the Engineers India Ltd. case (supra), we are of the considered opinion that the expenditure incurred in the present case cannot be termed as one of an “enduring nature”.
15. In view of the foregoing discussion, we answer the question framed in the affirmative; the expenditure in question ought to be treated a revenue expenditure, since it cannot be termed as one that results in an “enduring benefit.”
The appeal is accordingly allowed, with no order as to costs.
[Citation : 282 ITR 601]
