Commissioner Of Income Tax, Coimbatore v. S.venkatasubramaniam

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 27.09.2006 Coram : THE HONOURABLE MR.JUSTICE R.BALASUBRAMANIAN AND THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) Nos.67 & 68 of 2003and 920 of 2005 T.C.(A) Nos.67 & 68 of 2003: Commissioner of Income Tax,Coimbatore. Vs ..Appellant S.Venkatasubramaniam ..Respondent T.C.(A) No.920 of 2005: Shri Kamal Kumar V Shah Vs ..Appellant Commissioner of Income-tax,Coimbatore ..Respondent Appeal under Section 260A of the Income Tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, Madras, 'A' Bench in I.T.A.Nos.100/Mds/97 and 325/Mds/99 dated 03.01.2003 for the assessment years1993-94 and 1994-95 respectively against the order of Commissioner of IT(Appeals) dated 4.11.96 and 24.12.98 respectively in ITA.No.179-C/96-97and 70-C/97-98 respectively. Appeal under Section 260A of the Income Tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, Chennai, 'D' Bench in I.T.A.No.557/Mds/2000 dated 01.04.2005 for the assessment year 1996-97 againstthe order of Commissioner of IT (Appeals) X, Chennai-34 dated 28.1.00 madein IT/NT/GT Appeal No.234 C/99-2000. https://hcservices.ecourts.gov.in/hcservices/ For Respondent in TC(A) Nos.67 & 68 of 2003 : Mr.V.Ramachandran, The present appeals in T.C. (A) Nos.67 & 68 of 2003 are filed underSection 260A of the Income Tax Act, 1961 by the Revenue against the orderpassed in I.T.A. Nos.100/Mds/97 and 325/Mds/99 dated 03.01.2003 by theIncome Tax Appellate Tribunal, Madras, 'A' Bench. On 17.10.2003, thisCourt admitted the appeal and formulated the following question of law. "1. Whether in the facts and circumstances of thecase, the Tribunal was right in holding that theadmission fee and contribution to infrastructuredevelopment fund paid by the assessee to become amember of the stock exchange is a revenueexpenditure?" i)The assessee is a share-broker. The relevant assessment year are1993-94 and 1994-95 and the corresponding accounting years ended on31.03.1993 and 31.03.1994 respectively. For the assessment year 1993-94,the assessee filed Return of income admitting a total income ofRs.1,20,340/-. Later, the assessment was taken up for scrutiny and noticewas issued under Section 143(2) of the Income-tax Act (hereinafterreferred to as the "Act"). The assessment was completed on a total incomeof Rs.2,45,344/-. While completing the assessment, the Assessing Officerdisallowed the admission fee of Rs.1,25,000/- as payment to CoimbatoreStock Exchange on the ground that the said payment was made only foracquisition of capital asset. Aggrieved by the order, the assessee filedan appeal to the Commissioner of Income-tax (Appeals). The said C.I.T.(A) https://hcservices.ecourts.gov.in/hcservices/ allowed the appeal by following another assessee's case in the case ofShri D.Balasundaram in ITA No.491-C/95-96 dated 10.11.1995. Aggrieved bythe order, the Revenue filed an appeal to the Income-tax AppellateTribunal (hereinafter referred to as the "Tribunal"). ii)For the assessment year 1994-95, the assessee filed Return ofincome admitting a total income of Rs.1,49,830/-. The Assessing Officercompleted the assessment on a total income of Rs.4,44,061/-. Whilecompleting the assessment, the Assessing Officer disallowed the claim of asum of Rs.1,84,234/- paid to the Coimbatore Stock Exchange asinfrastructure development charges. The Assessing Officer was of theview that the amount was paid for acquisition of the capital asset,namely, the Membership Card. Aggrieved by the order, the assessee filed anappeal to the C.I.T.(A). The said C.I.T.(A) allowed the appeal.Aggrieved by the order, the Revenue filed an appeal to the AppellateTribunal. All the appeals relating to both the assessment years weretaken up together and the same was dismissed by the Tribunal by a commonorder. 3.Learned Standing Counsel appearing for the Revenue submittedthat the assessee had incurred expenditure towards payment of admissionfees as well as Infrastructure Development Fund paid to the CoimbatoreStock Exchange for the purpose of obtaining the right to trade in shareand the benefit derived by the assessee is of enduring nature. Hence thesame is only a capital expenditure. The Membership Card is an asset andit gives the benefit of an enduring nature lasting beyond the assessee'sclosure of business. By making these payments, the assessee has beengiven the privilege to function within the premises of Coimbatore StockExchange. Hence it is only capital in nature. To support the abovecontention, Revenue relied on the following judgments: a) 276 ITR 567 (Cal.) in the case of Rajendra Kumar Bachhawat Vs.Commissioner of Income-tax. b) 272 ITR 138 (Raj.) in the case of Satya Narain Modani Vs. Income-taxOfficer and Another. c) 263 ITR 368 (Raj.) in the case of Ravindra Kumar Jain Vs. Commissionerof Income-tax and Others. d) 225 ITR 792 (SC) in the case of Punjab State Industrial DevelopmentCorporation Ltd. Vs. Commissioner of Income-tax. 4.Learned counsel for the assessee submitted that the admissionfee and contribution to Infrastructure Development Fund is only to becomea member of the Coimbatore Stock Exchange and the same cannot be treatedas capital expenditure due to the fact that there is no acquisition of anyasset. The Coimbatore Stock Exchange had sought to provide certainfacilities to its members by developing infrastructure facilities for due https://hcservices.ecourts.gov.in/hcservices/ conduct of the business of the stock broking and hence the amount paidtowards Admission fee as well as Infrastructure Development Fund is onlyallowable as revenue expenditure. He further drew our attention to therespective Articles of the Memorandum of Stock Exchange that the StockExchange does not confer any ownership right in the Stock Exchange. 5.Heard the counsel. The assessee has incurred expendituretowards the admission fee of Coimbatore Stock Exchange as well ascontribution of development charges. By incurring these expenditure theassessee had acquired right of trading in shares and securities at theterminals of Coimbatore Stock Exchange. To acquire the said MembershipCard, the condition precedent is that the assessee shall pay admission feeas well as the contribution to infrastructure facilities, and only afterpaying the same, the assessee will become entitled to trade at theterminals of the Coimbatore Stock Exchange. 6.The Coimbatore Stock Exchange was incorporated under theCompanies Act on the 9[th] day of July 1991. The main object stated in theMemorandum of Association of Coimbatore Stock Exchange Limited reads asunder: "iii) OBJECTS: A. THE MAIN OBJECT TO BE PURSUED BY THE COMPANYHEREINAFTER REFERRED TO AS THE "EXCHANGE" ON ITSINCORPORATION ISTo apply for and obtain from the Government of Indiarecognition of the Exchange as a recognised StockExchange within the meaning of the SecuritiesContracts (Regulation) Act, 1956 and to facilitateassist, regulate and control the trade and business inall kinds of securities with a view to safeguard andfurther the interests of brokers, jobbers, dealers andthe investing public." Clause B of the Objects, deals with the objects incidental or ancillary tothe attainment of the main objects. Clause C of the Objects, deals withother objects not included in Clauses A and B. 7.The Articles of Association of Coimbatore Stock ExchangeLimited, deals with members. Article 3 states that only certain personsshall become the members of the Exchange. Article 4 states that themembership shall constitute a permission from the Exchange to exercise therights and privileges attached thereto. Articles 9 and 10 of the Articlesof Association of Coimbatore Stock Exchange Limited reads as under: Clause B of the Objects, deals with the objects incidental or ancillary tothe attainment of the main objects. Clause C of the Objects, deals withother objects not included in Clauses A and B. 7.The Articles of Association of Coimbatore Stock ExchangeLimited, deals with members. Article 3 states that only certain personsshall become the members of the Exchange. Article 4 states that themembership shall constitute a permission from the Exchange to exercise therights and privileges attached thereto. Articles 9 and 10 of the Articlesof Association of Coimbatore Stock Exchange Limited reads as under: "9. Every applicant applying for the Membership of theExchange shall pay an admission fee of Rs.1,00,000/-(Rupees one lakh only) or such higher amount as theCouncil may fix from time to time. Further, he / it https://hcservices.ecourts.gov.in/hcservices/ shall also pay such contribution for infrastructuredevelopment as the Council may fix from time to time.25% of the admission fee shall be paid to the Exchangealong with the application. 10.(a) Every member shall pay an annual subscriptionof Rs.2,000/- (Rupees two thousand only) or such otherhigher amount as may be fixed by the Council from timeto time. Such annual subscription prescribed underthese presents shall be payable on admission and thereafter on or before 30[th] day of April every year forwhich the subscription is due. (b) The Council may levy and collect a servicecharge of 0.1% of the volume of transactions of eachmember subject to a minimum of Rs.1,000/- (Rupees onethousand only) per month or any higher amount to meetthe data processing charges, administrative expensesand the capital expenditure on infrastructuredevelopment." From a reading of the above, it is clear that a member has to pay a sum ofRs.1,00,000/- as well as contribution for Infrastructure Development forbecoming a member. Further it is also stated that the member has to payan annual subscription for Rs.2,000/-. Without making these payments, theassessee cannot become a member. The assessee is a stock-broker, withoutbecoming a member, he cannot carry on the business. It is an admittedfact that the Stock Exchange allowed only their members to carry onbusiness on the floor of the Stock Exchange. As per the Articles citedabove, a member cannot carry on business unless he pays the admission fee,contribution to infrastructure development and annual fee. So, payment isnecessary for the assessee to carry on the business. By becoming a member,the assessee is also entitled to the benefit of using all the facilitiesof the Stock Exchange. The assessee is not the owner of any of the assetsin the Stock Exchange. It cannot, therefore be said that any enduringbenefit had accrued to the assessee. It is also very difficult to say howthe amount paid for becoming a member can possibly be regarded as acapital expenditure. 8.In the case of Empire Jute Co. Ltd. Vs. Commissioner of Income-tax, reported in 124 ITR 1, the Supreme Court held as follows:"The decided cases have, from time to time, evolvedvarious tests for distinguishing between capital andrevenue expenditure but no test is paramount orconclusive. There is no all embracing formula whichcan provide a ready solution to the problem; notouchstone has been devised. Every case has to bedecided on its own facts, keeping in mind the broad picture of the whole operation in respect of whichthe expenditure has been incurred. But a few testsformulated by the courts may be referred to as theymight help to arrive at a correct decision of thecontroversy between the parties. One celebrated testis that laid down by Lord Cave L.C. in Atherton v.British Insulated and Helsby Cables Ltd. [1925] 10 TC155, 192 (HL), where the learned Law Lord stated: picture of the whole operation in respect of whichthe expenditure has been incurred. But a few testsformulated by the courts may be referred to as theymight help to arrive at a correct decision of thecontroversy between the parties. One celebrated testis that laid down by Lord Cave L.C. in Atherton v.British Insulated and Helsby Cables Ltd. [1925] 10 TC155, 192 (HL), where the learned Law Lord stated: "......when an expenditure is made, not onlyonce and for all, but with a view to bringing intoexistence an asset or an advantage for the enduringbenefit of a trade, I think that there is very goodreason (in the absence of special circumstancesleading to an opposite conclusion) for treating suchas expenditure as properly attributable not torevenue but to capital." This test, as the parenthetical clause shows,must yield where there are special circumstancesleading to a contrary conclusion and, as pointed outby Lord Radcliffe in Commissioner of Taxes v. NchangaConsolidated Copper Mines Ltd. [1965] 58 ITR 241(PC), it would be misleading to suppose that in allcases, securing a benefit for the business would be,prima facie, capital expenditure "so long as thebenefit is not so transitory as to have no enduranceat all". There may be cases where expenditure, evenif incurred for obtaining advantage of enduringbenefit, may, none the less, be on revenue accountand the test of enduring benefit may break down. Itis not every advantage of enduring nature acquired byan assessee that brings the case within the principlelaid down in this test. What is material to consideris the nature of the advantage in a commercial senseand it is only where the advantage is in the capitalfield that the expenditure would be disallowable onan application of this test. If the advantageconsists merely in facilitating the assessee'strading operations or enabling the management andconduct of the assessee's business to be carried onmore efficiently or more profitably while leaving thefixed capital untouched, the expenditure would be onrevenue account, even though the advantage may endurefor an indefinite future. The test of enduringbenefit is, therefore, not a certain or conclusivetest and it cannot be applied blindly andmechanically without regard to the particular factsand circumstances of a given case. But even if this test were applied in the present case, it does notyield a conclusion in favour of the revenue. Here,by purchase of loom hours no new asset has beencreated. There is no addition to or expansion of theprofit-making apparatus of the assessee. The income-earning machine remains what it was prior to thepurchase of loom hours. The assessee is merelyenabled to operate the profit making structure for alonger number of hours. And this advantage isclearly not of an enduring nature. It is limited inits duration to six months and, moreover, theadditional working hours per week transferred to theassessee have to be utilised during the week andcannot be carried forward to the next week. It is,therefore, not possible to say that any advantage ofenduring benefit in the capital field was acquired bythe assessee in purchasing loom hours and the test ofenduring benefit cannot help the revenue." In the above judgment, the Supreme Court held that test of enduringbenefit is, therefore, not a certain or conclusive test and the samecannot be applied blindly and mechanically without regard to the facts andcircumstances of a given case. In the present case, no new assets had beencreated and there is no addition to or expansion of the profit-makingapparatus of the assessee. Payment of admission fee as well ascontribution to infrastructure development is like nature of license feeand it is paid only for carrying on the business. If any payment is madefor the purpose of running the business effectively and efficiently, it isonly a revenue expenditure. By becoming a member, the assessee ispermitted to make use of the facility provided in the Stock Exchange andhence it is only revenue expenditure. It is seen from the record thatthere is no dispute by the Revenue in respect of the annual fee paid bythe assessee to the Coimbatore Stock Exchange. 9.In the case of Alembic Chemical Works Co. Ltd. Vs. Commissionerof Income-tax, Gujarat reported in 177 ITR 377, the Supreme Court held asfollows:"The idea of "once for all" payment and "enduringbenefit" are not to be treated as something akin tostatutory conditions; nor are the notions of "capital"or "revenue" a judicial fetish. What is capitalexpenditure and what is revenue are not eternalverities but must needs be flexible so as to respondto the changing economic realities of business. Theexpression "asset or advantage of an enduring nature"was evolved to emphasise the element of a sufficientdegree of durability appropriate to the context. There is also no single definitive criterion which, byitself, is determinative whether a particular outlayis capital or revenue. The "once for all" paymenttest is also inconclusive. What is relevant is thepurpose of the outlay and its intended object andeffect, considered in a common-sense way having regardto the business realities. In a given case, the testof "enduring benefit" might break down." Applying the abovesaid principle, we can safely conclude that the amountspaid by the assessee to the Stock Exchange by becoming a member, is onlyrevenue expenditure. 10.Learned counsel for the Revenue strongly placed reliance on theSupreme Court Judgment reported in 225 ITR 792 in the case of Punjab StateIndustrial Development Corporation Ltd. Vs. Commissioner of Income-tax,wherein it was held as follows: "We do not consider it necessary to examine all thedecisions in extenso because we are of the opinionthat the fee paid to the Registrar for expansion ofthe capital base of the company was directly relatedto the capital expenditure incurred by the company andalthough incidentally that would certainly help in thebusiness of the company and may also help in profit-making, it still retains the character of a capitalexpenditure since the expenditure was directly relatedto the expansion of the capital base of the company.We are, therefore, of the opinion that the view takenby the different High Courts in favour of the Revenuein this behalf is the preferable view as compared tothe view based on the decision of the Madras HighCourt in Kisenchand Chellaram's case [1981] 130 ITR385. We, therefore, answer the question raised forour determination in the affirmative, i.e., in favourof the Revenue and against the assessee." In the above Supreme Court judgment, the assessee paid fees to theRegistrar of the Company for expansion of the share capital. The issueinvolved in the Supreme Court judgment is whether the amount paid is acapital or revenue expenditure in computing the income of the assessee.The Supreme Court held that the said expenditure related to the sharecapital of the company and hence it is only a capital expenditure. So,the facts of the Supreme Court are different from the facts involved inthe present case. Hence the Supreme Court judgment has no relevance tothe present case. In the above Supreme Court judgment, the assessee paid fees to theRegistrar of the Company for expansion of the share capital. The issueinvolved in the Supreme Court judgment is whether the amount paid is acapital or revenue expenditure in computing the income of the assessee.The Supreme Court held that the said expenditure related to the sharecapital of the company and hence it is only a capital expenditure. So,the facts of the Supreme Court are different from the facts involved inthe present case. Hence the Supreme Court judgment has no relevance tothe present case. 11.Learned counsel for the Revenue further relied on Calcutta HighCourt judgment reported in 276 ITR 567 in the case of Rajendra Kumar https://hcservices.ecourts.gov.in/hcservices/ Bachhawat Vs. Commissioner of Income-tax. In that case, the assessee paida sum of Rs.25,00,000/- for development charges for the purpose ofbecoming a member of the Calcutta Stock Exchange. In that judgment, wefind that there are no discussions or details available. Hence, withgreat respect, we are not agreeing with the same. 12.Learned counsel for the Revenue further relied on the RajasthanHigh Court judgment reported in 272 ITR 138 in the case of Satya NarainModani Vs. Income-tax Officer and Another, and also the judgment reportedin 263 ITR 368 (Raj.) in the case of Ravindra Kumar Jain Vs. Commissionerof Income-tax and Others. In the above cases, the issue involved iswhether the membership of the stock exchange is a property and on itstransfer whether capital gains tax is attracted or not. The another issueis that, when the assessee has transferred the membership card at a lowervalue than its market value, the difference should be taxed as gift-taxunder Gift-tax Act or not. In both the judgments, the issue is entirelydifferent from the present case. Hence, these judgments have also norelevance. 13.In view of the foregoing reasons, we are of the view that theTribunal is right in holding that amount paid towards admission fee aswell as contribution to infrastructure development is revenue expenditureand in view of the same, we answer the questions of law in favour of theassessee and against the Revenue. Hence the tax cases are dismissed. Nocosts. T.C.(A) No.920 of 2005: 14.This appeal is filed under Section 260A of the Income Tax Act,1961 by the assessee against the order passed in I.T.A. No.557/Mds/2000dated 01.04.2005 by the Income Tax Appellate Tribunal, Chennai, 'D' Bench.On 26.10.2005, this Court admitted the appeal and formulated the followingquestions of law. "1. Whether the Income-tax Appellate Tribunal wasright in law in holding that the payments made toCoimbatore Stock Exchange towards infrastructureDevelopment Fund of Rs.3,32,166/- and towardsGuarantee Fund of Rs.25,000/- were capitalexpenditure? 2. Whether on the facts and in the circumstances ofthe case, the Income-tax Appellate Tribunal was rightin following the decision of a Chandigarh Bench of theTribunal (88 ITD 496) in preference to the decision ofthe Single Member Bench of the Chennai Tribunalwherein identical issues of another member of the samestock exchange were decided in favour of the appellantof that case?" 15.In respect of Question No.1, we answer the question in favour ofthe assessee, against the Revenue by following the Tax Case (A) Nos.67 and68 of 2003, as discussed above. In view of answering the Question No.1,the second question becomes academic and does not require ourconsideration. 16.In view of the above observation, the tax case filed by theassessee is allowed. No costs.km Sd/-Asst. Registrar //true copy// Sub Asst.Registrar To 1.The Income Tax Appellate Tribunal, 'A' Bench, Chennai. 2.The Income Tax Appellate Tribunal, 'D' Bench, Chennai. 3.The Commissioner of Income Tax (Appeals), Coimbatore. 4.The Commissioner of Income Tax (Appeals) X, Chennai. 5.The Commissioner of Income Tax, Coimbatore. 15.In respect of Question No.1, we answer the question in favour ofthe assessee, against the Revenue by following the Tax Case (A) Nos.67 and68 of 2003, as discussed above. In view of answering the Question No.1,the second question becomes academic and does not require ourconsideration. 16.In view of the above observation, the tax case filed by theassessee is allowed. No costs.km Sd/-Asst. Registrar //true copy// Sub Asst.Registrar To 1.The Income Tax Appellate Tribunal, 'A' Bench, Chennai. 2.The Income Tax Appellate Tribunal, 'D' Bench, Chennai. 3.The Commissioner of Income Tax (Appeals), Coimbatore. 4.The Commissioner of Income Tax (Appeals) X, Chennai. 5.The Commissioner of Income Tax, Coimbatore. + 2 Ccs to Mr.N.Muralikumaran, Advocate Sr.Nos.45740 & 45741.+ 1 Cc to M/s.Anita Sumanth, Advocate Sr.No.45425. KSJ (CO)RSM/12.10.2006 T.C.(A) Nos.67 & 68 of 2003 and 920 of 2005