I-T ruling on 'non-refundable fee' to SEs

The Income Tax Appellate Tribunal has held that the expenditure on account of non-refundable membership fees paid to stock exchange is a capital expenditure.

It was held that by incurring such expenditure, the assessee has acquired a right of trading in shares, securities and stock-brokering on the floor of the stock exchanges, which was a condition precedent for commencement of such business and such right is enduring in nature and, therefore, such expenditure is capital in nature.

The nature of right acquired is the source of stock-in-trade and not stock-in-trade itself. Even if the expenditure incurred was non-refundable, the same would not make any difference as it relates to the capital field.

The assessee was engaged in the business of dealing in shares, securities and stock brokering. The assessee became a member of the National Stock Exchange in the accounting year under reference. The assessee became a member of Ludhiana Stock Exchange and OTCEI.

As per the conditions for becoming members of the aforesaid stock exchanges, the assessee paid non-refundable admission fee of Rs 10 lakh (Rs 1 million) and infrastructure fund of Rs 7.11 lakh (Rs 711,000), to the Ludhiana Stock Exchange. The assessee also paid non-refundable membership fees of Rs 20 lakh (Rs 2 million) to the Over-The-Counter Exchange of India.

In the return of income filed, the assessee claimed deduction of Rs 37.11 lakh (Rs 3.711 million) of the aforesaid payments as revenue expenditure.

The assessing officer called upon the assessee to explain why the said expenditure should not be treated as capital in nature. The assessee replied that the said expenditure was incurred with a view to earn profits and not for acquiring or bringing into existence a new capital asset and benefit of enduring nature.

Therefore, the said expenditure was allowable as revenue expenditure. Reliance was also placed on the judgment of Supreme Court in the case of Alembic Chemical Works Co. Ltd vs CIT (2002-Taxindiaonline-160-SC-IT),

where the Supreme Court has held that a lump sum payment made one for all did not amount to a capital expenditure. However, the assessing officer was not satisfied with the explanation of the assessee. He observed that the expenditure incurred by the assessee was a pre-requisite and condition precedent to the commencement of the business of the company. He further observed that but for incurring such expenditure the assessee would have not been able to carry on its business and therefore, the expenditure was capital in nature.

The CIT(A) upheld the disallowance of expenditure of Rs 17.11 lakh (Rs 1.711 million) being payments made to the Ludhiana Stock Exchange on the ground that by becoming a member of the Ludhiana Stock Exchange the assessee has acquired a capital asset which could be traded in the market -- it can be sold in the market at pre-determined fee to another person. The Ludhiana Stock Exchange on certain defaults of the assessee can even auction it.

Therefore, the said expenditure was capital in nature. However the payment made to OTCEI was held to be revenue in nature on the ground that by incurring such expenditure the assessee had not acquired any capital asset.

The ITAT set aside the order of the CIT(A) in regard to disallowance of expenditure of Rs 20 lakh being payment made to OTCEI and restored that of the assessing officer. The order of the CIT (A) in sustaining the disallowance of Rs 17.11 lakh in regard to payments made to the Ludhiana Stock Exchange was upheld.

See full text of Judgement in 2004-Taxindiaonline-21-ITAT-CHA in Legal Corner