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Peerless Securities Ltd. Vs. Joint Commissioner of Income Tax - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Kolkata
Decided On
Judge
Reported in(2005)94ITD89(Kol.)
AppellantPeerless Securities Ltd.
RespondentJoint Commissioner of Income Tax
Excerpt:
1. under section 255(3) of the it act, 1961 (hereinafter called the act), the hon'ble president of the tribunal has constituted this special bench to consider the following question : "whether, on the facts and in the circumstances of the case, the expenditure incurred by the assessee towards development fee and fees for operating on the floor paid to calcutta stock exchange association, towards admission fee and technology cost paid to otc exchange of india and towards non-adjustable deposit for membership subscription and deposit for very small aperture terminal (vsat) paid to national stock exchange of india could be treated as revenue or capital expenditure ?" 2.1. the appeal filed by the assessee before the tribunal involved several issues, one of which was whether the assessee was.....
Judgment:
1. Under Section 255(3) of the IT Act, 1961 (hereinafter called the Act), the Hon'ble President of the Tribunal has constituted this Special Bench to consider the following question : "Whether, on the facts and in the circumstances of the case, the expenditure incurred by the assessee towards development fee and fees for operating on the floor paid to Calcutta Stock Exchange Association, towards admission fee and technology cost paid to OTC Exchange of India and towards non-adjustable deposit for membership subscription and deposit for Very Small Aperture Terminal (VSAT) paid to National Stock Exchange of India could be treated as revenue or capital expenditure ?" 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 OTC Exchange of India and payment of non-adjustable deposit for membership subscription of Rs. 30,00,000 and deposit for Very Small Aperture 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 IT Act, 1961, by Kolkata Bench "C" to the President, 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, Esplanade East, Kolkata, for asst. yr. 1996-97 in ITA No. 251/Cal/2000 is a fit case for reference to the Special Bench.

The facts of the case are that the assessee-company made the following payments to different Stock Exchange : Calcutta Stock Exchange Association Rs. Development fee 70,00,000 Fees for operating on the floor 1,50,000 OTC Exchange of India Admission fee 6,00,000 Technology cost 2,00,000 National Stock Exchange of India Non-adjustable deposit for membership subscription 30,00,000 Deposit for VSAT 10,00,000 ------------- The Departmental Representative referred to the decision of the Kolkata Bench of the Tribunal in the case of Asstt. CIT v. Ajoy Bhauwala (2002) 76 TTJ (Kol) 240 : (2002) 80 ITD 79 (Kol) which had been followed in the case of ITO v. Narendra Kr. Pasari (ITA No. 801/Cal/1995) of E-Bench, Kolkata and Asstt. CIT v. Sangram Singh Baid (ITA No. 1057/Cal/1996) of 'B' Bench Kolkata.

Learned Authorized Representative, appearing on behalf of the assessee, however, relied on the decision of Mumbai Bench of the Tribunal in the case of Dy. CWT and Ors. v. Ashwin C. Shah and Ors.

(2002) 76 TTJ (Mumbai) 823 : (2002) 82 ITD 573 (Mumbai) in which it has been held that Stock Exchange Card of BSE is not an asset under Section 2(e) of WT Act, 1957, as also the decision of the Tribunal, Mumbai Bench in the case of Videsh Sanchar Nigam Ltd. v. Jt. CIT (2000) 69 TTJ (Mumbai) 882 : (2001) 118 Taxman 104 (Mumbai)(Mag) in which it has been held that licence fee paid to the DOT amounting to Rs. 282.60 crores would not amount to capital expenditure and that the same has to be allowed as business expenditure, the reasons being that the facilities provided by DOT and the payment for the same was inextricably bound up with the main business of the assessee and directly related to the actual user of the actual net work, etc.

Learned Authorized Representative also referred, to the decision of the apex Court in the case of Stock Exchange, Ahmedabad v. Asstt.

CIT (2001) 248 ITR 209 (SC) in which it has been held that Stock Exchange Card is not a right of property.

Such being the case, we find that there are divergent views on the issue as to whether the payment made to different Stock Exchanges as development fee or for operating on the floor or deposits for VSAT would amount to capital expenditure or revenue expenditure.

We are, therefore, of the view that this issue with the case record in question should be sent to the Hon'ble President, Tribunal 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 para 1 hereto above.

The assessee's claim for deduction of Rs. 1,19,50,000 was rejected by the AO in the assessment completed under Section 143(3) of the Act on 15th March, 1999 by stating and observing as under : "The assessee-company is engaged in the business of share and stock brokerage.

In the computation of income furnished along with 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 : Rs. Rs.Development Fee 70,00,000Fees for operating on the floor 1,50,000 71,50,000OTC Exchange of India : ---------Admission Fee 6,00,000Technology Cost 2,00,000 8,00,000National Stock Exchange of India : ---------Non-adjustable deposit for membershipSubscription 30,00,000Deposit for VSAT 10,00,000 40,00,000 --------- ---------------- The assessee was specifically asked to explain as to why the aforesaid deferred revenue expenditure claimed for deduction should not be treated as capital expenditure. It was submitted on behalf of the assessee that the development fees of Rs. 70 lakhs and fees for operating on the floor to the extent of Rs. 1.5 lakhs are one-time payments made to Calcutta Stock Exchange Association Ltd. for becoming a member of the Exchange. Without making such payments, it could not have become corporate member of Calcutta Stock Exchange and carried on operation on the floor. The object of paying development fee was to enable it to carry on the business in Stock Exchange in a better way and thus the expenditure was incurred wholly and exclusively for the purpose of business and the same should be allowed under Section 37(1).

Non-adjustable deposit for membership and subscription of Rs. 30 lakhs has been paid for obtaining the right of trading membership of the wholesale debt market of the National Stock Exchange and the above deposit is not transferable for a minimum period of 5 years.

In this context, it was also submitted on behalf of the assessee that it does not intend to withdraw the security deposit in future and as such the amount of deposit made, can be considered to have been incurred wholly and exclusively for the purpose of assessee's business.

Deposit of Rs. 10 lakhs for VSAT (Very Small Aperture Terminal) was paid by the assessee in order to get such facility. National Stock Exchange will provide computerized on-line based trading facilities on equal access basis to all the trading members and thus payment does not bring into existence any capital asset to the assessee. As such, the payment has been claimed as revenue expenditure in the return.

As per the terms and conditions of appointment as a dealer on OTCEI an admission fees of Rs. 8 lakhs is required to be 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 and 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 and 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 (1996) 218 ITR 427 (Mad) and of the Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT 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 the assessee's business and the assessee is engaged in the business of share trading and share brokerage. The aforesaid expenditures have been incurred on account of obtaining membership, subscription and rights of Calcutta Stock Exchange, OTC Exchange of India and National Stock Exchange. It can be seen that the above expenditure has been incurred for initial outlay or for acquiring or bringing into existence an asset or advantage of an enduring benefit to the business that is being carried on or for extension of the business that is going on. It is also well-settled that an asset or advantage of an enduring nature does not mean that it should last for ever. If the capital asset is in its nature a shortlived one, the expenditure incurred over it does not for that reason, cease to be a capital expenditure.

(b) The membership of Stock Exchange is intrinsically a capital asset for a person engaged in the business of share trading or share brokerage. If that is so, 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 the net sales. The outgoing in such a case would be of the nature of capital expenditure. This view is further vindicated by the fact the assessee has itself shown a sum of Rs. 1,26,08,250 on account of security deposit with Calcutta Stock Exchange, National Stock Exchange and OTC Exchange (in the balance sheet under the head Loans and Advances). It may be clarified here that it is over and above the sum of Rs. 1,19,50,000 paid as discussed in para 3 above.

(c) In view of the facts and circumstances stated above, the sum of Rs. 1,19,50,000 paid by the assessee without which it could not have become member of the Stock Exchanges, cannot be allowed to the assessee as revenue expenditure. I place reliance on the decision of (i) Andhra Pradesh High Court in the case of Hylam Ltd. v. CIT (1973) 87 ITR 310 (AP), (ii) Madras High Court in the case of Anna Transport Corporation Ltd. and Ors. v. CIT (1995) 215 ITR 800 (Mad), (iii) Himachal Pradesh High Court in the case of Mohan Meakin Breweries Ltd. (1997) 227 ITR 878 (HP)." 3.1. Being aggrieved with the AO's order in rejecting assessee's claim of abovementioned deductions, the assessee appealed to the CIT(A) and raised several contentions which were reproduced in para 4 of the order of the CIT(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 6th July, 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 dt. 11th July, 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 learned AO 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 Exchange is a capital asset.

We would like to state that the benefit of enduring nature is not the sole or exclusive test to decide whether a particular expenditure is a capital expenditure or revenue expenditure.

Further, it is submitted that the expenditure did not bring into existence any capital asset. The view of the AO that the membership of Stock Exchange is a capital asset is not tenable in view of the decision of the Bombay High Court in the case of Sejal Hikeen Dalal v. Stock Exchange, Bombay AIR 1991 Bom 30 (copy enclosed). The Bombay High Court in para 10 of the judgment observed that the membership of Stock Exchange shall constitute a personal permission from the exchange to exercise the rights and privileges attached thereto subject to rules, bye laws and regulations of the exchange.

The membership, therefore, is not a transferable right. It is only a personal permission granted by the Stock Exchange to an individual member. The right of membership is inalienable. Therefore, there is no property in membership.

Your appellant relies on the abovereferred judgment of the Bombay High Court and is accordingly of the view that if there is no property in Stock Exchange membership, the expenditure incurred for obtaining such membership should not be considered as a capital expenditure.

(b) Admission fee Rs. 6,00,000 and technology cost Rs. 2,00,000 paid to OTCEI. The terms and conditions of appointment as a dealer on the OTCEI are enclosed for your perusal. As per para 19 of such terms and conditions, the dealership of OTCEI is not transferable. The appellant gave one undertaking to OTCEI on 31st Aug., 1995 that it would not transfer the dealership at any point of time. A copy of the undertaking is enclosed for your perusal. Thus the right of dealership is not alienable. Therefore, there is no property in dealership in OTCEI. Therefore, the admission fee of Rs. 6,00,000 paid, to OTCEI should not be considered as capital expenditure.

Technology cost of Rs. 2 lakhs was paid to OTCEI towards training imparted by the institution to the employees of the appellant-company in the operation of the institution. As per para 17(A) of the terms and conditions for admission as dealer OTCEI may require two or more operating personnel of the dealer to undergo such qualification procedure, as may be prescribed. Such training was necessary for the employees of the appellant-company 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 bring 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 (or 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 allowed under Section 37(1).

Deposit for Very Small Aperture Terminal (VSAT) Rs. 10 lakhs was made to NSE in order to facilitate the appellant-company to have access to on-line trading facilities. The VSAT receives and transmits data to and from main frame computer of NSE using a satellite link. It may kindly be noted that VSAT does not belong to the appellant-company. The ownership lies with its supplier, HCL Commet Systems & Services (P) Ltd. The payment of Rs. 10 lakhs did not bring into telecommunication network (which) has been set up by the NSE at a significant cost with the permission of the Government of India. One of the conditions prescribed by the Government for installation and operation of the network is that the exchange should install, operate and maintain the system on no-profit and no-loss basis. NSE makes annual recovery from the members, the recovery pattern being on no-profit and no-loss basis certified by the independent chartered accountant firm as per the requirement of the Department of Telecommunication, Government of India.

Accordingly, the recovery made by the NSE from the appellant-company out of above deposit of Rs. 10 lakhs till date is as follows :Financial Year VSAT charges recovered1995-96 1,23,000 The appellant made further deposit of Rs. 35,000 in financial year 1998-99 and Rs. 14,454 in financial year 1999-2000.

You may kindly appreciate that the deposit of Rs. 10 lakhs for VSAT is not refundable to the appellant. Therefore, the amount of Rs. 10 lakhs can be allowed as revenue expenditure under Section 37(1) in the financial year 1995-96 (asst. yr. 1996-97). Alternatively, the deduction may be allowed on actual recovery basis i.e. Rs. 1,23,000 in financial year 1995-96, Rs. 2,72,785 in financial year 1996-97, Rs. 2,67,874 in financial year 1997-98 and Rs. 2,96,962 in financial year 1998-99.

In respect of ground No. 1 without prejudice to the appellant's right to claim Rs. 1,19,50,000 as revenue expenditure, the following alternative submission is made on behalf of the appellant.

In case the expenditure is considered as capital expenditure by considering that the appellant acquired a permanent right and by considering Stock Exchange membership card as a capital asset, it should be treated as 'plant ' within the meaning of Section 43(3) of the IT Act. Sec. 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 1st April, 1962 to state that the word '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 word of wide import and it must be broadly construed having regard to the facts that articles like books and surgical instruments are expressly included in the definition in Section 43(3). It includes any article or object, fixed or movable, live or dead, used by a businessman for carrying on his business. It is not necessarily confined to an apparatus which is used for mechanical operations or processes or is employed in mechanical or industrial business. An article to qualify as 'plant' must, furthermore, have some degree of durability.

Thus the enquiry which must be made is as to what operation the apparatus performs in the assessee's business. The relevant test to be applied is : Does it fulfil the function of plant in the assessee's trading activity Is it the tool of the assessee as trader If the answer is in the affirmative, then it is 'plant' irrespective of the fact that it is not very long-lasting or does not contain working parts such as a machine does and plays merely passive role in the accomplishment for trading purpose. Reliance is placed on the following decisions : (i) CIT v. McGaw Ravindra Laboratories (India) Ltd. (1981) 132 ITR 401 (Guj) (ii) Panipat Co-operative Sugar Mills Ltd. v. CIT (1981) 129 FTR 73 (P&H) Stock Exchange membership card is the main profit making apparatus of the appellant. This particular apparatus is used by the appellant for carrying on the business as a securities broker. It is the means of carrying on the business. Thus, the functional test of 'plant' is fully satisfied by Stock Exchange membership card for dealership in OTCEI. Therefore, the same can be treated as 'plant' so that the appellant should be allowed depreciation at general rate of 25 per cent Therefore, if the expenditure in question is not allowed as revenue expenditure, the appellant should be allowed depreciation at 25 per cent by treating stock exchange membership card as 'plant'." 3.2. After considering the assessee's submission and going through all the material with regard to the issue involved, the learned CIT(A) upheld the AO's action by deciding the issue as under : "5. I have gone through the case laws cited above, and the written submission of the appellant and after going through all the material with regard to this ground of appeal, I am of the opinion that all the expenses referred 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 per cent 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 asset.

Therefore, the question of allowable depreciation on the same for the asst. yr. 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.

"That on law and facts of the case, the learned CIT(A) has erred in confirming the addition made by the AO 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 of Rs. 2,00,000 paid to OTC Exchange of India and non-adjustable deposit for membership subscription of Rs. 30,00,000 and deposit for Very Small Aperture Terminal (VSAT) Rs. 10,00,000 on the ground these expenses are in the nature of capital expenditure." 3.4. Ground No. 1 relates to the questions referred to this Special Bench. The other grounds are not before us. The alternative claim of the assessee raised in ground No. 2 that if the expenses specified in ground No. 1 are treated as capital expenditure, depreciation applicable to plant and machinery (general) @ 25 per cent should have been allowed is also not before us.

Mr. S.K. Tulsiyan, the learned counsel for the assessee has submitted and contended as under: 1. The issue involved herein is as to whether the following payments made by the appellant-company to the different Stock Exchanges are allowable as revenue expenditure or will have to be treated as capital expenditure.Calcutta Stock Exchange of Association : Rs.Development fee 70,00,000Fees for operating on the floor 1,50,000OTC Exchange of India :Admission fee 6,00,000Technology cost 2,00,000National Stock Exchange of India :Non-adjustable deposit for membership subscription 30,00,000Deposit for VSAT 10,00,000 --------------- Total 1,19,50,000 --------------- 2.1. The main plank of Departmental argument in this case seems to be the judgment of Hon'ble Tribunal, Kolkata Bench "A" in the case of Asstt. CIT v. Ajoy Bhauwala (2002) 76 TTJ (Kol) 240 : (2002) 80 ITD 79 (Kol). In that case, the Tribunal held that the development fees of Rs. 5,00,000 paid by that assessee was of the nature of capital expenditure and hence disallowable.

2.2. It is required to be noted that at para 11 of the abovementioned judgment,? the Tribunal gave a finding that payments of development fee and entrance fee were necessary conditions for becoming a member of Stock Exchanges and that by making these payments, the assessee acquires a right to carry on the business on the floor of the Exchange. It is thus clear that the Tribunal actually acknowledged the fact that payments under consideration were made for the purpose of carrying on business as a stock broker.

Hence, it has got to be argued that on the basis of these findings, the payments should be considered as revenue expenditure.

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 desidendi 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. (1980) 124 ITR 1 (SC). However, in that particular case itself, the Supreme Court held that the test of enduring benefit is not a certain or 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, even if incurred for obtaining an advantage of enduring benefit, may, none the less, 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......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 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." 2.6. Reliance has also been placed by the Tribunal on two successive decisions of the Hon'ble Supreme Court in the cases of Punjab State Industrial Development Corporation Ltd. v. CIT (1997) 225 ITR 792 (SC) and Brooke Bond India Ltd. v. CIT (1997) 225 ITR 798 (SC). In the former judgment also, the Supreme Court held that the test of enduring benefit can at best be a guide in determining the nature of the expenditure, i.e., whether capital or revenue. The Supreme Court furthermore held that when the expenditure is directly related to the expansion of capital base of the company, it will be of capital nature, although incidentally that would certainly help in the business of the company and also may help in profit making. It may be argued conversely that the Supreme Court held in this case that where the expenditure is incurred merely to help the business of the company, and also to help in the profit-making, without affecting the capital base of the company, the expenditure will have to be allowed as revenue expenditure.

2.7. The Calcutta High Court also held in the case of Brook Bond India Ltd. v. CIT (1983) 140 ITR 272 (Cal) that when the object of incurring an expenditure is to affect the capital structure as a result of which certain incidental advantage flows, the expenditure will be of capital nature. The Supreme Court affirmed this decision in Punjab Industrial Development Corporation Ltd. v. CIT (supra).

3.1. So far as the present case is concerned, by making payment of development fee or admission fee, the assessee-company merely acquired the right to become a member of the respective Stock Exchange association. This right being of personal nature and also 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 v. Asstt. CIT (2001) 248 ITR 209 (SC), 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 abovementioned 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 expenses towards admission to some similar organizations has been either considered by the CBDT itself as revenue expenditure or held in judicial pronouncements to be so.

I. Hon'ble Calcutta High Court held in the case of Naskarpa Jute Mills Co. v. CIT (Ref. No. 237 of 1969 dt. 12th Dec, 1974) that admission fee for membership of East India Hessian Exchanges Ltd. constitutes revenue expenditure. A Stock Exchange stands pari materia with a Jute and Hessian. Exchange and hence the abovementioned judgment of Calcutta High Court can be considered to support the proposition that expenses incurred for acquisition of membership of Stock Exchanges are also revenue in nature.

II. Hon'ble Gujarat High Court held in the case of Gujarat State Export Corporation Ltd. v. CIT (1994) 209 ITR 649 (Guj) at p. 654 that payment of entrance fee for becoming member of the sports club constitutes revenue expenditure.

III. The CBDT accepted the proposition that life membership fee of Rs. 5,000 paid for becoming a member of the Indian Institute of Foreign Trade is to be allowed as admissible deduction under Section 37(1) in the hands of its payers, vide Board's Circular F. No. 9/56/66-IT(AI) dt. 17th Jan., 1967.

4. So far as the fees paid to Calcutta Stock Exchange Association at Rs. 1,50,000 is concerned, this amount is clearly stated to have been paid for operating on the floor. Thus, expenditure incurred in this regard was for day-today business of the assessee. Hence, the expense is clearly revenue in nature. Alternatively, the arguments as above relating to admission and development fee would apply.

5. So far as technology cost of Rs. 2,00,000 paid to OTCEI is concerned the payment was made towards training imparted by OTCEI to the employees of the assessee-company in the operations of the Institution as per para 17(A) of the terms and conditions for admission as dealer under OTCEI. The Allahabad High Court held in the case of Motor Sales v. CIT (1973) 87 ITR 595 (All) that sums paid for training of employees are revenue in nature. Hence, this expense is clearly allowable as revenue expenditure.

6.2. The amount of Rs. 30,00,000 was of the nature of non-adjustable deposit for membership subscription of National Stock Exchange of India (NSEI). Under the terms and conditions, the deposit amount could not be withdrawn for 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 abovementioned deposit of Rs. 10,00,000, NSE made appropriations/recoveries towards the charges on year-to-year basis as per details given below : 6.3. The CBDT itself allows security deposit for telex connection and under Tatkal Telephone Deposit Scheme as revenue expenditure under Section 37(1) vide Circulars Nos. 420, dt. 4th June, 1985 and No. 671 dt. 27th Oct., 1993. Hence, it has got to be argued that deposit for VSAT, although one-time payment, being of the nature of adjustable against expenditure is required to be allowed as revenue expenditure.

7. Hence ultimately, it is pleaded that all the expenditures as claimed by the assessee-company be kindly allowed as revenue expenditure.

4.1. The learned counsel for the assessee referred to the following circulars issued by the CBDT. : (i) Board's Circular No. 420, dt. 4th June, 1985 (File No. 204/10/83-ITA) saying that non-interest-bearing security deposit to cover a part of the cost of the postal department equipment installed at the premises of the subscriber of telex connection, which will also protect the postal department against any unpaid dues may be treated as a revenue expenditure allowable as a deduction, and in case when the amount refunded to the subscriber, it shall be treated as an income of the assessee of the year in which the amount is refunded.

(ii) Board's Circular No. 578, dt. 12th Sept., 1990 (File No. 203/44/90-ITA) stating that expenditure incurred by a sugar factory on cane development programme would be eligible for deduction in computing the taxable profit if, having regard to the facts and circumstances of the case, the AO is satisfied that the conditions laid down in Section 37(1) of the Act are fulfilled.

(iii) Board's Circular No. 671 dt. 27th Oct., 1993 (File No. 225/134/92-ITA) stating that entire amount of non-interest-bearing deposit for obtaining a new telephone connection under the "Tatkal Telephone Deposit Scheme" may be treated as a revenue expenditure allowable as a deduction in the year of payment. However, as and when any part of the amount is refunded to the assessee on surrender of telephone or otherwise, the refunded amount shall be treated as income of the assessee of the year in which the amount is so refunded and brought to tax by invoking the provisions of Section 41(1) of the Act.

(iv) Board's F. No. 204/70/75-ITA-II dt. 10th May, 1976 containing Board's reply to the letter from Secretary General of the FICCI to the Chairman, CBDT in the matter of allowing deduction of deposit for obtaining new telephone connection, in the year of payment and if money is paid back it will be charged to tax under Section 41(1) of the Act.

(v) Board's F. No. 9/23/67-ITA-I dt. 6th July, 1967 stating that since the members of the Indian Institute of Packaging compressing 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 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) dt. 17th Jan., 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-ITA-I dt. 26th Aug., 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 expenditure under Section 37(1) of the Act.

4.2 On the strength of these circulars, Mr. S.K. Tulsiyan submitted that the expenses in question incurred by the assessee during the year under consideration are to be treated as revenue expenditure deductible in computing assessee's profits and gains of business of shares and stock trading and brokerage which was being carried on by the assessee during that year inasmuch as they have been laid out wholly and exclusively for the purpose of assessee's day-to-day business.

4.3. In support of the assessee's case, reliance was also placed on the following decisions :Dy. CWT and Ors. v. Ashwin C. Shah and Ors. (2002) 76 TTJ (Mumbai) 823 : (2002) 82 ITD 573 (Mumbai) Mr. V.K. Saksena, the learned CIT (Departmental Representative) has supported the orders of the authorities below and has summarized his contentions in writing as under : 1. Development fee Rs. 70,00,000 and fee for operating on the floor Rs. 11,50,000 were one-time payments for becoming member of CSE and to carry on business on the floor.

2. Rs. 6,00,000 was paid to the OTC Exchange for purpose of admission.

3. Technology cost Rs. 2,00,000 was incurred for training employees on OTC Exchange operations.

4. Non-adjustable deposit for membership subscription Rs. 30,00,000 for NSE was a deposit which could not be withdrawn for 5 years. It was paid for obtaining membership of NSE. 5. VSAT Rs. 10,00,000 This was a deposit for doing on-line trading on NSE computer. It was adjusted in subsequent years towards charges.

1. AO's findings are in para 3.6 at p. 3 of his order. The learned CIT(A) has given his findings from para 5 at p. 7 of his order. I rely on these findings. My submissions are in addition to these findings.

2. I also rely on the case of Asstt. CIT v. Ajoy Bhauwaia (supra), where payment of development fee to Calcutta Stock Exchange has been held, to be capital expenditure, (pp. 1 to 7 of the paper book refers).

4. Expenses incurred are, therefore, in the nature 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 and stock broker. Mining Machinery & Explosives (P) Ltd. v. CIT (1993) 202 ITR 710 (Cal), CIT v. Cochin Refineries Ltd. (1988) 173 ITR 461 (Ker) at pp. 13 and 14 and extract at p. 10 of the paper book refers.

Therefore, under no circumstances can these expenses be allowed as a revenue expenditure in the asst. yr. 1996-97.

5. These expenses have resulted in a benefit of enduring nature (4th paragraph on p. 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 (refer Palkhiwala at p. 10 of the paper book). This clearly makes them capital in nature.

6. The expenses are not recurring expenses to be incurred on day-to-day 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 straight jacket of judicial interpretations based on technicalities (top of p. 9 of the paper book refers). The commercial practice, which is to treat the membership card as a commercial right which is transferable, has been taken note at p. 96 of the assessee's paper book (paragraph No. 30). This contrasts sharply with the judicial view expressed as obiter in Stock Exchange, Ahmedabad v. Asstt. CIT (supra). Moreover, the commercial view is in harmony with the legislative intent as expressed in Section 47(xi). In view of this, the view taken by the Hon'ble Mumbai Tribunal in (2002) 76 TTJ (Mumbai) 823 : (2002) 82 ITD 573 (Mumbai) (supra) does not appear to be correct. On the contrary the view taken by the Hon'ble Tribunal Calcutta 'A' Bench in Asstt. CIT v. Ajoy Bhauwala (supra), appears to be the correct view.

8. The general commercial and tax practice is to treat profit on sale of Stock Exchange ticket as capital gains. Therefore, Stock Exchange ticket or membership is a capital asset and expenses incurred in acquiring it cannot be allowed as a revenue expenditure.

(Refer Murarka's case at p. 20 of the paper book top paragraph).

This case clearly brings out that Stock. Exchange ticket is transferable and that too at a huge price. The resultant profit is taxable as capital gains.

9. Even if the membership of Stock Exchange is only an inalienable personal permission, merely because legally it is not considered to be an alienable property, does it mean expenses incurred for acquiring it are not capital expenses 10. As regards Calcutta High Court decision in Naskarpara. Jute Mills Ltd. mentioned in para 3.2 at p. 3 of the assessee's paper book : (i) Let a copy of the decision be filed to ascertain the basis on which it was held to be a revenue expenditure; and (ii) Let a copy of by-laws and rules of the Jute Exchange be provided and compared with the by-laws of Calcutta Stock Exchange as discussed in Asstt. CIT v. Ajoy Bhauwala (supra).

11. Sports Clubs and Indian Institute of Foreign Trade also mentioned in para 3.2 at p. 3 of the assessee's paper book cannot be compared to a Stock Exchange.Stock Exchange, Ahmedabad v. Asstt. CIT (supra) mentioned in the top para 3.2 at p. 3 and pp. 70 to 76 of the assessee's paper book-the facts and the issues are entirely different. The IT Department wanted to attach the Stock Exchange ticket of a deceased trader, which has already vested in. the Stock Exchange. It was held that under the circumstances the ticket could not be attached. Secondly, and more importantly, the question answered, in this case as obiter, was whether Stock Exchange ticket is a property However, the question before us is 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 Dy. CWT and Ors. v. Ashwin C. Shah and Ors.

13. Assessee has relied upon certain cases before the AO (para 3.5 of the order), but these cases are not apposite : (i) CIT v. Aquapump Industries (supra) : 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.Alembic Chemicals Works Co. Ltd. v. CIT (supra) the company was already manufacturing penicillin. Subsequently, it acquired license 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 operations of the institution (see p. 38 of assessee's paper book) is akin to training imparted to employees for learning the operation of a new machinery. Here the training cost has to be capitalized. In this context, I rely upon McGaw Ravindra Labs (supra) (pp. 28 and 29 of the paper book) where expenditure on training an employee for manufacturing a new product, was held to be a capital expenditure.

15. In respect of it's claim that training expenses are of revenue nature, in para 5 of written submissions, assessee has relied upon Motor Sales v. CIT (supra). But in this case the assessee was an existing dealer in motor sales. He took a new dealership for Mercedes cars. For this purpose staff was sent for training. In our case the business of stock trader is a new business. Therefore, this case is distinguishable on facts.

16. Payment to VSAT has been appropriated in the subsequent years.

Therefore, at best it can only be allowed in the years of appropriation. However, as it was for setting up the structure of the new business to do on-line trading, it falls squarely in the domain of capital expenditure.

17. To sum up, the only question to be decided viz., whether expenses incurred for obtaining membership of a Stock Exchange are capital or revenue in nature, has only been decided by the Hon'ble 'A' Bench, Kolkata in Asstt. CIT v. Ajoy Bhauwala (supra). There is no reason why it should not be followed.

The following clarifications/points were made by Mr. S.K. Tulsiyan in his reply to the arguments of the learned CIT(Departmental Representative) : (i) He clarified that expenses incurred were not pre-operative expenses before commencement of the business of share broking. He submitted that the business of share and stock trading and brokerage had already commenced during the year and the expenses were incurred for the purpose of carrying on operations in stock broking on the floor of the concerned Stock Exchanges. He further submitted that there is no such finding by the AO that the expenses in question were incurred before the commencement of assessee's business or before the business was set up. It is never the case of the AO as now raised by the learned CIT (Departmental Representative) (ii) That the expenses in question incurred by the assessee have never resulted in a benefit of such an enduring nature so that these can be held capital in nature. He reiterated his contention that the concepts of payment made 'once and for all' and of 'enduring benefit' must respond to the changing 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 breaks down.

(iii) He reiterated that decisions relied on by him are relevant and applicable to the facts and circumstances of the present case.

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 depend on the facts and circumstances of the case. The various tests or principle or criterion formulated by various decisions must be applied with proper regard to the facts of each case.

No strict norms can be settled to decide the issue in a particular case. The same is to be decided in the pecularities and circumstances of that case on application of general principle or tests or criterion laid down by the Courts from time to time. The general tests to be applied to distinguish capital expenditure from revenue expenditure have been enumerated in various decisions. There is no difficulty in enumerating those tests. But the difficulty arises when the Courts are called upon to apply those tests to a given set of facts. Barring rare exceptions, the facts of no two cases are similar.

7.2 In a nutshell, it may be said that no one test or principle or criterion is paramount or conclusive or of universal application. Each factor by itself is not decisive. Ultimately, the question will have to depend on the facts and circumstances of each case. It is the totality or cumulative effect of all the facts and circumstances that would afford the prime guiding factor.

Test of bringing into existence an asset or advantage of enduring benefit 7.3 One of foremost or general tests is of bringing into existence an asset or advantage of enduring benefit.

7.4 The leading authority of English cases on the test of "enduring benefit" is the decision in the case of Atherton v. British Insulated & Helsby Cables Ltd. (1926) AC 205 (HL) : (1925) 10 Tax Cases 155, 192-193 (HL) where Viscount Cave, LC, observed : "But there remains the question, which I have found more difficult whether apart from the express prohibitions, the sum in question is [in the words used by Lord Summer in Usher's case (1914) 6 Tax Cases 399] a proper debit item to be charged against incomings of the trade when computing the profits of it; or, in other words, whether it is in substance a revenue or a capital expenditure. This appears to me to be a question of fact which is proper to be decided by the Commissioners upon the evidence brought before them in each case; but where, as in the present case, there is no express finding by the Commissioners upon the point, it must be determined by the Courts upon the materials which are available and with due regard to the principles which have been laid down in the authorities. Now, in Villambrosa Rubber Co. v. Farmer (1910) AC 519 : 5 Tax Cases 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 say 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 record 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's test should be given its due significance. The Viscount Cave's test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion. The test of enduring benefits is not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.

7.5 In this connection, making reference to the following decisions would be useful: (i) The Hon'ble Supreme Court in case of Punjab State Industrial Development Corporation Ltd. v. CIT (supra), referred to above Viscount Cave's test and the decision of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT (supra) and observed as under : "This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion.

Briefly put, it is not a straitjacket formula and the question will have to be determined in the backdrop of facts of each case. The test laid down can at best be a guide for determining whether a particular expenditure forms part of revenue expenditure or capital expenditure." (ii) In Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC), Their Lordships of Supreme Court approved the principles laid down by the Full Bench of the Lahore High Court in Benarsidas Jagannath, In re (1947) 15 ITR 185 (Lahore)(FB). Their Lordships thus observed and held as under: "In Benarsidas Jagannath, In re (1947) 15 ITR 185 (Lahore)(FB), a Full Bench of the Lahore High Court attempted to reconcile all these decisions and deduced the following broad tests for distinguishing capital expenditure from revenue expenditure. The opinion of the Full Bench was delivered by Mr. Justice Mahajan, as he then was, in the following terms : 'It is not easy to define the term 'capital expenditure' in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Nor is it easy to reconcile all the decisions that were cited before us, for each case has been decided on its peculiar facts. Some broad principles can, however, be deduced from what the learned Judges have laid down from time to time. They are as follows : 1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment; vide Lord Sands in IRC v. Granite City Steamship Co. (1927) 13 Tax Cases 1 at p. 14. In City of London Contract Corporation v. Styles (1887) 2 Tax Cases 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 & Helsby Cables Ltd. (1926) AC 205 (HL): (1925) 10 Tax Cases 155 (HL). If what is got rid of by a lumpsum payment is an annual business expense chargeable against revenue, the lumpsum payment should equally be regarded as a business expense, but if the lumpsum 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 deducted out of the profits by claiming that it relieves the annual labour bill, the business, has acquired a new asset, that is, machinery.

The expressions 'enduring benefit' or 'of a permanent character' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset.

3. Whether, for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it." This synthesis attempted by the full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities.

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 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 manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations, it is difficult to lay down a test which would apply to all situations. One has, therefore, got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only, it would be a deductible allowance under Section 10(2)(xv) of the IT Act. The question has all along been considered to be a question of fact to be determined by the IT authorities on an application of the broad principles laid down above and the Courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles.

The expression 'once and for all' used by Lord Dunedin has created some difficulty and it has been contended that where the payment is not in a lumpsum but in instalments, it cannot satisfy the test.

Whether a payment be in a lumpsum or by instalments, what has got to be looked to is the character of the payment. A lumpsum payment can as well be made for liquidating certain recurring claims which are clearly of a revenue nature, and on the other hand payment for purchasing a concern which is 'prima facie' an expenditure of a capital nature as well be spread over a number of years and yet retain its character as a capital expenditure. (Per Mukherjea, J., in CIT v. Piggot Chapman & Co. (1949) 17 ITR 317 (Cal) at 329). The character of the payment can be determined by looking at what is the true nature of the asset which has been acquired and not by the fact whether it is a payment in a lumpsum or by instalments. As was otherwise put by Lord Greene, M.R., in Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd. (1942) 24 Tax Cases 453 : (1942) 2 KB 184 : (1943) 11 ITR Suppl. 10 (CA) : 'The thing that is paid for is of a permanent quality although its permanence, being conditioned by the length of the term, is shortlived. A payment of this character appears to me to be all into the same class as the payment of a premium on the grant of a lease, which is admittedly not deductible.

The case of Tata Hydro-Electric Agencies Ltd. v. CIT, Bombay Presidency & Aden (1937) 64 IA 215 : (1937) 5 ITR 202 (PC), 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 Company Ltd. v. Dale (1932) 1 KB 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 of trade at a comparatively early date." Lathnam, C.J. observed in Sun Newspapers Ltd. & Associated Newspapers Ltd. v. Federal Commissioner of Taxation (61 CLR 337 at 355) : "When the words 'permanent' or 'enduring' are used in this connection it is not meant that the advantage which will be obtained will last forever. The distinction which is drawn is that between more or less recurrent expenses involved in running a business and an expenditure for the benefit of the business as a whole'......

e.g.......-'enlargement of the goodwill company'- 'permanent improvement in the material or immaterial assets of the concern.' To the same effect are the observations of Lord Greene, M.R., in Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd. (supra) above referred to." (iii) In the case of Empire Jute Co. Ltd. v. CIT (supra), their Lordships of the Supreme Court have held thus : "In the first place, it is not a universally true proposition that what may be a capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer. It was felicitously pointed out by Macnaghten J. in Racecourse Betting Control Board v. Wild (1938) 22 Tax Cases 182 (KB), that a "payment may be a revenue payment from the point of view of the payer and a capital payment from the point of view of the receiver and vice-versa'. Therefore, the decision in CIT v. Maheshwari Devi Jute Mills Ltd. (1965) 57 ITR 36 (SC) case cannot be regarded as an authority for the proposition that payment made by an assessee for purchase of loom hours would be capital expenditure, Whether it is capital expenditure or revenue expenditure would have to be determined having regard to the nature of the transaction and other relevant factors." "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 v. British Insulated & Helsby Cables Ltd. (1926) AC 205 (HL) : (1925) 10 Tax Cases 155 (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 leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC), 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, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature required 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 a given case." "When dealing with cases of this kind where the question is whether expenditure incurred by an assessee is capital or revenue expenditure, it is necessary to bear in mind what Dixon J. said in Hallstorm's Property Ltd. v. Federal Commissioner of Taxation (72 CLR 634) : "What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process". The question must be viewed in the larger context of business necessity or expediency. If the outgoing expenditure is so related to the carrying on or the conduct of the business, that may be regarded 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 of the carrying on of the business, the expenditure may be regarded as revenue expenditure. [See Bombay Steam Navigation Co.

(1953) (P) Ltd. v. CIT (1965) 56 ITR 52 (SC)] the same test was formulated by Lord Clyde in Robert Addie & Sons' Collieries Ltd. v. IRC (1924) 8 Tax Cases 671 (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 & Son v. Moore (1921) 12 Tax Cases 266 (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 Co. Ltd. (1988) 172 ITR 257 (SC) referred to the decision in the case of Empire Jute Co. Ltd. v. CIT (supra), Assam Bengal Cement Co.

Ltd. v. CIT (supra), Atherton v. British Insulated & Helsby Cables Ltd. (supra) and Benarsidas Jagannath, In re (supra) and, thus, observed : "In the judgment appealed against, the learned Judges have referred to the dictum of Viscount Cave L.C., in Atherton v. British Insulated & Helsby Cables Ltd. (1925) 10 Tax Cases 155 (HL), which runs as follows: '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 Division Bench further pointed out that this dictum was stated with approval by this Court in Assam Bengal Cement Co. Ltd. v. CIT (supra), where this Court, inter alia, approved the decision of a Full Bench of the Lahore High Court in Benarsidas Jagannath, In re (supra), holding that 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 the trade. If, on the other hand, what is got rid of by lumpsum payment is an annual business expense chargeable against revenue, the lumpsum payment should equally be regarded as a business expense, but if the lumpsum payment brings in a capital asset, then that puts the business on another footing altogether.

The Division Bench also took into account the fact that the assessee was already running a cement factory at Shahabad and that it was not as if the expenditure incurred was in connection with the starting of a new business........

As observed by the Supreme Court in the decision in Empire Jute Co.

Ltd. v. CIT (supra), there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, 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 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 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.Alembic Chemical Works Co. Ltd. v. CIT (supra), the Hon'ble Supreme Court after applying the principle laid down by Supreme Court in the case of Empire Jute Co. Ltd. v. CIT (supra), CIT v. Associated Cement Co. Ltd. (supra) and Assam Bengal Cement Co. Ltd. v. CIT (supra), has observed as under: (i) "It would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology 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 science.

The state of the art in some of these areas of high priority research is constantly updated so that the know-how could not be said to bear the element of the requisite degree of durability and nonephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeonholing an outlay, such as this, as capital." (ii) "In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation.

However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants; but as masters they tend to be overexacting." (iii) "The question in each case would necessarily be whether the tests relevant and significant in one set of circumstances are relevant and significant in the case on hand also. Judicial metaphors are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it." The idea of "once for all" payment and "enduring benefit", are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal varieties but must needs be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.

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 commonsense way, having regard to the business realities. In a given case, the test of "enduring benefit" might break down.

In the said case, Viscount Cave's test laid down in British Insulated & Helsby Cables Ltd. v. Atherton (supra) was taken note of.

(vi) In the case of CIT v. Cominco Binani Zinc Ltd. (1993) 204 ITR 56 (Cal), 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 Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC), it was held by the Supreme Court at p. 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, none the less, 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 & Helsby Cables Ltd. (1925) 10 Tax Cases 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 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 a given case".

(vii) In the case of Bikaner Gypsums Ltd. v. CIT (1991) 187 ITR 39 (SC), their Lordship of Supreme Court held that where the assessee has an existing right to carry on a business, any expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction or disability, would be on revenue account, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the business, but that by itself would not acquire any capital asset.CIT v. Madras Auto Service (P) Ltd. (1998) 233 ITR 468 (SC), has held as under: "The general principles applicable in determining whether a particular expenditure is capital or revenue expenditure, are as follows : (1) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment; (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. If what is got rid of by a lumpsum payment is an annual business expense chargeable against revenue, the lumpsum payment should equally be regarded as a business expense, but if the lumpsum payment brings in a capital asset, then that puts the business on another footing altogether; (3) Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital".

It was further held by the Hon'ble Supreme Court on the facts of that case as under: "All these cases have looked upon expenditure 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 (Bom), 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 profession, is allowed in computing the income chargeable under the head "profits and gains of business or profession", provided it is not in the nature of capital expenditure or personal expenses of the assessee. The line that divides revenue expenditure from capital expenditure is often very thin and hazy. None of the tests evolved from time to time to determine what is attributable to capital and what to revenue is either exhaustive or of universal application. Each case depends on its own facts. To decide, therefore, on which side of the line the expenditure falls, it is necessary to look at the nature of the business, the nature of the expenditure and the nature of the right acquired. If it is incurred by the assessee for the purpose of creating, curing or completing his title to capital, it must be regarded as capital expenditure. But, if it is for the purpose of protecting his business, it would be considered as revenue expenditure. Moreover, it is the true nature of the expenditure that is relevant and not the description given to it by the assessee in his books of account or other documents".CIT v. Kalinga Otto (P) Ltd. (1983) 139 ITR 710 (Cal) has observed and held as under: "Expenditure incurred for bringing into existence an asset or advantage of enduring benefit would be of a capital nature. However, the expression "enduring or abiding benefit" is not a static expression. An asset or advantage may endure for the duration of the business of the assessee or for the duration of a contract. The question whether the advantage was of an enduring or transient nature has to be decided on considering the nature of the asset or advantage in the context of the trade in question.CIT v. Metal Corporation of India Ltd. (1982) 133 ITR 130 (Cal), the Hon'ble Calcutta High Court has held as under: "Whether a particular expenditure is revenue expenditure incurred for the purpose of a business must be determined on a consideration of all the facts and circumstances, and by the application of the principles 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 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 (Cal), 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 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 should be regarded as a revenue expenditure incurred wholly and exclusively for the purposes of the business".

"Held, that, in view of the admitted position that serving of hot drinks to stewards, etc., by the race club on race days was on age-old custom in the field of racing and such drinks were served in order to enable the employees to put forth their best efforts in making all the arrangements to ensure the smooth conduct of the race, such an expenditure is incidental to the trade and as such the expenditure was incurred wholly and exclusively for the purposes of the business. The disallowance of Rs. 40,000 could not be sustained".CIT v. British India Corporation Ltd. (1987) 165 ITR 51 (SC), the Hon'ble Supreme Court on the facts of that case has held that the payment of Rs. 50,000 for meeting initial expenses for establishing the distributorship, had to be considered to be a revenue expenditure by observing and holding as under: "The respondent-company, which carried on, inter alia, the business of tanning hides and manufacture of leather products, entered into an agreement with CW & Co. of London, whereby CW & Co. agreed to permit the respondent to use a number of registered trade marks and to disclose the technique, practices and application of specialised tanning process. The agreement was for seven years and the respondent agreed to pay CW & Co. technical fees calculated at 5 per cent of the selling price of its products produced by the processes disclosed to it. Clause 7 of the agreement further provided that the respondent was to appoint TGS, a private company, as its distributor for sale of industrial leather manufactured by it for the period of the agreement at a discount of 15 per cent, and in addition to pay the distributor Rs. 50,000 for meeting initial expenses of establishing the distributorship. The respondent entered into an agreement with TGS in which it was stipulated that the distributor would receive a discount of 15 per cent, of the sale price and that the agreement would extend for the period of seven years but no reference was made to the respondent's obligation to pay Rs. 50,000 to TGS. In computing its profits for the calendar year 1958, relevant to the asst. yr. 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 set-up under the distributorship agreement was to endure only for seven years and upon expiry of that period, the respondent had no relationship with that organisation 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".CIT v. Coal Shipments (P) Ltd. (1971) 82 ITR 902 (SC), the Supreme Court held that although "enduring benefit" need not be of an everlasting character for the expenditure to be held as of capital character, it should not be so transitory and ephemeral that it can be terminated at any time at the volition of any of the parties. The Hon'ble Supreme Court further held in this case that payment made to ward off competition in business to a rival would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time; the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. How long the period of contemplated advantage should be, in order to constitute enduring benefit, would depend on the circumstances and the facts of each individual case. It was further held that although an enduring benefit need not be of an everlasting character, it should not be so transitory and ephemeral that it can be terminated at any time at the volition of any of the parties.

(xiv) A long line of decisions have laid down that when an expenditure is made with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is good reason (in the absence of special circumstances leading to the opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. [See CIT v. Ashok Leyland Ltd. (1972) 86 ITR 549 (SC)]. But a payment made to remove the possibility of a recurring disadvantage cannot be considered as payment made to secure an enduring advantage [See CIT v. Ashok Leyland Ltd. (supra)].

(xv) In the case of Bengal & Assam Investors Ltd. v. CIT (1983) 142 ITR 156 (Cal), the Hon'ble Calcutta High Court has held that it is also necessary to reiterate that whether the expenditure yielded any result or proved abortive is not always a determinative factor. What is determinative of the question is the object and purpose of incurring the expenditure. Any expenditure which facilitates only the business to go on more profitably or to make earning of the profit would undoubtedly be a revenue expenditure. But the difficulty arises where the expenditure, apart from yielding profit, brings in an asset of an enduring nature or makes such basic alterations 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 lumpsum 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 lumpsum 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. [See M.K. Bros. (P) Ltd. v. CIT (1972) 86 ITR 38 (SC) and CIT v. India Tobacco Co. Ltd. (1978) 114 ITR 182 (Cal)].

(xvii) It is the true nature of the expenditure that is relevant and not the name or description given to it by the assessee in his books of account or other documents [See Minoo F. Mehta v. CIT (supra)].

(xviii) In the case of CIT v. Berger Paints (India) Ltd., the Hon'ble Calcutta High Court has held that it is now settled law that if according to the revenue laws, the assessee is entitled to treat a sum as a revenue expenditure, then that legal right of the assessee is not self-estopped by the treatment given by the assessee to it in its own books of account.

(xix) The nature of a receipt as capital or revenue is not always determinative of the nature of the outgoing in the hands of the person who pays for it. It is said, and truly said, that whether payment is a revenue payment or a capital payment, may depend upon the angle from which one looks at it-the payment may be a revenue payment from the point of view of the payer and a capital payment from the point of view of the receiver and vice versa. [See CIT v. Ciba of India Ltd. (1968) 69 ITR 692 (SC), Empire Jute Co. Ltd. v. CIT (supra)].

7.6 From these abovereferred decisions, we may draw the following general principles : (1) In the indefinite variety of situational diversities in which the. concept of what is capital expenditure and what is revenue, arises, it is well nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation.

However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay, in any particular case, might reasonably be held to fall. These tests are generally efficacious and serve as useful servants, but as masters they tend to be over exacting.

(2) The test of enduring benefit is not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. The test laid down can at best be a guide for determining whether a particular expenditure forms part of revenue expenditure or capital expenditure.

(3) It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle 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 benefit" might break down.

(7) Outgoings on account of capital or revenue depends effectively on practical and business point of view rather than upon juristic classification of the legal rights, if any, secured employed or exhausted in the process and the question must be viewed in the larger context of business necessity or expediency.

(8) The idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal varieties but needs to be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.

(9) By 'enduring' is meant 'enduring in the way that fixed capital endures' and it does not connote a benefit that endures in the sense that for a good number of years, it relieves the assessee of a revenue payment or a disadvantage. A payment made by the assessee to free himself from a capital liability, is capital expenditure, while a payment which frees an assessee from the liability to make recurring revenue payments or annual revenue payments, is revenue expenditure.

(10) Where the assessee has an existing right to carry on a business, any expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the business, but that by itself would not acquire any capital asset.

(11) 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 business as distinguished from a recurring expenditure in the nature of operational expenses.

(12) If the expenditure is for the initial outlay or for acquiring or bringing into existence an asset or advantage of an enduring benefit to the business that is being carried on, or for extension of the business that is going on, or for a substantial replacement 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 of expenditure would not cease to be so or alter into the nature of a revenue expenditure.

(17) A lumpsum amount for liquidating recurring claims would not cease to be revenue expenditure or get converted into capital expenditure merely because its payment is spread over a number of years. It is the intention and object with which the asset is acquired, that determines the nature of the expenditure incurred over it, and not the method or the manner in which the payment is made, or the source of such payment.

(18) If the expenditure is recurring and is incurred during the course of business or manufacture, it would be revenue expenditure.

(19) Simply because the payment in the hands of the recipient has been considered as capital receipts, it is not necessary that in all cases it will have the same character in the hands of the person who has made the payment and vice versa. Whether a payment is a revenue payment or a capital payment depends upon the angle from which one looks at it.

(20) It is true nature of the expenditure that is relevant and not the mark or description or treatment given to it by the assessee in his books of account or other documents.

7.7 From foregoing discussion it is clear that the test of enduring benefit is not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. Thus, in those cases, where the test of enduring benefit is of no avail, 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. As held by their Lordship of Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT (supra), we may observe that if expenditure incurred 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 the Revenue expenditure. In the case of Assam Bengal Cement Co. Ltd. v. CIT (supra), the Hon'ble Supreme Court further observed that the test of 'enduring benefit' and the test of "fixed or circulating capital" are mutually exclusive and have to be applied to the facts of each case in the manner indicated by them as under: 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 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 has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations, it is difficult to lay down a test which would apply to all situations.

One has, therefore, got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under Section 10(2)(xv) of the IT Act. The question has all along been considered to be a question of fact to be determined by the IT authorities on an application of the broad principles laid down above and the Courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles.

7.8 With regard to test of fixed or circulating capital, Their Lordship of Supreme Court in the case of Empire Jute Co. Ltd. v. CIT (supra) has observed as under: "Another test which is often applied is the one based on the distinction between fixed and circulating capital. This test was applied by Lord Haldane in the leading case of John Smith & Son v. Moore (1921) 12 Tax Cases 266 (HL) where the learned law Lord drew the distinction between fixed capital and circulating capital in words which have almost acquired the status of a definition. He said: "Fixed capital is what the owner turns to profit by keeping it in his own possession; circulating capital is what he makes profit of by parting with it and letting it change masters." Now, so long as the expenditure in question can be clearly referred to the 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. (supra), 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 income is to be the produce or fruit remains the same; it is not enlarged. We are not sure whether loom hours can be regarded as part of circulating capital like labour, raw material, power, etc., but it is clear beyond doubt that they are not part of fixed capital and hence, even the application of this test does not compel the conclusion that the payment for purchase of loom hours was in the nature of capital expenditure." 7.9 The test of fixed and circulating capital also sometimes breaks down because there are many forms of expenditure which do not fall easily within these two categories. Moreover, there may be cases where expenditure, though referable to or in connection with fixed capital, is nevertheless, allowable as revenue expenditure, e.g., an expenditure for preserving and maintaining capital asset as pointed out in the case of Empire Jute Co. Ltd. v. CIT (supra). Similarly, interest paid on the unpaid purchase price of a capital asset after the commencement of business is allowable as business expenditure. Likewise, a guarantee commission paid to a bank for guaranteeing deferred payment of the purchase price of a capital asset is revenue expenditure, as held by Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation v. CIT (supra) and by Bombay High Court in the case of Taparia Tools v. Jt. CIT (2003) 260 ITR 102 (Bom).

Broadly speaking, if the expenditure is for the initial outlay or for acquiring or bringing into existence an asset or advantage of an enduring benefit to the business that is being carried on, or for extension of the business that is going on, or for a substantial replacement of an existing business assets, it would be capital expenditure. 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. The initial outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment. However, this test should be applied with great care and circumspection, because expenditure for the initiation or extension of a business can easily be regarded as revenue in nature. The question is to 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.

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 CIT v. Associated Cement Co. Ltd. (supra), where under 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 1038 (Raj), the expenditure incurred on the construction of a fountain resulting in beautification of a traffic island was held deductible as the property so constructed did not belong to the assessee and such expenditure was incurred to advertise the name of the assessee and the line of the business it carried on.

(iii) Where the assessee changed over from direct to alternating current, the cost of laying new cables which became the property of the Municipal Authority was held to be on revenue account in the case of Hindustan Times Ltd. v. CIT (1980) 122 ITR 977 (Del).

(iv) To the assessee, who set up a new manufacturing unit and paid the electricity board, the cost of providing an overhead service line which was to remain the property of the board, the payment was allowed as revenue expenditure. [See CIT v. Excel Industries Ltd. (1980) 122 ITR 995 (Bom) SLP rejected (133 ITR (St) 54), CIT v. Gujarat Mineral Development Corporation (v) The premium paid by the assessee to a Government corporation to enable the Corporation to lay pipe line for supplying water to the assessee's factory was held to be a revenue expenditure. [See CIT v. National Machinery Manufacturers Ltd. (1991) 191 ITR 483 (Bom) and CIT v. Bharat Commerce & Industries Ltd. (1990) 184 ITR 90 (Del)].

(vi) The contribution made by a sugar mill towards the boring of wells and construction of godown on the land belonging to cane growers was held to be on revenue account in the case of R.B. Narayan Singh Sugar Mills (P) Ltd. v. CIT (vii) In CIT v. Madras Auto (supra), the Hon'ble Supreme Court allowed as revenue expenditure the entire cost incurred by the assessee on the construction of a building on the land taken on a long lease by the assessee since the building, though constructed by the assessee, was to belong to the lesser, and the assessee did not acquire any capital asset.

(viii) Expenditure on installation of computers not owned by the assessee but taken on hire, is allowable as being of revenue nature as held in the case of CIT v. Alembic Chemical (supra).

(ix) Payment made by the assessee, by whatever name called, for making use of network owned by Department of Telecommunications and for services utilised for purpose of business was considered 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 utilisation of network facilities and, therefore, the same was held as an allowable expenditure under Section 37(1) of the Act by the Tribunal, Mumbai Bench 'D' in the case of Videsh Sanchar Nigam Ltd. v. Jt. CIT (supra).

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 insofar 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 enumerated in foregoing paragraphs is to be applied to decide whether the items involved in this case are of capital or revenue in nature.

With regard to preliminary contention raised by the learned CIT (Departmental Representative) appearing for the Department, that expenses claimed by the assessee are in the nature of pre-operative expenses before commencement of the business of share broking, we find that no such case is made out by the AO as is evident from AO's observation and discussion made in the assessment order. The reason for rejecting the assessee's claim as given by the AO and CIT(A), is that the expenses incurred were of capital in nature. Admittedly, there is a finding by the AO that this is the first year of assessee's business and the assessee is engaged in the business of share trading and share brokerage, but there is no such allegation of the AO that expenses claimed by the assessee were incurred before set-up or commencement of assessee's business of share trading and share brokerage during the year. As stated by the AO himself, the assessee was engaged in the business of share trading and share brokerage in this year. The certificate for commencement of business granted by Registrar of Companies to the assessee on 14th Feb., 1995 reveals that the assessee was entitled to commence business on 14th Feb., 1995. The assessee effected purchase and sales of shares amounting to Rs. 3,82,76,905 and Rs. 3,93,62,811 respectively during the year in question. The assessee's business of share trading had already set up or commenced before the assessee had incurred the expenses in question, The Department has not pointed out any evidence to show and establish that the assessee's business of share trading or brokerage were not set up before incurring the expenses in question. In this connection, we may point out that the Revenue law requires that the business should have been set up, before expenditure could be booked or claimed. Outlay is deemed to be capital when it is made for the initiation of a business.

But this test should be applied with regard to the facts and circumstances of a given case. There has been some controversy as to the criteria for deciding, when the business has been set up. The principle, in 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. [See CIT v. Sarabhai Management Corporation Ltd. (1991) 192 ITR 151 (SC), Western India Vegetable Products Ltd. v. CIT (1954) 26 ITR 151 (Bom), Prem Conductors (P) Ltd. v. CIT(Guj), CIT v.Western India Seafood (P) Ltd. (1993) 199 ITR 777 (Guj) and CIT v.Electron India; (2000) 241 ITR 166 (Mad)]. In the case of CIT v. Stones & Mineral Associated Ltd. (2002) 257 ITR 479 (Raj), it was held that expenditure incurred for procuring materials for export should ordinarily be business expenditure, even if the assessee had not started his export business. In this case, the Hon'ble Rajasthan High Court endorsed the finding of the Tribunal, that the business should have been treated as having been set up during the year, so as to make the assessee eligible for the deduction, though there were no purchases nor export during the year, but only expenditure for procurement of the materials.

7.14 In this connection, certain guidelines approved by the Hon'ble Supreme Court in the case of CIT v. Sarabhai Management Corporation Ltd. (supra), are useful to be taken note of. It was held therein that, "However, the High Court has pointed out rightly, in our opinion, that in this case, the Tribunal has proceeded on a misapprehension regarding the nature of the assessee's business. It has analysed the various component activities of the assessee's business and pointed out that two categories of the activities of the business had been carried on during the previous year in question. The assessee had purchased a property; it was on the look out for persons to whom it could be let out; it had been able to get a customer; and it had carried out repairs, rewiring, installation of lift and other steps in the process of getting the premises converted from a residential house into a business and storage accommodation, conforming to the requirements of the customer. Even if, as submitted by Dr. Gauri Shankar, the first category of activity referred to by the High Court, viz., the acquisition of a property for being let out can be said to be only a preparatory state (analogous to the acquisition of buildings, plant and machinery in a manufacturing business), the subsequent activities certainly constitute activities in the course of the carrying on of the assessee's business, It would not be correct, as rightly pointed out by the High Court, to treat the assessee as having commenced its business only when the licensee or lessee occupied the premises or started paying rent. In these circumstances, we are of the opinion that the High Court was right in interfering with the finding of the Tribunal which was 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 (AP) 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 (supra), the question before the Bombay High Court was as to when a business could be said to have been set up within the meaning of the expression under Section 2(11) of the Indian IT Act, 1922. The Bombay High Court pointed out that there was a clear distinction between a person commencing a business and a person setting up a business. The relevant question which would fall for consideration under Section 2(11) of the Act was the setting up of the business and not the commencement of the business and it was only when a business was established and was ready to commence business, then it could be said that the business was set up, but before it was ready to commence business it could not be said to have been set up.

"That is why it is important to consider whether the expression used in the Indian statute for setting up a business is different from the expression, Mr. Justice Rowlatt was considering, viz., 'commencing of the business', It seems to us that the expression 'setting up' means, as is defined in the Oxford English Dictionary, 'to place on foot' or 'to establish', and in contradistinction to 'commence'. The distinction is this that when a business is established and is ready to commence business then, it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions under Section 10(2)."CIT v. Prem Hotel (P) Ltd. "In the case of CWT v. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478 (SC), a somewhat similar question arose before the apex Court in the context of the provisions of the WT Act, 1957, wherein Bhargava J., speaking for the Court, observed as under (at p. 481): 'A unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organisation, that it can be said that the unit has been set up'.

It follows, 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.Prem Conductors (P) Ltd. v. CIT (supra), 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 business activity of securing orders had practically started since the very date of the incorporation of the company, it was obvious that the business activity of this company started from the day of its incorporation and not from the day when the production of aluminium conductors commenced. As pointed out in Sarabhai Management Corporation Ltd.'s case (supra), what was material was the date when the company went into one or the other business activity and started one or the other component business activities of the company.CIT v.Western India Seafood (P) Ltd. (supra), held that "when a business is established and is ready to commence business, then it can be said of that business that it is set up. The words "ready to commence" would not necessarily mean that all the integrated activities are fully carried out and/or wholly completed. The requirement is also complied with in a given case where an assessee had undertaken the first of the kind of integrated activities which the business is overall comprised of. It is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up. The test to be applied is as to when a businessman would regard a business as having commenced and the approach must be from a common sense point of view. The question whether a business has been set up or not is always a question of fact which has to be decided on the facts and in the circumstances of each case." In the light of the settled legal position, the Hon'ble High Court decided the question before them as under: "In the light of the aforesaid settled legal position, therefore, it is easy to visualise that for the setting up of the business of processing marine products, the assessee, during the assessment year in question, had to make all preparations and had also to provide on the spot the necessary infrastructure. Even conceding that entering into advance contracts with fishermen for collection of fish during the monsoon season may not be taken as a first step towards setting up of business, at least from 15th Aug., 1970, when the assessee acquired a godown where the processing of marine products could start when fish became available after the monsoon, it can be said 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 AAC that the expenditure incurred by the assessee after 15th Aug., 1970, and before 6th Oct., 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 continuing 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 is said to be set up when it is ready to commence. In the present case, nothing is brought on record to say that the assessee's business of share dealing and share brokerage was not set up or was not ready to commence before the expenditure was incurred.

7.21 In this view of the matter and having regard to the fact that it was not the AO's case that the assessee had incurred the expenditures in question before the business was set up, we find no force in this contention advanced by the learned CIT (Departmental Representative), who has failed to point out any material or evidence in support of his contention. In his written note, he has not referred to any evidence or material to show that the expenditure were incurred before the business was set up or the business was ready to commence except by stating that this is the first year of assessee's business of share dealing and share brokerage.

Claim with regard to the payment of development fee paid to Calcutta Stock Exchange 7.22 An amount of Rs. 70,00,000 on account of development fee paid to Calcutta Stock Exchange was claimed as an expenditure of revenue in nature. The AO disallowed the same as of capital in nature. The CIT(A) upheld the AO's action.

7.23 We have considered the rival contentions of both the parties. At this stage, it is pertinent to note that a similar issue as to whether the development fee paid to Calcutta Stock Exchange is to be regarded as capital or revenue in nature, had come for consideration before the Hon'ble jurisdictional Calcutta High Court in the case of Rajendra Kumar Bachhawat v. CIT (IT Appeal No. 44 of 2002), where the Hon'ble High Court vide their order dt. 14th Aug., 2002, has held as under: "The assessee paid a sum of Rs. 25 lakhs for development purposes for the purpose of becoming a member of the Calcutta Stock Exchange.

In the assessment years in question viz., 1992-93, 1993-94, the assessee made two types of claims in regard to the said sura.

First, the assessees contention was that the amount is by way of a revenue expenditure and is not by way of capital expenditure.

Secondly, the assessee submitted that it was entitled to dissect the Revenue expenditure of Rs. 25 lakhs, into 10 equal parts of Rs. 2,50,000 each, and claimed deduction thereof in 10 successive assessment 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 IT 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 dt. 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 7.26 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 made to enable the assessee to carry on its business operation in stock broking on the floor of the Exchange in a better way and is, thus, to be regarded as revenue expenditure. The Revenue authorities have rejected the assessee's claim.

7.26 We have considered the rival contentions of both the parties. We have perused the materials on record.

7.27 It is an admitted position that payment of Rs. 1,50,000 for enabling the assessee to operate on the floor of the Exchange is in addition to Rs. 70,00,000 paid as development fee to the Stock Exchange. It is the payment for the use of the system or facilities or services made available to the assessee for the purpose of operating share transaction on the floor of the Stock Exchange. There is no doubt that having an advantage to operate on the floor of the Exchange would certainly facilitate the assessee's business operations of share trading or share brokerage or enable the management and conduct of assessee's business of share dealing and share brokerage to be carried on more efficiently or more profitably while leaving the fixed capital untouched. Though this advantage to operate on floor of the Stock Exchange may endure for an indefinite future, but it is related or connected to the assessee's day-to-day business operations and activities and it helps the assessee in profit-making. This expenditure cannot be held to acquire a capital asset or enduring advantage but is to be held to have incurred for the purpose of carrying on business of share trading and share brokerage. By making the said lumpsum payment towards fees for operating on the floor of the Stock Exchange, the assessee has got rid of annual or recurring business expenses, It does not bring into existence a capital asset. The payment made by the assessee to enable itself to operate on the floor of Stock Exchange is for making use of system of share trading owned and controlled by the Stock Exchange and for services utilised by the assessee for the purpose of carrying on its business more efficiently and profitably.

The mere criteria of payment having made "once and for all" is of no use to hold the same as capital expenditure in the instant case inasmuch as the payment has not been made with a view to bringing into existence an asset or an advantage of enduring benefit in capital field. The test of enduring benefit breaks down in the present case as 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 assessees 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 assessee 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 purpose of removal of restriction or obstruction or disability of not being able to operate on floor of the Stock Exchange.

There is no doubt that with a view to carry on business of share trading and share brokerage more efficiently and profitably in the present scenario of the stock market and working of Stock Exchanges, the operating on the floor of Stock Exchange is very much essential without which it would be difficult to manage and conduct the business of share trading and share brokerage more efficiently or more profitably. The payment is not related or connected to any capital asset which might have acquired by the assessee. It is closely linked to the business of share trading or share brokerage carried on by the assessee during the year under consideration. The payment is not of the same nature as of the development fee paid to Calcutta Stock Exchange to become a member thereof by acquiring one or more share of the said Calcutta Stock Exchange Corporation Ltd. The "member" as defined in Article 1 of the Articles of Association of the Calcutta Stock Exchange Corporation Ltd., means any individual or a company or a financial corporation registered in the register as the owner of one or more shares in the association. Thus, the payment of development fee to become a member of the association and to acquire one or more shares in the Calcutta Stock is on different footing, than that of making payment to operate on the floor of the Stock Exchange. Applying the cumulative effect of all the decisions referred to above in foregoing papers and the principles emerging therefrom to the facts of the present case, and having regard to the nature and object of the payment of fee for operating on the floor of the Stock Exchange, we hold that the payment of Rs. 1,50,000 made to Calcutta Stock Exchange for operating on the floor of the exchange is allowable as being of revenue in nature.

7.28 With regard to the assessee's claim of deduction on account of admission fee of Rs. 6,00,000 and technology cost of Rs. 2,00,000 paid to OTC Exchange of India, the assessee vide its letter dt. 29th Jan., 1998 submitted before the AO that as per the terms and conditions of appointment as a dealer on the OTC Exchange of India, an admission fee of Rs. 6,00,000 was required to be paid, 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 became 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 AO treated the same as of capital in nature. The learned CIT(A) upheld the AO'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 conditions of an appointment as a dealer on the OTC Exchange of India, it is clear that the admission fee as well as the technical cost for imparting training to the assessee's employees was paid for the purpose of dealership of the OTC Exchange of India. The terms and conditions of appointment as a dealer on the OTC Exchange of India are enumerated as under: "1. Your appointment as a dealer and continuation thereof is subject to all information furnished and statements/representations made by you in your application for dealership being found valid and true.

2. Only the applicant or the authorised signatories on the form will be allowed to operate the counter. Documents issued by persons other than the authorised signatories will not be recognised by the OTCEI. 3. OTCEI will prescribe a limit upto which (as a multiple of the net worth committed by you) the total business exposure allowed to be carried out by you on the OTCEI. OTCEI reserves the right to demand security deposit in a manner satisfactory to OTCEI for permitting any business on OTCEI. 4. OTCEI reserves the right to review, from time to time your operations on the exchange as to the level of business and the manner in which the business is conducted.

5. OTCEI, at its absolute and unfettered discretion, reserves the right to review dealership if your dealership or your operations are found to contravene any of provisions of its Bye-Laws, Rules and Regulations.

6. OTCEI will prescribe, from time to time, such code of conduct as it may deem fit and necessary for the smooth operations on the OTC Exchange of India. You will abide by such code of conduct and non compliance of the same may result in review of your dealership.

7. You will be required to comply with Securities Contracts (Regulations) Act & Rules & Multiple Membership Rules. In addition you will also be required to comply with the Guidelines/Enactments, Notification issued/modified by SEBI and Ministry of Finance from time to time.

8. OTCEI reserves the right to prescribe from time to time various Rules and Regulations for smooth operations of the exchange. You will abide by such Rules and Regulations to the satisfaction of the OTC Exchange of India and non-compliance may result in review of your dealership.

9. OTCEI may at its sole discretion increase, from 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 you OTC operations for inspection and, if and when, disciplinary action is initiated against you, 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, as may be required and establish the OTC counter as per specification prescribed from time to time.

16. You will use the OTC infrastructure facilities and equipment only for the purpose for which they are meant, and will not use or allow the same to be used for any other purpose.

17. (A) OTCEI may require two or more operating personnel (hereinafter called 'employee') of the dealer, to undergo such qualification procedure as may-be prescribed. The dealer shall ensure the continuance of such employees, who have qualified through OTCEI's qualification procedure, for the purpose of continuation of such dealership. Such employees shall be in full time employment with the dealer.

(B) In the event of such employees ceasing to be associated with the dealer in respect of the OTC operations, the dealer shall inform OTCEI immediately and employ suitable personnel to operate the counter.

Such personnel shall be required to undergo and qualify within a period of 3 months or such other period as may be deemed fit by OTCEI, such qualification procedures as may be prescribed by OTCEI in this regard from time to time, for the purpose of operating the counter.

(C) OTCEI reserves the right to suspend trading by the counter till fresh appointments are made to the satisfaction of OTCEI. (D) In the event of the dealer failing to employ a qualified person within a further period of three months from the date of the operating personnel leaving the employment or such other period as deemed fit by OTCEI, OTCEI reserves the right to review/suspend the dealership on the expiry of the said period.

(E) OTCEI may permit the personnel to operate the counter before the completion of the qualification procedure, at the sole risk of the dealer for all such failures/mistakes that may arise from counter.

18. (A) You will pay the balance of Rs. 5,00,000 towards the admission fee on or before 15th Sept., 1995.

(B) You will pay the annual dealership fee of Rs. 25,000 as advance for the period September, 1995-September, 1996 by 15th Sept., 1995.

(C) OTCEI reserves the right to increase the annual of dealership fees and to levy other charges as it may deem appropriate.

19. The admission fee of Rs. 6 lakhs is neither refundable nor is the dealership transferable. If the applicant decides or is forced 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 recognised.

OTCEI reserves the right, at 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 Exchange of India, it is seen that the assessee has been appointed as a dealer to operate the counter for conducting the assessee's business as a share-dealer by maintaining the norms as prescribed by the OTC Exchange of India. It is also seen that the assessee was allowed to use the OTC infrastructure facilities and equipment only for the purpose for which these infrastructure facilities and equipment were meant and was not allowed to use for any other purpose. It is also seen that the assessee was required to operate as a dealer on the counter of the OTC Exchange of India by or through employee or employees of the assessee, who had to undergo such a qualification procedure as may be prescribed by the OTC Exchange of India. For the purpose of continuation of such dealership, the assessee was required to employ qualified persons, who have qualified through OTC Exchange of India's qualification procedure. Such employees were required to be in full time employment with the dealer. It is further seen that the admission fee of Rs. 6,00,000 was neither refundable nor was the dealership transferable. If the assessee decides or forced to terminate the dealership or if the OTC Exchange of India terminates the dealership, this fee of Rs. 6,00,000 was not returnable by the OTC Exchange of India. A limit upto which the total business exposure allowed to be carried out by the assessee on the OTC Exchange of India has been prescribed by the OTCEI, and OTCEI reserves their right to demand security deposit in a manner satisfactory to OTCEI for permitting any business on OTCEI. There is no doubt that the security deposit so demanded by OTCEI for permitting any business on OTCEI is on separate footing. The dealer is required to abide by such code of conduct, various Rules and Regulations, guidelines, enactments and notifications, etc. as prescribed from time to time by OTCEI or under other laws for the time being in force, in defiance thereof the dealership may result in for review by OTCEI. It is also seen that holders or donees of the power of attorney given by the assessee are not allowed to operate the OTC counter, except with the prior written consent of the OTC Exchange of India. To allow holders or donees of power of attorney and to execute documents on OTC Exchange was at the sole discretion of the OTC Exchange of India. Considering the totality of the nature of the 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 assessees 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 dealer on OTC Exchange of India does not create in his favour any right or interest in the share capital of the OTC Exchange of India or does not entitle him to acquire one or more share of the OTC Exchange of India as in the case of membership of Calcutta Stock Exchange of India Ltd. where the person admitted as a member of the association shall as condition precedent to his registration as a member acquire one or more share of the association and shall have right for registration of share certificate for one or more share in his favour. Getting appointment as a dealer on the OTC Exchange of India only enables one to do trading of securities through a network of computers of OTCEI dealers, located in different cities, which are connected to the central computer of the OTCEI through a satellite linkup. In this sense, it, thus, helps the dealer in carrying on or running or managing the business of share dealer/dealings or share brokerage efficiently and profitably without creating in his favour any advantage of enduring benefit on capital field.7.31 It is not in dispute that the said dealership was not transferable and neither the admission fee of Rs. 6,00,000 was refundable in any case. Even if the assessee decides or forced to terminate the dealership or if the OTC Exchange of India terminates the dealership, the fee of Rs, 6,00,000 as admission fee was not refundable to the assessee as is clearly evident from the terms and conditions of appointment as a dealer of OTC Exchange of India. Similarly, the payment of technology cost for providing training to the assessee's employees for the purpose of making them qualified as per OTC Exchange of India's qualification procedure is found to be necessary or condition precedent for carrying on day-to-day business as a dealer on OTC Exchange of India and to operate the counter thereof. The aim and object of the aforesaid expenditures are, thus, for carrying on the assessee's business and as such, these are of revenue in nature. On the facts of this case, we find no reason to hold that the assessee has derived an advantage of enduring nature on capital field or otherwise has acquired any capital asset.

7.32 The contention of the learned CIT (Departmental Representative) contending that the expenses in question have resulted in a benefit of enduring nature on capital field is found to be of no merit in the light of the facts and circumstances 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 (Departmental Representative) 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 Departmental Representative that the decision of Hon'ble Supreme Court in the case of CIT v. Associated Cement Co. Ltd. (supra) 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 payments in question as of capital in nature as it is settled that 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 business in capital field as distinguished from a recurring expenditure in the nature of operational expenses. In the present case, the expenditure has been incurred for running the business of share dealing and share brokerage as an integral part of the profit earning process or operation. What is material is the nature and substance of the payment. Here, the purport and object of becoming dealer on OTC Exchange of India is to facilitate the assessee's trading operations or to enable the assessee to carry on its business more efficiently, extensively and profitably in the background of rapidly changing and advancing economic realities of stock business.

7.33 Be it stated here that with regard to non-interest bearing deposit for telex connection and telephone connection, expenditure incurred by a sugar factory on cane development programme, membership fee to be a member of Indian Institute of Packaging, membership fee for being a member of the Indian Institute of Foreign Trade and expenses incurred by a company for getting its share listed on a Stock Exchange, the Board has taken a view that these expenditures may be considered as laid out wholly and exclusively for the purposes of the business and, are as such, allowable as business expenditure under Section 37(1) of the Act as stated in the Board's Circular/Notifications, which have already stated above in para 4.1 hereto.

7.34 Applying the various principles and test as discussed in foregoing paras and in the light of the cumulative effect of all the decisions, we are of the considered view that the payment of admission fee to become a dealer on OTC Exchange of India and to operate the counter, and the payment for imparting training to assessee's employees so as to make them qualified as per guidelines laid down by OTC Exchange of India, are to be held as revenue expenditure. We, therefore, set aside the orders of the authorities below on this issue and allow the assessee's claim of deduction of the aforesaid amount as a revenue expenditure while computing the profit and gains of business of the assessee.

Non-adjustable deposit for membership subscription paid to National Stock Exchange 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 for 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 AO rejected the same by holding it as of capital in nature. The learned CIT(A) upheld the AO's order.

7.36 We have heard both the parties on this issue and have carefully gone through the papers and documents placed in the form of paper book before us. Having perused the papers related to the appointment of membership of National Stock Exchange of India, it is clear that the assessee had applied for Trading Membership of the WDM (Wholesale Debt Market) of National Stock Exchange of India, which was granted based on the written test and the interview held thereafter. However, this Trading. Membership of the WDM (Wholesale Debt Market) of National Stock Exchange of India was granted to the assessee subject to assessee's fulfilling conditions specified by the National Stock Exchange of India Ltd. The letter dt. 26th Dec., 1994 given by National Stock Exchange of India Ltd. to Mr. P.K. Jain, DGM & Company Secretary of the assessee-company is quoted as under: Please refer to your application for Trading Membership of the Wholesale Debt Market of the NSEIL. We are pleased to inform you that based on the written test and the interview held thereafter, it has been decided to grant you membership subject to your fulfilling the conditions as given in Annex. A on or before the dates as stipulated.

You are requested to confirm to us in writing that you accept the offer of admission as a trading member along with the first instalment of Rs. 55 lakhs (Rs. Fifty-five lakhs) towards the advance annual subscription fee, Non adjustable deposit and a part of the interest fee security deposit by a demand draft favouring National Stock Exchange of India Ltd. payable at Bombay. The balance amount of Rs. 55 lakhs (Rupees fifty-five lakhs) towards the interest free security deposit and the VSAT installation and equipment cost, will be payable as indicated in the payment schedule in Annex. B. NSE will provide computerised on-line screen-based trading facilities on equal access basis to all the trading members. The communication link between a PC workstation at your end and mainframe computer located at NSE will 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 along with other attachment is around Rs. 5 lakhs. After your site is ready, NSE will set up the VSATs along with their peripherals at your premises for which you would have to pay a security deposit of similar amount.

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 Annex. A. On complete compliance of the stipulations, trading membership would become effective.

7.37 Fees and deposit 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 lakhsII. Non adjustable deposit for membership subscription and Rs. 25 lakhsIII. Interest-free security deposit Rs. 75 lakhsIV. Securities (with margin) Rs. 50 lakhs The right of trading membership on the Wholesale Debt Market of the National Stock Exchange, is not transferable for a minimum period of five years. Trading members of NSE on the Wholesale Debt Market are required to 'pay subscription fee at the rate of Rs. 5 lakhs per annum.

Besides, a nominal transaction based service charge will be levied on each trading member.

The security deposit cannot be withdrawn for a minimum period of 5 years even if the trading member ceases or discontinues trading on the Wholesale Debt Market segment of the exchange. The margin for different types of securities will be decided by NSEIL Board from time to time.

The security deposit will be included in determining the net worth of the member.

7.38 The controversy that falls for our consideration is with regard to the payment of Rs. 30 lakhs towards non-adjustable deposit for trading membership subscription of the Wholesale Debt Market of the NSEIL. On reading the terms and conditions for granting trading membership of the Wholesale Debt Market of the NSEIL as prescribed by NSEIL, it is seen that the right of trading membership on the Wholesale Debt Market of the NSEIL is not transferable for a minimum period of five years. The membership granted by NSEIL is a trading membership of the Wholesale Debt Market of NSEIL and not a corporate membership in the equity of NSEIL. The person holding trading membership of the Wholesale Debt Market of NSEIL does not acquire or get any share in the NSEIL. The NSEIL as a company has been promoted by the consortium of financial institutions. It is envisaged as a pioneer institution to promote retail trade for debt securities. The NSE has two segments for trading in securities: (1) Capital market segment (equity, debentures and hybrids), and (2) Wholesale Debt Market (WDM) or Money Market Segment (T-bills, CPs, CDs, PSU bonds etc.). The assessee in the present case, has been granted trading membership of the Wholesale Debt Market (WDM), with the help of which the assessee can carry on its business smoothly and efficiently by using the network of computers, which is connected to the central computer of the NSE through a satellite link up. It has facilitated the assessee to do business transactions electronically using the network of computers 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 facilities 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 tool to bring people together, a tool to overcome the barriers of distance and location. These two exchanges aim to provide a genuine nationwide trading reach to investors. Investors or dealers or brokers, far from the city where local or regional Stock Exchanges are located, were at a disadvantage to avail the facilities provided by local or regional Stock Exchanges. But with the NSE and OTCEI investors or dealers or brokers do not need to travel to specified cities/locations. Instead, they merely have to visit their local NSE or OTC dealer and can do trading electronically having transparency of the transaction effected. This screen-based transparency safeguards the interest of investors and dealers and assures them fair dealings. Thus, the controversy before us is to be viewed from the practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency. It would be unrealistic to ignore the rapid changes and advancement brought in the business of dealing in shares, stocks, debts, etc. This area of dealing or operating in shares and securities has undergone vast changes to protect and safeguard the interests of investors, dealers or brokers. The trading membership granted to the assessee enables the assessee to use and utilise the network of NSEIL for its trading operations at a nationwide level so as to facilitate it to carry on business smoothly, extensively, efficiently and profitably. The dealership is also not transferable within first five years. Even if it is allowed to be transferred at a later stage, it is to be made in accordance with the terms and conditions provided by NSEIL. In this process, the assessee has not acquired any capital asset or an advantage of enduring benefit in capital field.7.39 Considering the totality of the facts and circumstances of the case as discussed above and having regard to the nature of trading membership of the Wholesale Debt Market of the NSEIL and nature and character of the payment towards non-adjustable deposit for said trading membership and applying the cumulative effect of all tests and criterians, and of various decisions referred to in foregoing paras in the light of rapidly changing and advancing economic and commercial realities 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.

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 workstation at trading members 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 NSSIL for the purpose of setting up the VSATs along with 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 facilitate the member to have access to on-line screen-based trading facilities on equal access basis by establishing a communication link between a PC work-station at trading member's end and mainframe computer located at NSEIL through satellite. It is also clear that VSATs equipments provided by NSE do not belong to the member. The member is only allowed to use the network owned by NSEIL. The payment towards VSATs is made for services utilised by the member for the purpose of on-line screen-based trading operations. The payment is directly related to the business operation and trading activities carried on by the assessee. To avail the services and facilities for the purpose of on-line screen-based trading operations, is an integral part of the profit earning process and trading operations of the assessee. The reasons given by us while deciding the issue related to the payment of fee for operating on the floor at Calcutta Stock Exchange, payment made to OTC Exchange of India and payment of non-adjustable deposit for membership subscription holding them as of revenue in nature are equally applicable to this item also. Therefore, on the facts so found, it cannot be said by any stretch of imagination that by making payment for availing VSATs facilities and services, the assessee has acquired any capital asset or advantage of enduring benefit in capital field. However, it is noticed by us that out of the deposit of Rs. 10,00,000 for installation of VSATs equipments, the NSE has appropriated or adjusted the following amount towards the charges on year-to-year basis as pointed out by the assessee himself: Financial year VSAT charges recovered 1995-96 1,23,000 On perusal of the said details, it is, thus, clear that an amount of Rs. 1,23,000 towards charges for VSATs services and facilities availed by the assessee is related to the period relevant to the assessment year under consideration. Therefore, the assessee's claim to the extent of Rs. 1,23,000 being revenue expenditure is only found to be allowable in the present assessment year under consideration and rest of the amount are allowable in subsequent years to the extent of such amount as relatable to the respective years. We order accordingly.

7.41 In the result, we answer the question referred to the Special Bench in the manner as indicated above, and thus hold as under : (i) The expenditure towards development fee paid to Calcutta Stock Exchange Association Ltd. is of capital in nature.

(ii) The expenditure towards fees for operating on the floor paid to Calcutta Stock Exchange Association is of revenue in nature.

(iii) The expenditure towards admission fee as a dealer on OTC Exchange of India, and payment of technology cost for providing training to the assessee's employees paid to OTC Exchange of India are of revenue in nature.

(iv) The expenditure towards non-adjustable deposit for admission as a trading member of the Wholesale Debt Market of National Stock Exchange of India and the expenditure towards Very Small Aperture Terminals (VSATs) paid to NSEIL are of revenue in nature.

8. Since there are other grounds of appeal in this case, the records will now be placed before the Division Bench for disposal in accordance with law.


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