ORDER
R.P. Garg, Vice-President
1. This is an appeal by the Revenue against the order of Dy. CIT(A) for asst. yr. 1992-93. The following ground is raised in this appeal:
“That, on the facts and in the circumstances of the case, the learned Dy. CIT(A) has erred in treating the capital expenditure of Rs. 50,000 as a revenue expenditure.”
2. There is delay of 2 days in filing the appeal. We are satisfied that there are sufficient and reasonable cause for such delay in filing the appeal. The delay is condoned and the appeal is disposed of on merits.
3. The assessee was dealing in shares consequent upon his admission to the membership of Calcutta Stock Exchange in the previous year relevant to the asst. yr. 1991-92- He had paid a sum of Rs. 5 lakh to the Calcutta Stock Exchange Association by way of development fees, 1/10th of which was claimed as deduction under Section 35D of the Act.
4. During the course of the proceedings before the AO the assessee also made a claim that it was a fee and consequently, the expenditure was revenue in nature. The AO did not agree with the contention of the assessee. He held that the payment was made for acquiring membership of a Stock Exchange and the term used as fee does not change the nature of the expenditure from capital to revenue. He, accordingly, disallowed the claim of the assessee. The CIT(A) held that since the payment was made for earning of income by way of doing business in the Stock Exchange for which fees were paid, the same was revenue in nature and directed the AO to allow the claim. The Revenue is in appeal.
5. We have heard the parties and considered the rival submissions. Under the provisions of Securities Contracts (Regulation) Act, 1956, to transact a business at the Stock Exchange, one has to be a member of the Stock Exchange. He has to get himself registered in the register as one or more shares in the Association. As per Clause 5 of the Articles of Association of the Calcutta Stock Exchange Association Ltd. every applicant for election as a member is to be proposed and seconded by members of the Association. A member elected by the Committee as eligible for admission is to acquire and submit to the Committee application for election as member in the prescribed form and for registration of share certificate of one share in the Association together with a duly stamped and executed transfer deed or a letter of allotment in his favour of such share and until otherwise determined by the Committee pay to the Committee the sum of Rs. 5,000 as an entrance fee which sum shall immediately upon the registration of the candidate as a member become the absolute property of the Association. Sub-clause (3) of Article 7 provides until otherwise prescribed by the Committee the member has to pay to the association such sum as a fee/levy towards development activities as may be prescribed by the Committee from time to time which said sum shall immediately upon the registration of the candidate as a member become the absolute property of the Association, As per Article 10 of the Articles of Association, such members operating on the floor of the. Exchange shall have to pay immediately at the time of enrolment as a member of the Association the prescribed sum as development fee which sum shall become the absolute property of the Association. Once a person becomes member of the Association, he has to pay regularly a sum of Rs. 3,000 p.a. for self and Rs. on 12 p.a. for the authorised assistant as per Article 24 of the Articles of Association,
6. Therefore, it is evident from the above that any person who wants to operate on the floor of the Stock Exchange has to be a member of the Association and the payment by way of entrance fee and development fee is condition precedent for his becoming a member without which, unless waived by the Committee, he cannot operate on the floor of the Exchange.
7. The term “Member” as defined in Article 1 reads as under :
“‘Member’ 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.”
8. The procedures for Membership as provided in Articles 5 to 7, for the sake brievity, are reproduced hereunder :
“5. No individual (other than such members as are existing on record on the date these amendments will come into force on the approval of the Central Government under Sub-section (5) of Section 4 of the Securities Contracts (Regulation) Act and individuals who will be entitled to shares on sub-division of shares) or company or Financial Corporation shall be eligible for membership of the Association until elected as eligible for admission by the Committee and as regards such election the following provisions shall have effect, subject however, to the provisions of the Securities Contracts (Regulation) Act, 1956, and the rules made thereunder :
(1) Every applicant for election must be proposed and seconded by members of the Association in a letter or letters addressed to the Secretary and signed by the proposer and by the seconder and such letter or letters shall state the names in full of the candidate and must be accompanied by a letter signed by the candidate in such form as may be prescribed by the Committee in that behalf specimen whereof is set out in annexure hereto.
(2) On receipt of every such application the Secretary shall paste the name of the candidate and that of his proposer and seconder on the notice board of the Association for 7 days at least before his application is brought before the Committee for consideration, during which period any objection to the candidate may be communicated in writing by any member to the Secretary for the information for the Committee. All such communication shall be treated as strictly private and confidential:
(Provided that Articles 5(1) and 5(2) shall not apply to a member which is a company or a Financial Corporation).
(3) A candidate shall be an individual (or a company or a Financial Corporation),
(4) No (individual) shall be eligible to be elected as a Member if:
(a) he is less than 21 years of age;
(b) he is not a citizen of India;
(bb) he has not passed the matriculation or an equivalent examination:
Provided, however, that the existing members shall be allowed to continue irrespective of any such educational qualification :
Provided further that when he succeeds to the established business of a deceased or a retiring member who is the father, uncle or any other person who is, in the opinion of the Committee, a close relative (or in any other deserving case) the Committee may with the concurrence of the Central Government waive compliance with this condition :
Provided that the Committee may in suitable cases relax this condition with the prior approval of the Central Government;
(c) he has been adjudged a bankrupt or a receiving order in bankruptcy has been made against him or he has been proved to be insolvent even though he has obtained his final discharge;
(d) he has compounded with his creditors unless such person has paid hundred naya Paise in a rupee;
(e) he has been convicted of an offence involving fraud or dishonesty;
(f) he is engaged as principal or employee in any business other than that of securities except as a broker or agent not involving personal financial liability unless he undertakes on admission to severe his connection with such business;
(g) he has been at any time expelled or declared a defaulter by any other Stock Exchange;
(h) he has been previously refused admission to membership unless a period of one year has elapsed since the date of such rejection.
(5) No (individual) eligible _ for admission as a member under Clause (4) aforesaid shall be admitted as a member, unless:–
(i) he has worked for not less than two years as an authorised assistant any time before the coming into force of this article or as an authorised assistant or authorised clerk or remisier or apprentice to any member at any time;
(ii) he succeeds to the established business of a deceased or retiring member who is the father, mother, uncle or any other person who is, in the opinion of the Committee, a close relative :
Provided, however, the Committee may waive compliance with any of the foregoing condition if the person seeking admission is, in respect of means,
position, integrity, knowledge and experience of business in securities
considered by the Committee to be otherwise qualified for membership.
(6) A company as defined in the Companies Act, 1956 (1 of 1956) shall also be eligible to be elected as a member of a Stock Exchange if:–
(i) such company is formed in compliance with the provisions of Section 12 of the said Act:
Provided further that an existing company which is a member of the Association on the date of adoption of this article shall have the option to convert the company into a company under Section 12 of the Companies Act, 1956 under this article subject to complying with the requirements of this Article and approval of SEBI. The said adoption to convert the existing company into a company under Section 12 of the Companies Act, 1956 should be exercised within one year of corning into force of this article.
(ii) such company undertakes to comply with such financial requirements and norms as may be specified by the Securities and Exchange Board of India Act, 1992 (15 of 1992).
(iii) the directors of the company are not disqualified for being members of a Stock Exchange under Clause 8(1) of the Securities Contracts (Regulation) Rules, 1957 [except Sub-clause (b) and Sub-clause (f) thereof] or Clause 8(3) [except Sub-clause (a) and Sub-clause (f) thereof] and the directors of the company which had not held offices of the directors in any company who had been a member of the Stock Exchange and had been declared defaulter or expelled by the Stock Exchange.
(iv) not less than two directors of the company are persons who possess a minimum of two years experience–(a) in dealing in securities, or (b) as portfolio managers, or (c) as investment consultants :
Provided further that the existing companies which are members of this Exchange on the date of adoption of this article, elect themselves to switch over to the requirements of this Article. (7) A firm shall not be admitted or continued as a member of this Association.
5A. Every member may nominate in writing the person or persons who would be entitled to succeed to the share or shares including shares of the Calcutta Stock Exchange Association Ltd., security deposits and all kinds of margin of the nominating member in the event of his death. In the event of more than one person being nominated as the nominees of the member, the order of preference must be clearly indicated in the instrument of nomination, failing which the directors of the Association or its Committee would have absolute discretion to chose amongst the nominees in whose favour the shares will be mutated. A member will be entitled to alter his nomination during his lifetime, but with intimation to the Association to be given within 60 days of such nomination and in default the alteration will not have any effect and will not be binding on the Association. Such nomination and alteration can be made also by registered will, in which event, the nomination will be operative only upon the death of the member. In the event of nomination or alterations being made by an unregistered will, the same will be operative only upon a probate from a Court of competent jurisdiction being obtained or if the Association in its discretion accepts such nomination or alteration without such probate. If any alteration in the nomination is made by will, a copy of the will duly certified by a Notary Public is to be delivered to the Association against acknowledgement to make such alteration binding on the Association. The Committee has the absolute right to accept/or not to accept the nomination.
6. A member with no authorised assistant will be entitled to take a substitute to act on his behalf on payment of an entrance fee of Rs. 100 for three months only from the date of granting of the application.
A member with one or more authorised assistants may also apply for a substitute in case of his own absence as also in the absence of all his authorised assistants and the Committee may grant a substitute to act in such a case for a maximum period for two months on payment of a consolidated entrance fee of Rs. 500.
No substitute shall be appointed unless he holds a Power of Attorney from the member concerned and is at least 21 years of age and in all other respects eligible for membership of the Exchange and is approved by the Committee. Any such Power of Attorney granted by a member must be registered and a copy thereof filed with the Exchange. Any member taking a substitute in the manner aforesaid remain liable for all acts and transactions done by the substitute during his term of office.
7. A member elected by the Committee as eligible for admission shall as conditions precedent to his registration as a member:
(1) acquire and submit to the Committee application for election as member in the prescribed form (specimen whereof is annexed herewith) and for registration a share certificate for one share in the Association together with a duly stamped and executed transfer deed or a letter of allotment in his favour of such share;
(2) until otherwise determined by the Committee pay to the Committee the sum of Rs. 5,000 as an entrance fee which said sum shall immediately upon the registration of the candidate as a member become the absolute property of the Association :
Provided always that if such member shall have been previously admitted as an authorised assistant to any member under any bye-law for the time being in force in that behalf and have been continuing as such authorised assistant till the date of his election as such member, the amount payable by him as entrance fee on his admission as a member shall be reduced by the amount paid on his behalf in respect of any entrance fee charged in respect of his admission as such authorised assistant. And provided also that whenever a member shall die, any one other member of his family may (if duly elected as eligible for membership) be admitted on payment of an entrance fee of Rs. 500 only. And provided also that whenever (a son or daughter or son’s son or daughter’s son or brother) of an existing member acquires a share in the Association and carries on business in partnership and continues to do so for three consecutive years as provided in Article 25 hereof with his father or grandfather or brother as the case may be, he shall (if duly elected as eligible for membership) be admitted on payment of an entrance fee of Rs. 500 only. But if such partnership is dissolved at the instance of the existing member or his son or daughter or son’s son or brother, within 3 years of its commencement, then such son or daughter or son’s son or daughter’s son or brother as the case may be, will have to pay the balance of the entrance fee viz., Rs. 4,500 forthwith. The election by the Committee of a member as eligible for admission as such shall be void unless the full entrance, fee payable by such member is paid within one month of the date of his election.
(3) Until otherwise prescribed by the Committee pay to the Association such sum as a fee/levy towards development activities as may be prescribed by the Committee from time to time which said sum shall immediately upon the registration of the candidate as a member become the absolute property of the Association :
Provided that the Committee may waive payment of development fee towards development activities prescribed by the Committee from time to time on admission of a Corporate member if such Corporate member has purchased any share of the Association which has been forfeited and sold by the Association in exercise of the powers conferred on the Association.”
9. Article 10 provides for payment of development fee and it reads as under:
“Such members operating on the floor of the Exchange shall have to pay immediately at the time of enrolment as a member the following sum as development fee which said sum shall become the absolute property of the Association :
Rs.
An individual who is not qualified
under the provisions of art. 5(5)
1,50,000
A company
1,50,000
A financial corporation
3,00,000″
10. Article 24 which provides for annual subscription reads as under :
“Every member shall regularly pay, until otherwise determined by the Committee subscription upto Rs. 3,000 per annum for self and for each authorised assistant at Rs. 12 per annum such subscriptions being always payable in advance.”
11. On a reading of the aforesaid provisions it is clear that the payment of development fee and the entrance fee are necessary conditions for becoming a member of the Stock Association. By these the assesses acquires a right to carry on the business on the floor of the Exchange. In such circumstances, in our opinion, it should be a capital expenditure and not revenue expenditure.
12. Reference in this connection may be made to the Supreme Court decision in the case of Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC) wherein it was observed that the decided cases have, from time to time, evolved various tests for distinguishing between capital and the revenue expenditure but no tests 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.
13. One celebrated test is laid down by Lord Cave L.C, in Atherton v. British Insulated & Helsby Cables Ltd. 10 Tax Cases 155 at 192 wherein it was stated that 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.
14. This was followed by the Supreme Court in the later decision in the case of Punjab State Industrial Development Corporation Ltd. v. CIT (1997) 225 JTR 792 (SC). This was a case for fees paid to the Registrar of Companies for expansion of the capital base of the company and it was directly related to the capital expenditure incurred by the assessee and although incidentally that would certainly help in the business of the company and may also help in profit-making, it still retains the character of capital expenditure since the expenditure is directly related to the expansion of the capital base of the company.
15. The Calcutta High Court in the case of Brooke Bond India Ltd. v. CIT (1983) 140 ITR 272 (Cal) observed that it is not the acquisition of a right of a permanent character alone, the creation of which is a condition for the carrying on of the business, that could be rightly treated as an expenditure on capital account. It was further held that where 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.
16. Following the decision of the Supreme Court in the case of Bombay Steam Navigation Co. (1983) (P) Ltd. v. CIT (1965) 56 JTR 52 (Bom), the Calcutta High Court in the case of CIT v. Rishabh Investment Ltd. (1979) 117 ITR 962 (Cal) held that if the payment was to ensure the source of stock-in-trade, then the expenditure incurred for that purpose would be capital in nature. If, on the other hand, payments are made to obtain stock-in-trade under a source arranged for, such payments would be payments for the supply of stock-in-trade and for carrying on the business.
17. To incur expenditure by way of development fee was to ensure the source for operating in the floor of the Exchange without which it was not possible for him to carry on the business and, therefore, it would be an expenditure of capital in nature.
18. Reference may also be made to the observation of Dixon J. in Hailstorm’s Property Ltd. v. Federal Commissioner of Taxation 72 CLR 634 referred to in the decision of the Supreme Court in the case of Empire Jute Co. Ltd. (supra) wherein it is staled that if the outgoing expenditure 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 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. The same test was formulated by Lord Clyde Robert Addie & Sons’ Cotteries Ltd. v. IRC 8 Tax Cases 671 at 676 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?”
19. The payment made by the assessee to the Stock Exchange is a condition for carrying on of the trade on the floor of the Exchange and, therefore, in our opinion, it is clear that it would be an expenditure of capital nature. The mere fact, as observed by their Lordships of the Supreme Court in the case of Punjab State Industrial Development Corporation Ltd. (supra) that although incidental, the expenditure would certainly help in the business of the assessee and may also help in profit-making, would not be sufficient to treat the same as revenue expenditure because it still retains the character of capital expenditure since the expenditure is directly related to the acquiring of right of carrying on of the business or to ensure the source of carrying on of the business.
20. Reference of the decision of the Calcutta High Court by the learned counsel of the assessee in the case of CIT v. New India Sugar Mills (1993) 68 Taxman 356 (Cal), is of no help as in that case the contribution made by the assessee-company which was engaged in manufacture of sugar towards Molasses Storage Reserve Fund created under U.P. Sheera Niyantran (Sanshodhan) Adesh, 1974 was held to be a revenue expenditure. There was no finding in that case that the assessee had gained any advantage of enduring nature or acquired a capital asset as a result of the contribution made under compulsion of law. The assessee in this case, as we have stated above, has acquired a right of carrying on of the business or to ensure the source thereof. Therefore, the said decision cannot be of any help to the assessee. We, therefore, reverse the order of the Dy. CIT(A) and restore that of the AO.
21. In the result, the appeal is allowed.