By TIOL News Service

NEW DELHI, APRIL 26, 2018: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether payment made to Stock Exchange for procuring a lifetime right in the form of a license to carry on trade, confers enduring benefit on the trader and hence should be capitalized. YES IS THE VERDICT.

Facts of the case:

The Assessee company is engaged in the business of stock markets, merchant banking and other financial services. During the relevant AY 1996-97, the assessee had acquired membership of the National Stock Exchange, and as per the rules had paid an amount of Rs.5,00,000/- to the said Exchange as a non-adjustable deposit for acquisition of membership. In addition to the said payment, the assessee had also paid amounts towards interest free security deposit, annual subscription for the first year and as margin deposit. The said payment to Stock Exchange was treated as revenue expenditure. However, this was not accepted by the AO, who held that the payment was non-recurring in nature and had given rise to an enduring benefit. However, the AO opined that the said expenditure could be allowed as a deduction equal to 1/10th of the total expenditure, in 10 equal annual installments, and accordingly, Rs.50,000/- was allowed as deduction and the balance amount of Rs.4, 50,000/- added to the computation of income.

On appeal, the FAA observed that Rs. 5,00,000/- was like subscription fee paid to the National Stock Exchange, which should not be treated as capital expenditure. On further appeal, the ITAT reversed the said finding and restored the order passed by AO, by observing that such expenditure was for addition to the capital assets held by the assessee as it was incurred to acquire full right to trade as a member.

High Court held that,

++ the Supreme Court in Techno Shares and Stocks Limited Vs. Commissioner of Income Tax has held that membership of a stock exchange was a business or commercial right conferred by the rules of the exchange. The membership right could be said to be owned by the member and used for the purpose of business. It was similar to a licence or franchise and was to be treated as an intangible asset. It is an accepted position that Rs.5,00,000/- was paid by the assessee to acquire membership of the National Stock Exchange. This was a fixed amount, which was paid at one time and is not an annual subscription fee. Without payment of the said amount, the assessee could not have acquired membership of the National Stock Exchange. On acquisition of membership, the assessee acquired right to trade in shares and act as a broker. Deposit of this amount was sine-qua-non for issue of and entitlement to the broker’s card. This membership card was an asset or a property which the petitioner had acquired on non-refundable payment of Rs.5,00,000/-. It was on acquisition of the said card/membership that the assessee could carry on business as a stock-broker, subject to other compliances including annual fee payment;

++ the right to transfer in the present facts, would not be the determinative test, for there can be capital assets on which there is restriction on transfer. Expenditure to acquire a capital asset would not become a revenue expense or consumable material because there are restrictions or strict stipulations on when transfer of capital asset can be made. There cannot be any doubt that one-time and lump-sum payment made to acquire membership right by a company or person engaged in business of trading in stocks, brings into existence an asset or an advantage of enduring nature. Membership card is not an addition to the stock-in-trade or consumable stock. This expenditure enabled the assessee to acquire an asset to earn income in that year and in future. It was a payment by the assessee to acquire a source which enabled him to do business. Membership brought into existence an advantage for all times. In the context in question, Rs 5,00,000/- represents money paid to procure a permanent right in the form of a license to carry on trade. This expenditure would not be revenue but capital in nature.

(See 2018-TIOL-777-HC-DEL-IT)