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Income Tax Appellate Tribunal, KOLKATA BENCH ‘A’, KOLKATA
Before: Shri P. M. Jagtap, A.M. & Shri S.S.Viswanethra Ravi, J.M.)
ORDER Per Shri S.S.Viswanethra Ravi, J.M. This appeal is filed by the assessee against the order dated 03.09.2012 passed by the CIT(Appeals)-VI, Kolkata for the assessment year 2006-07 framed under section 143(3) of the I.T.Act.
2. The grounds raised
by the assessee are placed as below: “01. That on the facts and in the circumstances of the case, the learned Commissioner of Income Tax (Appeals) -VI, Kolkata has erred in law in upholding an addition of Rs.5 Lakhs being Admission Fee and Broker Contingency Fund (non-refundable) paid to Bombay Stock Exchange by the appellant, treating the same as Capital Expenditure.
02. That on the facts and in the circumstances of the case, the learned Commissioner of Income Tax (Appeals)-VI, Kolkata has erred in law in upholding the addition of Rs.36,336/- being charges paid to Stock Exchanges treating same as a penalty on account of infringement of law .
03. That on the facts and in the circumstances of the case, the learned Commissioner of Income Tax (Appeals)-VI, Kolkata has erred in law in upholding the addition of Rs. 57,500/- treating the same 'as a Prior Period Expenses though the crystallization of liability occurred during the period of assessment.
M/s.Dayco Securities (P) Ltd. Assessment Year: 2006-07
4. That the appellant craves to add, alter and / or delete any grounds of appeal at later stage, if necessary.”
The brief facts of the case are that the assessee is a company and it is a registered stock broker of CSE, BSE and NSE. The assessee filed its return on 13.11.2006 declaring a total income of Rs.76,51,070/-. During the year under consideration, the assessee moved an application for obtaining Deposit based Membership of Bombay Stock Exchange Limited. The said membership was Trading Membership of the cash segment of Bombay Stock Exchange. As per the terms and conditions stipulated for the membership, the assessee apart from deposit of Rs.1 crore was required to pay the following amount to Bombay Stock Exchange Ltd:- 1) Base Minimum Capital – Rs.10,00,000 2) Trade Guarantee Fund - Rs. 10,00,000 3) Admission Fees (non-refundable) - Rs.2,50,000 + 12.36% Service Tax 4) Broker Contingency Fund (non-refundable) -Rs.2,50,000 +12.36% Service Tax 5) Annual Subscription – 7000/- + Service tax of 12.36% 6) Initial Contribution towards TGF -10000/- + 12.36% Service Tax 7) Any other amount so required by BSE Ltd The assessee in order to obtain membership paid admission fee (non-refundable) of Rs.2,50,000/- and Broker Contingency Fund (non-refundable) of Rs.2,50,000/-. The said payments have been considered as revenue expenditure by the assessee in view of the following:-
1) The payments towards member fee and Broker Contingency Fund are non- refundable in nature, as such, is to be written off in the year of payment.
M/s.Dayco Securities (P) Ltd. Assessment Year: 2006-07 2) The non-refundable deposits do not result in creation of an asset of enduring nature, so as to make the expenditure fall in the capital field.
3) Payment of admission fee as well as contribution to Fund is like nature of licence fee and it is paid only for carrying on the business effectively and efficiently. By becoming a member, the appellant is permitted to make use the facilities provided by the Stock Exchange
4. During the assessment proceedings, the AO was of the view that payments towards fee for broker contingency fund and admission fee of each Rs.2,50,000/- are in capital in nature and by getting the membership in Bombay Stock Exchange the assessee as a stock broker got additional benefit of extra trading terminals and assessee earned additional brokerage and such expenditure for the extension of assessee’s business and disallowed as inadmissible expenditure under section 37 of the Act.
5. Aggrieved with the above, the assessee preferred an appeal before the ld. CIT(A). The view taken by the ld. CIT(A) was that both the amounts were non- refundable in nature and such payment was made to trade in the stock exchange, while confirming the view of AO, relied on the Judgements of Hon’ble Jurisdictional Calcutta High Court in the case of Rajendra Kumar Bahavat –vs- CIT reported in 276 ITR 567 and also relied on the orders of ITAT at Kolkata and Chandigarh benches and treated the said amounts as capital expenditure.
In challenge by the assessee before us, the ld. AR reiterated the submissions made before the ld. CIT(A) and relied on the case laws reported in 291 ITR 193 and 282 ITR 601 and sought to allow the ground no.1. The ld. DR relied on CIT(A) order and case laws of Hon’ble Jurisdictional High Court of Calcutta reported in 276 ITR 567 and prayed to dismiss the ground no.1.
M/s.Dayco Securities (P) Ltd. Assessment Year: 2006-07 7. Heard both representatives and perused the materials available on record and considered the case laws relied on by both the sides. The facts in the case are not disputed. The only question arises for our consideration is that the payments made to Bombay Stock Exchange towards broker contingency fund and admission fees, both are stated to be non-refundable are capital expenditure or revenue expenditure. In this regard, the assessee relied on two judgements of Hon’ble Delhi High Court and Hon’ble Delhi High Court and Hon’ble Madras High Court. Hon’ble Delhi High Court held in the case of Neset Holdings Pvt. Ltd. –vs- CIT reported in [2006] 282 ITR 601 held that amounts paid to stock exchange as a non-refundable deposits for acquiring OTC membership is a revenue expenditure. The Hon’ble Madras High Court in the cases of CIT-vs- S.Venkata Subramanian and Kamat Kumar V Shah reported in 291 ITR 193 held that the admission fee and contribution to infrastructure development fund paid to stock exchange are of the nature of revenue expenditure.
On the other hand, the ld. DR relied on case law of Hon’ble Jurisdictional High Court in the case of Rajendra Kumar Bacchawat –vs- CIT by its judgement dated 14.08.2002 reported in 276 ITR 567. The relevant portion of which is reproduced as herein below.
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 and 1993-94, the assessee made two types of claims in regard to the said sum.
Firstly, the assessee’s contention was that the amount is by way of 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 claim deduction thereof in ten successive assessment years, of which the two assessment years in question were the first two.
M/s.Dayco Securities (P) Ltd. Assessment Year: 2006-07 3. 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 Sept., 2001. The petition of appeal is dismissed.
The ITAT, Kolkata Bench in the case of ACIT vs Ajoy Bhhauwala reported in 80 ITD 79 the relevant held portion and discussion thereon reproduced herein below:
Held: On a reading of arts. 10 and 24 of articles of association of the Calcutta Stock Exchange 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 assessee acquires a right to carry on the business on the floor of the exchange. In such circumstances, it should be a capital expenditure and not revenue expenditure. 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. The mere fact 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.—Punjab State Industrial Development Corpn. Ltd. vs. CIT (1997) 140 CTR (SC) 594 : (1997) 225 ITR 792 (SC) and Brooke Bond India Ltd. vs. CIT (1982) 28 CTR (Cal) 345 : (1983) 140 ITR 272 (Cal) relied on; Atherton vs. British Insulate & Helsby Cables Ltd. 10 Tax Cases 155, Halstorm’s Property Ltd. vs. Federal Commissioner of Taxation 72 CLR 634 and Lord Clyde Robert Addie & Sons’ Colleries Ltd. vs. IRC 8 Tax Cases 671 applied; CIT vs. New India Sugar Mills (1992) 107 CTR (Cal) 280 distinguished.
M/s.Dayco Securities (P) Ltd. Assessment Year: 2006-07 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.
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 Corpn. 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 vs. New India Sugar Mills (1992) 107 CTR (Cal) 280 : (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.
In the result, the appeal is allowed.
10. Respectfully following the aforesaid decisions and we hold that that the payments made to Bombay Stock Exchange towards broker contingency fund and admission fees are capital in nature, accordigly, ground no-1 fails and it is dismissed
Regarding ground no.2, the AO has narrated above the facts of the case that the assessee is a registered stock broker and obtained deposit based membership of M/s.Dayco Securities (P) Ltd. Assessment Year: 2006-07 Bombay Stock Exchange Ltd. The said membership was trading membership of cash segment of Bombay Stock Exchange. During the year under consideration, the assessee paid penalty charges for various types of defaults of Rs.33,336/- as per the trading norms issued by the stock exchanges. The question that now arises is whether this amount was a payment in the nature of penalty in terms of section 37 of the Act.
The AO disallowed the payment of the said sum of Rs.36,336/- observing it to be a penalty and it is an infringement of law. This order was confirmed by the CIT(A). According to CIT(A) that the assessee did not file any copy of ledger and any such evidence regarding the nature of penalties and violation committed by the assessee.
Having aggrieved, the assessee before us by this ground no.2. The assessee submitted that it is a stock exchange penalty and such bodies having no authority of law, the amounts being paid towards various defaults cannot be treated as penalty. It does not constitute any violation of law and relied on a case law CIT-vs- Murarilal Ahuja & Sons reported in 177 ITR 228. The ld. DR relied on AO’s order.
We may refer to the definition of penalties in Corpus Juris Secundum, Volume 70, page 387 which contains a comprehensive definition of the word "Penalty is an elastic term with many different shades of meaning. The term involves the idea of punishment, either corporal or pecuniary, or civil or criminal although its meaning is generally confined to pecuniary punishment.
Further, The penalty proceedings are not criminal proceedings. These proceedings are distinct and separate from tax proceedings or criminal proceedings. Penalty proceedings are certainly of a penal nature, i.e., intended to punish for the defaults. The word `penalty', however, is also used with reference to criminal M/s.Dayco Securities (P) Ltd. Assessment Year: 2006-07 proceedings in the sense of punishment. All penalties do not flow from an offence but all offences lead to penalties. Whereas the former flows from disregard to strict statutory provisions, the latter occurs when there is mens rea and is made the subject-matter of adjudication in a prosecution launched for the purpose in a criminal Court. The penalty is also frequently used to denote an equivalent by way of damages for a civil wrong and is, in this sense, sometimes applied to stipulated damages for breach of private contracts.
Regarding the decision cited by the Ld.AR reported in 177 ITR 228 In that case, it is seen that a finding of fact has been recorded by the AO that the payment of Rs. 48,158 was made by the assessee for breach of contract as a speculative transaction in terms of s. 43 of the Act. This transaction, cannot, therefore, be equated in the circumstances of the case on hand. Thus, the case law supplied by the Ld.AR does not fit into the facts of present case.
We find support, in the case of INCOME TAX OFFICER vs. GDB SHARE & STOCK BROKING SERVICES LTD BY ITAT, KOLKATA 'C’ BENCH reported in 88 TTJ(KOL)352, the relevant portion of order is reproduced herein below:
10. So far as the disallowance of Rs. 13,967 from miscellaneous expenses being penalty charges are concerned, we have noticed from the details that the same have been paid to National Stock Exchange for delay in payment of the dues and for various other obligations arising out of carrying on business activities. We, therefore, agree with the learned CIT(A) that the penalty charges cannot be said to be for infringement of any law but has been paid by the assessee to compensate for delay in payment of the dues to the National Stock Exchange and for various other obligations. We, therefore, agree with the learned CIT(A) that the disallowance is, therefore, not justified and he has rightly directed the AO to delete Rs. 13,967 from the total income
In the aforesaid order the assessee paid penalty for delay in payment of the dues and for various other obligations arising out of carrying on business activities and the ITAT agreed with view taken by the CIT-A that that the penalty charges M/s.Dayco Securities (P) Ltd. Assessment Year: 2006-07 cannot be said to be for infringement of any law. In the present case also the assessee paid penalty for various defaults during the course of business transactions, therefore, we are of the opinion the aforesaid order applicable to the facts on hand.
19. We also find a similar was answered in the case of GOLDCREST CAPITAL MARKETS LTD. vs. INCOME TAX OFFICER by ITAT, MUMBAI 'B’ BENCH reported in (2010) 130 TTJ 0446 the relevant portion of order is reproduced herein below:
We have heard the rival contentions and perused the orders carefully. The short question arising here is that whether violations of the Rules and Regulations of NSE Ltd. by its members could be treated as an offence or as an act prohibited by law. In case, it can be termed as an offence or an act prohibited by law, no doubt such expenditure would fall within the ambit of s. 37(1) of the Act. Rule. 1(1) of the NSE Ltd clearly brings out that it has been constituted as a limited company under the Companies Act, 1956, and it is subject to the provisions of Securities Contract (Regulations) Act, 1956 and Securities Exchange Board of India Act, 1992. The powers of the Board of NSE Ltd. to make bye-laws, rules and regulations is subject to the directives under these enactments and also the trading regulations prescribed by RBI from time to time. The appointments to the board of directors of the NSE Ltd has to be done as per the provisions of articles of association of NSE Ltd. The Board is having power for penalizing any disobedience or contravention of its rules, bye-laws and regulations by its member. No doubt, the board of directors of NSE has therein nominees of SEBI, but, in our opinion, this by itself would not make NSE a statutory body on par with SEBI. Members of NSE Ltd are bound through the articles of association to abide by the rules, regulations and bye-laws of the NSE Ltd. Nevertheless, such rules, regulations and bye-laws can be considered as regulations for controlling the internal inter se obligations and rights of the members and NSE Ltd. Though every member of NSE Ltd would be obliged to abide by such rules and regulations, a violation thereof cannot be treated as violation of a statutory law or rule. Fines and penalties levied for violation on account of ‘unfair trading practice’ as specified in regn. 4.6 of the NSE Regulations and ‘un- business like conduct’ as specified in r. IV(4)(e) of the NSE Rules cannot be equated with violation of a statutory rule or law. Though, the learned CIT(A) has referred r. 4C in Appendix 222 to SEBI Rules, 1992, this rule only specifies the condition to be satisfied for the SEBI Board to grant a certificate to a stock broker. It is true that working of stock exchanges can be regulated by SEBI under the SEBI enactment but violation of rules and regulations M/s.Dayco Securities (P) Ltd. Assessment Year: 2006-07 framed by such stock exchanges cannot be per se considered as violation of any provision of SEBI enactment. The fine imposed on the assessee by the disciplinary bench of the NSE was admittedly for violation of the regulation of NSE Ltd., and neither the AO nor the learned CIT(A) has been able to point out how such violation or breach of regulations could be treated on par with the breach of a rule under the SEBI enactment. Therefore, we are of the considered opinion that there was no violation of law by the assessee and the fine paid were only for non-observation of internal regulations of stock exchange. We derive support in taking this view from the decision of Co- ordinate Bench of this Tribunal in the case of Asstt. CIT vs. CFL Ltd. in decided on 5th Dec., 2008. In that case also, there was levy of fine by NSE for non-observance of bye-laws and rules. At para 6 of the order, this Tribunal has held as under:
In the aforesaid order the assessee and the fine paid were only for non- observation of internal regulations of stock exchange and the ITAT was of the opinion that Fines and penalties levied for violation on account of ‘unfair trading practice’ as specified in regn. 4.6 of the NSE Regulations and ‘un-business like conduct’ as specified in r. IV(4)(e) of the NSE Rules cannot be equated with violation of a statutory rule or law and taken support from the order of ITAT Co- ordinate Bench of this Tribunal in the case of Asstt. CIT vs. CFL Ltd. in decided on 5th Dec., 2008 where there was levy of fine by NSE for non-observance of bye-laws and rules. In the present case also the assessee paid penalty for various defaults Bombay Stock Exchange like that of National Stock Exchange conducting their business control under SEBI during the course of its business transactions, therefore, we are of the opinion that the Bombay Stock Exchange is not a statutory body and any penalties or fines paid as the case may be under regulations and bye-laws can be considered as regulations for controlling the internal obligations and therefore, facts of aforesaid order applicable to the facts on hand.
M/s.Dayco Securities (P) Ltd. Assessment Year: 2006-07 21. Respectfully following the aforesaid decisions and discussion above, we allow the ground no-2 of the assessee.
In the result, the appeal of the assessee is partly allowed.
Order Pronounced in the Open Court on 15th April, 2016.