Income Tax Appellate Tribunal Bangalore Infosys Technologies Ltd. vs Joint Commissioner Of Income Tax on 7 April, 2006 Equivalent citations: (2007)109TTJ(BANG)631 ORDER Deepak R. Shah, A.M. 1. These crossappeals by assessee and Revenue are directed against the order of learned CIT(A)I, Bangalore dt. 4th July, 2003. We shall first deal with the appeal of assessee. 1. The first ground of appeal is against disallowance of a sum of Rs. 10,86,803 towards share issue expenses. 2. At the time of hearing learned Counsel for assessee Shri Padam Khincha did not press the ground. For want of prosecution, the ground is dismissed and the disallowance is confirmed. 3. The next ground of appeal is against disallowance of a sum of Rs. 44,43,000 being custody charges paid to NSDL. 3.1 During the year, the assessee paid a sum of Rs. 44.43 lakhs to National Security Depository Ltd. (NSDL) as onetime charges for converting 80,08,600 shares of company from physical certificate into dematerialize form. The AO found that as per the letter of NSDL dt. 21st July, 1997, the assessee company has taken over the liability of shareholders. He held that since the liability is that of shareholders and not that of company, the same is not allowable. The AO further held that even if the liability is to be treated as that of the company, the same is not allowable as revenue expenditure, as the assessee derives an enduring benefit from Onetime payment and hence the expenses are capital in nature. Learned CIT(A) held that the payment to NSDL cannot be said to be wholly and exclusively for the appellant's business inasmuch as it was not a liability of the appellant to get the shares converted into demat form but the liability is that of the respective shareholders. The expenditure is related more to the easy handling of the shares rather than business of appellant. Learned CIT(A) accordingly held that the expenditure cannot be said to be incurred in the normal course of its business. 3.2 Learned counsel for assessee Shri Khincha submitted that the conversion into a demat form of shares was as per the compulsion under the orders of the Central Government through the SEBI. The custodial charges helped in reducing the cost of handling physical share certificates which would otherwise have been allowed as a revenue expenditure. The demat form of shares reduced the risk associated with the physical share certificate i.e. forgery and loss of certificates leading to a saving in administrative costs otherwise allowable as an expenditure. The demat form of shares has benefited the appellant in getting periodic information i.e. FII holding, etc.) at a much faster pace with less administrative hassles and at a lower cost. No asset capable of being recognized in the capital field has been acquired by the appellant as a result of the said expenditure. 3.3 Learned Departmental Representative Shri Ajit Korde heavily relied upon the appellate order. He submitted that in any case, payment is onetime fee for converting shares in physical form to demat form is to be incurred only once and assessee derived enduring benefit out of such conversion. Hence, such expenditure is capital expenditure and not allowable. 3.4 We have considered the relevant facts and arguments advanced. Before adverting to the allowability or otherwise of the expenses, it is necessary to understand as to what is the depository, how it functions and why the charges are payable. The Depository Act, 1956 has introduced by way of consequential amendments to Subsection (3) to Section 108 of Companies Act, 1956. The new subsection provides that the formalities prescribed by Section 108 shall not apply to any transfer of securities between a transferor and transferee both of whom are entered as beneficial owners in the records of a depository. One of the effects of this exemption from the operative requirement of Section 108 is that a lot of paper work, manual handling and postage and affixation of stamps would be saved, where transfers are effected through the mechanism provided by the depository system. The section will however continue to apply to transfers effected outside the depository mechanism. A depository is an organization where the securities of an investor are held in the electronic form at his request through the medium of a depository participant (DP). If the investor wants to utilize the services offered by a depository, the investor has to open a beneficiary account with the depository through a DP. DP is the representative or agent in the depository system (like a broker who trades on behalf of the investors in and outside the stock exchange), and he maintains the investor's securities, account balances and intimates to him the status of his holdings from time to time. The investor can open accounts with one or more DPs. When a person buys any security e.g. shares of debentures already in the depository mode, the buyer will become the ow