TMI Blog2010 (9) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... - Therefore, the right of membership, which includes right of nomination, is a "licence" or "akin to a licence" which is one of the items which falls in Section 32(1)(ii) of the 1961 Act. The right to participate in the market has an economic and money value. It is an expense incurred by the assessee which satisfies the test of being a "licence" or "any other business or commercial right of similar nature" in terms of Section 32(1)(ii). - the Tribunal was right in holding that depreciation was allowable on the cost of the membership card under Section 32(1)(ii) of the 1961 Act. - Civil Appeal Nos. 7780 - 7781 of 2010 arising out of SLP (C) Nos. 4053 - 4054 of 2010 - - - Dated:- 9-9-2010 - J U D G M E N T S.H. KAPADIA, CJI 1. Leave granted. 2. In this batch of cases the question which arises for determination is: whether BSE Membership Card can be considered an intangible asset for the purpose of depreciation under Section 32(1)(ii) of the Income Tax Act, 1961 (for short "the 1961 Act")? Facts in M/s Techno Shares Stocks Ltd. [Lead matter] 3. In this case, we are concerned with the Assessment Years 1999-2000, 2000-2001, 2001-2002 and 2002-2003. The assessee com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain decisions of this Court, that the BSE membership card is only a personal privilege granted to a member to trade in shares on the floor of the Stock Exchange; that, such a privilege cannot be equated with the expression "licence" or "any other business or commercial rights of similar nature" u/s 32(1)(ii); that, there is a difference between acquiring a know-how, patent, copyright or trademark and acquiring a licence to use such know-how, patent, copyright, trademark or franchise; that the expression "business or commercial rights of similar nature" in Section 32(1)(ii) of the 1961 Act would take its colour from the preceding words, namely, know-how, patent, copyright, trademark and franchise which belong to a class of intellectual property rights and applying the rule of ejusdem generis, the High Court held that the expression "licence" as well as the expression "business and commercial rights of similar nature" in Section 32(1)(ii) of the 1961 Act are referable to IPRs such as know-how, patent, copyright, trademark and franchise and since the BSE membership card does not fall in any of the above categories, the claim for depreciation was not admissible on the BSE membership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed Explanation 3.-For the purposes of this sub- section, the expressions "assets" and "block of assets" shall mean- (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. 9. We also quote hereinbelow relevant Rules of Bombay Stock Exchange Limited as they stood at the relevant time: "Membership a Personal Privilege 5. The membership shall constitute a personal permission from the Exchange to exercise the rights and privileges attached thereto subject to the Rules, Bye-laws and Regulations of the Exchange. Right of Membership Inalienable 6. A member shall not assign, mortgage, pledge, hypothecate or charge his right of membership or any rights or privileges attached thereto and no such attempted assignment, mortgage, pledge, hypothec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the place of the deceased member. In considering such nomination the Governing Board shall be guided so far as practicable by the instructions set out in Appendix C to these Rules. Nomination in case of Defaulter (c) The forfeited right of membership of a defaulter shall be restored to him if he be re-admitted as a member within six months from the date of default but if an application by a defaulter for re- admission be rejected by the Governing Board or if no such application be made within six months of the declaration of default the Governing Board may at any time exercise the right of nomination in respect of such membership. Dues and Claims 15. The Governing Board shall not approve a nomination unless the nominating member or in the case of a deceased member his legal representatives or heirs or the persons mentioned in Appendix C to these Rules or any other person on his behalf shall have paid and satisfied in full. Dues of the Exchange (i) Such subscriptions, debts, fines, fees, charges and other monies as shall have been determined by the Governing Board to be due to the Exchange or the Clearing House by the nominating or deceased member; and Liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefor shall be paid by the Governing Board to the Defaulters' Committee to be applied for the purposes and in the order of priority specified in the Bye-laws and the Regulations of the Exchange. 10. We also quote hereinbelow Bye-law 400 of BSE, which reads as under: "Application of Defaulters' Assets and Other Amounts 400. Subject to the provisions of Bye-law 398, the Defaulters' Committee shall realise and apply all the money, rights and assets of the defaulter which have vested in or which have been received by the Defaulters' Committee (other than the amount paid by the Governing Board to the Defaulters' Committee pursuant to Rule 16A in respect of the consideration received by the Governing Board for exercising the right of nomination in respect of the defaulter's erstwhile right of membership) and all other assets and money of the defaulter in the Exchange or the market including the money and securities receivable by him from any other member, money and securities of the defaulter lying with the Clearing House or the Exchange, credit balances lying in the Clearing House, security deposits, any bank guarantees furnished on behalf of the defaulter, fixed deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable be insufficient to pay and satisfy all such debts, liabilities, obligations and claims in full they shall be paid and satisfied pro rata; (vii) Seventh -subject to the Rules, Bye-Laws and Regulation of the Exchange, including in particular Bye-Law 343, the balance, if any, shall be applied by the Defaulters' Committee for the payment of such unpaid debts, liabilities, obligations and claims to or of the defaulter's constituents arising out of any contracts made by such defaulter subject to the Rules, Bye-laws and Regulations of the Exchange as shall have been admitted by the Governing Board; provided that if the amount available be insufficient to pay and satisfy all such debts, liabilities, obligations and claims in full they shall be paid and satisfied pro rata; (viii) Eighth -the balance, if any, shall be paid into the Exchange's Customers' Protection Fund to the extent of any and all amounts paid out of the Customers' Protection Fund towards the obligations or liabilities of the defaulter and interest thereon at the rate of 2.5% per month (or such other rate as the Governing Board may specify) from the date of payment out of the Customers' Protection Fund to the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though a member has a right of nomination, such right shall be personal and non-transferable. Rule 9 inter alia states that on the demise or default of a member the said right of nomination shall cease and vest in the Exchange. Rule 10 refers to forfeited or lapsed right of membership. It inter alia states that when a right of membership is forfeited to or when such right vests in the Exchange under any Rule or Bye-law, it shall belong absolutely to the Exchange free of all rights, claims or interests of such member or any person claiming through such member and the Governing Board alone shall be entitled to deal with or dispose of such right of membership as it may think fit. Rule 15 inter alia states that the Governing Board shall not approve a nomination unless the nominating member or in the case of a deceased member his legal representatives satisfy in full all dues of the Exchange; all liabilities relating to contracts and all amounts due and payable to the Trade Guarantee Fund. Rule 16 deals with allocation in the Order of Priority. It inter alia states that when the Board has exercised the right of nomination in respect of a membership vesting in the Exchange the considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right which is similar to a "licence" or "franchise" is declared to be an intangible asset. Moreover, under Rule 5 membership is a personal permission from the Exchange which is nothing but a "licence" which enables the member to exercise rights and privileges attached thereto. It is this licence which enables the member to trade on the floor of the Exchange and to participate in the trading session on the floor of the Exchange. It is this licence which enables the member to access the market. Therefore, the right of membership, which includes right of nomination, is a "licence" or "akin to a licence" which is one of the items which falls in Section 32(1)(ii) of the 1961 Act. The right to participate in the market has an economic and money value. It is an expense incurred by the assessee which satisfies the test of being a "licence" or "any other business or commercial right of similar nature" in terms of Section 32(1)(ii). 20. Since heavy reliance is placed by the Department on the judgments of this Court in the following cases, we need to discuss those judgments and clarify the position in law: (i) Vinay Bubna v. Stock Exchange, Mumbai [(1999) 6 SCC 215] (ii)Stock Exchan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e it so vests in the Exchange then the Exchange is free to allocate the consideration in the order of priority indicated by Rule 16. 22. In the case of Stock Exchange, Ahmedabad (supra), the question which arose for determination was whether after the demise of a stock-broker could he be declared a defaulter by the Exchange? In that case the facts were as follows. Ahmedabad Stock Exchange (ASE) admitted Rajesh Shah as its member on 19th February, 1988. He died on 7th February, 1994. On February 12, 1994, his legal representatives wrote to the Stock Exchange that they were unable to meet the liabilities of the deceased. Thereafter, the Governing Board of ASE passed a resolution on 12th February, 1994 declaring Rajesh Shah, the deceased member, as a "deemed defaulter". By the said resolution, the Board resolved that the membership rights of the deceased member who was declared to be a deemed defaulter should vest in the Stock Exchange and the said membership rights be disposed of by inviting offers within a minimum floor price of Rs. 25 lakhs. It is the said declaration dated 12th February, 1994 by which Rajesh Shah was declared to be a deemed defaulter came to be challenged. Ano ..... X X X X Extracts X X X X X X X X Extracts X X X X
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