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TMI Blog2010 (9) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... ice u/s 148 once again declaring loss of Rs. 10,77,276/-, the same as was in the original return of income. The main reason for reopening of assessment under Section 147 was the claim of depreciation by the assessee on BSE membership card amounting to Rs. 23,65,000/-. The claim of depreciation of the assessee was based on Section 32(1)(ii) which stood inserted by Finance (No. 2) Act, 1998 w.e.f. 1.4.1999. However, the said Section deals with claim for depreciation of items acquired on or after 1.4.1998. The assessee claimed before the A.O. that the BSE membership card is a "licence" or "business or commercial right of similar nature" u/s 32(1)(ii) and is, therefore, an intangible asset eligible for depreciation u/s 32(1)(ii) which submission was not accepted by the A.O. It was held that membership is only a personal permission which is non-transferable and which does not devolve automatically on legal heirs and, therefore, it is not a privately owned asset. That, there is no ownership of an asset and that what ultimately can be sold is only a Right to Nomination. Further, according to the A.O., in the case of BSE membership, there is no obsolescence, wear and tear or diminution in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket capitalization of the BSE is Rs. 5 trillion. The main aim and object of the BSE is to provide a market place for the purchase and sale of securities. It aims to promote, develop and maintain a well regulated market for dealing in securities and to safeguard the interests of the members and the investing public having dealings in the Exchange. It helps industrial development of the country through resources mobilization. It is set up to establish and promote "just practices" in securities transactions. In November, 1996, the BSE constituted a Trade Guarantee Scheme under which all trades carried out on online trading are guaranteed by the clearing house of BSE. Similarly, a depository has been set up as a joint venture between BSE and Bank of India etc. BSE has introduced trading also in fixed income securities to give impetus to trading in debentures and corporate debt instruments to increase trading in Government owned securities. Question arising in the Present Matters: 7. Is depreciation allowable on the cost of a Stock Exchange Membership Card under Section 32(1)(ii) of the Income Tax Act, 1961, which was enacted and inserted by Finance (No. 2) Act, 1998? & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Rule. Right of Nomination 7. Subject to the provisions of these Rules a member shall have the right of nomination which shall be personal and non- transferable. Right of Nomination of Deceased or Defaulter Member 9. On the death or default of a member his right of nomination shall cease and vest in the Exchange. Forfeited or Lapsed Right of Membership 10. When a right of membership is forfeited to or vest in the Exchange under any Rule, Bye-law or Regulation of the Exchange for the time being in force it shall belong absolutely to the Exchange free of all rights, claims or interest of such member or any person claiming through such member and the Governing Board shall be entitled to deal with or dispose of such right of membership as it may think fit. Nomination by Member 11(a) A member of not less than three years' standing who desires to resign may nominate a person eligible under these Rules, for admission to membership of the Exchange as a candidate for admission in his place: Provided that a member of less than three years' standing who desires to resign may with the sanction of the Governing Board nominate his own son eligi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable by the nominating or deceased member to the Trade Guarantee Fund. Allocation in Order of Priority 16. (1) When as provided in these Rules the Governing Board has exercised the right of nomination in respect of a membership vesting in the Exchange the consideration received therefor shall be applied to the following purposes and in the following order of priority, namely- Dues of Exchange and Clearing House (i) first -the payment of such subscriptions, debts, fines, fees, charges and other monies as shall have been determined by the Governing Board to be due to the Exchange, to the Clearing House or to the Trade Guarantee Fund by the former member whose right of membership vests in the Exchange. Liabilities relating to Contracts (ii) second-the payment of such debts, liabilities, obligations and claims arising out of any contracts made by such former member 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, and &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange or the Defaulters' Committee for the obligations of the defaulter to the following purposes and in the following order of priority , viz.:- (i) First -to make any payments required to be made under Bye-law 391 and 394; (ii) Second -the payment of such subscriptions, debts, fines, fees, charges and other money as shall have been determined by the Defaulters' Committee to be due to the Securities and Exchange Board of India, to the Exchange or to the Clearing House by the defaulter; (iii) Third -the rectification or replacement of or compensation for any bad deliveries made by or on behalf of the defaulter to any other member in the settlement in which the defaulter has been declared a defaulter or in any prior or subsequent settlement (unless the Governing Board has otherwise determined in respect of such settlement or settlements under Bye-law 394) provided the conditions of Bye-law 153 and all other applicable Rules, Bye-Laws and Regulations and instruc-tions of the Governing Board are complied with; (iv) Fourth -the balance, if any, shall be paid into the Fund to the extent of the money paid out of the Fund (other than payments made out of Members' refundable con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tee 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 as the same does not belong to the defaulter and the defaulter has no claim, right, title or interest therein." 11. At the outset we wish to clarify that our present judgment is confined to the Rules and Bye-laws of BSE, as they stood during the relevant assessment years. 12. Section 32 of the 1961 Act provides for a deduction of allowance being made in respect of depreciation of building, machinery, plant or furniture, being a tangible asset. Vide Finance (No.2) Act, 1998, the Parliament thought it fit to extend the benefit of depreciation also to intangible assets enumerated in Section 32(1)(ii) in respect of know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after 1st April, 1998. In the lead matter, the assessee bought the membership card of BSE for Rs. 95 lakhs. In the case of M/s. HDFC Securities Ltd. v. The Commissioner of Income Tax-4 (Civil Appeal arising out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and vest in the Exchange when his membership gets forfeited to the Exchange; that on such forfeiture the right of membership gets vested in the Exchange and on such vesting the Exchange has the right to deal with it as it may think fit. That, on forfeiture even the right of nomination vests in the Exchange. Thus, a non-defaulting continuing member owns the right of nomination with respect to the membership of the Exchange till his right of membership is forfeited to the Exchange. 17. The question which we are required to examine is - whether the right of nomination in the non-defaulting continuing member comes within the expression "business or commercial right of similar nature" in Section 32(1)(ii) of the 1961 Act? 18. On the analysis of the Rules of BSE, it is clear that the right of membership (including right of nomination) gets vested in the Exchange on the demise/ default committed by the member; that, on such forfeiture and vesting in the Exchange the same gets disposed of by inviting offers and the consideration received thereof is used to liquidate the dues owed by the former/ defaulting member to the Exchange, Clearing House, etc. [see Rule 16 and Bye-law 400]. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 21.81 crores was due and payable by the defaulter to Vinay Bubna who had moved the Bombay High Court by way of an arbitration petition against Yogesh Mehta (defaulter). In the said proceedings, an application was filed for appointing a court receiver. The High Court did not grant to Vinay Bubna any relief in respect of the membership card of the defaulter - member. In the said proceedings, Rule 16 was challenged on the ground that membership of BSE was an asset of the share-broker and on its sale from the proceedings thereof payment should be made to creditors like Vinay Bubna and proceeds should not be allowed to be distributed by BSE in the manner indicated by Rule 16. On behalf of the Stock Exchange, it was submitted that after respondent No. 3, Yogesh Mehta stood declared to be a defaulter he ceased to be the member of the Stock Exchange whereupon his rights of membership vested in the Exchange free of all rights, claims and interests and, therefore, the Exchange was at liberty to invite applications from other persons and to admit anyone who offers to pay the highest amount. It was argued that the said proceeds so received did not belong to the ex-member and the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rajesh Shah. On 16th February, 1994, the Stock Exchange issued advertisement inviting claims from member creditors to lodge their claims within 30 days. They invited offers for purchase of membership also within the minimum floor price of Rs. 25 lakhs. On 5th December, 1994, ASE passed a resolution disposing of the membership right of the deceased in favour of UTI Security Ltd. for Rs. 27 lakhs. However, a garnishee notice was issued by the Department under Section 226(3) of the 1961 Act in the sum of Rs. 12.25 lakhs. That notice was addressed to the Executive Director of the Stock Exchange by the Department. Under the said circumstances, ASE filed a writ petition in the High Court challenging the orders of provisional attachment as well as the garnishee notice. The question for determination which arose in the said judgment was as to the nature of the rights of the deceased or his legal representatives in the membership card. It was held by this Court, after examining the Rules and the Bye-laws, that the right of nomination which earlier vested in Rajesh Shah stood vested in the Exchange under the Rules when he committed default. On default, that right vested in the Stock Exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X
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