TMI Blog2011 (11) TMI 535X X X X Extracts X X X X X X X X Extracts X X X X ..... phold the finding of the Revenue authorities. Transaction charges as payments made on account of transaction charges are technical services within the purview of section 194J and therefore liable for deduction of tax. - ITA No. 6264/Mum./2009 & ITA No. 6394/Mum./2009 - - - Dated:- 23-11-2011 - Order The order of the Bench was delivered by J. Sudhakar Reddy (Accountant Member).-These cross-appeals are directed against the impugned order dated September 23, 2009, passed by the Commissioner (Appeals)-VIII, Mumbai, for the assessment year 2006-07. The brief facts of the case are that, the assessee is a company and is engaged in the business of trading in shares and share broking. In the financial year 2000-01, the assessee-company purchased a membership card in the cash segment and derivative segment from the Bombay stock exchange (for short BSE ), for a total consideration of ₹ 2,50,01,000, and claimed depreciation on the same. The allowability of the same is not in dispute in those years in view of the judgment of the hon'ble Supreme Court in the case of Techno Shares and Stocks Ltd. v. CIT [2010] 327 ITR 323 (SC). BSE, under the Scheme of corporatisatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quisition of membership rights and that cost of acquisition of the trading right shall be deemed to be nil ; (vi)that most of the share brokers have treated the entire cost of membership of erstwhile BSE as a capital asset and have claimed depreciation under section 32(1)(ii) and such claims have been upheld by the hon'ble Supreme Court ; (vii) that the statute does not provide double deduction in respect of any expenditure incurred and under section 55(2)(ab), the cost of acquisition is treated as original cost, the written down value in the books of account due to grant of depreciation results in double benefit. Thus, the Assessing Officer, vide paragraph 3.14 of the assessment order, concluded as follows : 3.14 In this case, although the written down value as on the date of exchange of BSE card with shares of BSEL and BSEL trading rights is ₹ 69,21,663. The assessee gets entitled to claim the original cost of the acquisition of membership of BSE, i.e., ₹ 2,50,01,000. Therefore there accrues an excessive benefit to the extent of depreciation aimed and allowed by the Income-tax Appellate Tribunal in this year, although this will be realised in the year in which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . A. No. 6264/Mum./2009. Ground No. 1, reads as follows : Depreciation exchange : On the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals)-8, Mumbai (hereinafter referred as the 'CIT(A)') erred in confirming the action of the Assessing Officer in disallowing the depreciation on the membership card of Bombay Stock Exchange. Disallowance of expenses under section 14A of the Act : On the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in confirming the disallowance of ₹ 4,21,701 under section 14A of the Act, as per rule 8D in respect of total dividend of ₹ 7,72,937 received by the appellant. On the issue of depreciation on membership card, the assessee relies on the judgment of the hon'ble Supreme Court in Techno Shares and Stocks Ltd. v. CIT [2010] 327 ITR 323 (SC). He submitted that the depreciation was allowed in the earlier years and once the same was held as allowable, the assessee is entitled to the claim, until such time the written down value becomes nil. He submitted that section 55(2)(ab) of the Act, is only on the computation of income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned Departmental representative relied on the orders of the authorities below and submitted that consequent to demutualisation and corporatisation, the assessee was granted 10,000 shares in the new company BSEL, as well as a right to trade subject to fulfilment of certain conditions such as making deposits, etc. He emphasised that any person could trade in BSEL subject to payment of a deposit and the right of the assessee was not an exclusive right and it was not connected or linked with his being a shareholder in BSEL. Thus, he submitted that the entire stock of the BSE card is attributable to the acquisition of 10,000 equity shares in BSEL and no part thereof can be assigned to the trading rights. He pointed out that the shares in BSEL had a high intrinsic value because of accumulated reserves and surplus. Hence, he submitted that the right of trading cannot be considered as having any value, much less written down value and, hence, question of grant of depreciation on such nil value does not arise. He relied on the provisions of section 55(2)(ab) of the Act. On the issue of disallowance under section 14A of the Act, the learned Departmental representative submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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) . . . 24. Before concluding, we wish to clarify that our present judgment is strictly confined to the right of membership conferred upon the member under the BSE membership card during the relevant assessment years. We hold that the said right of membership is a 'business or commercial right' which gives a non-defaulting continuing member a right to access the exchange and to participate therein and in that sense it is a licence or akin to licence in terms of section 32(1)(ii) of the 1961 Act. That, such a right vests in the exchange only on default/demise in terms of the rules and bye-laws of BSE, as they stood at the relevant time. Our judgment should not be understood to mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of members right into distinct segments, viz., ownership rights and trading rights. It changes the relationship between members and the stock exchange. Members while retaining their trading rights acquire ownership rights in the stock exchange, which have a market value, and they also acquire the benefits of limited liability. The shareholders in a corporatised stock exchange may be a diverse group, as members may decide to retain their shares or to sell them. Demutualisation however, does not insulate them from competition. A stock exchange whose management does not effectively work to maintain its position in the market may soon become a take-over target. 9.6 The group noted that there are two parts to this transition. One, which involves the changing the voluntary not-for-profit character of the entity into a for-profit one (in some cases into a corporate body as well) and second, is the process of delinking of ownership of the entity by the members from their trading rights. The first would involve the manner in which assets would be transferred from the existing entities to the new corporate entity, wherever demutualisation has to be accompanied by corporatisation as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds for their members. In some stock exchanges, e.g., BSE, the trading right is exercised through the ownership of a trading card, which subject to BSE's approval can be transferred for a consideration. Cards can be sold by members and also by the stock exchange when new members are introduced. 9.20 The representations received by the group from the stock exchanges, brokers' association and investors' association suggest that there are several advantages in the deposit system as opposed to the card system. The major advantages are : (i) The deposit provides a valuable source of funding for the stock exchange, which needs to make large investments in technology. (ii) The deposit is considered as part of the deposit required by the member for his trading operations as also as part of his 'net worth' unlike the card system where the amount invested by a member in the purchase of the card is not considered for either purpose. It neither forms a part of member's capital for the purpose of computing his base minimum capital, nor is it taken into account for exposure norms. 9.21 The group noted from the representations received by it that the stock excha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Value of trading rights ₹ 75 lakhs ₹ 125 lakhs The stock exchange will therefore issue to each member, on cancellation of the card, shares, which have an aggregate value of ₹ 50 lakhs and a deposit receipt of ₹ 75 lakhs. The shares may be issued at par or at premium as may be considered appropriate. In the books of the stock exchange, the aggregate value of the shares issued and deposit receipts issued will represent the total consideration. The excess of total consideration over the book value of the net assets will represent goodwill and will be recorded as such. Goodwill will have to be written off over a specified period say 20 years. A trading member can liquidate a part of his investment by selling all or part of the share capital. However, so long as he remains a trading member he has to retain the deposit. If the member wishes to terminate his membership, he can demand refund of the deposit but in order to ensure the liquidity of the stock exchange, there should be an initial 'lock-in' period of three years and thereafter such 'lock-in' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tock Exchange Ltd. 8.5 Bombay Stock Exchange Ltd. shall, for the purpose of admitting any person as a trading member of a segment, follow uniform standards in terms of capital adequacy, deposits, fees, etc. irrespective of mode of acquisition of trading right by that person : Provided that different standards may be followed for admission of a person as a trading member who has acquired trading right by way of transmission ; Provided further that different standards may be followed for admission of trading members in different segments. 8.6 A trading member may surrender his membership of any segment to Bombay Stock Exchange Ltd. in the manner specified in the rules, bye-laws and regulations of Bombay Stock Exchange Ltd. 8.7 Trading members of the cash segment of Bombay Stock Exchange Ltd. and the clearing members of the derivatives segment of Bombay Stock Exchange Ltd. shall clear and settle trades respectively till the clearing and settlement function is transferred to a recognised clearing corporation under clause 13.1 of this scheme. 8.8 Irrespective of the date or mode of acquisition of trading right, the trading members in a segment of Bombay Stock Exchange Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to obtain trading rights will be the value of the right to trade ; (xi) A trading member has to retain the deposit as long as he trades. If a trading member wishes to terminate his membership, he can demand refund of deposit. Hence, it is clear that the asset of the assessee, as it existed while it was a BSE membership cardholder, is different from the assets held by the assessee after corporatisation and demutualisation of stock exchanges, which resulted in the assessee becoming a shareholder in BSEL. The ownership rights of the assessee gives it a right to participate in the ownership of the assets and management of the stock exchange. The assessee has been granted certain shares in BSEL at par. The assessee has disclosed them as investment. Rightly, the assessee has not claimed that the shares allotted in BSEL was a business and commercial right of similar nature under section 32(1)(ii) of the Act. Coming to the trading rights, the report of the group on corporatisation and demutualisation of Stock Exchange fixed the value as equivalent to the deposit requirement. The trading right is a business and commercial rights of similar nature under section 32(1)(ii) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of his original membership of the exchange : Provided that the cost of a capital asset, being trading or clearing rights of the recognised stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of demutualisation or corporatisation, shall be deemed to be nil. 2(42)(h) in the case of a capital asset, being trading or clearing rights of a recognised stock exchange in India acquired by a person pursuant to demutualisation or corporatisation of the recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation ; (ha) in the case of a capital asset, being equity share or shares in a company allotted pursuant to demutualisation or corporatisation of a recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation ; (hb) in the case of a capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Securities and Exchange Board of India Act, 1992 (15 of 1992) ; All these sections deal with computation of capital gains under ChapterIV-E, i.e., sections 45 to 55A of the Act. In our considered opinion, these sections which are for the computation of capital gains, have no relevance on the allowability of depreciation. The argument of the assessee that it had taken the original cost of the share at Re. 1, while computing capital gain in a latter year, does not effect our decision. Thus, we uphold the order of the Assessing Officer as confirmed by the Commissioner (Appeals) wherein depreciation on membership card has been denied. Coming to disallowance under section 14A, the argument of the assessee that this is incidental income and that it has not incurred any direct or indirect expenditure is not in accordance with law. The hon'ble jurisdictional High Court in Godrej and Boyce Mfg. Co. Ltd. v. Deputy CIT [2010] 328 ITR 81 (Bom), has held that rule 8D cannot be applied retrospectively. As in the current year, rule 8D cannot be applied, we set aside the impugned order passed by the Commissioner (Appeals) and restore the matter back to the file of the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case. With regard to the remaining shares of BSE Ltd. which the assessee holds the question of computation of capital gain would continue to be the same basis on which the assessee has computed capital gain in the assessment year 2008-09. In view of the above we are of the view that the Commissioner of Income-tax (Appeals) was justified in deleting the addition made by the Assessing Officer. The order of the Commissioner of Income-tax (Appeals) does not call for any interference. Consequently ground No. 1 raised by the Revenue is dismissed. Keeping the aforesaid findings of the Tribunal in view, we dismiss the grounds raised by the Revenue. Ground No. 3, reads as follows : 3. On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in giving relief on account of transaction charges as payments made on account of transaction charges are technical services within the purview of section 194J and therefore liable for deduction of tax. The hon'ble jurisdictional High Court in CIT v. Kotak Securities Ltd. [2012] 340 ITR 333 (Bom) in I. T. A. No. 3111 of 2009, judgment dated October 21, 2011, held that transaction c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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