TMI Blog2002 (9) TMI 850X X X X Extracts X X X X X X X X Extracts X X X X ..... . The said agreement describes the assessee as the Seller and the aforesaid company as the Buyer . Clauses 1 to 5 of the said agreement are of the relevance and are, therefore, reproduced below : 1. The Seller i.e. Mr. Upendra M. Dalal, shall nominate the Buyer i.e. Saurashtra Capital Services Pvt. Ltd., for the membership of the Stock Exchange, Bombay in his place for a consideration of ₹ 2,40,00,000 (Rupees Two Crores Forty Lakhs only). 2. Out of the agreed consideration of ₹ 2,40,00,000 (Rupees Two Crores Forty Lakhs Only) the Buyer on behalf of the Seller shall pay the Seller said sum of ₹ 40,00,000 (Rupees Forty Lakhs Only) by pay order in favour of said Oman International Bank and a sum of ₹ 5,00,000 (Rupees Five Lakhs only) to the Seller, aggregating to ₹ 45,00,000 (Rupees Forty Five Lakhs only), (the receipt whereof the said Seller hereby admits and acknowledges separately by the letter). The balance consideration of ₹ 1,95,00,000 (Rupees One Crore Ninety Five Lakhs only) shall be paid by the Buyer to the Seller as follows : (a)The admitted liabilities of the Seller pertaining to the transactions made subject to the Bye- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et. The Assessing Officer, therefore, held that the gains made on sale of Membership Card were liable to tax under the head Capital Gains . After deducting indexed cost of acquisition amounting to ₹ 92,730, he brought the amount of ₹ 2,39,07,270 to tax as long term capital gains. 4. The assessee carried the matter in appeal before the learned CIT(A). Before the learned CIT(A) reliance was placed on the aforesaid decision of Hon ble Supreme Court in the case of Vinay Bubna (supra) and also on the decision of Hon ble Bombay High Court in the case of Mrs. Sejal Rikeen Dalal v. Stock Exchange, Bombay AIR 1991 Bom. 30, wherein the Hon ble Bombay High Court held that membership of Bombay Stock Exchange was not a transferable right and that it was a personal permission granted by the Stock Exchange to an individual member. This case related to share broker who died in an accident and on his death his right of nomination ceased and vested in the Stock Exchange. It is on these facts, Hon ble Bombay High Court held that there was no property in Membership Card. The learned CIT(A) examined the terms and conditions on which the Membership Cards are issued and came to the conclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 90. It was argued that though the decision was delivered under the provisions of the Wealth-tax Act, 1957, the ratio thereof would apply even to income tax. The Wealth-tax Bench has held that Bombay Stock Exchange card is not be liable to wealth-tax as it was not an asset within the meaning of section 2(e) of the said Act. The said decision was based on the decision of Hon ble High Court referred to earlier and the decision of the Hon ble Apex Court in the case of Stock Exchange, Ahmedabad v. Asstt. CIT [2001] 248 ITR 2091. Shri Girish Dave, learned DR, on the other hand, argued that the decisions relied upon by the learned AR have no application to the facts of the present case as those applied to the cases which involved loss of right of nomination due to death or default of Stock Exchange Card Holders and that the decision under the Wealth-tax Act cannot apply to income-tax as wealth tax involves annual levy while capital gains tax is a one time levy. It was also argued that definitions of a capital asset under the Wealth-tax Act and the Income-tax Act differ in content and scope. 6. The core issue involved in this case revolves around interpretation of the provisions of Bomb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing who desires to resign may with the sanction of the Governing Board nominate his own son eligible under these Rules for admission to membership of the Exchange as a candidate for admission in his place : Provided further that the Governing Board may, at its absolute discretion and in exception cases and for cogent reasons to be recorded in writing, permit by a special resolution, a member of less than three years standing, who desires to resign, to nominate a person as a candidate for admission in his place, subject to such terms and conditions as the Governing Board may in its absolute discretion think fit to impose. Provided further that a member of less than three years standing may resign and exercise his right of nomination in favour of a company with the sanction of the Governing Board on the following conditions namely : (i)He shall be a director of such company for a period of such number of years as would be brought him three years standing had he not resigned from the membership. (ii)He shall not hold less than 51% of the paid up equity capital of the company for the period mentioned in sub-clause (i); and (iii)The company is eligible for mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he conclusion that on a default being committed the share broker ceases to become a member of the exchange and all his rights, privileges, etc. as a member come to an end. If he does not clear the dues within six months the governing body then has a right of nomination in respect of such membership. It will be incorrect to state that on the stock broker ceasing to be a member, he still retains any right or interest in the permission which has been granted to him by the exchange to carry on business as a member. The membership card of a share broker is not his personal property which on default being committed by him and his ceasing to be a member, can be sold and the proceeds distributed amongst his creditors. Rules 53 and 54 leave no manner of doubt that the member s right of membership vests in the exchange after he is declared defaulter. Not only is rule 16 not illegal, arbitrary or unjust but the same is, on the other hand, framed in such a manner that the hardship which may be caused by the default committed by a erstwhile member is mitigated. There is nothing unfair or unjust in rule 16 providing that the first priority from out of the sale proceeds given to the debts, liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minate a member as set out in Rule 11. In the case of a deceased member, under Rule 9, on his death, his right of nomination ceases and vests in the exchange. There is, therefore, no property in membership. The aforesaid decision related to a case where one Pradip Harkishandas Dalal was a member of the Stock Exchange, Bombay. He died in an Air crash. The legal heirs appointed Smt. Sejal Dalal, the daughter-in-law of Pradip as the nominee who applied for transfer of the Card of the Stock Exchange. The Governing Body of the Stock Exchange declined to grant the permission for transfer of the Card to Smt. Sejal Dalal and the Hon ble Bombay High Court held that the Rules enabling the Governing Body to reject an application of a nominee were not ultra vires the Constitution and the order of the Governing body could not be faulted. 10. The next case to be noticed is the decision of the Hon ble Supreme Court in the case of Stock Exchange, Ahmedabad (supra). This was a case in which one Rajesh Shah who was a member of Ahmedabad Stock Exchanged died on 7th February, 1994. The Governing Body of Ahmedabad Stock Exchange declared Rajesh Shah a deemed defaulter and under Rule 9, the memb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atio of the ITAT, Special Bench decision was not applicable. Before us, heavy reliance was placed on the observation of Wealth-tax Bench in the said order and it was argued that what cannot constitute an asset for the purpose of wealth-tax it could not be asset for the purpose of the Income-tax Act, 1961. 13. The learned DR refer to the provisions of section 47(xi) of the Income-tax Act. This clause was inserted by the Finance Act, 1997 w.e.f. 1-4-1998. It provides that capital gains shall not be chargeable under section 45 in respect of any transfer made on or before the 31st day of December, 1998 by a person of a capital asset being membership of a recognized stock exchange to a company in exchange of shares allotted by that company to the transferor . The Explanation to the clause provides that membership of a stock exchange means membership of a stock exchange recognized under the Securities Contracts (Regulation) Act, 1956. The learned DR argued that but for this provision inserted by the Finance Act the transfer of Stock Exchange Card would mean transfer of a capital asset within the meaning of section 45. The learned AR referred to the paras 25 to 28 of the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effects etc. This is a definition which is different from the definition of asset contained in section 2(e) of the Wealth-tax Act, 1957. From the catena of decisions discussed earlier, it is quite clear that when a member of the Bombay Stock Exchange commits a default or he dies, his right of nomination lapses and there remains no property or an asset which could be said to be held by the defaulting Member or the deceased Member. It is also correct to say, as has been held by the Wealth-tax Bench of ITAT, Bombay, that even in the hands of the non-defaulting continuing Member mere possession of a Stock Exchange Card does not amount to possession of an asset, as the Card merely grants a personal privilege. However, it is difficult to agree with the learned AR for the assessee that the personal privilege enjoyed by the Member of the Bombay Stock Exchange is identical to the privilege enjoyed by members of professional bodies, such as lawyers and Advocates who are Members of the Bar Council of India. Membership of the Bar Council of India is not transferable by nomination and at all stages and at all times it remains a personal privilege, unlike the membership of Bombay Stock Exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ror was a valuable right of carrying on the business of a share broker in the Bombay Stock Exchange. The Stock Exchange Card has been transferred in the present case for a consideration of ₹ 2.40 crores. The assessee selected the nominee. The assessee was not declared a defaulter. He had a right to nominate. The Bombay Stock Exchange subsequently approved the nomination. What the assessee transferred was a valuable asset for which he realized the price of ₹ 2.4 crores. When the member puts his membership for sale and realizes a substantial value, it is difficult to deny that a valuable asset has been transferred. When membership of the Bombay Stock Exchange is put on sale through the nomination, a personal privilege is converted into an asset and the consequential gain is exigible to tax. This would be in line with the legislative intent as apparent from the provisions of section 47(xi) and the CBDT Circular quoted in para 14 above. This would also be in conformity with the ground realities which show that membership cards are being sold for substantial consideration. 17. In view of the foregoing, we find no infirmity in the order of the learned Assessing Officer and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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