2015 (8) TMI 180 - HC - Income Tax

Delhi Stock Exchange Membership Not Taxable Asset: High Court Decision

The High Court held that membership of the Delhi Stock Exchange Ltd. is not considered an asset for gift tax purposes. The Court rejected the composite ... Membership of stock exchange not property - right of membership as a personal privilege - non-transferability of membership except as provided by rules - transfer of share does not automatically transfer membership rights - composite valuation of share and trading ticket disallowed for gift taxMembership of stock exchange not property - right of membership as a personal privilege - Membership of the Delhi Stock Exchange (DSE) is not an asset of the shareholder and transfer thereof is not exigible to gift tax under the Gift Tax Act, 1958. - HELD THAT: - The Court examined the Memorandum and Articles of Association of the DSE and observed that the issue and transfer of shares and the conferment, transfer or termination of membership are regulated separately by the Articles. The Articles prescribe specific conditions, procedures and restrictions for admission, transfer and termination of membership and vest the Board with powers to refuse or condition registration of transfers. In light of these provisions and consistent with the settled view that membership is a personal privilege, non-transferable and hedged by rules, the Court held that membership is not the assessee's property capable of being taxed as a gift when a share is transferred. The Tribunal's conclusion that membership was an asset exigible to gift tax was therefore not justified. [Paras 9]Answered in favour of the assessee; membership of DSE held not to be an asset chargeable to gift tax.Composite valuation of share and trading ticket disallowed - transfer of share does not automatically transfer membership rights - The composite valuation of the share together with the trading ticket/membership for the purpose of computing gift tax is not permissible. - HELD THAT: - Having held that membership is not an asset of the transferor and that membership rights are governed separately and are not automatically conveyed by transfer of a share, the Court rejected the premise underlying adoption of a composite value (share plus ticket) for gift-tax computation. Because the membership right was not part of the gift, its value could not be aggregated with the share value for gift-tax purposes. [Paras 10]Answered in the negative; adoption of a composite value of share and ticket for gift tax was not justified.Final Conclusion: Reference disposed of: the Tribunal's findings that membership of DSE constituted an asset chargeable to gift tax and that a composite value of share plus ticket should be adopted were set aside; the Court did not adjudicate on the method of valuation of the share for gift-tax purposes as that question was not raised by the Revenue. Issues:1. Whether membership of the Delhi Stock Exchange Ltd. (DSE) and a share in DSE are considered property/assets for gift tax under the Gift Tax Act, 1958Rs.2. Whether the composite value of a share in DSE and the membership ticket should be adopted for gift tax purposesRs.Analysis:Issue 1:The Assessee declared a gift of a share of DSE to his son, which included the right to enter the trading ring as a broker. The Assessing Officer valued the gift at Rs. 40 lakhs, considering both the share and the membership rights. The Commissioner of Gift-Tax (Appeals) and the Special Bench, ITAT upheld this valuation. However, the Assessee argued that membership of DSE is distinct from holding shares, citing legal precedents. The High Court examined the Memorandum and Articles of Association of DSE, which clearly distinguished between share transfers and membership conditions. Legal precedents highlighted that membership rights are personal privileges and not tangible assets. The Court held that membership of DSE is not an asset and not subject to gift tax.Issue 2:Regarding the composite valuation of the share and membership ticket, the High Court ruled against adopting such a valuation. The Court referenced a previous decision that mandated valuing shares as per Schedule III of the Wealth Tax Act. However, as the Revenue did not raise any specific valuation issue for gift tax purposes, the Court did not delve into the correctness of share valuation for gift tax. Therefore, the Court answered the second question in the negative, rejecting the composite valuation approach.In conclusion, the High Court held that membership of DSE is not an asset for gift tax purposes and dismissed the composite valuation method for gift tax assessment. The reference under Section 26(1) of the Gift Tax Act, 1958 for Assessment Year 1992-93 was disposed of accordingly.