2010 (9) TMI 6 - SC - Income Tax

Membership card deemed intangible licence under s.32(1)(ii), allowing depreciation of its cost as business expense

M/s Techno Shares & Stocks Ltd. Versus The Commissioner of Income Tax IV

SC held that a stock-exchange membership card is an intangible licence-like commercial right falling under s.32(1)(ii) of the 1961 Act, so depreciation on ... Depreciation u/s 32(1)(ii) - BSE Membership card - intangible asset - Nature and ownership of the BSE Membership Card - expression 'licence' or 'any other business or commercial rights of similar nature' - Held that:- 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. - the right of membership (including the right of nomination) vests in the Exchange only when a member commits default. Otherwise, he continues to participate in the trading session on the floor of the Exchange; that he continues to deal with other members of the Exchange and even has the right to nominate subject to compliance of the Rules. Moreover, by virtue of Explanation 3 to Section 32(1)(ii) the commercial or business right which is similar to a 'licence' or 'franchise' is declared to be an intangible asset. - 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. Issues Involved:1. Eligibility of BSE Membership Card as an intangible asset for depreciation under Section 32(1)(ii) of the Income Tax Act, 1961.2. Nature and ownership of the BSE Membership Card.3. Interpretation of relevant rules and bye-laws of the Bombay Stock Exchange (BSE).Issue-wise Detailed Analysis:1. Eligibility of BSE Membership Card for Depreciation under Section 32(1)(ii):The primary question was whether the BSE Membership Card qualifies as an intangible asset eligible for depreciation under Section 32(1)(ii) of the Income Tax Act, 1961. The assessee argued that the card is a 'licence' or 'business or commercial right of similar nature' and thus depreciable. The Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this claim, stating that the membership card is a personal permission, non-transferable, and does not exhibit wear and tear or obsolescence. The Tribunal, however, held that the membership card is a capital asset that grants the right to trade on the BSE floor, thus qualifying as an intangible asset under Section 32(1)(ii). The High Court reversed this decision, concluding that the card is a personal privilege, not a 'licence' or 'business or commercial right' as defined in the Act.2. Nature and Ownership of the BSE Membership Card:The Supreme Court examined whether the BSE Membership Card constitutes a 'business or commercial right of similar nature' under Section 32(1)(ii). The Court analyzed BSE rules, particularly Rules 5 to 10, which describe the membership as a personal privilege, non-alienable, and subject to forfeiture upon default or demise. Despite these restrictions, the Court found that the membership card grants significant commercial rights, including the right to trade on the BSE floor, which has economic and monetary value. This right is akin to a 'licence' enabling the holder to access and participate in the market, thus qualifying as an intangible asset under Section 32(1)(ii).3. Interpretation of Relevant Rules and Bye-laws of BSE:The Court scrutinized various BSE rules and bye-laws to determine the nature of the membership card. Rule 5 describes the membership as a personal permission, Rule 6 prohibits its alienation, and Rule 7 grants a non-transferable right of nomination. Rules 9 and 10 state that upon default or demise, the membership vests in the Exchange. Rule 16 outlines the allocation of proceeds from the sale of a forfeited membership. The Court concluded that these rules indicate that the membership card, while subject to forfeiture, provides significant commercial rights to the non-defaulting member, thus constituting a 'business or commercial right' under Section 32(1)(ii).Conclusion:The Supreme Court held that the BSE Membership Card is a 'business or commercial right' eligible for depreciation under Section 32(1)(ii) of the Income Tax Act, 1961. The Court emphasized that this judgment is confined to the specific rules and bye-laws of BSE as they stood during the relevant assessment years. The judgment clarifies that not every business or commercial right would constitute a 'licence' or 'franchise' under Section 32(1)(ii). The impugned judgment of the Bombay High Court was set aside, and the appeal by the assessee was allowed with no order as to costs.