Apex Court in a recent judgment upheld the order of ITAT in which tribunal has allowed deprecation on membership card u/s 32.

See: M/s Techno Shares & Stocks Ltd. Versus The Commissioner of Income Tax IV [2010 -TMI - 77379 - SUPREME COURT OF INDIA]

In this case, ITAT allowed the depreciation on membership card by holding that the said card is capital asset for the purpose of section 32.

Bombay High Court [2009 -TMI - 34562 - BOMBAY HIGH COURT] did not find the order of ITAT justified and disallowed the depreciation on membership card by holding that the expression "licence" as well as the expression "business and commercial rights of similar nature" in Section 32(1)(ii) of the 1961 Act are referable to IPRs such as know-how, patent, copyright, trademark and franchise and since the BSE membership card does not fall in any of the above categories, the claim for depreciation was not admissible on the BSE membership card acquired by the assessee u/s 32(1)(ii).

Finally, on an appeal filed by the assessee, honorable Supreme Court has analyzed the provisions of Bye Laws of BSE to determine the nature of membership card and held as under:

"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 this right of membership which allows the non-defaulting member to participate in the trading session on the floor of the Exchange. Thus, the said membership right is a "business or commercial right" conferred by the Rules of BSE on the non-defaulting continuing member. 

19. The next question is -whether the membership right could be said to be owned by the assessee and used for the business purpose in terms of Section 32(1)(ii). Our answer is in the affirmative for the reason that the Rules and the Bye-laws analysed hereinabove indicate that 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. Moreover, under Rule 5 membership is a personal permission from the Exchange which is nothing but a "licence" which enables the member to exercise rights and privileges attached thereto. It is this licence which enables the member to trade on the floor of the Exchange and to participate in the trading session on the floor of the Exchange. It is this licence which enables the 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)."

In this matter, revenue relied upon the following two decisions of the SC against the assessee but the court found and applied the two decision in favor of assessee.

(i) Vinay Bubna v. Stock Exchange, Mumbai [2010 -TMI - 77382 - SUPREME COURT OF INDIA]

(ii)Stock Exchange, Ahmedabad v. Assistant Commissioner of Income-Tax [2008 -TMI - 5984 - SUPREME Court]  

See: M/s Techno Shares & Stocks Ltd. Versus The Commissioner of Income Tax IV [2010 -TMI - 77379 - SUPREME COURT OF INDIA]

 

Business or commercial licence: membership card treated as intangible asset eligible for depreciation under section 32. The membership right in a stock exchange is a personal permission akin to a licence, granting the holder economic rights to access the market and participate in trading; by virtue of Explanation 3 it is an intangible asset and therefore a business or commercial right of similar nature that satisfies the statutory test for being a depreciable asset under the provision governing licences and like rights.