TaxTMI 
TaxTMI 
2011 (11) TMI 535
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....a company incorporated under the Companies Act, 1956, under the name and style "Bombay Stock Exchange Ltd." (for short "BSEL"). The purpose for which the company was floated was to assist, regulate and control the business of buying, selling or dealing in securities as recognised stock exchange and segregation of ownership rights and management of the exchange from the trading rights of the members was contemplated. The assessee was granted 10,000 shares of the newly incorporated company BSEL, as he was an owner of BSE card. The Assessing Officer was of the view that the membership rights of the BSEL does not satisfy the conditions laid down under section 32(1)(b) of the Act for the reasons-(i) all the operations of BSE were taken over by BSEL with effect from August 19, 2005 and each holder of a BSE card given 10,000 shares of the newly incorporated company BSEL ; (ii) according to the new scheme, a trading member may or may not be a shareholder and a shareholder may not be a trading member. Hence, he concluded that the trading rights of BSE card got extinguished. The Assessing Officer also observed that new persons can do trading in BSE based on a deposits kept with it, which is ....
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.... and incident following from the legal fiction enunciated by section 55(2)(ab). This tantamount to recovering back the allowance of depreciation allowed under section 41(1)(a) of the Act, amounting to Rs. 1,80,79,337 (Rs. 2,50,01,000 Rs. 69,21,663)." Alternatively, the Assessing Officer held that no part of the original cost of BSE card can be attributed to the right to conduct trading and, hence, the assessee would not be entitled to the claim of depreciation. The Assessing Officer, at paragraph 3.18/page 8 of the assessment order, concluded as follows : "3.18 In view of above discussion, the assessee is not entitled for claim of depreciation in this year also, therefore, the claim of depreciation on BSE card of Rs. 17,30,416 is disallowed for this year. A protective addition of Rs. 1,80,79,337 is being therefore made in this case, as depreciation is denied to the assessee. In case it is finally held that the depreciation on BSE card is allowable the said disallowance would be Rs. 2,50,01,000." The Assessing Officer also made disallowances under section 14A as well as under section 40(a)(ia) of the Act and arrived at a total income of Rs. 2,60,41,151. Aggrieved, the asses....
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....claimed by the assessee under section 32(1)(i) of the Act. Section 2(42A) sub-clauses (h), (ha) inserted by the Finance Act, 2003, with effect from April 1, 2004, stipulates that capital assets being equity shares allotted on demutualisation, the period of holding of the capital assets shall include the period for which the person was a member of BSE and that this section also is concerned with the computation of capital gain only. He contends that there appears to be a lacuna in the Act which unintentionally provided double benefit to the assessee. The hon'ble Supreme Court has held that the BSE membership card falls within the definition of intangible asset and is eligible for depreciation and whereas for the purpose of computation of capital gains, the original cost of membership is considered and the period of holding would be reckoned from the date of acquisition of the original BSE card. He submitted that the assessee gets double benefit. However, learned counsel pointed out that the assessee, in the present case, has not claimed any double benefit since it has offered short-term capital gains of Rs. 2,37,17,383, in respect of 4,562 shares sold by them during the asses....
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....arned, the expenditure incurred in relation to income should also be excluded. The rival contentions heard. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record, as well as the case law cited before us, we hold as follows : The first issue is, whether the assessee is entitled to depreciation on the written down value of the erstwhile BSE card after becoming a member of BSEL. The assessee, consequent to demutualisation, has acquired two separate rights in new company BSEL. These rights are (i) ownership rights, and (ii) trading rights. These assets are held as a consequence to the assessee being a BSE membership cardholder. The hon'ble Supreme Court in Techno Shares and Stocks Ltd. [2010] 327 ITR 323 (SC) held that the BSE membership card conferred certain rights to the members in terms of rules and bylaws of BSE, as they stood during the relevant years, and that this was a business in commercial right. Paragraphs 19 and 25 of the judgment of the hon'ble Supreme Court in Techno Shares and Stocks Ltd., reads as follows (pages 334 and 336) : "19. The next question is-whether the membership right could be said to be o....
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....or a 'franchise' in terms of section 32(1)(ii) of the 1961 Act." (emphasis added). The question before us is whether this right, i.e., "the rights conferred upon the members as a BSE membership cardholder" which was held to be a depreciable asset, continues to be held in the same form by the assessee. The judgment of the hon'ble Supreme Court, as it is clear, does not extend to the current assessment year. This right as a BSE membership cardholder has undergone a change consequent to corporatisation and demutualisation of BSE. The rights in question are not held in the same form. To understand "corporatisation" and "demutualisation" of the stock exchange, we extract certain portions of the group report for ready reference : "Report of the group on corporatisation and demutualisation of stock exchanges : 1. Introduction : 1.1 The Government had announced its proposal to corporatise the stock exchanges by which ownership, management and trading rights would be segregated from each other and legislative changes, if required, would be proposed accordingly to give effect to the corporatisation and demutualisation of stock exchanges. The Finance Minister has also emp....
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....ion of these assets to the members. All stock exchanges, with the exception of the NSE, OTCEI and ICSEI have the concept of membership cards for their members. The twin rights of trading and an undivided interest in the ownership of the stock exchange are embedded in the membership card of a stock exchange. The transition to a demutualised stock exchange would involve the segregation of these twin rights into two separate and independent rights, viz., (a) the right to participate in the ownership of the assets of the stock exchange, and (b) the right to trade on the stock exchange. 9.8 This decoupling of the two rights would have to be effected through the cancellation of the card against a consideration of creation of two assets or two rights-one, an interest in the assets of the stock exchange and the other interest in the trading right. The interest in the asset is created by issuance of shares in the new entity in lieu of the consideration of extinguishment of cards currently owned by the members in the mutual entity. Internationally also, stock exchanges have followed the same procedure for demutualisation. The manner in which the interest in the trading rights would ....
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....he group therefore recommends that (a) the trading card system be replaced by the deposit system wherein the money deposited by the member to obtain trading rights only, be considered as deposit with the stock exchange for trading purpose. While the group favours the deposit system, it would like to leave the choice of adopting either the card or the deposit system to the stock exchanges ; and (b) the following procedures be adopted if the deposit system is accepted by an stock exchange for the purpose of segregation of the trading rights and ownership. As an illustration only, some figures have been assumed. Members of a stock exchange currently own an asset, viz., a card whose value can be assessed on two different parameters, viz., (i) the market value of the card as evidenced by the actual transactions which have taken place in recent years ; (ii) the fair value of the card derived by dividing the fair value of the stock exchange by the number of cards. This value can be determined by using some of the well-established bases like 'the underlying asset' approach, the 'income' approach, etc., and the task can be entrusted to professional valuers ; (....
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.... India Notification Mumbai, the 20th May, 2005 Securities and Exchange Board of India, Mumbai Order under section 4b(6) read with section 4b(7) of the Securities Contracts (Regulation) Act, 1956 in the matter of the BSE (Corporatisation and Demutualisation) Scheme, 2005. S. O. 684(E).-1.0 BSE (also known as 'The Stock Exchange, Mumbai') is an association of person and a recognised stock exchange having its principal place of business at Phiroze Jeejeebhoy Towers, Dalal Street, Fort, Mumbai 400 001. It is required to be corporatised and demutualised under the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as 'the SC(R)A'). 3. Incorporation of Bombay Stock Exchange Ltd. 3.1 The first shareholders shall incorporate a public company limited by shares under section 12 of the Companies Act, 1956 in the name and style of 'Bombay Stock Exchange Ltd.'. The first shareholders shall each subscribe to and pay for 10,000 fully paid-up equity shares of the face value of Re. 1 each for cash at par of Bombay Stock Exchange Ltd. 8. Trading rights 8.1 A member or a limited trading member of BSE, who is registered as ....
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....e due date. 8.9 Trading members of Bombay Stock Exchange Ltd. on the due date shall continue to have the same rights and privileges in respect of their clients and constituents and other members arising out of or under any act, omission or contract or law, notification, order, direction, etc., as had accrued to them while being members or limited trading members of BSE or trading members and or clearing member of derivative segment of BSE on or before the due date. 8.10 Trading members of Bombay Stock Exchange Ltd. shall be bound by all obligations and liabilities towards their clients and constituents, SEBI, BSE and other authorities or other persons arising out of or under any act, omission or contract or law, notification, order, direction, etc. while being members or limited trading members of BSE or trading members and/or clearing members of derivative segment of BSE on or before the due date." From the above, the following conclusions can be drawn. (i) BSE which was a voluntary, not for profit character of entity, got converted into a 'for profit' and corporate activity ; (ii) BSE membership card is cancelled and the twin rights that a holder of BSE car....
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....the Assessing Officer was right in holding that no depreciation can be granted on the written down value of the BSE membership card. At best, the claim for depreciation can be on a trading right of the members, which is newly acquired, which aspect we will discuss hereafter. As we have noticed, the group on corporatisation and demutualisation of stock exchanges has suggested the manner of valuation of ownership rights and trading rights. It was recommended that the value of trading rights be fixed at the amount of deposit that was required for acquiring trading rights. The value of the BSE card to the extent allocable or attributable to ownership rights, can be said to have been transmitted by way of allotment of shares in BSEL. The value is to be determined by the underlying value of assets of BSEL or through some other approved method. Coming to trading rights, we find that the value that can be assigned from out of the value of BSE card is only to the extent of deposit made. Trading right is no doubt a business and commercial right but its value is equivalent to the quantum of deposit. The assessee is entitled to refund of the deposit. When the value is equal to a refundable ....
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....mployees), the period shall be reckoned from the date of allotment or transfer of such specified security or sweat equity shares. 47(xiii) any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in the course of demutualisation or corporatisation of a recognised stock exchange in India as a result of which an association of persons or body of individuals is succeeded by such company : Provided that (a) all the assets and liabilities of the firm or of the association of persons or body of individuals relating to the business immediately before the succession become the assets and liabilities of the company; (b) all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession ; (c) the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company ; and (d)....
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.... No. 1, reads as follows : "1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in deleting the disallowance of Rs. 1,80,79,337 made on account of protective addition on BSE card. 2. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in ignoring the provision of sections 41(1) and 28(iv) of the Income-tax Act." After hearing both parties, we find that the issue is covered against the Revenue and in favour of the assessee by the decision of the Mumbai "C" Bench of the Tribunal in I. T. A. No. 5538/Mum/2009, for the assessment year 2006-07, in Asst. CIT v. Omniscient Securities P. Ltd. [2012] 15 ITR (Trib) 82 (Mumbai), order dated March 16, 2011, wherein the Tribunal, vide paragraph 10, dismissed the ground raised by the Revenue, which reads as follows (page 87) : "10. We have considered the rival submissions. We find that the entire case of the Assessing Officer is on the premise that in the event of sale of the shares which the assessee acquired on corporatisation and demutualisation of BSE as a company, the assessee would take the benefi....