Full Judgment Text
1
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOs.7780-7781 OF 2010
(Arising out of SLP(C) Nos. 4053-4054 of 2010)
M/s Techno Shares & Stocks Ltd. …. Appellant(s)
Versus
The Commissioner of Income Tax IV ….Respondent(s)
With
Civil Appeal No.7782 of 2010 @ S.L.P. (C) No.34944 of
2009,
Civil Appeal Nos.7783-7785 of 2010 @ S.L.P. (C) Nos.10452-
10454 of 2010,
Civil Appeal Nos.7786-7788 of 2010 @ S.L.P. (C) Nos.11514-
11516 of 2010,
Civil Appeal No.7789 of 2010 @ S.L.P. (C) No.11518 of
2010,
Civil Appeal Nos.7790-7791 of 2010 @ S.L.P. (C) Nos.11520-
11521 of 2010,
Civil Appeal No.7792 of 2010 @ S.L.P. (C) No.11523 of 2010
and
Civil Appeal Nos.7793-7794 of 2010 @ S.L.P. (C) Nos.11524-
11525 of 2010
Civil Appeal Nos.7795-7798 of 2010 @ S.L.P. (C) Nos.4373-
4376 of 2010
Civil Appeal Nos.7799-7802 of 2010 @ S.L.P. (C) Nos.4407-
4410 of 2010
Civil Appeal Nos.7803-7804 of 2010 @ S.L.P. (C) Nos.5033-
5034 of 2010
Civil Appeal No.7805 of 2010 @ S.L.P. (C) No.5153 of 2010
Civil Appeal Nos.7806-7809 of 2010 @ S.L.P. (C) Nos.5266-
5269 of 2010
Civil Appeal Nos.7810-7812 of 2010 @ S.L.P. (C) Nos.5302-
5304 of 2010
Civil Appeal Nos.7813-7814 of 2010 @ S.L.P. (C) Nos.5541-
5542 of 2010
Civil Appeal Nos.7815-7816 of 2010 @ S.L.P. (C) Nos.5581-
5582 of 2010
Civil Appeal Nos.7817-7818 of 2010 @ S.L.P. (C) Nos.5656-
2
5657 of 2010
Civil Appeal Nos.7819-7822 of 2010 @ S.L.P. (C) Nos.6093-
6096 of 2010
Civil Appeal Nos.7823-7824 of 2010 @ S.L.P. (C) Nos.6149-
6150 of 2010
Civil Appeal Nos.7825-7827 of 2010 @ S.L.P. (C) Nos.6151-
6153 of 2010
Civil Appeal No.7828 of 2010 @ S.L.P. (C) No.6661 of 2010
Civil Appeal Nos.7829-7830 of 2010 @ S.L.P. (C) Nos.6664-
6665 of 2010
Civil Appeal No.7831 of 2010 @ S.L.P. (C) No.6666 of 2010
Civil Appeal No.7832 of 2010 @ S.L.P. (C) No.6667 of 2010
Civil Appeal Nos.7833-7835 of 2010 @ S.L.P. (C) Nos.6668-
6670 of 2010
Civil Appeal Nos.7836-7839 of 2010 @ S.L.P. (C) Nos.6672-
6675 of 2010
Civil Appeal Nos.7840-7842 of 2010 @ S.L.P. (C) Nos.6676-
6678 of 2010
Civil Appeal Nos.7843-7844 of 2010 @ S.L.P. (C) Nos.6681-
6682 of 2010
Civil Appeal No.7845 of 2010 @ S.L.P. (C) No.6683 of 2010
Civil Appeal No.7846 of 2010 @ S.L.P. (C) No.7861 of 2010
Civil Appeal Nos.7847-7848 of 2010 @ S.L.P. (C) Nos.8223-
8224 of 2010
Civil Appeal No.7849 of 2010 @ S.L.P. (C) No.9503 of 2010
Civil Appeal No.7850 of 2010 @ S.L.P. (C) No.9688 of 2010
Civil Appeal No.7851 of 2010 @ S.L.P. (C) No.9854 of 2010
Civil Appeal No.7852 of 2010 @ S.L.P. (C) No.9855 of 2010
Civil Appeal Nos.7853-7855 of 2010 @ S.L.P. (C) Nos.16258-
16260 of 2010
Civil Appeal Nos.7856-7858 of 2010 @ S.L.P. (C) Nos.6707-
6709 of 2010
Civil Appeal Nos.7859-7861 of 2010 @ S.L.P. (C) Nos.6843-
6845 of 2010
Civil Appeal Nos.7862-7864 of 2010 @ S.L.P. (C) Nos.8672-
8674 of 2010
Civil Appeal Nos.7865-7866 of 2010 @ S.L.P. (C) Nos.7003-
7004 of 2010
Civil Appeal Nos.7867-7870 of 2010 @ S.L.P. (C) Nos.7206-
7209 of 2010
Civil Appeal No.7871 of 2010 @ S.L.P. (C) No.7210 of 2010
Civil Appeal No.7872 of 2010 @ S.L.P. (C) No.7211 of 2010
Civil Appeal Nos.7873-7875 of 2010 @ S.L.P. (C) Nos.7258-
7260 of 2010
Civil Appeal Nos.7876-7878 of 2010 @ S.L.P. (C) Nos.8686-
3
8688 of 2010
Civil Appeal No.7879 of 2010 @ S.L.P. (C) No.7309 of 2010
Civil Appeal No.7880 of 2010 @ S.L.P. (C) No.7350 of 2010
Civil Appeal Nos.7881-7882 of 2010 @ S.L.P. (C) Nos.7386-
7387 of 2010
Civil Appeal Nos.7883-7884 of 2010 @ S.L.P. (C) Nos.8679-
8680 of 2010
Civil Appeal Nos.7885-7886 of 2010 @ S.L.P. (C) Nos.8681-
8682 of 2010
Civil Appeal Nos.7887-7889 of 2010 @ S.L.P. (C) Nos.7823-
7825 of 2010
Civil Appeal No.7890 of 2010 @ S.L.P. (C) No.7536 of 2010
Civil Appeal Nos.7891-7892 of 2010 @ S.L.P. (C) Nos.8676-
8677 of 2010
J U D G M E N T
S.H. KAPADIA, CJI
1. Leave granted.
2. In this batch of cases the question which arises for
determination is: whether BSE Membership Card can be
considered an intangible asset for the purpose of
depreciation under Section 32(1)(ii) of the Income Tax
Act, 1961 (for short “the 1961 Act”)?
Facts in M/s Techno Shares & Stocks Ltd. [Lead matter]
3. In this case, we are concerned with the Assessment
Years 1999-2000, 2000-2001, 2001-2002 and 2002-2003. The
assessee company filed its Return of income for the
4
Assessment Year 1999-2000 disclosing a loss of Rs.
10,77,276/-. The return was processed under Section 143(1)
on November 8, 2000. The case stood reopened under Section
147 and Notice u/s 148 stood issued to the assessee on
16.7.2002. The assessee filed its return of income under
protest. The assessee filed its return of income pursuant
to the Notice u/s 148 once again declaring loss of Rs.
10,77,276/-, the same as was in the original return of
income. The main reason for reopening of assessment under
Section 147 was the claim of depreciation by the assessee
on BSE membership card amounting to Rs. 23,65,000/-. The
claim of depreciation of the assessee was based on Section
32(1)(ii) which stood inserted by Finance (No. 2) Act,
1998 w.e.f. 1.4.1999. However, the said Section deals with
claim for depreciation of items acquired on or after
1.4.1998. The assessee claimed before the A.O. that the
BSE membership card is a “licence” or “business or
commercial right of similar nature” u/s 32(1)(ii) and is,
therefore, an intangible asset eligible for depreciation
u/s 32(1)(ii) which submission was not accepted by the
A.O. It was held that membership is only a personal
permission which is non-transferable and which does not
devolve automatically on legal heirs and, therefore, it is
5
not a privately owned asset. That, there is no ownership
of an asset and that what ultimately can be sold is only a
Right to Nomination. Further, according to the A.O., in
the case of BSE membership, there is no obsolescence, wear
and tear or diminution in value by its use, hence, the
assessee was not entitled to claim depreciation u/s
32(1)(ii). This decision of the A.O. stood affirmed by
C.I.T. (A) in the appeal filed by the assessee.
4. Aggrieved by the said decision of CIT (A), the
assessee carried the matter in appeal to the Tribunal
which took the view that since the assessee had acquired a
right to trade on the floor of BSE through the membership
card, it was not entitled to depreciation u/s 32(1)(ii) of
the 1961 Act. That, the said Card is a capital asset
through which right to trade on the floor of BSE is
acquired and since it is intangible asset the said
assessee was entitled to depreciation u/s 32(1)(ii).
5. Against the said decision, the Department carried
the matter in appeal to the High Court which came to the
conclusion, following certain decisions of this Court,
that the BSE membership card is only a personal privilege
granted to a member to trade in shares on the floor of the
Stock Exchange; that, such a privilege cannot be equated
6
with the expression “licence” or “any other business or
commercial rights of similar nature” u/s 32(1)(ii); that,
there is a difference between acquiring a know-how,
patent, copyright or trademark and acquiring a licence to
use such know-how, patent, copyright, trademark or
franchise; that the expression “business or commercial
rights of similar nature” in Section 32(1)(ii) of the 1961
Act would take its colour from the preceding words,
namely, know-how, patent, copyright, trademark and
franchise which belong to a class of intellectual property
rights and applying the rule of ejusdem generis, the High
Court held 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). Consequently, the appeals
filed by the Department stood allowed, hence, these civil
appeals.
Importance of BSE:
6. BSE is recognized by the Government of India under
7
Securities Contracts (Regulation) Act, 1956. Approximately
70000 deals are executed on a daily basis. There are about
3500 companies which are listed on BSE. The market
capitalization of the BSE is Rs. 5 trillion. The main aim
and object of the BSE is to provide a market place for the
purchase and sale of securities. It aims to promote,
develop and maintain a well regulated market for dealing
in securities and to safeguard the interests of the
members and the investing public having dealings in the
Exchange. It helps industrial development of the country
through resources mobilization. It is set up to establish
and promote “just practices” in securities transactions.
In November, 1996, the BSE constituted a Trade Guarantee
Scheme under which all trades carried out on online
trading are guaranteed by the clearing house of BSE.
Similarly, a depository has been set up as a joint venture
between BSE and Bank of India etc. BSE has introduced
trading also in fixed income securities to give impetus to
trading in debentures and corporate debt instruments to
increase trading in Government owned securities.
Question arising in the Present Matters:
7. Is depreciation allowable on the cost of a Stock
Exchange Membership Card under Section 32(1)(ii)
8
of the Income Tax Act, 1961, which was enacted and
inserted by Finance (No. 2) Act, 1998?
Answer to the above Question:
8. To answer the above question, we need to quote
hereinbelow certain relevant provisions of the 1961 Act:
2. In this Act, unless the context otherwise
requires,—
“capital asset” means property of any kind
( 14 )
held by an assessee, whether or not connected with
his business or profession, but does not include—
( i ) any stock-in-trade, consumable
stores or raw materials held for the
purposes of his business or profession ;
( ii ) personal effects, that is to say,
movable property (including wearing apparel and
furniture, but excluding jewellery) held for
personal use by the assessee or any member of
his family dependent on him.
Depreciation.
32. (1) In respect of depreciation of—
( i ) ..
( ii )know-how, patents, copyrights, trade marks,
licences, franchises or any other business or
commercial rights of similar nature, being
intangible assets acquired on or after the 1st day
of April, 1998, owned, wholly or partly, by the
assessee and used for the purposes of the business
9
or profession, the following deductions shall be
allowed—
Explanation 3 .- For the purposes of this sub-
section, the expressions “assets” and “block of
assets” shall mean-
(a) tangible assets, being buildings,
machinery, plant or furniture;
(b) intangible assets, being know-how, patents,
copyrights, trademarks, licences, franchises
or any other business or commercial rights of
similar nature.
9. We also quote hereinbelow relevant Rules of Bombay
Stock Exchange Limited as they stood at the relevant time:
“Membership a Personal Privilege
5. The membership shall constitute a
personal permission from the Exchange to
exercise the rights and privileges attached
thereto subject to the Rules, Bye-laws and
Regulations of the Exchange.
Right of Membership Inalienable
6. A member shall not assign, mortgage,
pledge, hypothecate or charge his right of
membership or any rights or privileges
attached thereto and no such attempted
assignment, mortgage, pledge, hypothecation
or charge shall be effective as against the
Exchange for any purpose nor shall any right
or interest in any membership other than the
personal right or interest of the member
therein be recognized by the Exchange. The
Governing Board shall expel any member of
the Exchange who acts or attempts to act in
violation of the provisions of this Rule.
10
Right of Nomination
7. Subject to the provisions of these
Rules a member shall have the right of
nomination which shall be personal and non-
transferable.
Right of Nomination of Deceased or Defaulter
Member
9. On the death or default of a member his
right of nomination shall cease and vest in
the Exchange.
Forfeited or Lapsed Right of Membership
10. When a right of membership is forfeited
to or vest in the Exchange under any Rule,
Bye-law or Regulation of the Exchange for the
time being in force it shall belong absolutely
to the Exchange free of all rights, claims or
interest of such member or any person claiming
through such member and the Governing Board
shall be entitled to deal with or dispose of
such right of membership as it may think fit.
Nomination by Member
11( a ) A member of not less than three
years’ standing who desires to resign may
nominate a person eligible under these Rules,
for admission to membership of the Exchange as
a candidate for admission in his place:
Provided that a member of less than three
years’ standing who desires to resign may with
the sanction of the Governing Board nominate
his own son eligible under these Rules for
11
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 exceptional
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.
*
Nomination in Case of Deceased Member
( b ) The legal representatives of a deceased
member or his heirs or the persons
mentioned in Appendix C to these Rules
may with the sanction of the Governing
Board nominate any person eligible under
these Rules for admission to membership
of the Exchange as a candidate for
admission in the place of the deceased
member. In considering such nomination
the Governing Board shall be guided so
far as practicable by the instructions
set out in Appendix C to these Rules.
Nomination in case of Defaulter
( c ) The forfeited right of membership of a
defaulter shall be restored to him if he
be re-admitted as a member within six
months from the date of default but if
an application by a defaulter for re-
admission be rejected by the Governing
Board or if no such application be made
within six months of the declaration of
12
default the Governing Board may at any
time exercise the right of nomination in
respect of such membership.
Dues and Claims
15. The Governing Board shall not approve a
nomination unless the nominating member or in
the case of a deceased member his legal
representatives or heirs or the persons
mentioned in Appendix C to these Rules or any
other person on his behalf shall have paid and
satisfied in full.
Dues of the Exchange
( i ) Such subscriptions, debts, fines, fees,
charges and other monies as shall have
been determined by the Governing Board to
be due to the Exchange or the Clearing
House by the nominating or deceased
member; and
Liabilities relating to Contracts
( ii ) Such debts, liabilities,
obligations and claims arising out of any
contracts made by such member subject to
the Rules, Bye-laws and Regulations of
the Exchange as shall have been admitted
by the Governing Board; and
(iii) all amounts due or payable by the
nominating or deceased member to the
Trade Guarantee Fund.
Allocation in Order of Priority
13
16. (1) When as provided in these Rules the
Governing Board has exercised the right
of nomination in respect of a membership
vesting in the Exchange the consideration
received therefor shall be applied to the
following purposes and in the following
order of priority, namely-
Dues of Exchange and Clearing House
( i ) first - the payment of such
subscriptions, debts, fines, fees,
charges and other monies as shall have
been determined by the Governing Board to
be due to the Exchange, to the Clearing
House or to the Trade Guarantee Fund by
the former member whose right of
membership vests in the Exchange.
Liabilities relating to Contracts
( ii ) second-the payment of such
debts, liabilities, obligations and
claims arising out of any contracts made
by such former member subject to the
Rules, Bye-laws and Regulations of the
Exchange as shall have been admitted by
the Governing Board:
Provided that if the amount
available be insufficient to pay and
satisfy all such debts, liabilities,
obligations and claims in full they shall
be paid and satisfied pro rata, and
Surplus
( iii ) third - the payment of the
surplus, if any, to the funds of the
Exchange: provided that the exchange in
general meeting may at its absolute
14
discretion direct that such surplus be
disposed of or applied in such other
manner as it may deem fit.
(2) The provisions of clause (1) of this
Rule shall not apply in cases where the
Governing Board has exercised the right
of nomination in respect of a membership
which has vested in the Exchange upon a
member having been declared a defaulter
on or subsequent to such date as the
Governing Board may specify in this
behalf.
Application of Consideration
16A When the Governing Board has exercised
the right of nomination in respect of a
membership which has vested in the
Exchange upon a member having been
declared a defaulter on or subsequent to
the date to be specified by the Governing
Board as referred to in clause (2) of
Rule 16, the consideration received
therefor shall be paid by the Governing
Board to the Defaulters’ Committee to be
applied for the purposes and in the order
of priority specified in the Bye-laws and
the Regulations of the Exchange.
10. We also quote hereinbelow Bye-law 400 of BSE, which
reads as under:
“Application of Defaulters’ Assets and Other
Amounts
Subject to the provisions of Bye-law 398,
400.
the Defaulters’ Committee shall realise and
apply all the money, rights and assets of the
defaulter which have vested in or which have
been received by the Defaulters’ Committee
(other than the amount paid by the Governing
Board to the Defaulters’ Committee pursuant to
15
Rule 16A in respect of the consideration
received by the Governing Board for exercising
the right of nomination in respect of the
defaulter’s erstwhile right of membership) and
all other assets and money of the defaulter in
the Exchange or the market including the money
and securities receivable by him from any
other member, money and securities of the
defaulter lying with the Clearing House or the
Exchange, credit balances lying in the
Clearing House, security deposits, any bank
guarantees furnished on behalf of the
defaulter, fixed deposit receipts discharged
or assigned to or in favour of the Exchange,
Base / Additional Capital deposited with the
Exchange by the defaulter, any security
created or agreed to be created by the
defaulter or any other person in favour of the
Exchange or the Defaulters’ Committee for the
obligations of the defaulter to the following
purposes and in the following order of
priority , viz.:-
(i) First - to make any payments required to
be made under Bye-law 391 and 394;
(ii) Second - the payment of such
subscriptions, debts, fines, fees, charges and
other money as shall have been determined by
the Defaulters’ Committee to be due to the
Securities and Exchange Board of India, to the
Exchange or to the Clearing House by the
defaulter;
(iii) Third - the rectification or replacement
of or compensation for any bad deliveries made
by or on behalf of the defaulter to any other
member in the settlement in which the
defaulter has been declared a defaulter or in
any prior or subsequent settlement (unless the
Governing Board has otherwise determined in
respect of such settlement or settlements
under Bye-law 394) provided the conditions of
Bye-law 153 and all other applicable Rules,
Bye-Laws and Regulations and instruc- tions of
the Governing Board are complied with;
(iv) Fourth - the balance, if any, shall be
paid into the Fund to the extent of the money
16
paid out of the Fund (other than payments made
out of Members’ refundable contributions) and
not recovered by the Fund and the interest
payable by the defaulter to the Fund in
respect thereof;
(v) Fifth - the balance, if any, shall be paid
into the Fund to the extent of the money paid
out of the Fund out of the refundable
contributions of members (other than the
refundable contribution of the defaulter) and
not recovered by the Fund and the interest
payable by the defaulter to the Fund in
respect thereof;
(vi) Sixth - subject to the Rules, Bye-Laws
and Regulation of the Exchange, including in
particular Bye-Law 343, the balance, if any,
shall be applied by the Defaulters’ Committee
for the payment of such unpaid outstandings,
debts, liabilities, obligations and claims to
or of members of the Exchange arising out of
any contracts made by the defaulter with such
members subject to the Rules, Bye-laws and
Regulations of the Exchange as shall have been
admitted by the Defaulters’ Committee;
provided that if the amount available be
insufficient to pay and satisfy all such
debts, liabilities, obligations and claims in
full they shall be paid and satisfied pro
rata;
(vii) Seventh - subject to the Rules, Bye-Laws
and Regulation of the Exchange, including in
particular Bye-Law 343, the balance, if any,
shall be applied by the Defaulters’ Committee
for the payment of such unpaid debts,
liabilities, obligations and claims to or of
the defaulter’s constituents arising out of any
contracts made by such defaulter subject to the
Rules, Bye-laws and Regulations of the Exchange
as shall have been admitted by the Governing
Board; provided that if the amount available be
insufficient to pay and satisfy all such debts,
liabilities, obligations and claims in full
they shall be paid and satisfied pro rata;
(viii) Eighth - the balance, if any, shall be
paid into the Exchange’s Customers’ Protection
17
Fund to the extent of any and all amounts paid
out of the Customers’ Protection Fund towards
the obligations or liabilities of the
defaulter and interest thereon at the rate of
2.5% per month (or such other rate as the
Governing Board may specify) from the date of
payment out of the Customers’ Protection Fund
to the date of repayment to the Fund; and
(ix) Ninth - the surplus, if any, shall be
paid to the defaulter.
Clarification : It is clarified that this Bye-law 400 does not
apply to the amount paid by the Governing Board
to the Defaulters’ Committee pursuant to Rule
16A in respect of the consideration received
by the Governing Board for exercising the
right of nomination in respect of the
defaulter’s erstwhile right of membership as
the same does not belong to the defaulter and
the defaulter has no claim, right, title or
interest therein.”
11. At the outset we wish to clarify that our present
judgment is confined to the Rules and Bye-laws of BSE, as
they stood during the relevant assessment years.
12. Section 32 of the 1961 Act provides for a deduction
of allowance being made in respect of depreciation of
building, machinery, plant or furniture, being a tangible
asset. Vide Finance (No.2) Act, 1998, the Parliament
thought it fit to extend the benefit of depreciation also
to intangible assets enumerated in Section 32(1)(ii) in
respect of know-how, patents, copyrights, trade marks,
licences, franchises or any other business or commercial
rights of similar nature, being intangible assets acquired
18
st
on or after 1 April, 1998. In the lead matter, the
assessee bought the membership card of BSE for Rs. 95
lakhs. In the case of M/s. HDFC Securities Ltd. v. The
Commissioner of Income Tax-4 (Civil Appeal arising out of
SLP (C) Nos. 5656-5657 of 2010), the assessee bought the
membership card of BSE for Rs. 2.80 crores.
13. Appellant before us claims that the membership card
enables him to trade on the floor of BSE and,
consequently, it is a business or commercial right in the
nature of a licence under Section 32(1)(ii). On the other
hand, it is the case of the Department that membership is
a personal privilege; that it is not an asset; that it is
not owned by the assessee, therefore, the claim of the
assessee for depreciation was not admissible under Section
32(1)(ii).
14. To decide the above controversy, we need to examine
the Rules of BSE.
15. Rule 5, quoted above, states that membership shall
constitute a personal permission from the Exchange to
exercise the rights and privileges attached thereto. Rule
6 inter alia states that membership shall not be
alienable. Rule 7 confers right of nomination on the
member of the Exchange. However, that Rule clarifies that
19
although a member has a right of nomination, such right
shall be personal and non-transferable. Rule 9 inter alia
states that on the demise or default of a member the said
right of nomination shall cease and vest in the Exchange.
Rule 10 refers to forfeited or lapsed right of membership.
It inter alia states that when a right of membership is
forfeited to or when such right vests in the Exchange
under any Rule or Bye-law, it shall belong absolutely to
the Exchange free of all rights, claims or interests of
such member or any person claiming through such member and
the Governing Board alone shall be entitled to deal with
or dispose of such right of membership as it may think
fit. Rule 15 inter alia states that the Governing Board
shall not approve a nomination unless the nominating
member or in the case of a deceased member his legal
representatives satisfy in full all dues of the Exchange;
all liabilities relating to contracts and all amounts due
and payable to the Trade Guarantee Fund. Rule 16 deals
with allocation in the Order of Priority. It inter alia
states that when the Board has exercised the right of
nomination in respect of a membership vesting in the
Exchange the consideration received thereof shall be
applied to the specified purposes.
20
16. On reading Rules 5 to 10 it becomes clear that the
right of nomination is conferred on the member of the
Exchange; that, the said right shall cease and vest in the
Exchange when his membership gets forfeited to the
Exchange; that on such forfeiture the right of membership
gets vested in the Exchange and on such vesting the
Exchange has the right to deal with it as it may think
fit. That, on forfeiture even the right of nomination
vests in the Exchange. Thus, a non-defaulting continuing
member owns the right of nomination with respect to the
membership of the Exchange till his right of membership is
forfeited to the Exchange.
17. The question which we are required to examine is -
whether the right of nomination in the non-defaulting
continuing member comes within the expression “business or
commercial right of similar nature” in Section 32(1)(ii)
of the 1961 Act?
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
21
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
22
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).
20. Since heavy reliance is placed by the Department on
the judgments of this Court in the following cases, we
need to discuss those judgments and clarify the position
in law:
(i) Vinay Bubna v. Stock Exchange, Mumbai [(1999) 6
SCC 215]
(ii) Stock Exchange, Ahmedabad v. Assistant
[(2001) 248 ITR 209]
Commissioner of Income-Tax
23
21. In the case of Vinay Bubna (supra) , one Yogesh Mehta
who was a member of BSE was declared a defaulter by the
Exchange. An amount of Rs. 21.81 crores was due and
payable by the defaulter to Vinay Bubna who had moved the
Bombay High Court by way of an arbitration petition
against Yogesh Mehta (defaulter). In the said
proceedings, an application was filed for appointing a
court receiver. The High Court did not grant to Vinay
Bubna any relief in respect of the membership card of the
defaulter – member. In the said proceedings, Rule 16 was
challenged on the ground that membership of BSE was an
asset of the share-broker and on its sale from the
proceedings thereof payment should be made to creditors
like Vinay Bubna and proceeds should not be allowed to be
distributed by BSE in the manner indicated by Rule 16. On
behalf of the Stock Exchange, it was submitted that after
respondent No. 3, Yogesh Mehta stood declared to be a
defaulter he ceased to be the member of the Stock Exchange
whereupon his rights of membership vested in the Exchange
free of all rights, claims and interests and, therefore,
the Exchange was at liberty to invite applications from
other persons and to admit anyone who offers to pay the
highest amount. It was argued that the said proceeds so
24
received did not belong to the ex-member and the order of
priority contained in Rule 16 was just and fair and was
not illegal, wrong or arbitrary. The contention of the
Stock Exchange was accepted by this Court observing that
when the defaulting member is expelled from the Exchange
no interest in his membership card remains in himself and
none can pass to his assignee. It was held that once the
membership ceases to be an asset of the share-broker the
question of Rule 16 being contrary to the insolvency law
does not arise. In our view, the judgment in
Vinay
supports our reasoning in this case. The
Bubna’s case
judgment in clearly indicates that it
Vinay Bubna’s case
was a case dealing with the rights of a defaulting non-
continuing member. The judgment in Vinay Bubna’s case
clearly indicates that membership card is an asset of a
non-defaulting continuing member. However, the membership
card ceases to be an asset only when the member commits a
default in which event the card vests in the Exchange free
from all encumbrances and once it so vests in the Exchange
then the Exchange is free to allocate the consideration in
the order of priority indicated by Rule 16.
22. In the case of Stock Exchange, Ahmedabad (supra) ,
the question which arose for determination was whether
25
after the demise of a stock-broker could he be declared a
defaulter by the Exchange? In that case the facts were as
follows. Ahmedabad Stock Exchange (ASE) admitted Rajesh
th th
Shah as its member on 19 February, 1988. He died on 7
February, 1994. On February 12, 1994, his legal
representatives wrote to the Stock Exchange that they were
unable to meet the liabilities of the deceased.
Thereafter, the Governing Board of ASE passed a resolution
th
on 12 February, 1994 declaring Rajesh Shah, the deceased
member, as a “deemed defaulter”. By the said resolution,
the Board resolved that the membership rights of the
deceased member who was declared to be a deemed defaulter
should vest in the Stock Exchange and the said membership
rights be disposed of by inviting offers within a minimum
floor price of Rs. 25 lakhs. It is the said declaration
th
dated 12 February, 1994 by which Rajesh Shah was declared
to be a deemed defaulter came to be challenged. Another
interesting fact which needs to be mentioned was that on
th
15 February, 1994 a provisional attachment order was
passed under Section 281B of the 1961 Act in respect of
th
the membership card in the name of Rajesh Shah. On 16
February, 1994, the Stock Exchange issued advertisement
inviting claims from member creditors to lodge their
26
claims within 30 days. They invited offers for purchase
of membership also within the minimum floor price of Rs.
th
25 lakhs. On 5 December, 1994, ASE passed a resolution
disposing of the membership right of the deceased in
favour of UTI Security Ltd. for Rs. 27 lakhs. However, a
garnishee notice was issued by the Department under
Section 226(3) of the 1961 Act in the sum of Rs. 12.25
lakhs. That notice was addressed to the Executive
Director of the Stock Exchange by the Department. Under
the said circumstances, ASE filed a writ petition in the
High Court challenging the orders of provisional
attachment as well as the garnishee notice. The question
for determination which arose in the said judgment was as
to the nature of the rights of the deceased or his legal
representatives in the membership card. It was held by
this Court, after examining the Rules and the Bye-laws,
that the right of nomination which earlier vested in
Rajesh Shah stood vested in the Exchange under the Rules
when he committed default. On default, that right vested
in the Stock Exchange absolutely and, therefore, the
consideration received by the Stock Exchange of Rs. 27
lakhs from UTI Security Ltd. could not be attached by the
Income Tax Department because on vesting, such right of
27
nomination belonged to the Exchange absolutely.
23. For the afore-stated reasons, we are of the view
that both the afore-stated judgments support the reasoning
given by us hereinabove.
24. Before concluding, we wish to clarify that our
present judgment is strictly confined to the right of
membership conferred upon the member under the BSE
membership card during the relevant assessment years. We
hold that the said right of membership is a “business or
commercial right” which gives a non-defaulting continuing
member a right to access the Exchange and to participate
therein and in that sense it is a licence or akin to
licence in terms of Section 32(1)(ii) of the 1961 Act.
That, such a right vests in the Exchange only on default/
demise in terms of the Rules and Bye-laws of BSE, as they
stood at the relevant time. Our judgment should not be
understood to mean that every business or commercial right
would constitute a “licence” or a “franchise” in terms of
Section 32(1)(ii) of the 1961 Act.
Conclusion
25. We answer the question at page 6 in the affirmative
by holding that on the facts and circumstances of these
cases the Tribunal was right in holding that depreciation
28
was allowable on the cost of the membership card under
Section 32(1)(ii) of the 1961 Act. Accordingly, the
impugned judgment(s) of the Bombay High Court is set aside
and the appeal(s) filed by the nominated non-defaulting
continuing member stands allowed with no order as to
costs.
...................CJI
(S. H. Kapadia)
.....................J.
(K.S. Radhakrishnan)
New Delhi;
September 09, 2010