Supreme Court of India
M/S. TECHNO SHARES & STOCKS LTD.versusTHE COMMISSIONER OF INCOME TAX IV
- Citation
- 2010 INSC 596
- Decided
- 9 September 2010
- Disposal
- Appeal(s) allowed
- Bench
- S H KAPADIA
Holding
Depreciation under Section 32(1)(ii) is permissible on the cost of a BSE membership card as it is a business or commercial right akin to a licence.
Summary
M/s. Techno Shares & Stocks Ltd. claimed depreciation on the cost of its Bombay Stock Exchange (BSE) membership card for assessment years 1999-2003, invoking Section 32(1)(ii) of the Income Tax Act, 1961. The Assessing Officer rejected the claim, holding that the membership card was a personal, non‑transferable privilege and not an asset eligible for depreciation. The Tribunal allowed depreciation, but the High Court reversed that decision, interpreting the membership right as a personal licence not covered by the statute. On appeal, the Supreme Court examined the BSE Rules and Bye‑laws, concluding that the membership right functions as a business or commercial right akin to a licence, thereby qualifying as an intangible asset under Section 32(1)(ii). The Court affirmed the Tribunal's view and set aside the High Court judgment, allowing depreciation on the membership card. Consequently, the appeal filed by the petitioner was allowed.
Issues considered
- Whether a BSE membership card constitutes a 'business or commercial right' or a 'licence' within the meaning of Section 32(1)(ii) of the Income Tax Act, 1961 for depreciation purposes.
- Whether depreciation can be claimed on the cost of such a membership card acquired after 1 April 1998.
Legislation cited
- Finance (No.2) Act, 1998
- Income Tax Act, 1961s. 14, s. 143(1), s. 147, s. 148, s. 226(3), s. 281 B, s. 32(1)(ii)
- Securities Contracts (Regulation) Act, 1956
Subjects
depreciationintangible assetSection 32stock exchange membershiplicencebusiness rightincome taxBSE rulesassessment year
Judgment
[2010] 11 S.C.R. 437
M/S. TECH NO SHARES & STOCKS LTD. A
v.
THE COMMISSIONER OF INCOME TAX IV
(Civil Appeal Nos. 7780-7781 of 2010)
SEPTEMBER 9, 2010
8
[S.H. KAPADIA, CJI AND K.S. PANICKER
RADHAKRISHNAN, J.]
Income Tax Act, 1961 - 32(1)(ii) - Depreciation under -
Whether permissible on the cost of a Stock Exchange C
Membership Card - Held: As per Bombay Stock Exchange
Rules, membership right is a 'Business or Commerciar Right'
- Therefore, depreciation is allowable on the cost of a Stock
Exchange Membership Card - Bombay Stock Exchange
Rules - Rules 5 to 10 and 16 - Bombay stock exchange Bye- D
Laws-Bye-law 400.
The question which arose for consideration in the
instant appeals was whether depreciation u/s. 32(1)(ii) of
Income Tax Act, 1961 is allowable on the cost of a Stock E
Exchange Membership Card.
Allowing the appeals, the Court
HELD: 1.1 On the facts and circumstances of the
instant cases, the Tribunal was right in holding that F
depreciation was allowable on the cost of the Stock
Exchange Membership Card u/s. 32(1 )(ii) of the Income
Tax Act, 1961. 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/ G
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/
437 H
438 SUPREME COURT REPORTS [2010) 11 S.C.R.
A defaulting member to the Exchange, Clearing House, etc.
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·
B Rules of BSE on the non-defaulting continuing member.
[Paras 18 and 25) [458-C; 453-G-H; 454-A]
1.2 Rules 5 to 10 and 16 of BSE Rules and the Bye-
law 400 of BSE indicate that the right of membership
C (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. By virtue
D 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, u/r. 5 membership is a personal permission
from the Exchange which is nothing but a "licence"
E 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
F 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
G 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). [Para
19) [453-C-G]
• -~inay Bubna v. Stock Exchange, Mumbai (1999) 6 SCC
H
TECHNO SHARES & STOCKS LTD. v. COMMISSIONER 439
OF INCOME TAX IV
215; Stock Exchange, Ahmedabad v. Assistant A
Commissioner of Income-Tax (2001) 248 ITR 209 - relied
on.
2. The instant judgment is strictly confined to the
right of membership conferred upon the member under 8
the BSE membership card during the relevant
assessment years. The 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. [Para 24] [457- C
F-G; 458-A]
Case Law Reference:
(1999) s sec 215 Relied on. Para 20
(2001) 248 ITR 209 Relied on. Para 20 D
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
7780-7781 of 2010.
From the Judgment & Order dated 11.09.2009 of the
High Court of Judicature at Bombay in Income Tax Appeal No. E
1333 of 2009.
WITH
C.A. Nos. 7782, 7783-7785, 7786-7788, 7789, 7790-
7791, 7792, 7793-7794, 7795-7798, 7799-7802, 7803-7804, F
7805, 7806-7809, 7810-7812, 7813-7814, 7815-7816, 7817-
7818, 7819-7822, 7823-7824, 7825-7827, 7828, 7829-7830,
7831, 7832, 7833-7835, 7836-7839, 7840-7842, 7843-7844,
7845, 7846, 7847-7848, 7849, 7850, 7851, 7852, 7853-7855, G
7856-7858, 7859-7861, 7862-7864, 7865-7866, 7867-7870,
7871, 7872, 7873-7875, 7876-7878, 7879, 7880, 7881-7882.
7883-7884, 7885-7886, 7887-7889, 7890, 7891-7892 of2010
& 35600 of 2009.
RP.Bhatt, S. Ganesh, Jatin Zaveri, Vimal Chandra S. H
440 SUPREME COURT REPORTS [201 OJ 11 S.C.R.
A Dave, F.V. Irani, Rustom B. Hathikhanawala, Pramod B.
Agarwala, Abhishek Baid, Praveena Gautam, Mukul Gupta,
Arijit Prasad, B.V. Balaram Das, U.A. Rana, Mrinal Majumdar,
Devina Sehgal (for Gagrat & Co.), Kunal Chatterjee, Partha Sil
for the appearing parties.
B
The Judgment of the Court was delivered by
S.H. KAPADIA, CJI 1. Leave granted.
2. In this batch of cases the question which arises for
c 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 Mis Techno Shares & Stocks Ltd. [Lead matter]
D
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
E 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
F 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
G 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
H the A.O. that the BSE membership card is a "licence" or
TECHNO SHARES & STOCKS LTD. v. COMMISSIONER 441
1
OF INCOME TAX IV [S.H. KAPADIA, CJI.]
"business or commercial right of similar nature" u/s 32(1 )(ii) and A
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 not a privately owned asset. That, B
there is no ownership of an asset and that what ultimately can
1 is only a Right to Nomination. Further, according to the
be so1d
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/ c
s 32(1)(ii). This decision of the A.O. stood affirmed by C.l.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 D
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). E
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 F
member to trade in shares on the floor of the Stock Exchange;
that, such a privilege cannot be equated 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 G
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
H
442 SUPREME COURT REPORTS [2010) 11 S.C.R.
A 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,
B 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
c allowed, hence, these civil appeals.
Importance of BSE:
6. BSE is recognized by the Government of India under
Securities Contracts (Regulation) Act, 1956. Approximately
D 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
E 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.
F 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
G 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:
H 7. Is depreciation allowable on the cost of a Stock
TECHNO SHARES & STOCKS LTD. v. COMMISSIONER 443
OF INCOME TAX IV [S.H. KAPADIA, CJI.]
Exchange Membership Card under Section 32(1 )(ii) of the A
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 B
hereinbelow certain relevant provisions of the 1961 Act:
2. In this Act, unless the context otherwise requires,-
( 14) "capital asset" means property of any kind held by an C
assessee, whether or not connected with his business or
profession, but does not include-
(1) any stock-in-trade, consumable stores or raw
materials held for the purposes of his
business or profession ; D
(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 E
member of his family dependent on him.
Depreciation.
32. (1) In respect of depreciation of-
F
(1)
(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 G
assessee and used for the purposes of the business 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- H
444 SUPREME COURT REPORTS [2010] 11 S.C.R.
A (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.
B
9. We also quote hereinbelow relevant Rules of Bombay
Stock Exchange Limited as they stood at the relevant time:
"Membership a Personal Privilege
c 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.
D 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
E 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
F
to act in violation of the provisions of this Rule.
Right of Nomination
7. Subject to the provisions of these Rules a member shall
G have the right of nomination which shall be personal and non-
transferable.
Right of Nomination of Deceased or Defaulter
Member
H 9. On the death or default of a member his right of
TECHNO SHARES & STOCKS LTD. v. COMMISSIONER 445
OF INCOME TAX IV [S.H. KAPADIA, CJI.]
nomination shall cease and vest in the Exchange. A
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 B
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. c
Nomination by Member
11 (a) A member of not less than three years' standing
who desires to resign may nominate a person eligible D
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 E
these Rules for admission to membership of the
Exchange as a candidate fr' admission in his place;
Provided further that the Governing Board may, at its
absolute discretion and in exceptional cases and for F
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 G
absolute discretion think fit to impose.
*** *** ***
Nomination in Case of Deceased Member
H
(b) The legal representatives of a deceased
446 SUPREME COURT REPORTS [2010] 11 S.C.R.
A 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
B 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
c these Rules.
Nomination in case of Defaulter
(c) The forfeited right of membership of a
defaulter shall be restored to lilim if he be re-
D 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
E default the Governing Board may at any time
exercise the right of nomination in respect of
such membership.
Dues and Claims
F 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
G in full.
Dues of the Exchange
(1) Such subscriptions, debts, fines, fees,
charges and other monies as shall have
H
TECHNO SHARES & STOCKS LTD. v. COMMISSIONER 447
OF INCOME TAX IV [S.H. KAPADIA, CJI.] .
been determined by the Governing Board to A
be due to the Exchange or the Clearing
House by the nominating or deceased
member; and
Liabilities relating to Contracts
B
(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 C
(iii) all amounts due or payable by the nominating
or deceased member to the Trade
Guarantee Fund.
Allocation in Order of Priority D
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 E
following purposes and in the following order of priority,
namely-
Dues of Exchange and Clearing House
(1) first - the payment of such subscriptions, debts, fines, F
fees, charges and other monies as shall have been
detarmined 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. G
Liabilities relating to Contracts
(ii) second-the payment of such debts, liabilities,
obligations and claims arising out of any contracts made
H
448 SUPREME COURT REPORTS [2010) 11 S.C.R.
A 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
B in full they shall be paid and satisfied pro rata, and
Surplus
(iii) third - the payment of the surplus, if any, to the funds
c of the Exchange: provided that the exchange in general
meeting may at its absolute 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
D 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.
E
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
F 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 recejved therefor shall be paid by the
Governing Board to the Defaulters' Committee to
G 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 herein below Bye-law 400 of BSE,
H which reads as under:
TECHNO SHARES & STOCKS LTD. v. COMMISSIONER 449
OF INCOME TAX IV [S.H. KAPADIA, CJI.]
"Application of Defaulters' Assets and Other A
Amounts
400. Subject to the provisions of Bye-law 398, the
Defaulters' Committee shall realise and apply all the
money, rights and assets of the defaulter which have B
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 Rule 16A
in respect of the consideration received by the Governing
Board for exercising the right of nomination in respect of C
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 D
deposits, any bank guarantees furnished on behalf of the
defaulter, fixed deposit receipts discharged or assigned
to or in favour of the Exchange,
Base I Additional Capital deposited with the Exchange by E
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.:- F
(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 G
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
H
450 SUPREME COURT REPORTS (2010] 11 S.C.R.
A 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
B 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
c to the extent of the money 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;
D (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
E 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,
F 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
G 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
H
TECHNO SHARES & STOCKS LTD. v. COMMISSIONER 451
OF INCOME TAX IV. [S.H. KAPADIA, CJI.]
Regulation of the Exchange, including in particular Bye- A
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 B
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;
c
(viii) Eighth - the balance, if any, shall be paid into the
Exchange's Customers' Protection Fund to the extent of
any and all amounts paid out of the Customers' Protection
Fund towards the obligations or liabilities of th~ defaulter
and interest thereon at the rate of 2.5% per month (or such D
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. E
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 F
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 G
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,
H
452 SUPREME COURT REPORTS (2010] 11 S.C.R.
A 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
B commercial rights of similar nature, being intangible assets
acquired on or after 1st 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 <Irising out of SLP (C) Nos.
C 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
D 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).
E
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
F 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 although a member has a right
of nomination, such right shall be personal and non-transferable.
G 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
H any Rule or Bye-law, it shall belong absolutely to the Exchange
TECHNO SHARES & STOCKS LTD. v. COMMISSIONER 453
OF INCOME TAX IV [S.H. KAPADIA, CJI.]
free of all rights, claims or interests of such member or any A
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 B
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 c
vesting in the Exchange the consideration received thereof shall
be applied to the specified purposes.
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 D
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 E
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 - F
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 G
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, H
454 SUPREME COURT REPORTS [201 O] 11 S.C.R.
A 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-
B 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
C 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
D 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
E 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
F 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
G 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
H discuss those judgments and clarify the position in law:
TECHNO SHARES & STOCKS LTD. v. COMMISSIONER 455
OF INCOME TAX IV [S.H. KAPADIA, CJI.]
(i) Vinay Bubna v. Stock Exchange, Mumbai ((1999) A
6 sec 2151
(ii) Stock Exchange, Ahmedabad v. Assistant
Commissioner of Income- Tax [(2001) 248 ITR
209] B
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 C
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 chaHenged on the ground that D
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 E
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 F
persons and to admit anyone who offers to pay the highest
amount. It was argued that the said proceeds so 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 G
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
H
456 SUPREME COURT REPORTS [2010] 11 S.C.R.
A insolvency law does not arise. In our view, the judgment in
Vinay Bubna's case supports our reasoning in this case. The
judgment in Vinay Bubna's case clearly indicates that it was a
case dealing with the rights of a defaulting non-continuing
member. The judgment in Vinay Bubna's case clearly indicates
B that membership card is an asset of a non-defaulting continuing
member. However, the membership card ceases to be an
asset only when the memb~r 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
c 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 after
the demise of a stock-broker could he be declared a defaulter
D by the Exchange? In that case the facts were as follows.
Ahmadabad Stock Exchange (ASE) admitted Rajesh Shah as
its member on 19th February, 1988. He died on 7th February,
1994. On February 12, 1994, his legal representatives wrote
. to the Stock Exchange that they were unable to meet the
E liabilities of the deceased. Thereafter, the Governing Board of
ASE passed a resolution on 12th 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
F 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
dated 12th February, 1994 by which Rajesh Shah was declared
to be a deemed defaulter came to be challenged. Another
G interesting fact which needs to be mentioned was that on 15th
February, 1994 a provisional attachment order was passed
under Section 281 B of the 1961 Act in respect of the
membership card in the name of Rajesh Shah. On 16th
February, 1994, the Stock Exchange issued advertisement
H inviting claims from member creditors to lodge their claims
TECHNO SHARES & STOCKS LTD. v. COMMISSIONER 457
OF INCOME TAX IV [S.H. KAPADIA, CJI.]
within 30 days. They invited offers for purchase of membership A
also within the minimum floor price of Rs. 25 lakhs. On 5th
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 B
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 c
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
D
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 nomination
E
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.
F
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 G
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
H
. 458 SUPREME COURT REPORTS [2010] 11 S.C.R.
A 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
8
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 was allowable
on the cost of the membership card under Section 32(1 )(ii) of
C 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.
K.K.T. Appeals allowed.
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