Depreciation — Membership card of Bombay Stock Exchange is an ‘intangible asset’ on which depreciation is allowable u/s.32(1)(ii).

[Techno Shares and Stocks Ltd. v. CIT, (2010) 327 ITR
323 (SC)]

The assessee-company filed its return of income for the A.Y.
1999-2000, disclosing a loss of Rs.10,77,276. The return was processed
u/s.143(1) on November 8, 2000. The case stood re-opened u/s.147 and the notice
u/s.148 was issued to the assessee on July 16, 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 the
assessment u/s.147 was the claim of depreciation by the assessee on the BSE
membership card amounting to Rs.23,65,000. The claim of depreciation of the
assessee was based on S. 32(1)(ii) which stood inserted by the Finance (No. 2)
Act, 1998, with effect from April 1, 1999. However, the said Section deals with
claims for depreciation of items acquired on or after April 1, 1998. The
assessee claimed before the Assessing Officer 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), the
submission of which was not accepted by the Assessing Officer. 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, there is no ownership of an asset and that what
ultimately can be sold is only a right to nomination. Further, according to the
Assessing Officer, 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 AO stood affirmed by
the Commissioner of Income-tax (Appeals) in the appeal filed by the assessee.

Aggrieved by the said decision of the Commissioner of
Income-tax (Appeals), 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 the BSE through the membership card, it was entitled to depreciation
u/s.32(1)(ii) of the 1961 Act. That, the said card is a capital asset through
which the right to trade on the floor of the BSE is acquired and since it is an
intangible asset the said assessee was entitled to depreciation u/s.32(1)(ii).

Against the said decision, the Department carried the matter
in appeal to the High Court which came to the conclusion, following certain
decisions of the Supreme 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 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
trade mark or franchise; that the expression ‘business or commercial rights of
similar nature’ in S. 32(1)(ii) of the 1961 Act would take its colour from the
preceding words. Namely, know-how, patent, copyright, trade mark 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 or commercial right of similar nature’ in S. 32(1)(ii)
of the 1961 Act are referable to IPRs such as know-how, patent, copyright, trade
mark 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.

On civil appeals against the decision of the High Court, the
Supreme Court observed that the question which it was required to examine was —
whether the right of nomination in the non-defaulting continuing member comes
within the expression ‘business or commercial right of similar nature’ in S.
32(1)(ii) of the 1961 Act ?

The Supreme Court held that on the analysis of the Rules of
the BSE, it was clear that the right of membership (including right of
nomination) got vested in the exchange on the demise/default committed by the
member; that, on such forfeiture and vesting in the exchange that the same got
disposed off by inviting offers and the consideration received thereof was used
to liquidate the dues owned by the former/defaulting member to the exchange,
clearing house, etc. (see Rule 16 and bye-law 400). It was this right of
membership which allowed the non-defaulting member to participate in the trading
season on the floor of the exchange. Thus, the said membership right was a
‘business or commercial right’ conferred by the rules of the BSE on the
non-defaulting continuing member.

The next question was — whether the membership right could be said to be owned by the assessee and used for the business purpose in terms of S. 32(1)(ii). The Supreme Court held that its answer was in affirmative for the reason that the rules and bye-laws analysed hereinabove indicated that the right of nomination vested in the exchange only when a member committed default. Otherwise, he continued to participate in the trading session on the floor of the exchange; that he continued to deal with other members of the exchange and even had the right to nominate a subject to compliance with the Rules. Moreover, by virtue of Explanation 3 to S. 32(1)(ii) the commercial or business right which was similar to a ‘licence’ or ‘franchise’ was declared to be an intangible asset. Moreover, under Rule 5, membership was a personal permission from the exchange which was nothing but a ‘licence’ which enabled the member to exercise rights and privileges attached thereto. It was this licence which enabled the member to trade on the floor of the exchange and to participate in the trading session on the floor of the exchange. It was this licence which enabled the member to access the market. Therefore, the right of membership which included right of nomination, was a ‘licence’ which was one of the items which fell in S. 32(1)(ii) of the 1961 Act. The right to participate in the market had an economic and money value. It was an expense incurred by the assessee which satisfied the test of being a ‘licence’ or ‘any other business or commercial right of similar nature’ in terms of S. 32(1)(ii).