Stock Exchange card is not an intangible asset eligible for depreciation U/s. 32 (1) of the Income Tax Act 1961
In A judgment that could have a bearing on the tax outgo of many stock brokers, the Bombay High Court on Friday ruled that depreciation cannot be claimed on stock exchange membership cards, while calculating tax liabilities. The I-T Department’s contention was that a membership card is not capable of diminishing in value due to its use, wear and tear and obsolescence.
Counsel Vimal Gupta, assisted by advocate Suresh Kumar, who argued for the department, submitted that the card was a personal privilege, and not a licence or a commercial right. The stock broking firms, they said, were not owners of the membership cards and thus could not categorise the same as capital assets.
Counsel for the brokers pointed out to the court that like a licence, which is depreciable, a membership card entitles brokers to trade on the exchange. The rights conferred by the ownership of the stock exchange card constituted business or commercial rights and would therefore be entitled to depreciation, they said. According to Section 32 of the Income-Tax Act, depreciation can be claimed either in respect of tangible assets or certain intangible assets such as patents, copyrights, trademarks, or similar intangible assets.
The division bench of Justice VC Daga and Justice JP Devadhar was hearing over a hundred applications filed by the I-T Department against brokers, including Techno Shares and Stocks, Credit Suisse, ICICI Brokerage Services, JM Morgan Stanley Fixed Income Services, Tata TD Warehousing Securities, Kotak Securities and Net Worth Stock Broking.
They observed in the judgement that the membership card cannot be construed as a licence or a commercial right. The court held that Section 32 allowed depreciation on the listed categories of assets only and were related to acquisition or user of intellectual property rights, while disallowing depreciation on the cards.
We are producing below the summary of Case law CIT vs. Techno Shares & Stocks decided by Bombay High Court.
S. 32 (1), as amended w.e.f. 1.4.1998 allows depreciation on “intangible assets” being, inter alia, “licenses … or any other business or commercial rights of similar nature”. The Tribunal took the view that a BSE card was an “intangible asset” eligible for depreciation. On appeal by the Revenue, HELD, reversing the Tribunal:
(1) Though the term ‘licences’ is a very wide term and includes permission to carry on any trade, business, profession, etc, it is used in s. 32(1)(ii) in arestricted sense. S. 32 restricts depreciation to a class of tangible & intangible assets specifically enumerated therein. All intangible assets enumerated in s. 32(1)(ii) (except the term ‘licences’) belong to the class of intellectual properties. As the expression ‘licences’ in s. 32(1)(ii) is preceded by the expressions know-how, patents, copyrights, trade marks and succeeded by the expression ‘franchises’ which are all relatable to intellectual property rights, the term ‘licences’ in s. 32(1)(ii) is, applying the principle of Noscitur a sociis, intended to be used restrictively and as applying only to licences relating to acquisition / user of intellectual property rights;
(2) A BSE card is also not a “business or commercial right” because what s. 32(1)(ii) contemplates is “business or commercial rights” relating to intellectual properties and not all categories of business or commercial rights. Since a BSE card is not a business or commercial right relating to intellectual property rights depreciation cannot be allowed on it;
(3) The fact that a BSE card is a capital asset and liable for capital gains tax is irrelevant because s. 32 does not allow depreciation on all capital assets but only on capital assets which fall in the enumerated categories .