Case Law Details
CASE LAWS DETAILS
DECIDED BY: HIGH COURT OF KERALA,
IN THE CASE OF : CDR. P. J. Mathew Vs ITO, APPEAL NO: ITA No. 1548 of 2009, DECIDED ON: October 21, 2009
RELEVANT PARAGRAPH
3. The appellant- assessee was a member of the Cochin Stock Exchange. However, on account of chronic default, the Cochin Stock Exchange declared him a defaulter and terminated his membership and sold his stock exchange membership card in auction which fetched sale consideration of Rs. 12,75,000/- Since the membership card was sold in the previous year relevant for the assessment year 1994- 95, the assessing officer brought to tax long term capital gain arising to the appellant on the sale of the Stock Exchange card. Even though the appellant’s challenge against the assessment was successful before first appellate authority who allowed the appeal, on second appeal by the Department, the Income-tax Appellate Tribunal allowed the appeal and restored the assessment. It is against this order of the Tribunal, the appellant-assessee has filed this appeal under section 260A of the Act.
4. The short question that arises for consideration is whether the Stock Exchange card of the appellant-assessee sold by the Stock Exchange in the circumstances stated above can be treated as “capital asset” falling under section 2(14) of the Act attracting tax on the profit arising out of the sate of the same under section 45 of the IT Act “Capital asset”, as defined under section 2(14) of the IT Act, means property, of any kind held by an assessee, whether or not connected with his business or profession. Though the definition clause provides for exclusions of certain items of property, admittedly, membership card of stock Exchange is not an item excluded under the said clause. However, it is pertinent to note that Section 47 (xiiia) of the IT Act provides for exclusion of capital gains on the sale of membership right held by a member of a recognized stock exchange in India for the purpose stated therein, that is, for acquisition of shares and trading or clearing – rights acquired by’ such member in that recognised stock exchange in accordance with a scheme for demutualisation or corporatisation which is approved by the Securities and Exchange Board of India. A membership card which confers right on the member to trade in stock and shares in the exchange, is certainly a property. So much so, it falls within the definition of ‘capital asset” under section 2(14) of the I.T. Act. Further, section 47 (xiiia) makes itself very dear that membership: in stock ,Exchange is a ‘capital asset * and so much so, the transfer of it except in cases covered by the said clause, would attract liability for tax. However, there is a distinction in this case in as much as the appellant has not sold the membership card, but the same is sold by the Stock Exchange after declaring the appellant a defaulter and after taking over the membership card.
6. We have examined the rules of the Stock Exchange which govern the terms for forfeiture and sale of stock exchange memberships of defaulted members. Under clause 47, as and when a member is declared a defaulter, his membership shall lapse and vest In the Exchange. Clause 47A(b) provides for auction sale of the membership after 90 days of declaring a member as defaulter. Cause 47A(e) provides for appropriation of sale proceeds of the membership of the defaulting member. According to this provision, sale proceeds has to be appropriated first towards liability due to the Stock Exchange and then to members of the Exchange and then to settle all such debts and obligations due to Exchange and Department/ Clearing House. Finally, it is made very dear in the said clause that if any balance is left after making payments as stated therein, the same shall be paid to the defaulting member or to his nominee or his legal heirs, if the member is dead. In other words, the appellant happens to be the beneficiary of the sale of his membership by Stock Exchange because the sale proceeds are adjusted to discharge his debts and the balance if any is also payable to him. Since the Stock Exchange membership card which is sold in auction is property covered by the description “capital asset” under section 2(14) of the I.T Act, it’s sale by stock Exchange amount to transfer” within the meaning of Section 2(47) of the I.T. Act. Therefore, in our view, the Tribunal is right in upholding the assessment for capital gains.
