The SC has reversed the view of the Bombay High Court which had held that the term “business or commercial rights” and “licence” are referable to a class of intellectual property rights such as know-how, patents, copyrights, trademarks etc. The SC has held that the “business or commercial rights” need not be similar to a “license” or “franchise” or other classes of intellectual property rights to be considered as an intangible asset.
It was held that the right of membership conferred upon a member under BSE membership card in terms of rules and bye laws of BSE was a business or commercial right and therefore depreciation was allowable on the cost of such card under section 32(1)(ii) of the Act.
Citation : Techno Shares & Stocks Ltd Vs. CIT
Civil Appeal Nos. 7780- 7781 of 2010
Dated: 9 September, 2010
Court : Supreme Court of India
· The Appellant, a stock brooking company, acquired a membership card of the Bombay Stock Exchange (BSE) for carrying on the business of brooking on the exchange. It claimed depreciation allowance on the cost of acquisition, on the ground that the BSE card was an intangible asset under section 32(1)(ii) of the Income Tax Act, 1961 (the Act?), being a license or a business or commercial right of a similar nature.
· The claim of the Appellant was not allowed by the tax officer on the ground that membership is only a personal privilege which is non-transferable and which does not devolve automatically on legal heirs and, hence not a privately owned asset. Further, there was no ownership of an asset; what ultimately could be sold was only a right to nomination and in the case of the membership card, there was no obsolescence, wear and tear or diminution in value by its use.
· On appeal, the Tribunal accepted the contention of the Appellant and granted the relief.
· On appeal by the revenue authorities, the High Court (HC) following certain decisions of the SC, held 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 and that such privilege could not be equated with the expression “license” or “any other business or commercial rights of similar nature”. The HC also held that these expressions would take their color from the preceding words, namely, know-how, patent, copyright, trademark and franchise which belong to a class of intellectual property rights and since the BSE membership card did not fall in any of the categories, and the claim for depreciation was not admissible.
· Aggrieved by the order of the HC, the Appellant(s) filed an appeal to the SC.
Issue:-Whether the BSE membership card can be considered as an intangible asset for the purpose of claiming depreciation under Section 32(1) (ii) of the Act?
· The SC while analyzing the rules and bye-laws of the BSE observed that a non defaulting continuing member, as in the case of the Appellant, would own the right of nomination with respect to the membership of the Exchange till his right of membership is forfeited to the exchange. The SC therefore observed that it was clear that the right of membership (including right of nomination) would get vested in the exchange only in the case of the demise / default by a member and not otherwise.
· Hence, it was the membership right which allowed a non-defaulting member to participate in the trading sessions on the floor of the exchange and the said membership right was a „business or commercial right? conferred by the rules of the BSE on a non-defaulting continuing member.
· On the aspect whether the membership right could be said to be owned by the assessee and used for the purposes of business, the SC held that it was so, since the rules and the bye-laws indicate that the member could participate in the trading sessions on the floor of the exchange and deal with other members of the exchange and have a right of nomination. The right of membership (including the right of nomination) would vest in the exchange only when a member commits a default. The membership, which was a personal permission from the exchange, was nothing but a “licence” which enabled the member to exercise rights and privileges and to trade on the floor of the exchange. The right to participate in the market would have an economic and money value. It is an expense incurred by the assessee which satisfies the test of being a „license? or „any other business or commercial right of similar nature?
. The membership card would constitute an “intangible asset” and the Appellant would therefore be entitled to depreciation on the cost of the membership card under section 32(1 )(ii) of the Act.
· In coming to the above conclusion, the SC explained that its earlier decisions in the case of Vinay Bubna Vs. Stock Exchange, Mumbai (6 SCC 215) & Stock Exchange, Ahmedabad Vs. ACIT (248 ITR 209), wherein it was held that the membership card could not be considered as an asset, related to cases where the membership had vested in the stock exchange and the asset ceased to exist in the hands of the members. Hence the ratio in those decisions would not be applicable in the present case.
· The SC further clarified that the ruling was confined to the rights of membership, conferred upon the member under the BSE membership card and should not be understood to mean that every business or commercial right would constitute a “license” or a “franchise” in terms of the provisions of the Act.
Comments:- The SC has reversed the view of the Bombay High Court which had held that the term “business or commercial rights” and “license” are referable to a class of intellectual property rights such as know-how, patents, copyrights, trademarks etc. The SC has held that the “business or commercial rights” need not be similar to a “licence” or “franchise” or other classes of intellectual property rights to be considered as an intangible asset.