By TIOL News Service

NEW DELHI, SEPT 11, 2010: THE issues before the Apex Court are - Whether the right of nomination in the non-defaulting continuing member of the Bombay Stock Exchange falls within the expression "business or commercial right of similar nature" in Section 32(1)(ii) and 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). And the answers to both the questions are YES.

Facts of the case

Assessee, a company, filed its return of income for the impugned year disclosing loss. The same was processed under section 143(1) of the Act. Subsequently the case was reopened under section 147 of the Act on the ground that depreciation on the value of BSE card has been wrongly allowed to the assessee. CIT (A) affirmed the view of the AO. ITAT allowed the appeal of the assessee holding that depreciation is allowable. High Court reversed the order of the ITAT and held that no depreciation is allowable since the BSE card is a personal asset and hence out of the purview of the definition of “Capital Assets” and it can also not be equated with business or commercial right. Appeal was filed in the Supreme Court where the Bench considered the rules of the BSE and also the definition of Capital assets and business or commercial right as provided in section 32(1)(ii).

After hearing the parties, the Apex Court has held that,

++ on reading Rules 5 to 10 of the BSE, 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 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 member owns the right of nomination with respect to the membership of the Exchange till his right of membership is forfeited to the Exchange;

++ now the question which is required to be examined is - 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? 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/ 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, 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-defaulting continuing member;

++ 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). The answer is in the affirmative for the reason that the Rules and the Bye-laws analysed 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 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 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 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 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).

++ this judgment is strictly confined to the right of membership conferred upon the member under the BSE membership card during the relevant assessment years. The said right of membership is a "business or commercial right" which 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 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;

++ the Tribunal was right in holding that depreciation was allowable on the cost of the membership card under Section 32(1)(ii) of the 1961 Act. Accordingly, the impugned judgment 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.

(See 2010-TIOL-67-SC-IT in 'Income Tax')