By TIOL News Service

MUMBAI, OCT 08, 2014: THE issues before the Bench are - Whether when a membership card-holder of a stock exchange gets shares on demutualisation of the exchange in the new entity, any capital gains liability arises and Whether such conversion of shares amounts to transfer. And the answers go against the Revenue.

Facts of the case

The assessee company was engaged in business of shares and stock trading and broking. It was a member of Bombay Stock Exchange. The membership of BSE was purchased in the FY 1998-99 for total consideration of Rs.97,51,000/-. The return of income was filed on 30th November, 2006 declaring total income of Rs.1,59,42,000/-. The assessment was completed on 30th December, 2008 u/s 143(3) on a total income of Rs.1,80,24.063/-. The Assessee claimed depreciation on the value of card in AYs 2004-05 and 2005-06 aggregating to Rs.42,66,063/- which was disallowed by the AO. In the AY under consideration, 2006-07, BSE was demutualised and its operation were taken over by Bombay Stock Exchange Ltd. and with effect from 19th August, 2005 each holder of the card was given 10,000 shares of BSEL in lieu of the membership card as provided in section 55(2)(ab) and the cost of acquisition of shares so allotted was to be taken as equivalent to the original cost of acquisition of the card whereas the cost of acquisition of trading rights was to be deemed as "Nil". According to the AO, the Assessee was entitled to claim the cost of acquisition of shares at Rs.97,51,000/- being the original cost of acquisition of membership card as against the written down value of the card at Rs.54,86,937/- had it been that claim for depreciation was allowed. Therefore, the benefit of Rs.42,66,063/- which had accrued to assessee due to demutualisation of BSE and on the footing the claim of the assessee for BSE card would have been allowed. Since that had been disallowed and the matter was pending in appeal, the AO for the AY added this benefit to the total income of the assessee u/s 41(1) so also alternatively u/s 28(1)(iv) on protective basis.

Before HC, the Revenue's counsel had submitted that it was this exercise and referable to section 28(1)(iv) that was subject matter of the present appeal. It had submitted that the value of any benefit or perquisite whether convertible into money or not arising from the business or the exercise of a profession was what was postulated by section 28(1)(iv). It was benefit in this case and which arises from the business of the Assessee. It may be that the benefit would accrue after the card had been transferred. On the other hand, assessee's counsel had submitted that the entire question was academic. In that regard our attention was invited to the AO's order. It was further submitted that there had been absolutely no benefit and only if the card had been transferred and the assessee claims that deduction should be on the original price of Rs.97,51,000/- then, whether section 28(1)(iv) applies and was attracted or not, can be considered.

Held that,

++ pertinently, the question as referred above and stated to be of law is raised for the assessment year 2006-07. It has been candidly stated and in the assessment officer's order as well that the sum of Rs.42,66,063/- was claimed as depreciation but that was disallowed and proceedings in that behalf are pending. However, that sum is taken to be benefit which will be arising to the Assessee on account of demutualisation of the exchange. Further, the argument is that demutualisation of the exchange resulted in each holder of the card being given 10,000 shares of BSEL in lieu of the membership card. The cost of acquisition of shares so allotted was to be taken to be the original cost of acquisition whereas the cost of trading rights was deemed to be "Nil". When the claim arises for the year 2006-07 and we find that depreciation has been disallowed, yet the assessing officer proceeded to undertake the exercise as noted above, then, the question of law as posed before need not be entertained. The assessing officer himself is aware of the fact that it may be argued that the benefit will arise in the year of transfer and not in the current year. Therefore, for the current year it is only demutualisation which has taken place and on that basis alone it is said that the assessee derives benefit. Nothing has been pointed out other than this fact to indicate as to how section 28 (1)(iv) is stated to be attracted. There is nothing on record save and except the fact that the exchange is now a limited company and a corporate entity. It is that corporate entity of which the assessee has become share holder/member. It is that corporate entity which is successor in title of BSE. The members/share holders of the BSE have thus been allowed to continue with new corporate entity and with the same benefits. That 10,000 shares have been allotted and without anything more would not be enough to undertake the exercise as is now stated to be undertaken;

++ it is in these circumstances and factual background that we find that the tribunal's order and particularly discussion in paragraph 7 thereof does not raise any substantial question of law. The tribunal may have referred to legal provisions and the judgment of Full Bench of the Gujarat High Court in case of the Commissioner of Income Tax vs. Bharat Iron and Steel Industries reported in (1993) Vol.199 ITR Page 67 but we are of the opinion that if this essential background is not lost sight of then, everything else is purely academic for the year under consideration. Even the issue or claim of depreciation does not arise. The depreciation that was claimed was disallowed and computed as benefit and which could be derived because of demutualisation. As a result of the above discussion we do not think that this appeal can be entertained as we do not find any larger questions or wider controversy needs to be gone into in the facts and circumstances of this case. The appeal is therefore dismissed. No orders as to costs.

(See 2014-TIOL-1746-HC-MUM-IT)