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IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL  NOs.7780-7781 OF 2010 (Arising out of SLP(C) Nos. 4053-4054 of 2010)

M/s Techno Shares & Stocks Ltd.    …. Appellant(s)

              Versus

The Commissioner of Income Tax IV   ….Respondent(s)

With

Civil Appeal No.7782 of 2010 @ S.L.P. (C) No.34944 of  2009, Civil Appeal Nos.7783-7785 of 2010 @ S.L.P. (C) Nos.10452- 10454 of 2010, Civil Appeal Nos.7786-7788 of 2010 @ S.L.P. (C) Nos.11514- 11516 of 2010, Civil Appeal No.7789 of 2010 @ S.L.P. (C) No.11518 of  2010, Civil Appeal Nos.7790-7791 of 2010 @ S.L.P. (C) Nos.11520- 11521 of 2010, Civil Appeal No.7792 of 2010 @ S.L.P. (C) No.11523 of 2010  and Civil Appeal Nos.7793-7794 of 2010 @ S.L.P. (C) Nos.11524- 11525 of 2010 Civil Appeal Nos.7795-7798 of 2010 @ S.L.P. (C) Nos.4373- 4376 of 2010 Civil Appeal Nos.7799-7802 of 2010 @ S.L.P. (C) Nos.4407- 4410 of 2010 Civil Appeal Nos.7803-7804 of 2010 @ S.L.P. (C) Nos.5033- 5034 of 2010 Civil Appeal No.7805 of 2010 @ S.L.P. (C) No.5153 of 2010 Civil Appeal Nos.7806-7809 of 2010 @ S.L.P. (C) Nos.5266- 5269 of 2010 Civil Appeal Nos.7810-7812 of 2010 @ S.L.P. (C) Nos.5302- 5304 of 2010 Civil Appeal Nos.7813-7814 of 2010 @ S.L.P. (C) Nos.5541- 5542 of 2010 Civil Appeal Nos.7815-7816 of 2010 @ S.L.P. (C) Nos.5581- 5582 of 2010 Civil Appeal Nos.7817-7818 of 2010 @ S.L.P. (C) Nos.5656-

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5657 of 2010 Civil Appeal Nos.7819-7822 of 2010 @ S.L.P. (C) Nos.6093- 6096 of 2010 Civil Appeal Nos.7823-7824 of 2010 @ S.L.P. (C) Nos.6149- 6150 of 2010 Civil Appeal Nos.7825-7827 of 2010 @ S.L.P. (C) Nos.6151- 6153 of 2010 Civil Appeal No.7828 of 2010 @ S.L.P. (C) No.6661 of 2010 Civil Appeal Nos.7829-7830 of 2010 @ S.L.P. (C) Nos.6664- 6665 of 2010 Civil Appeal No.7831 of 2010 @ S.L.P. (C) No.6666 of 2010 Civil Appeal No.7832 of 2010 @ S.L.P. (C) No.6667 of 2010 Civil Appeal Nos.7833-7835 of 2010 @ S.L.P. (C) Nos.6668- 6670 of 2010 Civil Appeal Nos.7836-7839 of 2010 @ S.L.P. (C) Nos.6672- 6675 of 2010 Civil Appeal Nos.7840-7842 of 2010 @ S.L.P. (C) Nos.6676- 6678 of 2010 Civil Appeal Nos.7843-7844 of 2010 @ S.L.P. (C) Nos.6681- 6682 of 2010 Civil Appeal No.7845 of 2010 @ S.L.P. (C) No.6683 of 2010 Civil Appeal No.7846 of 2010 @ S.L.P. (C) No.7861 of 2010 Civil Appeal Nos.7847-7848 of 2010 @ S.L.P. (C) Nos.8223- 8224 of 2010 Civil Appeal No.7849 of 2010 @ S.L.P. (C) No.9503 of 2010 Civil Appeal No.7850 of 2010 @ S.L.P. (C) No.9688 of 2010 Civil Appeal No.7851 of 2010 @ S.L.P. (C) No.9854 of 2010 Civil Appeal No.7852 of 2010 @ S.L.P. (C) No.9855 of 2010 Civil Appeal Nos.7853-7855 of 2010 @ S.L.P. (C) Nos.16258- 16260 of 2010 Civil Appeal Nos.7856-7858 of 2010 @ S.L.P. (C) Nos.6707- 6709 of 2010 Civil Appeal Nos.7859-7861 of 2010 @ S.L.P. (C) Nos.6843- 6845 of 2010 Civil Appeal Nos.7862-7864 of 2010 @ S.L.P. (C) Nos.8672- 8674 of 2010 Civil Appeal Nos.7865-7866 of 2010 @ S.L.P. (C) Nos.7003- 7004 of 2010 Civil Appeal Nos.7867-7870 of 2010 @ S.L.P. (C) Nos.7206- 7209 of 2010 Civil Appeal No.7871 of 2010 @ S.L.P. (C) No.7210 of 2010 Civil Appeal No.7872 of 2010 @ S.L.P. (C) No.7211 of 2010 Civil Appeal Nos.7873-7875 of 2010 @ S.L.P. (C) Nos.7258- 7260 of 2010 Civil Appeal Nos.7876-7878 of 2010 @ S.L.P. (C) Nos.8686-

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8688 of 2010 Civil Appeal No.7879 of 2010 @ S.L.P. (C) No.7309 of 2010 Civil Appeal No.7880 of 2010 @ S.L.P. (C) No.7350 of 2010 Civil Appeal Nos.7881-7882 of 2010 @ S.L.P. (C) Nos.7386- 7387 of 2010 Civil Appeal Nos.7883-7884 of 2010 @ S.L.P. (C) Nos.8679- 8680 of 2010 Civil Appeal Nos.7885-7886 of 2010 @ S.L.P. (C) Nos.8681- 8682 of 2010 Civil Appeal Nos.7887-7889 of 2010 @ S.L.P. (C) Nos.7823- 7825 of 2010 Civil Appeal No.7890 of 2010 @ S.L.P. (C) No.7536 of 2010 Civil Appeal Nos.7891-7892 of 2010 @ S.L.P. (C) Nos.8676- 8677 of 2010  

J U D G M E N T

S.H. KAPADIA, CJI

1. Leave granted.

2. In this batch of cases the question which arises for  

determination  is:  whether  BSE  Membership  Card  can  be  

considered  an  intangible  asset  for  the  purpose  of  

depreciation  under  Section  32(1)(ii)  of  the  Income  Tax  

Act, 1961 (for short “the 1961 Act”)?

Facts in M/s Techno Shares & Stocks Ltd. [Lead matter]

3. In this case, we are concerned with the Assessment  

Years 1999-2000, 2000-2001, 2001-2002 and 2002-2003. The  

assessee  company  filed  its  Return  of  income  for  the

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Assessment  Year  1999-2000  disclosing  a  loss  of  Rs.  

10,77,276/-. The return was processed under Section 143(1)  

on November 8, 2000. The case stood reopened under Section  

147 and Notice u/s 148 stood issued to the assessee on  

16.7.2002. The assessee filed its return of income under  

protest. The assessee filed its return of income pursuant  

to the Notice u/s 148 once again declaring loss of Rs.  

10,77,276/-, the same as was in the original return of  

income. The main reason for reopening of assessment under  

Section 147 was the claim of depreciation by the assessee  

on BSE membership card amounting to Rs. 23,65,000/-. The  

claim of depreciation of the assessee was based on Section  

32(1)(ii)  which  stood  inserted  by  Finance  (No.  2)  Act,  

1998 w.e.f. 1.4.1999. However, the said Section deals with  

claim  for  depreciation  of  items  acquired  on  or  after  

1.4.1998.  The assessee claimed before the A.O. that the  

BSE  membership  card  is  a  “licence”  or  “business  or  

commercial right of similar nature” u/s 32(1)(ii) and is,  

therefore, an intangible asset eligible for depreciation  

u/s  32(1)(ii)  which  submission  was  not  accepted  by  the  

A.O.   It  was  held  that  membership  is  only  a  personal  

permission which is non-transferable and which does not  

devolve automatically on legal heirs and, therefore, it is

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not a privately owned asset.  That, there is no ownership  

of an asset and that what ultimately can be sold is only a  

Right to Nomination.  Further, according to the A.O., in  

the case of BSE membership, there is no obsolescence, wear  

and tear or diminution in value by its use, hence, the  

assessee  was  not  entitled  to  claim  depreciation  u/s  

32(1)(ii).  This decision of the A.O. stood affirmed by  

C.I.T. (A) in the appeal filed by the assessee.   

4. Aggrieved  by  the  said  decision  of  CIT  (A),  the  

assessee  carried  the  matter  in  appeal  to  the  Tribunal  

which took the view that since the assessee had acquired a  

right to trade on the floor of BSE through the membership  

card, it was not entitled to depreciation u/s 32(1)(ii) of  

the 1961 Act.  That, the said Card is a capital asset  

through  which  right  to  trade  on  the  floor  of  BSE  is  

acquired  and  since  it  is  intangible  asset  the  said  

assessee was entitled to depreciation u/s 32(1)(ii).  

5. Against the said decision, the Department carried  

the matter in appeal to the High Court which came to the  

conclusion,  following  certain  decisions  of  this  Court,  

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; that, such a privilege cannot be equated

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with the expression “licence” or “any other business or  

commercial rights of similar nature” u/s 32(1)(ii); that,  

there  is  a  difference  between  acquiring  a  know-how,  

patent, copyright or trademark and acquiring a licence to  

use  such  know-how,  patent,  copyright,  trademark  or  

franchise;  that  the  expression  “business  or  commercial  

rights of similar nature” in Section 32(1)(ii) of the 1961  

Act  would  take  its  colour  from  the  preceding  words,  

namely,  know-how,  patent,  copyright,  trademark  and  

franchise which belong to a class of intellectual property  

rights and applying the rule of ejusdem generis, the High  

Court held that the expression “licence” as well as the  

expression  “business  and  commercial  rights  of  similar  

nature” in Section 32(1)(ii) of the 1961 Act are referable  

to IPRs such as know-how, patent, copyright, trademark and  

franchise and since the BSE membership card does not fall  

in any of the above categories, the claim for depreciation  

was not admissible on the BSE membership card acquired by  

the  assessee  u/s  32(1)(ii).  Consequently,  the  appeals  

filed by the Department stood allowed, hence, these civil  

appeals.

Importance of BSE:

6. BSE is recognized by the Government of India under

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Securities Contracts (Regulation) Act, 1956. Approximately  

70000 deals are executed on a daily basis. There are about  

3500  companies  which  are  listed  on  BSE.  The  market  

capitalization of the BSE is Rs. 5 trillion. The main aim  

and object of the BSE is to provide a market place for the  

purchase  and  sale  of  securities.  It  aims  to  promote,  

develop and maintain a well regulated market for dealing  

in  securities  and  to  safeguard  the  interests  of  the  

members and the investing public having dealings in the  

Exchange. It helps industrial development of the country  

through resources mobilization. It is set up to establish  

and promote “just practices” in securities transactions.  

In November, 1996, the BSE constituted a Trade Guarantee  

Scheme  under  which  all  trades  carried  out  on  online  

trading  are  guaranteed  by  the  clearing  house  of  BSE.  

Similarly, a depository has been set up as a joint venture  

between  BSE  and  Bank  of  India  etc.  BSE  has  introduced  

trading also in fixed income securities to give impetus to  

trading in debentures and corporate debt instruments to  

increase trading in Government owned securities.  

Question arising in the Present Matters:

7. Is depreciation allowable on the cost of a Stock  

Exchange Membership Card under Section 32(1)(ii)

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of the Income Tax Act, 1961, which was enacted and  

inserted by Finance (No. 2) Act, 1998?

Answer to the above Question:   8. To  answer  the  above  question,  we  need  to  quote  

hereinbelow certain relevant provisions of the 1961 Act:

2. In  this  Act,  unless  the  context  otherwise  requires,—

(14)“capital  asset”  means  property  of  any  kind  held by an assessee, whether or not connected with  his business or profession, but does not include—

           (i)    any  stock-in-trade,  consumable  stores  or  raw  materials  held  for  the  purposes of his business or profession ;

                (ii)  personal effects, that is to say,  movable property (including wearing apparel and  furniture,  but excluding  jewellery) held  for  personal use by the assessee or any member of  his family dependent on him.  

Depreciation.

32. (1) In respect of depreciation of— (i) .. (ii)know-how,  patents,  copyrights,  trade  marks,  licences,  franchises  or  any  other  business  or  commercial  rights  of  similar  nature,  being  intangible assets acquired on or after the 1st day  of April, 1998, owned, wholly or partly, by the  assessee and used for the purposes of the business

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or profession, the following deductions shall be  allowed—

Explanation  3.-  For  the  purposes  of  this  sub- section, the expressions “assets” and “block of  assets” shall mean-

(a) tangible assets, being buildings,  machinery, plant or furniture;

(b) intangible  assets,  being  know-how,  patents,  copyrights,  trademarks,  licences,  franchises  or any other business or commercial rights of  similar nature.

9. We also quote hereinbelow relevant Rules of Bombay  

Stock Exchange Limited as they stood at the relevant time:

“Membership a Personal Privilege

5. The  membership  shall  constitute  a  personal  permission  from  the  Exchange  to  exercise the rights and privileges attached  thereto  subject  to  the  Rules,  Bye-laws  and  Regulations of the Exchange.

Right of Membership Inalienable

6. A member shall not assign, mortgage,  pledge, hypothecate or charge his right of  membership  or  any  rights  or  privileges  attached  thereto  and  no  such  attempted  assignment,  mortgage,  pledge,  hypothecation  or charge shall be effective as against the  Exchange for any purpose nor shall any right  or interest in any membership other than the  personal  right  or  interest  of  the  member  therein be recognized by the Exchange. The  Governing  Board  shall  expel  any  member  of  the Exchange who acts or attempts to act in  violation of the provisions of this Rule.

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Right of Nomination

7. Subject  to  the  provisions  of  these  Rules  a  member  shall  have  the  right  of  nomination which shall be personal and non- transferable.

Right of Nomination of Deceased or Defaulter  Member

9. On the death or default of a member his  right of nomination shall cease and vest in  the Exchange.

Forfeited or Lapsed Right of Membership

10. When a right of membership is forfeited  to or vest in the Exchange under any Rule,  Bye-law or Regulation of the Exchange for the  time being in force it shall belong absolutely  to the Exchange free of all rights, claims or  interest of such member or any person claiming  through such member and the Governing Board  shall be entitled to deal with or dispose of  such right of membership as it may think fit.

Nomination by Member

11(a)  A member of not less than three  years’  standing  who  desires  to  resign  may  nominate a person eligible under these Rules,  for admission to membership of the Exchange as  a candidate for admission in his place:

Provided that  a  member  of  less  than  three  years’ standing who desires to resign may with  the sanction of the Governing Board  nominate  his own son eligible under these Rules for

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admission to membership of the Exchange as a  candidate for admission in his place;

Provided further that the Governing Board may,  at its absolute discretion and in exceptional  cases and for cogent reasons to be recorded in  writing,  permit  by  a  special  resolution,  a  member of less than three years’ standing, who  desires to resign, to nominate a person as a  candidate for admission in his place, subject  to such terms and conditions as the Governing  Board may in its absolute discretion think fit  to impose.

*** *** ***

Nomination in Case of Deceased Member

(b) The  legal representatives of a deceased  member  or  his  heirs  or  the  persons  mentioned  in  Appendix  C  to  these  Rules  may  with  the  sanction  of  the  Governing  Board  nominate any person eligible under  these Rules for admission to membership  of  the  Exchange  as  a  candidate  for  admission  in  the  place  of  the  deceased  member.  In  considering  such  nomination  the  Governing  Board  shall  be  guided  so  far  as  practicable  by  the  instructions  set out in Appendix C to these Rules.

Nomination in case of Defaulter

(c)  The forfeited right of membership of a  defaulter   shall be restored to him if he  be  re-admitted  as  a  member  within  six  months from the date of default but if  an  application  by  a  defaulter  for  re- admission  be rejected  by the  Governing  Board or if no such application be made  within six months of the declaration of

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default the Governing Board may at any  time exercise the right of nomination in  respect of such membership.

Dues and Claims

15.  The Governing Board shall not approve a  nomination unless the nominating member or in  the  case  of  a  deceased  member  his  legal  representatives or  heirs  or  the  persons  mentioned in Appendix C to these Rules or any  other person on his behalf shall have paid and  satisfied in full.

Dues of the Exchange

(i) Such  subscriptions,  debts,  fines,  fees,  charges  and  other  monies  as  shall  have  been determined by the Governing Board to  be due to the Exchange or the Clearing  House  by  the  nominating  or  deceased  member; and

Liabilities relating to Contracts

         (ii) Such  debts,  liabilities,  obligations and claims arising out of any  contracts made by such member subject to  the  Rules,  Bye-laws  and  Regulations  of  the Exchange as shall have been admitted  by the Governing Board; and

     (iii) all amounts due or payable by the  nominating  or  deceased  member  to  the  Trade Guarantee Fund.

Allocation in Order of Priority

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16.  (1) When as provided in these Rules the  Governing Board has exercised the right  of nomination in respect of a membership  vesting in the Exchange the consideration  received therefor shall be applied to the  following purposes and in the following  order of priority, namely-

Dues of Exchange and Clearing House

   (i)  first  -  the  payment  of  such  subscriptions,  debts,  fines,  fees,  charges  and  other  monies  as  shall  have  been determined by the Governing Board to  be due to the Exchange, to the Clearing  House or to the Trade Guarantee Fund by  the  former  member  whose  right  of  membership vests in the Exchange.

Liabilities relating to Contracts

   (ii) second-the  payment  of  such  debts,  liabilities,  obligations  and  claims arising out of any contracts made  by  such  former  member  subject  to  the  Rules,  Bye-laws  and  Regulations  of  the  Exchange as shall have been admitted by  the Governing Board:

 Provided  that  if  the  amount  available  be  insufficient  to  pay  and  satisfy  all  such  debts,  liabilities,  obligations and claims in full they shall  be paid and satisfied pro rata, and

Surplus

      (iii) third - the payment of the  surplus,  if  any,  to  the  funds  of  the  Exchange: provided that the exchange in  general  meeting  may  at  its  absolute

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discretion  direct  that  such  surplus  be  disposed  of  or  applied  in  such  other  manner as it may deem fit.

(2)    The provisions of clause (1) of this  Rule shall not apply in cases where the  Governing Board has exercised the right  of nomination in respect of a membership  which has vested in the Exchange upon a  member having been declared a defaulter  on  or  subsequent  to  such  date  as  the  Governing  Board  may  specify  in  this  behalf.

Application of Consideration

16A When  the  Governing  Board  has  exercised  the right of nomination in respect of a  membership  which  has  vested  in  the  Exchange  upon  a  member having  been  declared a defaulter on or subsequent to  the date to be specified by the Governing  Board  as  referred  to  in  clause  (2)  of  Rule  16,  the  consideration  received  therefor shall be paid by the Governing  Board to the Defaulters’ Committee to be  applied for the purposes and in the order  of priority specified in the Bye-laws and  the Regulations of the Exchange.

10. We also quote hereinbelow Bye-law 400 of BSE, which  

reads as under:

“Application of Defaulters’ Assets and Other  Amounts   400. Subject to the provisions of Bye-law 398,  the  Defaulters’ Committee shall  realise  and  apply all the money, rights and assets of the  defaulter which have vested in or which have  been  received  by  the Defaulters’ Committee  (other than the amount paid by the Governing  Board to the Defaulters’ Committee pursuant to

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Rule  16A  in  respect  of  the  consideration  received by the Governing Board for exercising  the  right  of nomination  in  respect  of  the  defaulter’s erstwhile right of membership) and  all other assets and money of the defaulter in  the Exchange or the market including the money  and  securities  receivable  by  him  from  any  other member,  money  and  securities  of  the  defaulter lying with the Clearing House or the  Exchange,  credit balances lying in  the  Clearing  House,  security  deposits, any bank  guarantees  furnished  on  behalf  of  the  defaulter, fixed deposit receipts discharged  or assigned to or in favour of the Exchange,  Base / Additional Capital deposited with the  Exchange by  the  defaulter,  any  security  created  or  agreed  to be  created  by  the  defaulter or any other person in favour of the  Exchange or the Defaulters’ Committee for the  obligations of the defaulter to the following  purposes  and  in  the  following  order  of  priority , viz.:-  (i) First - to make any payments required to  be made under Bye-law 391 and 394;  (ii)  Second  -  the  payment  of  such  subscriptions, debts, fines, fees, charges and  other money as shall have been determined by  the Defaulters’ Committee to be due to the  Securities and Exchange Board of India, to the  Exchange  or  to  the  Clearing  House  by  the  defaulter;  (iii) Third - the rectification or replacement  of or compensation for any bad deliveries made  by or on behalf of the defaulter to any other  member  in  the  settlement  in  which  the  defaulter has been declared a defaulter or in  any prior or subsequent settlement (unless the  Governing  Board  has otherwise  determined  in  respect  of  such  settlement  or  settlements  under Bye-law 394) provided the conditions of  Bye-law 153 and all other applicable Rules,  Bye-Laws and Regulations and instruc- tions of  the Governing Board are complied with;  (iv)  Fourth - the balance, if any, shall be  paid into the Fund to the extent of the money

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paid out of the Fund (other than payments made  out of Members’ refundable contributions) and  not recovered by the Fund and the interest  payable  by  the  defaulter  to  the  Fund  in  respect thereof;  (v) Fifth - the balance, if any, shall be paid  into the Fund to the extent of the money paid  out of  the Fund  out  of  the  refundable  contributions  of  members  (other  than  the  refundable contribution of the defaulter) and  not  recovered  by  the  Fund  and  the  interest  payable  by  the  defaulter  to  the  Fund  in  respect thereof;  (vi)  Sixth - subject to the Rules, Bye-Laws  and Regulation of the Exchange, including in  particular Bye-Law 343, the balance, if any,  shall be applied by the Defaulters’ Committee  for the payment of such unpaid outstandings,  debts, liabilities, obligations and claims to  or of members of the Exchange arising out of  any contracts made by the defaulter with such  members  subject  to  the Rules,  Bye-laws and  Regulations of the Exchange as shall have been  admitted by the  Defaulters’ Committee;  provided  that  if  the  amount  available  be  insufficient to  pay  and  satisfy  all  such  debts, liabilities, obligations and claims in  full  they  shall  be  paid  and  satisfied pro  rata;  (vii) Seventh - subject to the Rules, Bye-Laws  and Regulation of the Exchange, including in  particular Bye-Law 343, the balance, if any,  shall be applied by the Defaulters’ Committee  for the  payment of such  unpaid  debts,  liabilities, obligations and claims to or of  the defaulter’s constituents arising out of any  contracts made by such defaulter subject to the  Rules, Bye-laws and Regulations of the Exchange  as shall have been admitted by the Governing  Board; provided that if the amount available be  insufficient to pay and satisfy all such debts,  liabilities,  obligations  and  claims  in  full  they shall be paid and satisfied pro rata;  (viii) Eighth - the balance, if any, shall be  paid into the Exchange’s Customers’ Protection

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Fund to the extent of any and all amounts paid  out of the Customers’ Protection Fund towards  the  obligations or  liabilities  of  the  defaulter and interest thereon at the rate of  2.5%  per  month  (or  such  other rate as  the  Governing Board may specify) from the date of  payment out of the Customers’ Protection Fund  to the date of repayment to the Fund; and  (ix) Ninth - the surplus, if any, shall be  paid to the defaulter.  Clarification: It is clarified that this Bye-law 400 does not  apply to the amount paid by the Governing Board  to the Defaulters’ Committee pursuant to Rule  16A in respect of the consideration received  by  the  Governing Board  for  exercising  the  right  of  nomination  in  respect  of  the  defaulter’s erstwhile right of membership as  the same does not belong to the defaulter and  the defaulter has no claim, right, title or  interest therein.”  

11. At the outset we wish to clarify that our present  

judgment is confined to the Rules and Bye-laws of BSE, as  

they stood during the relevant assessment years.

12. Section 32 of the 1961 Act provides for a deduction  

of  allowance  being  made  in  respect  of  depreciation  of  

building, machinery, plant or furniture, being a tangible  

asset.   Vide  Finance  (No.2)  Act,  1998,  the  Parliament  

thought it fit to extend the benefit of depreciation also  

to intangible assets enumerated in Section 32(1)(ii) in  

respect  of  know-how,  patents,  copyrights,  trade  marks,  

licences, franchises or any other business or commercial  

rights of similar nature, being intangible assets acquired

18

on  or  after  1st April, 1998.  In the lead matter, the  

assessee  bought  the  membership  card  of  BSE  for  Rs.  95  

lakhs.  In the case of M/s. HDFC Securities Ltd. v. The  

Commissioner of Income Tax-4 (Civil Appeal arising out of  

SLP (C) Nos. 5656-5657 of 2010), the assessee bought the  

membership card of BSE for Rs. 2.80 crores.   

13. Appellant before us claims that the membership card  

enables  him  to  trade  on  the  floor  of  BSE  and,  

consequently, it is a business or commercial right in the  

nature of a licence under Section 32(1)(ii).  On the other  

hand, it is the case of the Department that membership is  

a personal privilege; that it is not an asset; that it is  

not owned by the assessee, therefore, the claim of the  

assessee for depreciation was not admissible under Section  

32(1)(ii).

14. To decide the above controversy, we need to examine  

the Rules of BSE.

15. Rule 5, quoted above, states that membership shall  

constitute  a  personal  permission  from  the  Exchange  to  

exercise the rights and privileges attached thereto.  Rule  

6  inter  alia  states  that  membership  shall  not  be  

alienable.   Rule  7  confers  right  of  nomination  on  the  

member of the Exchange.  However, that Rule clarifies that

19

although a member has a right of nomination, such right  

shall be personal and non-transferable.  Rule 9 inter alia  

states that on the demise or default of a member the said  

right of nomination shall cease and vest in the Exchange.  

Rule 10 refers to forfeited or lapsed right of membership.  

It inter alia states that when a right of membership is  

forfeited  to  or  when  such  right  vests  in  the  Exchange  

under any Rule or Bye-law, it shall belong absolutely to  

the Exchange free of all rights, claims or interests of  

such member or any person claiming through such member and  

the Governing Board alone shall be entitled to deal with  

or dispose of such right of membership as it may think  

fit.  Rule 15 inter alia states that the Governing Board  

shall  not  approve  a  nomination  unless  the  nominating  

member  or  in  the  case  of  a  deceased  member  his  legal  

representatives satisfy in full all dues of the Exchange;  

all liabilities relating to contracts and all amounts due  

and payable to the Trade Guarantee Fund.  Rule 16 deals  

with allocation in the Order of Priority.  It inter alia  

states  that  when  the  Board  has  exercised  the  right  of  

nomination  in  respect  of  a  membership  vesting  in  the  

Exchange  the  consideration  received  thereof  shall  be  

applied to the specified purposes.

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16. On reading Rules 5 to 10 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.     

17. The question which we are required to examine 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?   

18. 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

21

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.   

19. 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).   Our  

answer is in the affirmative for the reason that the Rules  

and the Bye-laws analysed hereinabove 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

22

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).   

20. Since heavy reliance is placed by the Department on  

the judgments of this Court in the following cases, we  

need to discuss those judgments and clarify the position  

in law:

(i) Vinay Bubna v. Stock Exchange, Mumbai [(1999) 6  

SCC 215]

(ii)Stock  Exchange,  Ahmedabad  v.  Assistant  

Commissioner of Income-Tax [(2001) 248 ITR 209]

23

21. In the case of Vinay Bubna (supra), one Yogesh Mehta  

who was a member of BSE was declared a defaulter by the  

Exchange.   An  amount  of  Rs.  21.81  crores  was  due  and  

payable by the defaulter to Vinay Bubna who had moved the  

Bombay  High  Court  by  way  of  an  arbitration  petition  

against  Yogesh  Mehta  (defaulter).   In  the  said  

proceedings,  an  application  was  filed  for  appointing  a  

court receiver.  The High Court did not grant to Vinay  

Bubna any relief in respect of the  membership card of the  

defaulter – member.  In the said proceedings, Rule 16 was  

challenged on the ground that membership of BSE was an  

asset  of  the  share-broker  and  on  its  sale  from  the  

proceedings thereof payment should be made to creditors  

like Vinay Bubna and proceeds should not be allowed to be  

distributed by BSE in the manner indicated by Rule 16.  On  

behalf of the Stock Exchange, it was submitted that after  

respondent  No.  3,  Yogesh  Mehta  stood  declared  to  be  a  

defaulter he ceased to be the member of the Stock Exchange  

whereupon his rights of membership vested in the Exchange  

free of all rights, claims and interests and, therefore,  

the Exchange was at liberty to invite applications from  

other persons and to admit anyone who offers to pay the  

highest amount.  It was argued that the said proceeds so

24

received did not belong to the ex-member and the order of  

priority contained in Rule 16 was just and fair and was  

not illegal, wrong or arbitrary.  The contention of the  

Stock Exchange was accepted by this Court observing that  

when the defaulting member is expelled from the Exchange  

no interest in his membership card remains in himself and  

none can pass to his assignee.  It was held that once the  

membership ceases to be an asset of the share-broker the  

question of Rule 16 being contrary to the insolvency law  

does  not  arise.  In  our  view,  the  judgment  in  Vinay  

Bubna’s case supports our reasoning in this case.  The  

judgment in  Vinay Bubna’s case clearly indicates that it  

was a case dealing with the rights of a defaulting non-

continuing  member.   The  judgment  in  Vinay Bubna’s case  

clearly indicates that membership card is an asset of a  

non-defaulting continuing member.  However, the membership  

card ceases to be an asset only when the member commits a  

default in which event the card vests in the Exchange free  

from all encumbrances and once it so vests in the Exchange  

then the Exchange is free to allocate the consideration in  

the order of priority indicated by Rule 16.

22. In the case of  Stock Exchange, Ahmedabad (supra),  

the  question  which  arose  for  determination  was  whether

25

after the demise of a stock-broker could he be declared a  

defaulter by the Exchange?  In that case the facts were as  

follows.  Ahmedabad Stock Exchange (ASE) admitted Rajesh  

Shah as its member on 19th February, 1988.  He died on 7th  

February,  1994.   On  February  12,  1994,  his  legal  

representatives wrote to the Stock Exchange that they were  

unable  to  meet  the  liabilities  of  the  deceased.  

Thereafter, the Governing Board of ASE passed a resolution  

on 12th February, 1994 declaring Rajesh Shah, the deceased  

member, as a “deemed defaulter”.  By the said resolution,  

the  Board  resolved  that  the  membership  rights  of  the  

deceased member who was declared to be a deemed defaulter  

should vest in the Stock Exchange and the said membership  

rights be disposed of by inviting offers within a minimum  

floor price of Rs. 25 lakhs.  It is the said declaration  

dated 12th February, 1994 by which Rajesh Shah was declared  

to be a deemed defaulter came to be challenged.  Another  

interesting fact which needs to be mentioned was that on  

15th February,  1994  a  provisional  attachment  order  was  

passed under Section 281B of the 1961 Act in respect of  

the membership card in the name of Rajesh Shah.  On 16th  

February,  1994,  the  Stock  Exchange  issued  advertisement  

inviting  claims  from  member  creditors  to  lodge  their

26

claims within 30 days.  They invited offers for purchase  

of membership also within the minimum floor price of Rs.  

25 lakhs.  On 5th December, 1994, ASE passed a resolution  

disposing  of  the  membership  right  of  the  deceased  in  

favour of UTI Security Ltd. for Rs. 27 lakhs.  However, a  

garnishee  notice  was  issued  by  the  Department  under  

Section 226(3) of the 1961 Act in the sum of Rs. 12.25  

lakhs.   That  notice  was  addressed  to  the  Executive  

Director of the Stock Exchange by the Department.  Under  

the said circumstances, ASE filed a writ petition in the  

High  Court  challenging  the  orders  of  provisional  

attachment as well as the garnishee notice.  The question  

for determination which arose in the said judgment was as  

to the nature of the rights of the deceased or his legal  

representatives in the membership card.  It was held by  

this Court, after examining the Rules and the Bye-laws,  

that  the  right  of  nomination  which  earlier  vested  in  

Rajesh Shah stood vested in the Exchange under the Rules  

when he committed default.  On default, that right vested  

in  the  Stock  Exchange  absolutely  and,  therefore,  the  

consideration  received  by  the  Stock  Exchange  of  Rs.  27  

lakhs from UTI Security Ltd. could not be attached by the  

Income Tax Department because on vesting, such right of

27

nomination belonged to the Exchange absolutely.   

23. For the afore-stated reasons, we are of the view  

that both the afore-stated judgments support the reasoning  

given by us hereinabove.

24. Before  concluding,  we  wish  to  clarify  that  our  

present  judgment  is  strictly  confined  to  the  right  of  

membership  conferred  upon  the  member  under  the  BSE  

membership card during the relevant assessment years.  We  

hold that 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.   

Conclusion  

25. We answer the question at page 6 in the affirmative  

by holding that on the facts and circumstances of these  

cases the Tribunal was right in holding that depreciation

28

was allowable on the cost of the membership card under  

Section  32(1)(ii)  of  the  1961  Act.   Accordingly,  the  

impugned judgment(s) 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.

...................CJI     (S. H. Kapadia)

.....................J.    (K.S. Radhakrishnan)

New Delhi;  September 09, 2010