Stock exchange membership is always considered a proud privilege entitling the cardholder to trade in the stock exchange for gain. In popular parlance, it is an asset of value. Is it entitled to depreciation as a capital asset? The Finance (No.2) Act, 1998 amended Section 32 of the Income-Tax Act, 1961 so as to enlarge the scope for claiming depreciation on trading assets.
Prior to this amendment, depreciation was allowed only on buildings, plant and 
machinery and furniture being tangible assets.With effect from April 1, 1998, depreciation is allowable on knowhow, patents, copyrights, trademarks, ‘licenses’, franchise or any other business or commercial rights of similar nature, being intangible assets acquired on or after April 1, 1998, and used for business or profession.
The same Finance Act also amended Section 47 and inserted clause (xi) so as to make it clear that stock exchange membership card is a capital asset liable to capital gains tax on transfer w.e.f. April 1, 1998.
Membership cards of recognised stock exchanges are traded for huge sums of money, sometimes the consideration exceeded eight figure amounts. If the card is a capital asset liable for capital gains tax, should it not be entitled to deprecation under Section 32?
Techno Shares Case
In this case (CIT vs Techno Shares and Stocks Ltd., 323 ITR 69 Bombay), a group of companies were taken to the Bombay High Court by the Revenue after they succeeded before the Income-Tax Appellate Tribunal in their claim for deprecation on the stock exchange membership card.
The scope of the amendment by Finance Act, 1998 was thoroughly examined by the High Court. It was argued that the membership card fell in the category of ‘licenses’, mentioned in Section 32 (1)(ii). It is an intangible asset or can be taken as any other business or commercial rights of similar nature enumerated in Section 32(1)(ii).
There is no definition of the term ‘licenses’ in the Act. In common parlance, the expression means permission to carry on trade. Intellectual property rights, like patents and copyrights, are governed by the Patent Act 1970 and the Copy Right Act, 1957, containing licensing provisions.
‘Knowhow’ is defined under Explanation 4 to Section 32(1) to mean any industrial information or technique which is likely to assist in the manufacture or processing of goods. ‘Franchise’ is not defined in the Act but it connotes rights more substantial than covered by the term ‘license’.
The term ‘license’ is a very wide term and would cover permission to carry on trade, including the right to acquire intellectual property rights. The question is whether the term should be interpreted widely or restrictively.
Restrictive View
The High Court expressed the view that the term has to be construed restrictively so as to apply to licenses relating to acquisition/user of IPRs. The scope cannot be enlarged so as to grant depreciation. Barring the term ‘licenses’, the category of intangible assets enumerated in Section 32 (1)(ii) are all relatable to intellectual properties.
The term ‘license’ would take colour from those expressions but construing the same widely so as to apply all types of licenses relating to intangible assets, said the High Court, would defeat the object of the Act. It is not a business or commercial right relating to intellectual properties. Depreciation is not allowable. It is not all capital assets that get depreciation allowance. The BSE card does not fall in any of the categories specified in Section 32(1)(ii).
The Supreme Court had held in 248 ITR 209 that the right of membership of a stock exchange is merely a personal privilege granted to the member. It is non-transferable and incapable of alienation except to the limited extent provided in the stock exchange rules. The right of nomination belongs to the stock exchange absolutely. Membership right is not the property of the member.
The ruling has been roundly criticised for not taking a liberal view of the term ‘license’. Even an asset like ‘goodwill’ has recently been held to be eligible for depreciation (128 TTJ Hyderabad 596) though this again is a matter of controversy. It will be anomalous to argue that goodwill can ever depreciate.
As far as stock exchange membership is concerned; the stock broking community recognises it as a valuable trading asset. Valuation of the card is a matter of bargain. It can appreciate or depreciate depending on the market conditions in the stock exchange. It is an intangible asset.
The legislature cannot be expected to lay down all types of intangible assets when it conferred the benefit of depreciation allowance under the Finance (No.2) Act, 1998. The intention behind the amendment was to enlarge the scope for depreciation allowance on various types of assets, both tangible and intangible. Seven items of intangible assets are specifically mentioned and this provision is fairly exhaustive.
The views of the Supreme Court on this issue will be eagerly awaited by the stock broking community.
nice write up on license fee tax depreciation
thanks for sharing the news