2006 (9) TMI 237 - AT - Income Tax

Capital gains - Transfer of membership card - Whether membership card of Madras Stock Exchange could be construed to be a capital asset within the meaning of section 2(74) ex consequenti, consideration of the alleged transfer of membership card is exigible to capital gains tax ? - HELD THAT - Under the rules framed by MSE, as per Article 48(a), once a member is declared defaulter, the right of nomination vests with the Stock Exchange authorities and such right can be exercised only by the Exchange. So far as death of a member is concerned, there is a slight variation in the MSE rules to the effect that legal representatives of a deceased member or his heirs may nominate any person eligible under the rules for admission to the membership of the Exchange. But this slight deviation also does not make any difference. During the subsistence of membership, what a person is holding is a valuable right through which he can exercise the privileges of a cardholder, i.e., mainly trading on the floor of the Stock Exchange. The use of a card by a member is q nothing but an exploitation of this valuable right for the purpose of earning income on regular basis. Therefore, when a continuing member nominates another person in his place, it is nothing but the transfer of this right from one to the other. Accordingly, the card is a valuable property which entitles the members to deal in transactions on the floor of the Stock Exchange and without which one cannot transact such business. This right can be disposed of by a member by nomination, though subject to rules and regulations of Stock Exchange and settlement of debts and liabilities of the members of the Stock Exchange. The argument of the learned counsel was that exercising the right of nomination is not equivalent to transferring an asset. This argument has been met with by the Ahmedabad Bench of the Tribunal in the case of V.G. Gajjar 2004 (9) TMI 290 - ITAT AHMEDABAD-A . We are in full agreement with the view expressed therein. Accordingly, in the present case, we hold that the transfer of membership card by the assessee to ASERA Securities Pvt. Ltd. is a transfer of capital asset within the meaning of section 2(14) of the Act and consequently the consideration of the said transfer is exigible to capital gains tax. In the result, the appeal of the assessee is dismissed.

Issues Involved:
1. Whether the membership card of Madras Stock Exchange (MSE) constitutes a capital asset under section 2(14) of the Income-tax Act, 1961.
2. Whether the transfer of the membership card is subject to capital gains tax.

Issue-wise Detailed Analysis:

1. Whether the membership card of Madras Stock Exchange (MSE) constitutes a capital asset under section 2(14) of the Income-tax Act, 1961:

The primary contention revolves around whether the MSE membership card qualifies as a capital asset. The Assessing Officer and the Commissioner (Appeals) both held that the membership card is a capital asset, thus subjecting its transfer to capital gains tax. The assessee argued that the membership card is a personal right or permission, not a transferable asset.

The learned counsel for the assessee referred to several judicial decisions, including the Gujarat High Court's judgment in Stock Exchange, Ahmedabad v. Asstt. CIT, which initially held that the membership card was a property. However, the Supreme Court in ASE v. Asstt. CIT reversed this decision, stating that the membership right is not the property of the assessee, but a personal permission from the exchange. Consequently, it cannot be attached under section 281B of the Income-tax Act.

The Tribunal considered the broader definitions of 'assets' and 'capital assets' under sections 2(14) and 281B of the Income-tax Act, and section 2(e) of the Wealth-tax Act, which include "property of any kind." The learned counsel argued that since the Supreme Court held the membership right is not property, it should not be considered a capital asset.

However, the Tribunal noted that the Supreme Court's judgment in ASE applied to specific circumstances where the member had lost their membership due to death or default, thus losing all rights and privileges. In contrast, a continuing member holds a valuable right to trade on the stock exchange, which can be transferred by nomination, indicating it is a capital asset.

2. Whether the transfer of the membership card is subject to capital gains tax:

The Tribunal examined whether the transfer of the membership card by the assessee to ASERA Securities Pvt. Ltd. constitutes a taxable event under capital gains. The learned counsel for the assessee argued that the right to nominate a successor is not equivalent to transferring an asset. However, the Tribunal referred to the Ahmedabad Bench's decision in V.G. Gajjar v. Dy. CIT, which held that the membership card is a valuable asset that can be sold or transferred, thus subject to capital gains tax.

The Tribunal also considered the legislative intent behind section 47(xi) of the Income-tax Act, which treats the membership of a stock exchange as a capital asset. This amendment indicates that Parliament intended to treat such membership cards as capital assets, subject to capital gains tax upon transfer.

The Tribunal concluded that the membership card is indeed a valuable property right, and its transfer constitutes a transfer of a capital asset. Consequently, the consideration received from the transfer is exigible to capital gains tax.

Conclusion:

The Tribunal held that the transfer of the MSE membership card by the assessee to ASERA Securities Pvt. Ltd. is a transfer of a capital asset within the meaning of section 2(14) of the Income-tax Act. Therefore, the consideration received from this transfer is subject to capital gains tax. The appeal of the assessee was dismissed.

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