DEPRECIATION ON MEMBERSHIP RIGHTS USED FOR THE PURPOSE OF BUSINESS OR PROFESSION

[C.A. DEV KUMAR KOTHARI]

 

Earlier article:

In article titled "Capital or revenue expenses:- membership fees etc, having enduring advantage" displayed on this website on 03.05.2008 the author has suggested that depreciation allowance can be claimed on some assets which are in nature of intangible assets. Regarding other expenses having enduring benefit spread over more than one year it was suggested to make a provision for allowing the same over certain period instead of being allowed in one year. This will facilitate following matching principal of income and revenue over certain period.

In the same article  a case for depreciation allowance was made out as follows :

It is true that a membership of institution like a Stock Exchange, which is allowed on some substantial payment, is a necessity for the purpose of carrying such business. The right of membership is for a period spread over more than one year, the rights of membership can also be transferred. Therefore, such rights are in nature of business rights which entitle the holder to carry such business may be  subject to some more requirements or compliances like training or continuing training, some annual payments  etc.

Therefore, rights obtained on payment of such amount can be considered as an intangible asset acquired for the purpose of carrying business. In section 32 we find mention of intangible assets as follows:

     "know-how, patents, copyrights, trade marks, license, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998".

       A membership of stock exchange is like a license or any other business or commercial right to carry business of share and security brokers. Therefore,  costs of such membership is eligible for depreciation allowance u/s 32 if acquired on or after 1^st April, 1998.

Similarly route permit is in nature of a license for plying a vehicle on specified route. The cost of route permit can therefore be amortized u/s 32 read with the appendix to the I.T.Rules.  

Expenditure incurred for obtaining an industrial licence can also be considered as cost of acquiring an intangible asset and it can be amortized by way of claiming depreciation allowance.

It is desirable that expenses considered as capital expenditure in earlier years, which resulted into acquisition of some enduring rights, should also be allowed to be amortized by way of depreciation allowance.

Recent decision of Tribunal allowing depreciation:

In Kotak Securities Ltd. Kotak Securities Ltd. V Addl. Commissioner of Income-tax, Range-4(3), Mumbai , The Tribunal "A" bench (quoram - N.V. VASUDEVAN, JUDICIAL MEMBER  AND D.K. RAO, ACCOUNTANT MEMBER)  in IT APPEAL NO. 1955 (MUM.) OF 2008 for  ASSESSMENT YEAR: 2005-06 in its order dated  August 26, 2008  the assessee-company was engaged in the business of share broking, depositories, mobilization of deposits and marketing of public issue. It purchased BSE membership card and claimed depreciation at 25 per cent on the written down value of the said card. The Assessing Officer rejected claim of depreciation on the ground that since membership card is not a tangible assets it cannot be treated as plant. The Commissioner (Appeals) confirmed the order of the Assessing Officer.

On second appeal the Tribunal considered that in  catena of decisions, Tribunal  had consistently taken a view that depreciation on membership card of stock exchange is to be allowed. Therefore, in the light of the aforesaid position, it was to be held that the assessee would be entitled to claim depreciation on the written down value of the membership right of the stock exchange.

Thus the Tribunal allowed depreciation allowance on the cost of membership of stock exchange considering it as an intangible asset required for the purpose of business as it confer upon assessee various business and commercial rights to carry on business as a stock broker being a member of BSE- a recognized stock exchange.

Actual cost will be WDV in first year:

Depreciation on intangible assets was first introduced in the I.T.Act and I.T.Rules w.e.f.

01.04.1999. Prior to that depreciation was not allowed (unless claimed and allowed on the basis of treating membership as 'plant'). Therefore, when depreciation has not actually been allowed in past, the 'actual cost' shall be considered as written down value and the assessee will be entitled to claim depreciation allowance on actual cost in the first year when he starts claiming depreciation. This si because any notional deprecation cannot be deducted from actual cost to determine WDV.

In subsequent years, actual cost minus depreciation actually allowed will be the WDV for claiming depreciation.

Other membership rights:

Similarly in case of other membership rights required for carrying business or profession, when the cost is disallowed as capital cost, the assessee can claim depreciation by establishing that the rights conferred upon the assessee, by such rights are in nature of commercial rights which help him in carrying his business or profession.

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IN THE ITAT MUMBAI BENCH 'A'

Kotak Securities Ltd.

v.

Addl. Commissioner of Income-tax, Range-4(3), Mumbai

N.V. VASUDEVAN, JUDICIAL MEMBER

AND D.K. RAO, ACCOUNTANT MEMBER

IT APPEAL NO. 1955 (MUM.) OF 2008

[ASSESSMENT YEAR: 2005-06]

August 26, 2008

I           Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance - Rate of - Assessment year 2005-06 - Whether depreciation is allowable on written down value (WDV) of membership right of stock exchange - Held, yes

FACTS - I

The assessee-company was engaged in the business of share broking, depositories, mobilization of deposits and marketing of public issue. It purchased BSE membership card and claimed depreciation at 25 per cent on the written down value of the said card. The Assessing Officer rejected claim of depreciation on the ground that since membership card is not a tangible assets it cannot be treated as plant. The Commissioner (Appeals) confirmed the order of the Assessing Officer.

On second appeal:

HELD - I

The Tribunal in catena of decisions had consistently taken a view that depreciation on membership card of stock exchange is to be allowed. (Para 11)

In the light of the aforesaid position, it was to be held that the assessee would be entitled to claim depreciation on the written down value of the membership right of the stock exchange. (Para 12)