2014 (10) TMI 184 - HC - Income Tax

Accrual of income from demutualisation of the exchange (BSE) - each holder of the card being given 10,000 shares of BSEL in lieu of the membership card. - AO was of the view that the assessee was entitled to claim the cost of acquisition of shares being the original cost of acquisition of membership card as against the written down value of the card at had it been that claim for depreciation was allowed Held that - AO added the benefit to the total income of the assessee u/s 41(1) so also alternatively u/s 28(1)(iv) on protective basis - The AO 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 - 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/shareholders of the BSE have thus been allowed to continue with new corporate entity and with the same benefits - 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 - The depreciation that was claimed was disallowed and computed as benefit and which could be derived because of demutualization Decided against revenue.

Summary

Issues:
Interpretation of section 28(1)(iv) of the Income Tax Act regarding benefits arising from business operations due to demutualization of Bombay Stock Exchange.

Detailed Analysis:

Issue 1:
The Revenue challenged the tribunal's order disallowing depreciation claimed by the Assessee for the assessment year 2006-07, following the demutualization of Bombay Stock Exchange (BSE) and the transfer of membership cards to shares of Bombay Stock Exchange Ltd. (BSEL).

Analysis:
The Revenue argued that the benefit accrued to the Assessee due to demutualization should be added to the total income under section 41(1) or alternatively under section 28(1)(iv). They contended that the benefit, arising from the business of the Assessee, should be considered as per section 28(1)(iv) even if it accrues after the card transfer.

Issue 2:
The Assessee's representative argued that the question raised by the Revenue was academic, as no benefit had been realized yet, and the issue would only arise if the card was transferred and a deduction claimed on the original price of Rs. 97,51,000.

Analysis:
The Assessee's representative emphasized that no benefit had been derived yet, and the Revenue's appeal was premature. They highlighted that the assessing officer's order indicated no benefit had been received, making the question of law premature and academic.

Issue 3:
The High Court analyzed the facts and legal provisions, including the applicability of section 28(1)(iv) in the context of the demutualization of BSE and the transfer of membership cards to shares of BSEL.

Analysis:
The Court observed that the assessing officer's exercise regarding the benefit arising from demutualization was premature for the assessment year 2006-07. They noted that the mere transfer of shares without additional factors did not justify invoking section 28(1)(iv) and adding the benefit to the Assessee's income.

Conclusion:
The High Court dismissed the Revenue's appeal, stating that no substantial question of law arose in the case. They found that the assessing officer's actions were premature, and the issue of benefit accrual due to demutualization was not substantiated. The Court emphasized that the appeal was not warranted, as no larger legal questions needed to be addressed in the circumstances of the case.