2022 (5) TMI 266 - AT - Income Tax

Disallowance of depreciation on WDV of BSE Membership Card - HELD THAT - As decided in own case 2012 (2) TMI 718 - ITAT MUMBAI sections which are for the computation of capital gains, have no relevance on the allowability of depreciation. The argument of the assessee that it had taken the original cost of the share 1, while computing capital gain in a latter year, does not effect our decision. Thus, we uphold the order the Assessing Officer as confirmed by the Commissioner (Appeals) wherein depreciation on membership card has been denied. Computation of capital gain - applicability of provisions of section 55(2)(ab) of the Act as per which cost of acquisition of membership rights of the exchange is deemed to be the cost of shares received on demutualization - While computing the capital gains arisen on sale of shares of Bombay stock exchange rate, the cost of acquisition on membership rates of the exchange as cost of shares sold. Since Assessing Officer charged long term capital gain on sale of BSE shares @20% - HELD THAT - This issue under consideration is covered in favour of the assessee in the case of M/s.Techno Shares Stocks Ltd. 2019 (8) TMI 1770 - ITAT MUMBAI hold that the cost of acquisition of shares of BSE Ltd. shall be the original cost of acquisition of membership card in terms of Section 55(2)(ab) of the Act even though assessee has claimed depreciation on the cost of membership card in the earlier years. As regards the period of holding of shares of BSE Ltd., find that as per clause (ha) inserted in Explanation 1 to Section 2(42A) of the Act by the Finance Act, 2003, period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation shall also be included in period of holding of shares. In terms of the clear and unambiguous language of the section, hold that the period of holding of shares of BSE Ltd. shall be reckoned from the date of original membership of BSE and not from date of allotment of shares in BSE Ltd. We thus, agree with the view taken by the learned Judicial Member that the cost of shares will be original cost of the membership card in terms of Section 55(2)(ab) of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of depreciation on WDV of BSE Membership Card.
2. Computation of cost of shares for long-term capital gains arising from the sale of shares of Bombay Stock Exchange Limited.
3. Withdrawal of depreciation allowed on BSE Card for previous assessment years.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on WDV of BSE Membership Card:
The assessee claimed depreciation of Rs. 9,38,281/- on the WDV of the BSE Membership Card, arguing it is a capital asset eligible for depreciation under section 32 of the Income Tax Act. The disallowance was upheld by the Commissioner of Income Tax (Appeals) and the Assessing Officer. The Tribunal noted that the issue was already decided against the assessee in a previous case (ITA.No. 6710/Mum/2011 dated 15.02.2017). The Tribunal reiterated that after the demutualization of BSE, the membership card ceased to exist as an asset, and thus, no depreciation was allowable. The Tribunal referenced the case of Sino Securities Pvt. Ltd. vs. ITO, which concluded that trading rights are equivalent to a refundable deposit, and therefore, no depreciation can be granted. Consequently, the Tribunal upheld the disallowance of depreciation.

2. Computation of Cost of Shares for Long-term Capital Gains:
The assessee contested the computation of the cost of shares for long-term capital gains, arguing that the cost should be the original acquisition cost of the BSE membership rights (Rs. 2,98,51,108/-) instead of the WDV on 01.04.2005 (Rs. 66,72,217/-). The Tribunal referred to the provisions of section 55(2)(ab) of the Act, which deems the cost of acquisition of the membership rights as the cost of shares received on demutualization. The Tribunal cited the case of M/s Techno Shares & Stocks Ltd. (ITA.No. 5938/Mum/2012 dated 30.08.2019), which held that the cost of acquisition of shares should be the original cost of the membership card, even if depreciation was claimed in earlier years. The Tribunal agreed with this precedent and allowed the ground raised by the assessee, thus determining the cost of shares based on the original cost of the membership card.

3. Withdrawal of Depreciation Allowed on BSE Card for Previous Assessment Years:
The Commissioner of Income Tax (Appeals) directed the Assessing Officer to withdraw depreciation allowed on the BSE Card for the assessment years 2006-07 (Rs. 16,68,054/-) and 2007-08 (Rs. 12,51,041/-). Both counsels agreed that this issue is directly connected with the disallowance of depreciation on the WDV of the BSE Membership Card (Issue 1). Since Issue 1 was decided against the assessee, the Tribunal deemed it fit to dismiss this ground as well.

Conclusion:
The Tribunal partly allowed the appeal filed by the assessee. The disallowance of depreciation on the WDV of the BSE Membership Card was upheld, and the withdrawal of depreciation for previous years was also confirmed. However, the Tribunal allowed the computation of the cost of shares for long-term capital gains based on the original cost of the BSE membership card, in line with section 55(2)(ab) of the Act and relevant case law precedents. The order was pronounced in the open court on 06.04.2022.