9911796707
TMI Blog2006 (5) TMI 307X X X X Extracts X X X X X X X X Extracts X X X X ..... 90, against which, assessee, preferred an appeal before the CIT(A), but the CIT(A) relying upon the order of the Tribunal in the case of V.N. Kentol v. WTO [WT Appeal Nos. 322 and 323 of 93] has confirmed the order of the Assessing Officer after holding that the Membership of a Stock Exchange is a property within the meaning of section 2(e) of the Wealth Tax Act. In assessment year 1990-91 the value of the Membership Card was taken by the CIT(A) at Rs. 16,63,000 as against Rs. 1,11,000 declared by the assessee, following the order of the Tribunal in the case of V.N. Kentol. In the assessment years 1991-91 and 1992-93 the value of the Membership Card was taken by the Assessing Officer at Rs. 22,50,000 which was later on confirmed by the CIT(A) following the order of the Tribunal in the case of V.N. Kentol. Against this order of the CIT(A), assessee, preferred an appeal before the CIT(A) with the submissions that holding of Membership right with the Stock Exchange is a personal right or privilege which cannot be valued in terms of money. In support of his contention, he has placed reliance upon the following judgments : (1)Vinay Bubna v. Stock Exchange, Bombay [1999] 155 CTR (SC) 51 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all stages and at all times it remains a personal privilege unlike the Membership of Stock Exchange which is transferable by such members through nomination subject to certain conditions and approval of the governing body. The moment the holder of the Membership Card of a Stock Exchange decides to nominate another person as Member and submits an application for nomination to the Stock Exchange, the personal privilege gets converted into a valuable asset. This is very clear from the Rules of Bombay Stock Exchange which provides the transfer of cards through nominations. This is also clear from the language in the agreement entered into by the assessee on 1-11-1994 wherein the assessee has been described as seller and Saurashtra Capital Services Ltd. as the buyer. What seller sells and the buyer buys is an asset of a valuable property and the rights embedded in such card seized to mere a personal privilege. The Tribunal, accordingly, held that the Stock Exchange card is a property and once it is transferred or put on sale through nomination, is transfer of an asset exigible to capital gain tax. The learned DR further invited our attention to the provisions of section 32 of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation of the Membership is filled by the admission of other person who generally is a person who offers to pay the highest amount. The consideration, which is received by the Exchange for making a fresh nomination after the termination of the (sic). The vacancy thus created by termination of the Membership is filled by the admission of other person who generally is a person who offers to pay the highest amount. The consideration, which is received by the Exchange for making a fresh nomination after the termination of the Members, is then allocated according to rule 16. The order of priority laid down by rule 16 ensures that powers to the Exchange or to the clearing house have first to be met before the balance amount can be utilized for payment of debts, the liabilities, obligations etc., arising out of any contact made by the former member. If the amount available is insufficient to pay all such debts, liabilities etc., then the payment is to be made pro rata. If, however, any surplus is still remains, the same is to be disposed of or applied in such a manner as the exchange in general meeting may decide. Their Lordships have further held that on default being committed, the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the BSE and as such sale proceeds becomes distributable under rule 16 of the BSE Rules. Their Lordships have further held that there is a clear dichotomy under Rules and bye-laws between the sale of Membership card and recovery of defaults from other asset and obligation thereof. 6. All these judgments were considered by the Tribunal in the case of V.G Gajjar (supra) and has categorically held that stock exchange card is a property and consequently an asset under section 2(e) of the Wealth Tax Act. It can be sold by nomination for a price though hatched by the Rules of Stock Exchange. In this judgment the Tribunal has made a thread bear analysis of different Rules of the Stock Exchange and the various judgments referred hereinabove and have held that stock exchange rules provides how the sale proceeds of the stock exchange card or right of nominations are to be appropriated. As such, appropriation is to be according to Rules and the surplus would be given to the Members whose Membership card has been put to sale or who has given up his right of nomination. The Tribunal has finally concluded, having examined the various judgments on the subject in detail, that the card is a va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or his legal representatives. The question for determination before the Supreme Court was "as to the nature of rights of the deceased or his legal representatives in the stock exchange card; whether the card was the property of the assessee and after his death devolved upon his legal representatives or it was a personal permission in favour of the deceased and right of nomination of the legal representatives and heirs after his death has ceased and the said right thereupon has vested in the stock exchange". The Supreme Court narrated various clauses of rules and held : "The stock exchange rules, bye-laws and regulations have been approved by the Government of India under the Securities Contracts (Regulation) Act, 1956. There is no challenge to these rules. The question whether right of membership confers upon the member any right of property is, therefore, to be examined within the framework of the rules, bye-laws and regulations of the exchange. On a plain and combined reading of the rules, it is clear that the right of membership is merely a personal privilege granted to a member; it is non-transferable and incapable of alienation by the member or his legal representatives and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... virtue of rule 11. The decision of the Supreme Court, no doubt, states that it is a mere personal privilege granted to the member, it is non-transferable and incapable of alienation of the member or legal heirs but simultaneously stating, "except to the limited extent provided in the rules and subject to fulfilment of certain conditions and the right of nomination is not automatic but hedged by rules". The card was sold by the stock exchange itself in this case for a sum of Rs. 27 lakhs. Therefore, to say that there was no property at all in stock exchange card is not the decision of Supreme Court. 12. Similarly, in the case of Mrs. Sejal Rikeen Dalal v. Stock Exchange, Bombay 69 CC 709, the nomination of Sejal, the daughter-in-law of the member of stock exchange, Sh. Pardeep, by the legal heirs on his death was right of stock exchange which was claimed to be violating Art. 31(1) of the Constitution, being right to property. The Court held that on death, right of nomination ceases and vests in stock exchange by rule 9. There is, therefore, no property in membership. This also is a case dealing with right of legal heirs on death of the card holder. 13. In Stock Exchange v. Custod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities Contracts (Regulation) Act, 1956, and constituted with the main object of protecting, in public interest, the status of brokers, dealers and investors and in order to assist, regulate and control in public interest, dealings in securities in order to ensure fair dealing, integrity and to protect equitable principles of trade and business. A card membership of Bombay Stock Exchange cannot be sold for the benefit of the creditors of a member on his becoming bankrupt or pursuant to a member being declared defaulter, his membership rights vests in the stock exchange and also membership, the membership security deposit, office deposit, etc. vest in the stock exchange. The balance surplus would be held by the stock exchange for and on behalf of the members and that is attachable under Income-tax Act. Therefore, the Bombay High Court propounded that the stock exchange membership card has monetary value in economic parlance, though on the death or default of the members, the said value would vest in the Bombay Stock Exchange but it is for meeting the liability of such deceased or defaulted members according to the bye-laws, and the surplus retained on behalf of such member shall be g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if any, accruing to the funds of the exchange, absolute discretion is given to the BSE for disposal of such surplus. The BSE is free to apply such surplus in any manner as it may deem fit. However, under rule 16(2), it is laid down that rule 16(1) which refers to allocation in order of priority shall not apply in cases where the governing board has exercised the right of nomination in respect of a membership which has vested in the exchange upon a member having been declared a defaulter on or subsequent to such date as the governing board may specify in this behalf. In the present case, we are furnished with extracts of the minutes of the AGM held on 13th Oct., 1999, which dealt with appropriation of surplus amount of consideration of the membership right vested in the exchange. In the said AGM, the general body of the BSE has accepted the recommendation of the governing board of the BSE that such surplus amount, after paying the dues and liabilities under rule 16, shall be appropriated in the manner mentioned in the minutes of the AGM. As per the said resolution, after deducting 5 per cent of the surplus for the customers' protection fund and 5 per cent of the surplus for the brok ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of priority mentioned in clauses (i) to (vii) of bye-law No. 400, and the surplus, if any, shall be paid to the exchange provided that the exchange in the general body may at its absolute discretion direct that such surplus be disposed of or applied in such other manner as it may deem fit. Under rule 36, a new member, on admission, is required to provide security on admission. The amount is to be decided by the governing board. The security to be furnished by such a member shall be either in cash or in the form of a deposit receipt of a bank or in the form of securities approved by the governing board (rule 37). Therefore, every incoming member has to furnish a security either in the form of cash or in the form of deposit receipt of a bank or in the form of securities approved by the governing board and every such member has to maintain the value of such securities at not less than Rs. 2 lakhs by providing further security to the satisfaction of the governing board. Rule 43 provides for a lien. Rule 43 lays down that the security provided by the member under rule 37 shall be subject to a paramount lien for any sum due to the exchange or to the clearing house and for due fulfil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the petitioners, in cases falling under rule 16, the surplus belongs to the exchange and the exchange is vested with the absolute discretion to dispose of such surplus in the manner as it may deem fit. However, when it comes to the application of defaulter's assets (other securities) under bye-law No. 400, the surplus, if any, has to be paid to the defaulter. In fact, there is a clarification to bye-law No. 400. It states that bye-law No. 400 does not apply to the amounts paid to the defaulters' committee under rule 16A in respect of the consideration received by the governing board for exercising the right of nomination in respect of the defaulters' erstwhile right of membership as the same does not belong to the defaulter and the defaulter has no right, title or interest therein. Therefore, when it comes to distribution of the consideration received by the governing board for exercising the right of nominating the surplus, if any, belongs to the BSE and, therefore, the exchange has a right to dispose of the surplus in the manner it deems fit. However, the exchange has no such right when it comes to distribution of surplus arising on the sale of the defaulter's other assets. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition contained in section 2(e) which includes the property of every description, whatsoever. 14. In the case of Purshottam N. Amarsay v. CWT 1972 CTR (SC) 255/[1973] 88 ITR 417 (SC), the Supreme Court dealt with the case of settler under the trust deed wherein the trustees were to apply the net income of the trust funds for the support, maintenance and advancement in life and otherwise for the benefit of the settler and his wife in such manner as to enable the settler to live as far as possible with the same comforts and to enjoy life in the same manner as he is accustomed to it. The Tribunal held that the settler's interest under the trust deed had no value for the purpose of wealth-tax, it being personal estate, which was not possible to sell in the market. The High Court on reference held that even though the estate conferred is a personal estate and it is not possible to sell in the open market, yet under the law, the same has to be valued on the basis of the principles of Wealth-tax Act. On appeal to the Supreme Court confirming the decision of the High Court, it was held that even it being personal estate was incapable of being sold in the market in the interest of set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en market and the property can be sold in such a market and, on that basis, the value has to be found out. It is a hypothetical case which is contemplated and the Tax Officer must assume that there is an open market in which the asset can be sold. Mr. Chagla, learned counsel for the assessee, contended that in that case this Court did not consider the possibility of an asset not having any value whatsoever. We are unable to accede to that contention. What this Court ruled in Ahmed G.H. Ariff's case (supra), was that even if the property in question is incapable of being sold in the open market, being a personal estate, in that event also the interest of the assessee has to be valued by the WTO. In our opinion, the decision of this Court in Ahmed G.H. Ariff's case (supra) completely covers the issue under discussion." 14.2 On reading these two decisions, in our opinion, it is amply clear that the definitions of "asset" under section 2(e) and that of 'net wealth' under section 2(m) are comprehensive provisions and all assets were included in the net wealth. It is observed by the Bombay High Court in the case of Purshottam N. Amarsay ( supra) which was later upheld by the Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets which could be said to be held by the defaulting member. It is also correct to say that even in the hands of the non-defaulting continuing member, as held by the wealth-tax Bench of the Tribunal, mere possession of a stock exchange card does not amount to possession of an asset, as the card merely grants a personal privilege. However, the personal privilege enjoyed by the members of the stock exchange is not identical to the privilege enjoyed by members of professional bodies, such as lawyers and advocates who are members of the Bar Council of India. The membership of the Bar is not transferable by nomination and at all stages and at all times, it remains a personal privilege, unlike the membership of Bombay Stock Exchange which is transferable through nomination subject to certain conditions and approval of the Governing Body. The Tribunal held that the moment the holder of the membership card of stock exchange decides to nominate another person as member and submits an application for nomination to the stock exchange authority, the personal privilege gets converted into a valuable asset. That was also clear from the language of the Rules of the Bombay Stock Exchange which pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on 11th March, 1986, on payment of admission fee of Rs. 2,500. On 21st Aug., 1989, assessee entered into an agreement with Pawan Kumar that he will transfer the membership to him when it is transferable, as minimum 5 years are required, within which he cannot transfer the membership. The membership was transferred on 24th Dec., 1991, at Rs. 50,000. The GTO noticed that one of the memberships of the stock exchange was auctioned in 1991 at Rs. 8,71,000, therefore, he held that the transfer of membership card was for inadequate consideration. The learned counsel for the assessee submitted that the membership is not a property, therefore, there is no question of charging any gift-tax on transfer of the membership of the stock exchange by the assessee, by placing reliance on the decision of the Supreme Court in the case of Stock Exchange, Ahmedabad (supra). The Rajasthan High Court, after referring the definition of property given in clause (xxii) of section 2(e) of the GT Act, which includes any interest in the property, movable or immovable, observed that it is true that Their Lordships have considered whether membership of the stock exchange can be attached as in case of other prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is an essential requirement to attain the status of member of the DSE and because of its peculiar nature its value cannot be determined in isolation. Referring to the decision of the Supreme Court in the cases of Ahmed G.H. Ariff's (supra) and Purshottam N. Amarsay (supra), it was held that even if an asset is non-transferable and not saleable in the open market, still it can be valued for the purposes of the levy of wealth-tax and word "property" signifies every possible interest which a person can clearly hold and enjoy. 17.1 Thereafter, the Special Bench discussed the decision of the membership of the stock exchange and held that : "In the instant case, DSE Rules provide a vested right to its members to carry on business as stock broker. This is a very important right. In a way, it is a ticket to explore the ELDORADO. This right cannot be disturbed. Only by becoming a defaulter or in the event of death, membership comes to an end. However, if a member becomes a defaulter, stock exchange auctions the card and utilises the proceeds to pay his debts. Similarly, on his demise, his successors may step into his shoes subject to the fulfilment of conditions contained in the memor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The right of nomination is invariably for consideration and is equivalent to right to sell which itself has characteristics of property, as held by Bombay Bench Tribunal while dealing with the liability to the capital gain on transfer of the membership right. It is only when the member is declared as a defaulter or he dies, his right of nomination vests in stock exchange. In all the cases cited at the Bar, the stock exchange has sold/auctioned card and that also is another pointer that the cardholder has right in property or; so to say, the card is property in itself and consequently, an asset within the meaning of section 2(e) of the Wealth-tax Act. 19. There is yet another angle which requires attention and that is that the sale proceeds of the card are utilised by the stock exchange under rule 16 for discharge of the liabilities of the cardholders. It is an indirect way of receiving the consideration which is received either in cash or in kind and later would include the discharge of the liability of the member card. 20. All the three situations are, in our opinion, pointers of a fact that the stock exchange card is a property; it can be sold/transferred by nomination by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, but also bye-laws of the stock exchange, held that even if the broker member has no right, title and interest in the membership card, still in view of rule 16(1)(iii) of the Stock Exchange Rules, the balance surplus amount would come into the hands of the stock exchange for and on behalf of the assessee-broker in the course of administration of assets and allocation under rule 16(1)(iii) read with the general body resolution dated 13th October, 1999, and that they vested in the committee only to enable the committee administration and distribution and apply the same in order of priority given in the rules and bye-laws. The decision of the Rajasthan High Court in the case of Ravindra Kumar Jain ( supra), upheld the levy of gift-tax for inadequate consideration for transfer of membership card. In both these cases the decisions of the Supreme Court in the case of Ahmedabad Stock Exchange (supra) was considered. The later decision of the Tribunal in the case of Upendra M. Dalal (supra ) was also not there before the Division Bench in the case of Ashwin C. Shah (supra), wherein it was held that capital gains tax is chargeable on the transfer of membership card by the member of stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght as such, which is not transferable, but exercise of the right of nomination cannot be delegated to any person other than the member himself. He has to exercise his right himself; (iv)By rule 14, notice of proposed membership is to be placed on the notice board of the stock exchange for at least 15 days and within 14 days thereafter, members have to file their respective claims against the transferee members. By rule 15, the nomination is not be approved unless nominating member or in case of his death his legal heirs satisfy his dues in full; (v)The right of nomination on death of a member of defaulter ceases and vested in the stock exchange by virtue of rule 9 but that is also not absolute and is subject to rule 11(b) and 11(c) and it is only when that fails that right of nomination is forfeited and lapsed and Governing Body becomes eligible to deal with and dispose of such rights as it may think fit. If the Governing Body decides to exercise its right, consideration received on the sale/disposal of those rights are to be applied in order of priority as prescribed under rule 16/16A. 24. Crux of these rules is that the card is valuable property which enables the member to de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermine the question whether the stock exchange card is an asset or not. The Special Bench itself has noted the difference between shareholding by a member of the stock exchange and membership card held by such person. Both species, viz., share as well as membership card of the stock exchange are to be assessed independently. The ratio of the aforesaid Special Bench, in our opinion, would apply with full force to the present case as well. 27. The reopening was also challenged by the assessee in WTA No. 27/A/2000 on the ground that it was reopened on the basis of Gujarat High Court decision which has been reversed by the Supreme Court, also has no force in view of the discussion aforesaid and our finding that card held by the assessee in Ahmedabad Stock Exchange is an asset chargeable to wealth-tax and the decision of the Supreme Court in the case of Stock Exchange, Ahmedabad (supra), has no application, as it deals with only the situation of a member who has been declared as defaulter and not a continuing member. 28. The contention of the assessees in some of the cases that the membership was for less than a period of five years and therefore the right of nomination was itself not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under these provisions, reference to DVO is not made, it amounts to a procedural irregularity. In a case where the flaw in the order appealed against consists of in the non-observance of certain procedure, it is open to the Assessing Officer to start the procedure once again with the view to follow the rules of procedure and the principles of natural justice." 29.1 In conformity with the Special Bench decision of the Tribunal, in the case of Jagan Nath Sayal (supra) we set aside the matter of valuation and remit back to file of Assessing Officer to value the property in lines of direction given by the Special Bench and after giving opportunity of hearing to the assessee." 7. With regard to the valuation aspect, similar issue was also raised before the Tribunal in the aforesaid order and they have restored the matter to the file of the Assessing Officer to value the card in the light of guidelines laid down by the Special Bench in the case of Jagan Nath Syal. Since the Tribunal has examined this issue in detail in the light of all relevant case laws on the subject, we find no justification to take contrary view. We, therefore, following the same, hold that the stock exchange ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
