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TMI Blog2011 (12) TMI 506X X X X Extracts X X X X X X X X Extracts X X X X ..... - "21. The first issue is, whether the assessee is entitled to depreciation on the WDV of the erstwhile BSE card after becoming a member of BSEL. The assessee, consequent to demutualization, has acquired two separate rights in new company BSEL. These rights are - (i) ownership rights and (ii) trading rights. 22. These assets are held as a consequence to the assessee being a BSE membership cardholder. The Hon'ble Supreme Court in Techno Shares and Stock Ltd. (supra) held that the BSE membership card conferred certain rights to the members in terms of rules and bylaws of BSE, as they stood during the relevant years, and that this was a business in commercial right. Paras-19 and 25 of the judgment of Hon'ble Supreme Court in Techno Shares and Stocks Ltd. (supra), reads as follows:- "19. The next question is - whether the membership right could be said to be owned by the assessee and used for the business purpose in terms of Section 32(1)(ii). Our answer is in the affirmative for the reason that the Rules and the Bye-laws hereinabove indicate that the right of membership (including the right of nomination) vests in the Exchange only when a member commits default. Otherwise, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year. This right as a BSE membership card holder has undergone a change consequent to corporatization and demutualization of BSE. The rights in question are not held in the same form. 24. To understand "corporatization" and "demutualization" of Stock Exchange, we extract certain portions of the group report for ready reference:- "Report of the Group on Corporatisation & Demutualisation of Stock Exchanges 1. Introduction 1.1 The Government had announced its proposal to corporatise the stock exchanges by which ownership, management and trading rights would be segregated from each other and legislative changes, if required, would be proposed accordingly to give effect to the corporatisation and demutualisation of stock exchanges. The Finance Minister has also emphasized in his Budget Speech for the year 2002- 03 that this process would be completed during the course of the year to implement the decision to separate ownership, management and operation of the stock exchanges. Demutualisation - the new governance structure 5.6 This redefinition of the roles and the new paradigm of competition, forced changes in the traditional governance structures of stock exchanges. Coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two separate and independent rights viz. a. the right to participate in the ownership of the assets of the stock exchange, and b. the right to trade on the stock exchange. 9.8 This decoupling of the two rights would have to be effected through the cancellation of the card against a consideration of creation of two assets or two rights - one, an interest in the assets of the stock exchange and the other interest in the trading right. The interest in the asset is created by issuance of shares in the new entity in lieu of the consideration of extinguishment of cards currently owned by the members in the mutual entity. Internationally also, stock exchanges have followed the same procedure for demutualisation. The manner in which the interest in the trading rights would be created is discussed in paragraphs 9.20 to 9.22 of this report. 9.9 At the point of time, when a trading right is acquired, and a share is allotted to a member of an stock exchange by virtue of which he acquires a membership privilege against the extinguishment of the previous right of membership, no transfer of assets effectively takes place and neither of the acquisitions should therefore be deemed to be a trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eposit system is accepted by an stock exchange for the purpose of segregation of the trading rights and ownership. As an illustration only, some figures have been assumed. Members of an stock exchange currently own an asset viz. a card whose value can be assessed on two different parameters viz.:- i. the market value of the card as evidenced by the actual transactions which have taken place in recent years. ii. the fair value of the card derived by dividing the fair value of the stock exchange by the number of cards. This value can be determined by using some of the well-established bases like "the underlying asset" approach, the "income" approach etc. and the task can be entrusted to professional valuers. iii. Based on the above, a value of the card can be determined. The value of the card represents the aggregate value of two independent rights of the holder viz. (a) the right to a share in the net assets and goodwill of the stock exchange and (b) the right to trade on the stock exchange. Since trading rights are in future to be made conditional on the placement of a deposit with the stock exchange and such deposit will also be collected from new members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to be corporatised and demutualised under the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as 'the SC(R)A'). 3. Incorporation of Bombay Stock Exchange Limited 3.1 The First Shareholders shall incorporate a public company limited by shares under section 12 of the Companies Act, 1956 in the name and style of "Bombay Stock Exchange Limited". 3.2 The First Shareholders shall each subscribe to and pay for 10,000 fully paid-up equity shares of the face value of Re.1/- each for cash at par of Bombay Stock Exchange Limited. 8. Trading Rights 8.1 A Member or a Limited Trading Member of BSE, who is registered as a stock broker on the day preceding the Due Date shall become a Trading Member of the Cash Segment of Bombay Stock Exchange Limited on the Due Date; 8.2 A Member who is not registered as a stock broker on the day preceding the Due Date shall become a Trading Member of the Cash Segment of Bombay Stock Exchange Limited on being registered as a stock broker under the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 within 3 months from the Due date. 8.3 A Trading Member and/or a Clearing Member of the Derivatives Segment of BSE on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be bound by all obligations and liabilities towards their clients and constituents, SEBI, BSE and other authorities or other persons arising out of or under any act, omission or contract or law, notification, order, direction, etc. while being Members or Limited Trading Members of BSE or Trading Members and or Clearing Members of Derivative Segment of BSE on or before the Due Date." 25. From the above, following conclusions can be drawn. i. BSE which was a voluntary, not for profit character of entity, got converted into a "for profit" and corporate activity; ii. BSE membership card is cancelled and the twin rights that a holder of BSE cardholder had got separated into the following independent rights - (a) ownership rights and (b) trading rights. iii. The previous rights of a BSE membership cardholder gets extinguished and in lieu thereof the BSE member acquires shares in BSEL and trading rights in BSEL; iv. Under section 47(xiiia), such extinguishment of rights and acquisition of shares and trading rights in BSEL is not regarded as transfer. v. That cost of acquisition of ownership rights and trading rights would have to be split and valued on transmission. vi. Trading ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights. The value of the BSE card to the extent allocable or attributable to ownership rights, can be said to have been transmitted by way of allotment of shares in BSEL. The value is to be determined by the underlying value of assets of BSEL or through some other approved method. 31. Coming to trading rights, we find that the value that can be assigned from out of the value of BSE card is only to the extent of deposit made. Trading right is no doubt a business in commercial rights but value is equivalent to the quantum of deposit. The assessee is entitled to refund of the deposit. When the value is equal to a refundable deposit, how can such value of refundable deposit be depreciated when the value in reality does not come down. If the refundable deposit is deducted from the value, then the present value of trading right is nil. Under these circumstances, there is no value to the trading in commercial right entitling the assessee for deduction by way of depreciation. Hence, no depreciation can be granted on this right. Thus, we uphold the finding of the Revenue authorities. We now discuss the impact of the following sections:- "55(2) For the purposes of sections 48 and 49, &quo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the firm [or of the association of persons or body of individuals] relating to the business immediately before the succession become the assets and liabilities of the company; (b) all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession; (c) the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company; and (d) the aggregate of the shareholding in the company of the partners of the firm is not less than fifty per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession; (e) the demutualisation or corporatisation of a recognised stock exchange in India is carried out in accordance with a scheme for demutualisation or corporatisation which is approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);] 47(xiiia) any transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Omniscient Securities P. Ltd., order dated 16th March 2011, wherein the Tribunal, vide Para-10, dismissed the ground raised by the Revenue, which reads as follows:- "10. We have considered the rival submissions. We find that the entire case of the AO is on the premise that in the event of sale of the shares which the assessee acquired on Corporatization and demutualization of BSE as a Company, the assessee would take the benefit of the provisions of section 55(2)(ab) of the Act and claim the cost of acquisition at the price at which the assessee originally paid for acquiring BSE Card ignoring the depreciation on the BSE Card which the assessee availed from the period of acquisition of the BSE Card till exchange of shares for the BSE Card. This apprehension of the AO which has been the basis of protective assessment made in the order of assessment is erroneous because the assessee has sold 6386 shares of BSE Ltd. out of 10000 shares of BEE Ltd., which it had got on Corporatization and demutualization of the BSE as a limited company, in the assessment year 2008-09. While computing capital gain on such transfer the assessee calculated its cost of acquisition on the basis of the wri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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