Bombay High Court
Recently, the Bombay High Court in the case of various stock broking houses1 held that the depreciation cannot be granted on Bombay Stock Exchange Membership Card (BSE card) acquired on or after 1 April 1998 either by nomination or directly through the stock exchange.
Facts of the case
The taxpayers owning a BSE card acquired on or after 1 April 1998
either by nomination or directly through the stock exchange,
claimed depreciation on the BSE card after considering it as an
intangible asset under the provision of section 32 of the Income-tax
Act, 1961 (the Act).
The Income-tax Appellate Tribunal held that the BSE card acquired
on or after 1 April 1998 was an intangible asset and depreciation
was allowable on the BSE card.
Issue before the High Court
Whether the depreciation under section 32 of the Act was allowable
on the BSE card acquired on or after 1 April 1998?
Contentions of the tax department
The tax department after relying on the decision of the Supreme
Court in the case of Alps Theatre2 contended that the BSE card was neither an asset nor a capital asset which was subject to wear and tear and therefore depreciation was not allowable on the BSE Card. The BSE card was only a personal privilege granted to a member to trade in shares on the floor of the Stock Exchange and such a
privilege cannot be equated with the expression 'licences' or the expression 'any other business or commercial right of similar nature' enumerated in Section 32 of the Act. The tax department placed reliance on the decisions of the Supreme Court in the case of Stock Exchange, Ahmedabadand Vinay Bubna.
The expression 'licences' as well as the expression 'business or
commercial rights of similar nature' in section 32(1)(ii) of the Act
are referable to the intellectual property rights such as know-how,
patents, copyrights, trade marks and franchises. Since the BSE card
does not fall in any of the above categories the depreciation cannot
be allowed on the BSE card acquired by the taxpayers.
Contentions of the taxpayers
The expression ‘licences’ used in section 32 of the Act has been
deliberately used in a wider sense so as to allow depreciation on all
types of licences, except personal licenses which are purely
regulatory in nature.
It was contended by the taxpayer that the BSE card is nothing but a
`licence' which permits or entitles the taxpayer to carry on the
business of trading in shares on the Stock Exchange. BSE card is a
source from which the revenue income flows. Acquisition of the
BSE card is a must for entering into a share broking business and
without acquiring such a card, share broking business cannot be
carried on by the taxpayer. Therefore, the BSE card which permits
or entitles the taxpayer to carry on share broking business would be
covered within the meaning of the expression 'licences' set out under
section 32(1)(ii) of the Act and accordingly depreciation should be
allowed on the BSE card.
Further, since the expression 'licences' used in section 32 of the Act
is applicable to all types of licences (except personal licences) it is
clear that the expression 'business or commercial rights of similar
nature' would apply to all business or commercial rights which are
akin to licences. It is contended that neither the rule of noscitur a
sociis nor the rule of ejusdem generis are applicable in the present
case, because the legislature has intentionally used the expression
'licences' which has a wider meaning and the said intention has been
reiterated in the Memorandum explaining the amendment to section
32 of the Act by Finance Act, 1997.
As per section 47(xi) of the Act the membership card of a
recognised stock exchange acquired on or after 1 April 1998 is a
capital asset and liable to capital gains tax. Accordingly, there is no
reason as to why the BSE card acquired on or after 1 April 1998should not be treated as a capital asset for the purposes of
Ruling of the High Court
Though the term `licences' is a very wide term and includes
permission to carry on any trade, business, profession, etc, it is used
in section 32(1)(ii) of the Act in a restricted sense.
The depreciation on a class of tangible and intangible assets under
section 32 of the Act was allowed on assets specifically enumerated
therein. All intangible assets enumerated in section 32(1)(ii) of the
Act (except the term `licences') belong to the class of intellectual
properties. As the expression `licences' in section 32(1)(ii) of the
Act is preceded by the expressions know-how, patents, copyrights,
trade marks and succeeded by the expression `franchises' which are
all relatable to intellectual property rights, the term `licences' in
section 32(1)(ii) of the Act is, applying the principle of Noscitur a
sociis, intended to be used restrictively and as applying only to
licences relating to acquisition / user of intellectual property rights.
Further, if the expression 'licences' in section 32(1)(ii) of the Act is
construed widely so as to apply to all types of licences relating to
intangible assets then it would defeat the object of the Act, because,
depreciation under section 32 of the Act is intended to a limited
category of intangible assets and not to a wider category of
intangible assets. Therefore, it is reasonable to construe that the
expression 'licences' used in section 32(1)(ii) of the Act will apply to
licences relatable to intellectual properties only and not to all
A BSE card cannot be considered as "business or commercial right"
because what section 32(1)(ii) of the Act contemplates is "business
or commercial rights" relating to intellectual properties and not all
categories of business or commercial rights. Further, a BSE card is
not a business or commercial right relating to intellectual property
rights therefore, depreciation cannot be allowed on it.
The fact that a BSE card is a capital asset and liable for capital gains
tax is irrelevant because section 32 does not allow depreciation on
all capital assets but only on capital assets which fall in the
Accordingly, the High Court held that the depreciation under section
32 of the Act was not allowed on the BSE card.