(Per : HONOURABLE MS.JUSTICE HARSHA DEVANI) 1) By these petitions, the petitioner has challenged notices dated 30.11.2004 issued by the respondent under section 148 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) seeking to reopen the petitioner's assessment for assessment years 2000-01 and 2001-2002 respectively. Since the facts and issues are involved in both these petitions are similar and the parties are also common, the same were taken up for hearing together and are decided by this common judgment.
2) The petitioner, a company was at the relevant time carrying on the business of share broking. The petitioner company obtained membership of Vadodara Stock Exchange on payment of Rs.23,43,500/- during the previous year relevant to assessment year 2000-01. The petitioner had filed its original return of income for assessment year 2000-01 on 23.8.2001 declaring loss of Rs.2,96,430/- wherein, inter alia it had claimed depreciation of Rs.5,85,875/- being 25% of Rs.23,43,500/- in respect of the membership card of the Vadodara Stock Exchange. During the course of assessment, the Assessing Officer issued notice dated 28.8.2002 under section 143(2)(i) calling upon the petitioner to furnish evidence/particulars in support of its claim of depreciation allowance as he had reason to believe that excessive depreciation had been claimed in respect of computers and electric installations.
3) In response to the said notice, the petitioner filed its reply dated 17.12.2002 and furnished necessary details. The claim of depreciation of Rs.5,85,875/- made on the Vadodara Stock Exchange Card was clearly reflected in the chart submitted by the petitioner. The respondent, thereafter, framed assessment under section 143(3)(i) of the Act on 31st December, 2002 and allowed depreciation of Rs.6,66,127/- as against Rs.6,74,529/- originally claimed by the petitioner.
4) Subsequently, by the impugned notice dated 30.11.2004, the assessment of the petitioner was sought to be reopened. In response to the said notice, the petitioner filed return of income on 7.1.2005 declaring loss of Rs.2,88,028/- as assessed under section 143(3)(i) and requested the respondent to furnish a copy of the reasons recorded. Initially, the reasons were not supplied. However, pursuant to further request made by the petitioner, the reasons came to be supplied on 10.10.2005. The petitioner, thereafter, vide communication dated 6.1.2006 submitted its objections to the reopening of assessment, inter alia, contending that the claim of depreciation on Vadodara Stock Exchange Membership Card had already been verified by the respondent while making limited scrutiny under section 143(3)(i) of the Act and as such the examination of the said claim is nothing but a change of opinion by the successor Assessing Officer. It was also contended that on the material on which reliance had been placed by the respondent, he could not have formed a reasonable belief that income chargeable to tax had escaped assessment. By an order dated 15.2.2006, the respondent rejected the objections raised by the petitioner.
5) For assessment year 2001-02 the petitioner filed its original return of income on 18.10.2001 declaring nil income wherein it had, inter alia, claimed depreciation of Rs.4,39,406/- being 25% of Rs.17,57,625/- in respect of written down value of Vadodara Stock Exchange membership card. The Assessing Officer issued a notice dated 23.10.2002 under section 143(1)(i) of the Act calling for working of depreciable assets as he had reason to believe that excessive depreciation had been claimed on computers and electrical installations. The petitioner submitted its reply dated 17.12.2002 and furnished the details called for by the Assessing Officer. After verification of the details submitted by the petitioner, the Assessing Officer framed assessment under section 143(3)(i) of the Act on 13.1.2003 allowing aggregate depreciation at Rs.5,11,679/- as against Rs.5,15,054/- originally claimed by the petitioner. Subsequently, by the impugned notice dated 30.11.2004, the respondent sought to reopen the assessment for the assessment year 2001-02. In response to the notice the petitioner filed return of income on 7.1.2005 declaring nil income as assessed under section 143(1)(i) and requested for a copy of the reasons. Pursuant to further request made by the petitioner, the reasons came to be furnished, whereupon the petitioner filed its objections thereto. By an order dated 15.2.2006, the respondent rejected by the said objections. It is in the aforesaid factual background that the petitioner has filed the present petitions.
6) Mr. S. N. Divatia, learned advocate for the petitioner assailed the impugned notices by submitting that the Assessing Officer had no reason to form a belief that any income chargeable to tax had escaped assessment for the assessment years under consideration. It was pointed out that during the course of scrutiny assessment the Assessing Officer had called for details as regards the claim of depreciation made by the petitioner pursuant to which necessary details had been furnished. Attention was invited to the chart showing depreciation allowance claimed by the petitioner for assessment year 2001-02 showing depreciation allowance which included membership card of Vadodara Stock Exchange and deprecation allowance of Rs.4,39,406/-. It was submitted that for both the years under consideration, the Assessing Officer after having thoroughly verified the claim of deprecation allowance under the circumstances, this is a clear case of change of opinion on the part of the respondent, hence reopening of assessment under section 147 of the Act is not permissible in law. Referring to the reasons recorded before issuance of notice under section 148 of the Act, it was submitted that the same clearly show that there was no material or cause so as to justify formation of belief that the stock exchange card was not an asset eligible for depreciation allowance. As regards the decisions of the Supreme Court in the case of Stock Exchange, Ahmedabad Vs. Assistant Commissioner of Income-Tax, 248 ITR 209 (SC) and Vinay Bubna v. Stock Exchange, Mumbai & Ors., (1999) 6 SCC 215, on which reliance has been placed by the respondent in the reasons recorded for forming the opinion that the membership card of stock exchange is not an intangible or tangible asset and as such not entitled for depreciation under section 32(1)(i) or (ii) of the Act, the learned counsel drew that attention of the court to the decision of the Supreme Court in the case of Techno Shares & Stocks Ltd. v. Commissioner of Income-Tax, (2010) 327 ITR 323 (SC), to point out that in the said decision, the Supreme Court has considered its earlier two decisions in the case of Stock Exchange, Ahmedabad v. Assistant Commissioner of Income-Tax (supra) as well as Vinay Bubna v. Stock Exchange, Mumbai (supra) and has held that the right of membership, which includes right of nomination, is a “licence” or “akin to a licence” which is one of the items which falls in section 32(1) (ii) of the Act. It is an expense incurred by the assessee which satisfies the test of being a “licence” or “any other business or commercial right of similar nature” in terms of section 32(1)(ii) of the Act. Thus, the very basis for reopening the assessment by the Assessing Officer is fallacious. It was submitted that under the circumstances, the reopening of assessment being based upon a mere change of opinion as well as on a fallacious premise, is bad in law and without jurisdiction.
7) Opposing the petition, Mr. K.M. Parikh, learned senior standing counsel for the respondent submitted that the claim of depreciation in respect of membership card of the Vadodara stock exchange was not subject matter of the notice under section 143(2)(i) of the Act. While framing assessment under section 143(3) of the Act, the Assessing Officer had not expressed any opinion on the issue of depreciation of membership card of stock exchange and, as such, it cannot be said that there is any change of opinion, as it sought to be contended on behalf of the petitioner. It was further submitted that the Supreme Court in the case of Stock Exchange, Ahmedabad v. Assistant Commissioner of Income Tax (supra) has held that the right of membership card of stock exchange is not an asset but a personal privilege granted to a member. Similarly, in the case of Vinay Bubna v. Stock Exchange, Mumbai (supra) the Supreme Court has held that membership card of a stock exchange is not an intangible or tangible asset. Under the circumstances, the Assessing Officer is justified in placing reliance upon the said decisions for the purpose of reopening the assessment. It was submitted that the decision of the Supreme Court in the case of Techno Shares & Stocks Ltd. (supra), would not be applicable to the facts of the present case and that the Assessing Officer having formed an opinion that income chargeable to tax has escaped assessment, there is no warrant for interference by this court.
8) It is by now well settled that at the stage of examining the validity of a notice under section 148 of the Act, all that is required to be seen is as to whether there are reasonable grounds for the Assessing Officer to believe that income chargeable to tax has escaped assessment. Such belief has to be reflected in the reasons recorded by the Assessing Officer before issuance of notice under section 148 of the Act. It would, therefore, be necessary to refer to the reasons recorded which read thus:
“Scrutiny of the assessments records revealed that the Assessee claimed and allowed in assessment depreciation on membership card of Vadodara Stock Exchange WDV (Rs.23,43,500/- / Rs. 17,57,625/- / 13,18,219/- / Rs.9,88,644/-).
Supreme Court has held in the case of Stock Exchange of Ahmedabad that the right of membership card of stock exchange was not a private asset and is of personal property/asset and it is a personal privileged granted to the member 248 ITR 209 (SC) and therefore, not entitled for depreciation u/s.32(1)(i) or (ii) of Income-tax Act.
Supreme Court has also held in the case of Vinay Bubna vs Stock Exchange of Bombay that the membership card of stock exchange is not an intangible or tangible asset and hence not entitled for depreciation u/s.32 of Income-tax Act. In view of the above facts, I have reason to believe that income chargeable to tax has escaped assessment for A.Y. 2000-2001 / 2001-2002 / 2002- 2003/2003-2004 within the meaning of section 147 of the I.T. Act.”
9) On a plain reading of the reasons recorded, it is apparent that the sole ground for reopening the assessment is that according to the respondent, the Supreme Court in the case of Stock Exchange, Ahmedabad (supra) as well as in the case of Vinay Bubna v. Stock Exchange, Mumbai (supra) has held that a right of membership card of stock exchange is not a private asset and that the same is not an intangible or tangible asset and, as such, the depreciation claimed by the petitioner on the membership card of Vadodara Stock Exchange could not have been allowed.
10) A perusal of the decisions of the Supreme Court in Stock Exchange, Ahmedabad Vs. Assistant Commissioner of Income-Tax, (supra) and Vinay Bubna v. Stock Exchange, Mumbai & Ors., (supra) reveals that in neither of the said decisions has the Supreme Court laid down any proposition of law to the effect that membership card of the stock exchange is not an intangible or tangible asset. In Stock Exchange, Ahmedabad v. Assistant Commissioner of Income-tax, one Rajesh Shah, who became a member of the stock exchange on 19th February, 1988, died on 7th February, 1994. On 12th February, 1994, his heirs and legal representatives wrote to the stock exchange that they were unable to meet the liabilities of the deceased. On the same day, the governing body of the stock exchange declared Rajesh Shah a deemed defaulter and resolved that his membership rights which vested in the stock exchange be disposed of, fixing a floor price of Rs.25 Lakhs for purchase of membership. On February 15, 1994, a provisional attachment order was issued under section 281B of the Act. In respect of the said stock exchange card and margin money and security deposits kept with the stock exchange, the stock exchange took the stand that on the death or default of a member, the member's right of nomination vested in the stock exchange free of all rights, claims and interests of the member or persons claiming through him. Subsequently, the stock exchange disposed of the membership card for Rs.27 lakhs. A garnishee notice under section 226(3) in the sum of about Rs.12 lakhs was also issued by the respondent therein to the executive director, Stock Exchange. The stock exchange took the stand that no amount was due to the deceased or his heirs and the exchange does not hold any money on or behalf of the deceased or his legal heirs. The respondent did not accept the plea of the stock exchange. The Supreme Court held that the right of membership of the stock exchange was not a private asset. It was merely a personal privilege granted to a member. In case of death or default of a member, his right of nomination ceased and vested in the stock exchange. Thus, what is held in the said decision is that in case of default or death of a member, the rights under the membership card stood vested in the stock exchange. It has nowhere been held that the membership card of the stock exchange is not a tangible or intangible asset. Similarly, in the case of Vinay Bubna v. Stock Exchange, Mumbai (supra), the Supreme Court, on a perusal of the rules of the stock exchange, held that the membership of the Exchange constitutes a personal permission from the Exchange to exercise the rights and privileges attached thereto subject to the rules, bye-laws and regulations of the Exchange. On a default being committed, the share broker ceases to be a member of the Exchange and all his rights, privileges etc. as a member come to an end. If he does not clear the dues within six months the Governing Body then has a right of nomination in respect of such membership card. The membership card of a share broker is not his personal property which, on default being committed by him and his ceasing to be a member, can be sold and the proceeds distributed amongst his creditors. The member's right of membership vests in the Exchange after he is declared a defaulter. Hence, the defaulting member can claim no interest in the membership card.
11) In Techno Shares & Stocks Ltd. v. Commissioner of Income-Tax (supra), the Supreme Court was dealing with the question as to whether the BSE membership card can be considered an intangible asset for the purpose of depreciation under section 32(1)(ii) of the Act. The court firstly dealt with the question as to whether the right of nomination in the non-defaulting member comes within the expression “business or commercial right of similar nature” in section 32(1) (ii) of the Act. On analysis of the Rules of the BSE, the court observed that it was clear that the right of membership (including right of nomination) gets vested in the exchange on the demise/default committed by the member; that, on such forfeiture and vesting in the exchange the same gets disposed of by inviting offers and the consideration received thereof is used to liquidate the dues owed by the former/defaulting member to the exchange, clearing house, etc. It is this right of membership which allows the non- defaulting member to participate in the trading session on the floor of the exchange. Thus, the said membership right is a “business or commercial right” conferred by the rules of the BSE on the non- defaulting continuing member. The question whether the membership card could be said to be owned by the assessee and used for business purpose in terms of section 32(1)(ii) of the Act was answered in the affirmative for the reason that the rules and the bye- laws indicated that the right of membership (including the right of nomination) vest in the exchange only when the member commits default. Otherwise, he continues to participate in the trading session on the floor of the exchange; that he continues to deal with other members of the exchange and even has the right to nominate subject to compliance with the Rules. The court further held that by virtue of Explanation 3 to section 32(1)(ii) the commercial or business right which is similar to “licence” or “franchise” is declared to be an intangible asset. Under rule 5, membership is a personal permission from the exchange which is nothing but a “licence” which enables the member to participate in the trading session on the floor of the exchange. It is this licence which enables the member to access the market. Therefore, the right of membership, which includes right of nomination, is a “licence” or “akin to licence” which is one of the items which falls in section 32(1)(ii) of the Act. The right to participate in the market has an economic and money value. It is an expense incurred by the assessee which satisfies the test of being a “licence” or “any other business or commercial right of similar nature” in terms of section 32(1)(ii) of the Act. As regards, it’s earlier decision in the case of Vinay Bubna v. Stock Exchange, Mumbai (supra), the court observed that it was a case dealing with the rights of a defaulting non-continuing member and that the said judgment clearly indicates that the membership card is an asset of a non-defaulting continuing member. After discussing its decision in the case of Stock Exchange, Ahmedabad the Supreme Court was of the view that both the aforestated judgments support the reasoning given by it as referred to hereinabove.
12). From the principles propounded in the above referred decision, it is evident that the membership card of a stock exchange is an intangible asset on which depreciation can be claimed under section 32(1) (ii) of the Act. Reverting to the facts of the present case, the reopening of the assessments in the case of the petitioner is based upon a fallacious premise, viz., that the stock exchange card of the petitioner is not an intangible asset. Under the circumstances, on the reasons recorded, the Assessing Officer could not have formed the requisite belief that income chargeable to tax has escaped assessment. When the basic requirement for invoking section 147 of the Act, namely, that income chargeable to tax has escaped assessment is not satisfied in the facts of the present case, the assumption on jurisdiction by the Assessing Officer under section 147 of the Act by issuing notice under section 148 is without authority of law. Consequently, the impugned notices cannot be sustained.
13) For the foregoing reasons, the petitions succeed and are, accordingly, allowed. The impugned notices dated 30.11.2004 are hereby quashed and set aside. Rule is made absolute accordingly with no order as to costs.
(AKIL KURESHI, J.)
(HARSHA DEVANI, J.)
Vahid