The Mumbai income-tax department owes around Rs50 crore to large stock brokers, who have a membership card of the Bombay Stock Exchange (BSE). This is after a landmark judgement passed by the Supreme Court today, which allowed brokers to claim depreciation on the BSE card.
Around 45 top brokers, including Citi Group, ICICI, Morgan Stanley, Enam Securities, Techno Shares and Edelweiss Capital among others, had approached the court seeking a permission to claim depreciation on their BSE card, using the written-down value method.
“On an average, each broker stands to get over Rs1 crore from the I-T department, as it had collected this amount from them for the past eight years,” said a managing director of a brokerage firm involved in the matter.
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In 1994, the BSE had collected around Rs40 crore through the sale of cards with membership rights to 71 brokers at Rs55 lakh each. Some of these cards were resold to different entities, which converted their exchange membership cards to corporate cards in 1997, after the government gave a one-time exemption from capital gains tax to encourage speedy corporatisation of the broking business.
Before BSE was de-mutualised in 2008, the maximum value of an exchange membership card was Rs2.25 crore and brokers claimed 25 per cent depreciation on this every year, which was debited to their profit & loss account. Cards were converted into equity shares after BSE de-mutualisation.
However, the I-T department insisted that brokers pay tax as the BSE card was not an intangible asset, eligible for depreciation.
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It was of the view that depreciation could be claimed on plant and machinery, which suffer wear-and-tear with time, and not on the card, the value of which fluctuates and can also appreciate.
Brokers had argued that their cards fall in the list of intangible asset, and are used as a licence to conduct trading activity on which depreciation can be claimed under section 32 of the Income-Tax Act, which was amended in 2000.
Section 32 of the Act introduced, with effect from the assessment year 1999-2000, “intangible assets”, namely, “knowhow, patents, copyrights, trademarks, licences, franchises, or any other business or commercial right of similar nature” in the eligible category of depreciable assets.
Based on this, the brokers’ argument was upheld by the I-T appellate tribunal in 2006, which the Bombay High Court reversed in 2009, saying since the BSE card is not a business or commercial right relating to intellectual property rights, depreciation cannot be allowed on it.
The order was reversed today by the Supreme Court, which ruled that a stock exchange card is a “licence” and eligible for depreciation. The court set aside the high court's reasoning that the expression ‘licences’, though a wide term including permission to carry on any trade, business, profession, etc, is used in Section 32(1)(ii) in a restricted sense.