ORDER
K.K. Boliya, Accountant Member
1. This appeal has been filed by the assessee against the order dated 31.7.2000 of CIT(A)-XLI, Mumbai. The first ground of appeal is as under:
In the facts and circumstances of the case and in law and particularly having regard to diverse submissions on record, the ld. CIT(A) erred in not admitting claim of the appellant for grant of depreciation of Rs. 23,75,000/- w.r.t. cost of stock exchange card acquired, owned and used by the appellant as plant in the conduct of its business of sharebroking.
2. The assessee is a member of the Bombay Stock Exchange (BSE) and the simple question involved in this appeal is as to whether the assessee is entitled to depreciation allowance Under Section 32 of the IT Act on the cost of the BSE membership card acquired by the assessee. The claim of the assessee has been disallowed by the AO and the ld. CIT(A) has confirmed the AO’s finding. The ld. CIT(A) has referred to the Supreme Court decision in the case of Sitalpur Sugar Works Ltd. v. CIT 49 ITR 160, in support of his view that depreciation Under Section 32, as applicable up to the AY 98-99, is admissible only on tangible assets.
3. The ld. counsel appearing for the assessee, Shri Niraj Sheth, contended that the BSE membership card is a capital asset and it constitutes an apparatus for the assessee for carrying on the business activity and that depreciation is clearly allowable on the cost of the BSE membership card. The ld. counsel pointed out that the issue is now covered by the ITAT, Mumbai Bench decision in the case of M/s Techno Shares & Stocks Ltd. vide order dated 4.1.2006 in ITA Nos. 778, 779 and 1951/Mum/2004. A copy of the order has been filed. The ld. counsel was fair enough to point out that this order has been passed taking into account the amended provisions of Section 32, which took effect from the AY 1999-2000, whereas the AY under appeal is 1998-99 and therefore the old provisions will be applicable. It is contended that even with reference to the old provisions, the stock exchange membership card would come under the definition of ‘plant’ and for this proposition, he relied on the following judgments:
i. Scientific Engineering House Pvt. Ltd. v. CIT 157 ITR 86 (SC)
ii. CIT v. Elecon Engineering Co. Ltd. 96 ITR 672 (Guj.), as affirmed by the Supreme Court 166 ITR 66.
The ld. DR, Ms. Ruby Srivastava, strongly supported the orders of the Revenue authorities and contended that the stock exchange membership card is an intangible asset and therefore depreciation is not allowable.
4. We have given a careful consideration to the rival submissions vis-a-vis the facts of the case and have gone through the precedents relied upon by the ld. counsel for the assessee. Sub-section (1) of Section 32, as applicable up to the AY 98-99, reads as under:
In respect of depreciation of buildings, machinery, plant or furniture owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of Section 34, be allowed-
It may be mentioned that with effect from AY 1999-2000, the scope and ambit of Section 32 has been enlarged as per the amended Sub-section (1) of Section 32, which is as under:
(1) In respect of depreciation of
(i) buildings, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,
owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed.
From the above, it appears that with effect from 1.4.99, depreciation in respect of intangible assets as mentioned in Clause (ii) of Section 32(1) would be admissible. However, up to AY 98-99, depreciation is admissible in respect of four specified categories of assets viz. building, machinery, plant or furniture. The question which we have been called upon to adjudicate is as to whether the stock exchange membership card would fall under the category of ‘plant’ so as to make it eligible for grant of depreciation allowance.
5. A reference may first be made to the cases relied upon by the ld. counsel for the assessee. In the case of M/s Techno Shares & Stocks Ltd., this question arose before the IT AT, Mumbai Bench in respect of the AYs 1999-2000 to 2001-02. The issue was considered and decided by the Tribunal at Paras 2 to 4 of the order, which arc reproduced below:
During the course of hearing, the ld. counsel for the assessee has invited our attention to the provisions of Section 32 of the IT Act with the submission that the depreciation is allowable on know-how, patent copy rights, trade marks license, franchise or any other business or commercial rights of similar nature, being intangible assets acquired on or after 1st April, 1998. Since assessee has acquired right to trade on the floor of the stock exchange through Bombay Stock Exchange card, it is an intangible asset and the assessee is entitled for depreciation Under Section 32 of the IT Act. The ld. counsel for the assessee, however, invited our attention to the following orders of the Tribunal and the judgment of different High Courts in which it has been held that the acquisition of card of BSE is a capital asset.
i. Upendra M. Dalai v. DCIT ITA No. 6202/Mum/99.
ii. Ravindrakumar Jain v. CIT 132 Taxman 882 (Raj.)
iii. J.P. Khandelwal v. DCIT ITA 4510/Mum/99.
iv. Jagan Nath Sayal v. ACGT 72 ITD (1) (Del)(SB)
v. V.G. Gajjar v. DCIT (1) SOT 702 (Ahd.)
We have carefully perused the orders of the authorities below in the light of the aforesaid judgments and we find that it has been repeatedly held in series of orders of the Tribunal that the BSE card is a capital asset and whenever it is transferred a capital gain accrued thereon. In the case of Upendra M. Dalai (supra), the Tribunal has held that when the member puts his membership for sale and realized substantial value, it is, difficult to deny that valuable asset has been transferred. When the BSE is put on the same through nomination, personal privilege is converted into an asset and the consequential gain is eligible to tax. In the case of Ravindrakumar Jain v. CIT their lordship of the Rajasthan High Court have held that whenever a membership of the stock exchange which has some value in terms of money had been transferred for consideration less than its market value, it will be deemed to be a gift to a transferee and will attract the provision of Section 4(1)(A) of the Gift Tax Act. Likewise, in the case of J.P. Khandelwal, the Tribunal has held that the membership card of the stock exchange is an asset and profit arising out of the same is the income under the head ‘capital gain’ and is taxable. Similar view was also expressed in the case of Jagan Nath Sayal v. ACGT in which it has been held that the shares in Delhi Stock Exchange should be separately valued apart from BSE membership card value and composite value of the share and ticket is to be adopted. In the case of V.G. Gajjar v. DCIT (supra), the Tribunal has held that the membership card of the stock exchange is an asset within the meaning of Section (2)(e) of the Wealth Tax Act.
From the perusal of the aforesaid judgments, it has been made emphatically clear that the BSE card is a capital asset through which right to trade on the floor of the Stock Exchange is acquired by the assessee. Since, it is an intangible asset within the definition of Section 32 of the IT Act, the assessee is entitled for depreciation thereon.”
In the above case, the Tribunal primarily proceeded on the premise that the stock exchange membership card is a capital asset through which assessee acquires right to trade on the floor of the Stock Exchange. It also recorded a finding that it is an intangible asset within the meaning of the amended Section 32. In our view, this order was rendered in the context of the amended provisions of Section 32 and therefore cannot be applied to the AYs prior to 1999-2000 as the provisions of Section 32 have undergone material transformation.
6. In the case of Scientific Engineering House Pvt. Ltd. (supra), the Supreme Court was concerned with the question as to whether documentation service comprised of drawings, designs, plans and processing data etc. can be treated as book and constitute ‘plant’ for the purposes of Section 32 Relevant part of the ratio of this case may be reproduced below from the headnote:
Held, accepting the claim of the appellant, (i) that reading Clauses 3 and 6(a) together, it was clear that rendition of documentation service was really the main service to be rendered by the foreign collaborator;
(ii) that the various documents such as drawings, designs, charts, plans, processing data and other literature included in documentation service, the supply whereof was undertaken by the foreign collaborator, more or less formed the tools by using which the business of manufacturing the instruments was to be done by the appellant and for acquiring such technical know-how through these documents, a lump sum payment was made. This expenditure was incurred by the appellant as and by way of purchase price of the drawings, designs, charts, plans, processing data and other literature, etc., comprised in ‘documentation service’ and was of a capital nature as a result whereof a capital asset of technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature was acquired by the appellant.
(iii) that ‘plant’ was not necessarily confined to an apparatus which was used for mechanical operations or process or was employed in mechanical or industrial business. But in order to qualify as ‘plant’, the particular article had to have some degree of durability. The test to be applied was: Did the article fulfill the function of a plant in the assessee’s trading activity? Was it a tool of his trade with which he carried on his business? If the answer was in the affirmative, it would be a ‘plant’.
(iv) that the drawings, designs, charts, plans, processing data and other literature comprised in the ‘documentation service’ as specified in Clause 3 constituted a ‘book’ and fell within the definition of ‘plant’ in Section 43(3) of the IT Act. The purpose of rendering such documentation service by supplying these documents to the appellant was to enable it to undertake its trading activity of manufacturing theodolites and microscopes and these documents had a vital function to perform in the manufacture of these instruments; in fact, it was with the aid of these complete and up to date set of documents that the appellant was able to commence its manufacturing activity and these documents really formed the basis of the business manufacturing the instruments in question. That by themselves these documents did not perform any mechanical operations or processes did not militate against their being a plant since they were in a sense the basic tools of the assessee’s trade having a fairly enduring utility, though owing to technological advances they might or would in course of time become obsolete. The capital asset acquired by the appellant, viz., the technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature, fell within the definition of ‘plant’ and was, therefore, a depreciable asset.
In the above case, the Hon’ble Supreme Court laid down certain guiding principles as to what constitutes ‘plant’. It has been observed by the Supreme Court that a ‘plant’ was not necessarily confined to an apparatus which was used for mechanical operations, but in order to qualify as ‘plant’, the particular article had to have some degree of durability. From this observation of the Supreme Court, it may be seen that before any article can be held to be covered in the category of “plant’, it must fulfill the test of
tangibility. The Supreme Court held that drawings, designs, charts, plans etc. constitute a ‘book’ and fell within the definition of ‘plant’.
7. This issue has also been considered by the Gujarat High Court in the case of Elecon Engineering Co. Ltd. (supra). In this case, the question related to drawings, patterns and know-how acquired by the assessee from a foreign company. It would be appropriate to reproduce below the ratio of this case from the headnote of the Report:
The word ‘plant’ in its ordinary meaning is a word of wide import and it must be broadly construed having regard to the fact that articles like books and surgical instruments are expressly included in the definition of plant in Section 3(3) of the Act. It includes any article or object, fixed or movable, live or dead, used by a businessman for carrying on his business. It is not necessarily confined to an apparatus which is used for mechanical operations or processes or is employed in mechanical or industrial business. It would not, however, cover the stock-in-trade, that is, goods bought or made for sale by a businessman. It would also not include an article which is merely a part of the permission in which the business is carried on. An article to qualify as ‘plant’ must furthermore have some degree of durability and that which is quickly consumed or worn out in the course of a few operations or within a short time cannot properly be called plant. But an article would not be any the less plant because it is small in size or cheap in value or a large quantity thereof is consumed while being employed in carrying on business. In the ultimate analysis the inquiry which must be made is as to what operation the apparatus performs in the assessee’s business. The relevant test to be applied is: does it fulfill the function of plant in the assessee’s trading activity? Is it the tool of the taxpayer’s trade? If it is, then it is plant, no matter that it is not very long lasting or does not contain working parts such as a machine does and plays a merely passive role in the accomplishment of the trading purpose.
Know-how is a peculiar kind of asset. It is the accumulated fund of knowledge acquired by years of observation, research, experimentation and experience. The whole of it is not in an intangible form even while it is in the process of being acquired and very often it takes a physical form as it grows in the shape of formulae, drawings, patterns, blue-prints, specifications and so on. The material form it takes not only facilitates preservation, collation and ready reference but also makes it perceptible and visible and easily capable of being transmitted to others. Books which one consults to inform one’s mind and thereby uses them in the course of one’s business or profession are expressly included within the meaning of the word ‘plant. Hence, there is no reason to exclude from the wide meaning of the term objects of similar nature such as drawings, patterns, designs, etc., which, like books, are the embodiments of know-how and serve the purpose of teaching at long range. Having regard to the legislative intent to give a wide meaning to the word ‘plant’, material record of know-how (even assuming that know-how itself is intangible) is clearly included within the meaning of the word ‘plant’ in Section 32.
The depreciation allowance Under Section 32 is a statutory allowance not confined expressly to diminution in value of the asset by reason of wear and tear. The allowance can be claimed if the asset in question is shown to be capable of diminishing in value on account of any factor known to the prevailing accounting or commercial practice. The principal factors responsible for the retirement of a capital asset and, therefore, responsible for depreciation are: (i) ordinary wear and tear, (ii) unusual damage, (iii) inadequacy and (iv) obsolescence. The factors listed above include not only those relating to physical deterioration but also those referring to the suitability of the asset as an economically productive unit after a period of time. Apart from accounting practice, Section 32(1)(iii) itself speaks of allowance in the case of any plant which is ‘discarded’ in the previous year and the word ‘discarded’ has been understood to cover the case of obsolescence. Know-how in whatever form it may be is capable of diminishing in value over the years by obsolescence. It would, therefore, be included within the meaning of the word ‘plant’ in Section 32.
The assessee acquired drawings and patterns for the manufacture of gear units and conveyor idlers from foreign collaborators. The agreement between the assessee and the foreign collaborators provided that the assessee would receive ‘all existing and up-to-date patterns, drawings and information which the authorized manufacture requires’. The Tribunal found as a matter of fact that the drawings and patterns formed the basis of manufacturing the machinery in question:
Held, that the drawings and patterns by themselves did not perform any mechanical operations or processes and on the commencement of production of gears and idlers it might not be necessary to consult them and owing to technological advance they might in course of time become obsolete. These factors, however, could not militate against their being plant since they formed the basis of manufacturing the machinery and they were so to say the basic tools of the assessee’s trade having a fairly enduring quality. The drawings and patterns were plant within the meaning of Section 32 and the assessee was entitled to depreciation in respect of those assets on the pro-rata cost of their acquisition.
While considering the import of ‘know-how’, the Gujarat High Court observed that it is the accumulated fund of knowledge acquired by years of observation, research, experimentation and experience. The High Court also observed that the whole of the know-how is not in an intangible form even while it is in the process of being acquired and very often it takes a physical form as it grows in the shape of drawings, patterns, blue-prints etc. It takes a material form which facilitates preservation, collation and ready reference and makes it visible and easily capable of being transmitted to others. In other words, such know-how may be called ‘book’ and therefore it would be considered as ‘plant’ for the purposes of allowing depreciation.
8. Here, a reference may also be made to the Supreme Court decision in the case of Sitalpur Sugar Works Ltd. (supra) which has been relied upon by the ld. CIT(A). In this case, it has been held that depreciation is admissible only on tangible assets. The ld. counsel for the assessee has also argued before us that the stock exchange membership card should be treated as tangible asset as it is subjected to diminution in value on account of the following factors:
i. Creation of more exchanges, particularly NSE – Creation of NSE with more advanced technology. The turnover on the NSE is more than the turnover on BSE. With the introduction of derivatives segment on NSE, value of BSE card has fallen significantly.
ii. Development of technology – Due to E-trading, the role of broker has been reduced substantially, which has resulted in reduction in the value of BSE card.
iii. Increased competition – With there being no constraint of space, BSE has allotted new memberships. Due to sheer pressure of supply and competition, the value of card has been eroded.
iv. Statutory changes – Abolition of Badla and carry forward has resulted in erosion of value of BSE card. Moreover, if transactions in shares are allowed under SCRA through commodity exchanges or investment bank, the importance of the stock exchange will stand further reduced.
v. Economic changes – Development of debt market, mutual fund market etc. have adversely impacted the value of card.
vi. Inherent risk of the business – De-recognition of the exchange; suspension or expulsion for default of a member for alleged non-compliance of rules and regulations for misconduct of employees etc. will render the value of the card eroded.
9. The Gujarat High Court, in the case of Elecon Engineering Co. Ltd. (supra), has observed that depreciation allowance Under Section 32 is a statutory allowance not confined expressly to diminution in value of the asset by reason of annual wear and tear. The allowance can be claimed even if the asset in question is shown to be capable of diminishing in value on account of any factors known to the prevailing accounting or commercial practice. The High Court also observed that the principal factors responsible for the diminution in the value of a capital asset would be ordinary wear and tear, unusual damage, inadequacy and obsolescence. In our view, the stock exchange membership card does not fit into the category of an asset, the value of which is subject to diminution on account of any of these factors. The value of stock exchange membership card would be subject to fluctuation only depending upon the various relevant factors. The value of the stock exchange card may decrease or may increase depending upon such factors. It cannot be said that the value of a stock exchange membership card would only diminish and not appreciate. Depreciation Under Section 32 as applicable to the AY 98-99 has been provided only to take care of the erosion in the value of an asset and not for safeguarding any fluctuation in such value. We are also of the view that the stock exchange membership card is only an intangible asset which admits the holder to the membership of the stock exchange so that such member can trade in stocks on the floor of the stock exchange. It only confers the right on the holder and therefore even though it is an asset, it is an intangible asset. In our view, up to the AY 98-99, depreciation is not allowable in respect of intangible assets. We, therefore, confirm the order of the ld. CIT(A) on this issue.
10. The only other ground of appeal pertains to charging of interest Under Section 234A and 234B, which is admitted to be only consequential. The AO is, therefore, directed to re-calculate the interest chargeable while giving effect to this order.
11. In the result, the assessee’s appeal stands dismissed.
Order pronounced on 23.3.2006.