Ita/1548/2009 Of Cdr.p.j.mathew v. The Income Tax Officer,Ward-2(3)

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN WEDNESDAY, THE 21ST OCTOBER 2009 / 29TH ASWINA 1931 ITA.No. 1548 of 2009() ---------------------- ITA.321/COCH/2002 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT ----------------- CDR. P.J.MATHEW,PALAKKAPILLIL, HOUSE,THEVARA CANAL ROAD, COCHIN -15,REPRESENTED BY SMT.ANU SEBASTIAN,W/O. LATE SEBASTIAN V.T.,RESIDING AT PALAKKAPPALLIL HOSUE,THEVARA, THEVARA CANAL ROAD, COCHI- 682 015, KERALA. BY ADV. M/S. K.B.MOHAMEDKUTTY & K.M.FIROZ RESPONDENT -------------------- THE INCOME TAX OFFICER, WARD -2(3) RANGE-2, ERNAKULAM. BY STANDING COUNSEL SRI JOSE JOSEPH. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 21/10/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: (CR) C.N. RAMACHANDRAN NAIR & V.K.MOHANAN, JJ. ---------------------------------------- I.T.A. No.1548 OF 2009 ---------------------------------------- Dated, the 21st day of October, 2009 JUDGMENT Ramachandran Nair, J. The question raised in the appeal filed by theassessee is whether the Income Tax Appellate Tribunalwas justified in holding that the sale of membershipcard of the appellant by the Cochin Stock Exchangeattracts liability for capital gains under section 45 of theIncome Tax Act (hereinafter referred for short,'TheI.T.Act'). 2. We have heard Sri K.B.Mohamedkutty, Senior Counsel appearing for the appellant and the StandingCounsel appearing for the respondent. 3. The appellant-assessee was a member of the Cochin Stock Exchange. However, on account of chronicdefault, the Cochin Stock Exchange declared him a ITA No.1548/09 defaulter and terminated his membership and sold hisstock exchange membership card in auction which fetchedsale consideration of Rs.12,75,000/-. Since themembership card was sold in the previous year relevantfor the assessment year 1994-95, the assessing officerbrought to tax long term capital gain arising to theappellant on the sale of the Stock Exchange card. Eventhough the appellant's challenge against the assessmentwas successful before first appellate authority who allowedthe appeal, on second appeal by the Department, theIncome Tax Appellate Tribunal allowed the appeal andrestored the assessment. It is against this order of theTribunal, the appellant-assessee has filed this appeal undersection 260A of the Act. 4. The short question that arises for consideration iswhether the Stock Exchange card of the appellant-assesseesold by the Stock Exchange in the circumstances statedabove can be treated as “capital asset” falling undersection 2(14) of the Act attracting tax on the profit arising ITA No.1548/09 out of the sale of the same under section 45 of the IT Act.“Capital asset”, as defined under section 2(14) of the ITAct, means property of any kind held by an assessee,whether or not connected with his business or profession.Though the definition clause provides for exclusions ofcertain items of property, admittedly, membership card ofstock Exchange is not an item excluded under the saidclause. However, it is pertinent to note that Section 47(xiiia) of the IT Act provides for exclusion of capital gainson the sale of membership right held by a member of arecognized stock exchange in India for the purpose statedtherein, that is, for acquisition of shares and trading orclearing rights acquired by such member in thatrecognized stock exchange in accordance with a schemefor demutualisation or corporatisation which is approvedby the Securities and Exchange Board of India. Amembership card which confers right on the member totrade in stock and shares in the exchange, is certainly aproperty. So much so, it falls within the definition of ITA No.1548/09 -: 4 :- ITA No.1548/09 -: 4 :- 'capital asset' under section 2(14) of the I.T. Act.Further, section 47 (xiiia) makes itself very clear thatmembership right in stock Exchange is a 'capital asset 'and so much so, the transfer of it except in casescovered by the said clause, would attract liability for tax.However, there is a distinction in this case in as much asthe appellant has not sold the membership card, but thesame is sold by the Stock Exchange after declaring theappellant a defaulter and after taking over themembership card. 5. The Senior Counsel for the appellant contended that the appellant has not got any benefit on the sale of themembership card and the entire sale proceeds wasutilised by the Stock Exchange in their discretion to setoff liabilities due to it and to other members and tocreditors to whom the appellant had liabilities. 6. We have examined the rules of the StockExchange which govern the terms for forfeiture and saleof stock exchange memberships of defaulted members. ITA No.1548/09 Under clause 47, as and when a member is declared adefaulter, his membership shall lapse and vest in theExchange. Clause 47A(b) provides for auction sale of themembership after 90 days of declaring a member asdefaulter. Clause 47A(e) provides for appropriation ofsale proceeds of the membership of the defaulting member.According to this provision, sale proceeds has to beappropriated first towards liability due to the StockExchange and then to members of the Exchange and thento settle all such debts and obligations due to Exchangeand Department/Clearing House. Finally, it is madevery clear in the said clause that if any balance is leftafter making payments as stated therein, the same shallbe paid to the defaulting member or to his nominee orhis legal heirs, if the member is dead. In other words,the appellant happens to be the beneficiary of the sale ofhis membership by Stock Exchange because the saleproceeds are adjusted to discharge his debts and thebalance if any is also payable to him. Since the Stock ITA No.1548/09 Exchange membership card which is sold in auction isproperty covered by the description “capital asset” undersection 2(14) of the I.T Act, it's sale by stock Exchangeamount to “transfer” within the meaning of Section 2(47)of the I.T.Act. Therefore, in our view, the Tribunal is rightin upholding the assessment for capital gains. 7. Even though the senior counsel referred to ajudgment of the Supreme Court in Vinay Bubna v. Stock Exchange Mumbai and Others (155 CTR 519) andcontended that Stock Exchange member card is notpersonal property of the member, we are unable toaccept the argument because the case decided is not asto whether the membership card is a capital asset or not.Further, Stock Exchange rules vary from Exchange toexchange and, so far as the Cochin stock Exchange isconcerned, we found that rules provide for sale inauction of the membership of a defaulter by the StockExchange and adjustment of sale proceeds towards hisdebt and his entitlement for payment of the balance if ITA No.1548/09 any to him. So much so, the decision has no applicationin this case. In the circumstances of the case, there is nomerit in the appeal and the same is dismissed accordingly.However, considering the plight of the appellant statedby the Senior Counsel appearing for him, we direct theDepartment to show leniency in waiver of interest forhim to settle liability. C.N.RAMACHANDRAN NAIR JUDGE V.K.MOHANAN, JUDGE kvm/- ITA No.1548/09 -: 8 :- V.K.MOHANAN, J.O.P.No. JUDGMENTDated:..