The Hindu Business Line : Bias in bourse cards

REGIONAL stock exchanges lost their importance because of the emergence of the National Stock Exchange and online trading. And, as a result, the value of stock exchange membership cards, over the past few years, have been falling. But with the stock market now booming, there seems to be a revival of interest in these cards. Is there tax liability on transfer of membership cards? This question, in a number of cases, has invariably been answered in favour of the Revenue.

In a Rajasthan High Court case, Satya Narain Modani transferred his membership card in the Jaipur Stock Exchange in June 1993 for Rs 6 lakh and claimed that there was no tax liability attached to the transaction. He had obtained the membership in 1987. The assessing officer (AO) estimated the value of the membership card at Rs 25.25 lakh and assessed the difference between this amount and Rs 6 lakh to gift tax as deemed gift under Section 4(1)(a) of the Gift Tax Act. He also assessed the Rs 6 lakh as long-term capital gains. The Tribunal estimated the value of the card at Rs 10 lakh and limited the assessment to gift tax to the difference between Rs 10 lakh and Rs 6 lakh. The Tribunal also directed the AO to compute the value of capital gains on the basis of the estimated value of the card at Rs 10 lakh.

It was argued before the Rajasthan High Court that tax liabilities cannot be attributed to the transaction. Objection was taken to the decision of the Tribunal, first to charge gift tax on the difference in the consideration shown and the market value and, second, to tax the entire amount of Rs 10 lakh as capital gains. The objection was not without substance.

The Supreme Court itself had considered the question whether membership of stock exchange can be attached, as in the case of other property, and held that the right of nomination finally vested in the stock exchange; without nomination by the stock exchange membership cannot be transferred and, therefore, the membership card cannot be attached like any other property (Stock Exchange, Ahemadabad vs Asst. CIT 248 ITR 209 SC).

In spite of this ruling, the Rajasthan High Court decided in favour of the Revenue. The amount by which the market value of the property at the date of the transfer exceeded the value of the consideration shown shall be deemed to be a gift by the transferor. The Rajasthan High Court held that the Supreme Court ruling was not applicable to the facts on hand. It agreed that the Rs 4 lakh, being the difference between the market value of the card and the consideration declared in the return, attracted liability to gift tax. However, the High Court ruled that once the difference was brought to tax as deemed gift, that amount cannot again be taxed under the Income-Tax Act. The Rs 6 lakh alone should be taxed as long-term capital gains tax.

This ruling of the Rajasthan High Court was given in the Satya Narain Modani vs ITO (Rajasthan 272 ITR 138) case.

It was following the views it had expressed in the earlier Ravindrakumar Jain vs CIT (263 ITR 368) case. The High Court chose to distinguish the aforementioned Supreme Court judgment. To that extent, the ruling will come as a disappointment to those dealing in the membership of the stock exchanges. The Supreme Court's view that such membership is not property which can be attached, strengthens the argument that transfer should not give rise to tax obligations.

The law regarding deemed gifts came into operation from the assessment year 1992-93 onwards. With regard to capital gains, if the membership of the stock exchange cost nothing, then the old argument about computation becoming unworkable can be brought in. However, Section 55 of the I-T Act has been amended several times and the cost of the right to carry on any business can be taken as nil. In both the cases before the Rajasthan High Court, the case for the assessee was not fully argued. The matter needs to be thrashed out at a higher level.

(The author is a former Chief Commissioner of Income-tax.)

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