The Income Tax Department has moved the Bombay High Court to recover nearly Rs 500 crore from top stock brokers, who have managed to avoid paying income tax on the pretext of claiming depreciation on their Bombay Stock Exchange membership card.
Top I-T officials said nearly 60 per cent of the BSE card-holders have been claiming a 25 per cent depreciation benefit using the written down value method on the BSE membership card.
These brokers had converted their member 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 Rs 2.25 crore and brokers claimed depreciation on this every year, which is debited to their profit and loss account.
The I-T department is of the view that depreciation benefits can be claimed on items like plant and machinery, which suffer wear-and-tear with time, and not on the card, the value of which fluctuates and can also appreciate. I-T officials say they would also charge interest of 12 per cent to the brokers now for all those years for which they have claimed depreciation and paid lower taxes.
Brokers, however, are of the view 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 I-T Act, which was amended in 2000.
The section 32 of the Income Tax Act introduced, with effect from the assessment year 1999-2000, "intangible assets" viz "know-how, patents, copyrights, trademarks, licences, franchises, or any other business or commercial right of similar nature" in the eligible category of depreciable assets.
According to an I-T assessing officer, the Cochin Bench of the I-T appellate tribunal in its ruling in the case of Peninsular Capital Market has said that, by acquiring the membership card of the stock exchange the assessee is free to enjoy the rights and privileges of membership and that is analogous to capital introduced by a partner in a firm or shareholder in a company or a member in an association of persons.
"Hence, it is not at all an official permit and it cannot be equated to a licence," said the official. However, the I-T appellate tribunal in 2006 had ruled in the favour of brokers and allowed them depreciation benefits on the card.
