Ahmedabad Stock Exchange Ltd., ... vs Assessee

The Ahmedabad Stock Vs The Dy. Commissioner of Exchange Ltd., Income Tax, Circle-I, Kamdhenu Complex, Ahmedabad. Opp. Sahajanand College, Panjarapole, Ambawadi, Ahmedabad. PAN: AAFCA 4919E (Appellant) (Respondent)

Revenue by : Smt. Sonia Kumar, Sr.D.R. Assessee(s) by : Shri M.G. Patel, A.R.

सुनवाई क तार ख/ Date of Hea ring : 20 /01/201 5 घोषणा क तार ख /Date of P ronouncement: 23/01/2015

आदेश /O R D E R

PER MUKUL KUMAR SHRAWAT, JUDICIAL MEMBER

This is an Appeal filed by the Assessee arising from an order of the learned CIT(A)-VI, Ahmedabad dated 09.11.2010. The grounds raised before us are reproduced below:

"1. The Learned Commissioner of Income Tax (Appeals)-VI, Ahmedabad has erred in law as well as on facts of the case by confirming the addition made by the Learned Assessing Officer on the basis that the amount of Rs.23,64,489/- deducted from gross interest for transfer to other Funds is not allowable deduction and the same is to be treated as income of the Appellant."

2. The Appellant, therefore, prays that addition of Rs.23,64,489/- made by the Learned Assessing Officer by disallowing deduction claimed in respect of interest transferred to other Funds be deleted fully."

ITA No.112/Ahd/2011 The Ahmedabad Stock Exchange Vs. DCIT, Cir-1, Ahmedabad For A.Y. 2006-07 -2-

2. Facts in brief as emerged from the corresponding assessment order passed u/s.143(3) dated 03.12.2008 were that the assessee-company is incorporated to facilitate, support control and manage in the public interest business of buying, selling, clearing, dealing and settlement of securities and instruments of all kinds. A return of income was filed declaring Rs.45,00920/- in respect of the above issue. It was noted by the AO that the Assessee had received an interest of Rs.87,60,247/-. Against that receipt of interest, the assessee has claimed deduction from such interest income in respect of following accounts.

i. Interest credited to Defaulters Account 185813 ii. Interest credited to Broker's Contingency Fund 56050 iii. Interest credited to Trade Guarantee Fund 2122626 iv. Interest on 1% Security Deposit credited to CPF 150594 Total 2515083

3. A query was raised to explain as to why the deduction of interest of Rs.25,15,083/- be not disallowed. In compliance, the Assessee's reply was as under:

"7. As regards deduction claimed from interest in respect of amount of interest transferred to Trade Guarantee Fund and Broker's Contingency Fund, we have to submit as under:

(a) Interest transferred to the Trade Guarantee Fund.

Trade Guarantee Fund was created about a decade ago as per the guidelines in that respect issued by the Securities Exchange Board of India (SEBl). Accordingly, amount standing to the credit of the members security deposits accounts as on that date were transferred to Trade Guarantee Fund Further, as per the Scheme approved by SEBI, further amounts from the transaction charges collected from the members were also required to be transferred every year. This fund is required to be utilized for the purposes of the scheme and as per direction and approval from SEBI. As such, the fund is to be utilized to meet with defaults by the members to honour their liabilities in settlements so as to safeguard the interest of the other members as well as their constituent investor public as well as the dues of the Stock Exchange. As the fund has been created out of funds of the members held as security deposit as well as transfer from transaction charges collected from them, the fund has been held by the Stock Exchange as liability which may be repayable in case any member ceases to be a member and as may be directed by" SEBI.

ITA No.112/Ahd/2011 The Ahmedabad Stock Exchange Vs. DCIT, Cir-1, Ahmedabad For A.Y. 2006-07 -3- Further, as per guidelines of SEBI in that regard, interest on investment out of this fund is also required to be transferred to the fund and accordingly interest has been transferred to this fund every year.

(b) Broker's contingency fund This fund was also created about a decade before as per the guidelines from SEBI in this regard and this has also been approved by SEBI. Fund was created from collections made from the members as well as amounts transferred out of transaction charges from the members. This fund is required to be utilized in respect of default in payment by the members at the time of settlement of their dues, In case of default, members are provided temporary short term loan for making payment of their dues at the time of settlement so that settlement can be finalized and not kept pending due to default on part of any member. This fund has also been created out of the funds of the members held as well as transfer from transaction charges collected from them, the fund has been held by the Stock Exchange as liability which may be repayable in case any member ceases to be a member and as per the direction in that regard from SEBI. Further, as per guidelines of SEBI in that regard, interest on investment out of this fund is also required to be transferred to the fund and accordingly interest has been transferred to this fund every year."

3.1 However, the AO was not convinced and disallowed the claim in the following manner:

"The submission of the assessee has been perused and no force is found in the contention of the assessee. Though, the interest on investments out of these funds are required to be transferred as per Guidelines issued by the SEBI, but it is very clear that nowhere this interest amount is taxed. Neither the assessee nor the SEBI (fund) paid tax on such interest amounts received during the year. Since these funds are reflected in the books of the assessee company, the onus is on the assessee to pay tax on such interest. The assessee is transferring interest amounts from P&L A/c. to its Reserve. These funds are no where shifted but are reflected in the books of the assessee. In view of this, such interest amount is treated as income of the assessee for the year under consideration. However, considering the facts that customer protection fund is a separate legal entity and as reported that the same is filing its return of income, interest to the tune of Rs.1,50,594/- shall be treated as income in the hands of Customer Protection Fund. Therefore, the balance sum of Rs.23,64,489/- is treated as income of the assessee and no deduction is allowed to the assessee on such income."

4. When the matter was carried before the First Appellate Authority, it was again reiterated that the funds were earmarked consisting of "trade ITA No.112/Ahd/2011 The Ahmedabad Stock Exchange Vs. DCIT, Cir-1, Ahmedabad For A.Y. 2006-07 -4-

guarantee fund" "investors service sale fund" and "brokers contingency funds" and informed that those funds were more than a decade old. It was informed that those funds were created as per the directions of SEBI, being controlling authority over all the recognized stock exchanges in India. The interest amount is transferred to the said funds as directed by SEBI, hence, it was argued that because of an overriding title the Assessee has not earned the interest income. The funds so created were required to be utilized as per the directions of SEBI. An order of ITAT 'D' Bench for A.Y. 2005-06 dated 17.10.2008 has also been referred. It was also informed that a show cause was issued in respect of the said disallowance by learned Commissioner u/s.263 for A.Y. 2004-05 but later on after considering the explanation the said proceedings were dropped. However, learned CIT(A) was not convinced and affirmed the action of the AO as under:

2.3 I have considered the facts of the case; assessment order and appellant's submission. It is not in dispute that appellant received interest income on certain funds created as per Sebi guidelines. Appellant excluded these interest incomes from its taxable income on the ground that these are subject to control by Sebi. Appellant also referred revision proceedings under section 263 in assessment year 2004-05 which was dropped subsequently. It is also not in dispute that the interest income on these funds is not taxable anywhere else if not taxed in hands of appellant.

Any income received or earned by any person is taxable in his hand unless the same is exempt specifically. The income which is having overriding title is also excludable since the same is taxable in the hands of recipient. These are the broad parameters under which income earned or received by anybody is to be treated. The onus to prove that a particular income received is exempt or to be excluded is on the appellant. In the present case appellant is earning income by way of interest on three different funds maintained by it. Though these funds are under supervision of Sebi, the same are maintained in the books of the appellant only. The money is not transferred to any outside entity and there is no overriding title, therefore the income earned/received by the appellant is not taxable in anybody else's hand. This income is not specifically exempt under any provisions of IT act therefore appellant's claim of reducing interest income from its taxable income is without any basis. On any income, someone has to pay tax if the same is not exempt. It is not in dispute that the said income is not exempt under arty provisions of IT act and therefore the ITA No.112/Ahd/2011 The Ahmedabad Stock Exchange Vs. DCIT, Cir-1, Ahmedabad For A.Y. 2006-07 -5- same has to be taxed somewhere. Since the appellant is maintaining these funds and also receiving the income, there is no entity or person in whose name these can be taxed. The operations of the funds may be as per Sebi guidelines but it does not mean that the income is not received. Income is taxable even in the case of an entity under liquidation. Therefore reducing interest income without the same being exempt or not transferred to an outside entity by way of overriding title, is not correct. I agree with the assessing officer that there cannot be any case where no one pays tax on any income which is not exempt. Since appellant is receiving such income and maintaining such funds, the income earned on such funds are taxable in the hands of appellant.

The dropping of the proceedings under section 263 in assessment 2004-05 does not entitle the appellant to claim such income exempt. For claiming any income exempt, there has to be specific provision which appellant is not able to identify or mention therefore this does not help appellant. In any case each year is a separate proceedings and any view taken in one year need not be necessarily taken in other years since res judicata does not apply to income tax proceedings. Since interest income is not exempt under any provision and the same is not diverted to other person by overriding title, there is no basis for excluding such income. Accordingly, I confirm the addition made by the assessing officer."

5. From the side of the Appellant, learned AR, Mr. M.G. Patel appeared and mainly contested that the assessee has created those funds as per the circular from SEBI and it was mandatory to provide interest. Funds so created were required to be utilized towards specific purpose as directed by SEBI. Learned AR has drawn our attention on a show cause notice dated 18th February, 2009 issued by Director of Income Tax (Exemption), Ahmedabad through which it was suggested that the accrual of interest income was to be taxed by initiating revision proceedings u/s.263 of IT Act. Learned AR has informed that later on those proceedings were dropped by the said authority vide an order dated 27th of March, 2009 after considering the facts of the case. Learned AR has also explained that in respect of "contingency fund" the explanation offered was as under:

"Brokers' Contingency Fund which is set up by way of contribution from brokers. ASE has also appropriated amount out of surplus in Income & ITA No.112/Ahd/2011 The Ahmedabad Stock Exchange Vs. DCIT, Cir-1, Ahmedabad For A.Y. 2006-07 -6- Expenditure Account. The fund is also utilised to provide to the brokers temporary loan or financial assistance for meeting temporary shortfall, if any, in daily Settlement of the transactions to ensure that pay-in process is completed in time and pay out takes place on schedule. This is a separate and distinct fund setup and earmarked for the specific purpose and not available to the Exchange for distribution to the members out of this fund. As such interest income from investments relatable to utilization out of fund has been transferred to this fund and reduced from the gross interest income from all investments. Such claim has been upheld by the Appellate Authority in earlier assessments of the Exchange."

5.1 However, he has informed that in the past the stock exchange was assessed under the status of "AOP" but later on it was converted into a company, however, the issue of accrual of interest was always decided in assessee's favour. Our attention was drawn on an order of ITAT 'D' Bench Ahmedabad bearing ITA No.1195/Ahd/2008 for A.Y. 2004-05 titled as Deputy Director of Income Tax (Exemption) Ahmedabad Vs. Stock Exchange of Ahmedabad, Ahmedabad order dated 6th of August, 2010 wherein "investors service sales" was held as a contingent liability and the same was considered as exemption u/s.11 of IT Act. An antoher order of ITAT 'D' Bench Ahmedabad bearing ITA No.1814/Ahd/2008 for A.Y. 2005-06 order dated 17.10.2008 the issue of disallowance of contribution transferred to investor service sale was decided in assessee's favour was discussed at length and thereafter held that he contribution transferred to investor sale was exempted.

6. On the other hand, from the side of the Revenue, learned Sr.D.R., Smt. Sonia Kumar has vehemently opposed the claim of deduction on the ground that if the income is not taxed in the hands of the assessee then the impugned interest income shall not be taxed at all. She has further argued that there was no overriding title and learned CIT(A) has rightly considered the issue that the interest income so granted was not exempted ITA No.112/Ahd/2011 The Ahmedabad Stock Exchange Vs. DCIT, Cir-1, Ahmedabad For A.Y. 2006-07 -7-

under any provisions of IT Act. Even, the orders cited by learned AR have no direct connection with the issue as raised in the ground of Appeal.

7. We have heard both the sides at some length. We have perused the compilation filed before us in the light of the case laws cited. We are able to trace an account in the compilation pertained to "brokers contingency fund" in which the Assessee has credited the interest on loan as granted by the Assessee as well as debited an amount given as loan to members. Rest of the accounts were not found in the compilation although it was specifically asked to refer but learned AR has failed to indicate that account. The issue has to be decided in the light of the facts that if there was an overriding title of SEBI then the accrual interest cannot be taxed from the assessee. The Assessee is expected to place on record the SEBI guidelines to substantiate the creation of the fund. The Assessee is therefore directed to place all the three accounts to establish that the interest was made part and parcel of the fund and no part of the interest so accrued was the income of the Assessee. The Assessee is also directed to place on record the SEBI guidelines. We, therefore, restore this issue back to the stage of the AO to consider all these three accounts and if it is demonstrated that the interest is accrued but funds were taken out for the purpose of the benefit of the members and the assessee has no benefit of accrual of interest then naturally in the absence of the element of "income" the additions so made deserves to be deleted.

ITA No.112/Ahd/2011 The Ahmedabad Stock Exchange Vs. DCIT, Cir-1, Ahmedabad For A.Y. 2006-07 -8-

7.1 With these remarks the grounds may be treated as allowed but for statistical purpose being restored back for denovo consideration by the AO.

8. In the result, the Appeal is allowed for statistical purpose.

Sd/- Sd/- (ANIL CHATURVEDI) (MUKUL Kr. SHRAWAT) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 23/01/2015 Prabhat Kr. Kesarwani, Sr. P.S. आदेश क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. संबं धत आयकर आयु त / Concerned CIT 4. आयकर आयु त(अपील) / The CIT(A)-III, Ahmedabad

5. वभागीय त न ध, आयकर अपील य अ धकरण, अहमदाबाद / DR, ITAT, Ahmedabad

6. गाड फाईल / Guard file.

आदेशानुस ार / BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad