Income Tax Appellate Tribunal - Mumbai
Otc Exchange Of India, Mumbai vs Asst.Dit(E)-Ii(1), Mumbai on 28 July, 2017
ITA No.2625 & 2626/Mum/2016 OTC Exchange of India Assessment Year 2010-11 & 2011-12 आयकर अपीलीय अिधकरण "सी" ायपीठ मुं बई म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH, MUMBAI ी डी.टी. गरािसया, ाियक सद एवं ी मनोज कुमार अ वाल, लेखा सद के सम ।
BEFORE SHRI D.T. GARASIA, JM AND SHRI MANOJ KUMAR AGGARWAL, AM आयकर अपील सं./I.T.A. No. 2625 &2626/Mum/2016 (िनधा रण वष / Assessment Year: 2010-11 & 2011-12) OTC Exchange of India Assistant Director of 92/93, Maker Tower'F' Income Tax (Exemption)-II(1) Cuffe Parade बनाम/ 5 t h Floor Mumbai - 400 005 Vs. Piramal Chambers Lalbaug, Parel Mumbai- 400 012 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAACO-0089-Q (अ पीलाथ" /Appellant) : (#$थ" / Respondent) Assessee by : V.Mohan, Ld. AR Revenue by : Rajat Mittal, Ld. DR सुनवाई की तारीख / : 27/06/2017 Date of Hearing घोषणा की तारीख / : 28 /07/2017 Date of Pronouncement 2 ITA No.2625 & 2626/Mum/2016 OTC Exchange of India Assessment Year 2010-11 & 2011-12 आदे श / O R D E R Per Manoj Kumar Aggarwal (Accountant Member)
1. The captioned appeals by assessee for Assessment Years [AY] 2010-11 & 2011-12 assails separate order of Ld. Commissioner of Income Tax (Appeals)-1 [CIT(A)], Mumbai on various grounds of appeal. Since, the common issue involved in both the appeals is related with exemption u/s 11 & 12, we proceed to dispose-off the same by way of this common order for the sake of convenience and brevity. First we take up ITA No. 2625/Mum/2016 for AY 2010-11 which contest the order of Ld. CIT(A) order dated 20/01/2016 denying exemption u/s 11 & 12 of the Income Tax Act, 1961 to the assessee. The assessee has filed concise grounds of appeals and assails various conclusions drawn by lower authorities to deny exemption u/s 11 & 12 and we proceed to deal with the same in succeeding paragraphs.
2. Briefly stated, the assessee being a corporate entity registered u/s 25 of the Companies Act, 1956 and registered Trust u/s 12A vide Registration No. INS/29014 dated 01/04/1991, hitherto, enjoying exemption as Trust u/s 11 & 12 of the Income Tax Act, 1961 has been denied the said exemption during impugned AYs and the same is the subject matter of these appeals.
2.1 The assessee is a public charitable trust and a recognized stock exchange registered u/s 4 of the Securities Contract (Regulation) Act, 1956 formed to create a script less, screen based multi tiered fully automated securities market to help medium / small scale enterprises to 3 ITA No.2625 & 2626/Mum/2016 OTC Exchange of India Assessment Year 2010-11 & 2011-12 finance their projects in a cost effective manner and to provide investors with a convenient, efficient mode of trading.
2.2 The return for the impugned AY was filed at 'Nil' after claiming exemption u/s 11 / 12 for Rs.110.85 Lacs. During the assessment proceedings, Ld. Assessing Officer [AO] noted that the assessee held 42.50 Lacs equity shares of Rs.10/- each in its 100% subsidiary concern namely OTCEI Securities Ltd. [OSL] since financial year 1999-2000. Since, OSL was not public sector company, the case of the assessee, in the opinion of Ld. AO, was hit by the provisions of Section 11(5) & 13(1)(d)(iii) and therefore the impugned exemption was not available to the assessee.
2.3 The Ld. AO further noted that OSL obtained membership rights of bigger stock exchanges like National Stock Exchange [NSE] and Bombay Stock Exchange [BSE] and the members of the assessee exchange could only be registered as the sub-brokers of the OSL and no other client / sub broker could be entertained by OSL. Further, OSL could not undertake any dealing in its own account, which led the Ld. AO to believe that trading members of the assessee trust were able to deal in bigger exchanges through its subsidiary OSL by using assessee's systems and platforms, software hardware and expertise etc. and therefore availed certain benefits from the assessee, which makes assessee ineligible to claim the said exemption. 2.4 The Ld. AO after perusing the agreement between assessee company and OSL further noted that the assessee trust provided various services like infrastructure, maintenance, day-to-day expenses, capital 4 ITA No.2625 & 2626/Mum/2016 OTC Exchange of India Assessment Year 2010-11 & 2011-12 expenses manpower services, capital & commercial expertise etc. to OSL and the same was reimbursable to assessee on actual basis. However, it was noted that the cost of technical/commercial expertise and other services like marketing / branding / legal services were to be charged by assessee @0.005% of the turnover of the subsidiary after OSL achieved turnover of Rs.6000 crores. Since, the turnover of OSL was well below this figure, no amount was charged by the assessee against the same, which resulted into direct benefit, by assessee to OSL. It was further noted that the amount reimbursable to assessee remained outstanding at year-end and no interest was charged thereupon and hence, the assessee extended further benefit to OSL. 2.5 Ld. AO further opined that the assessee trust carried on the business of stock broking through OSL and the activity of sub-broking was nowhere mentioned in the Memorandum of the assessee trust and therefore, the same was not in accordance with the objects of the trust and since assessee engaged in commercial profit making activity through its subsidiary, the membership of which was restricted to particular class of brokers and not to investors at large and hence the impugned exemption was not available to the assessee. 2.6 All these factors led the Ld. AO to conclude that the case of the assessee was hit by the provisions of Section 11(5) read with Section 13(1)(d)(iii) & also hit by the provisions of 13(2)(a),(b),(d) and (g) and therefore, the exemption u/s 11 & 12 was not available to the assessee trust.
5ITA No.2625 & 2626/Mum/2016 OTC Exchange of India Assessment Year 2010-11 & 2011-12 2.7 Finally, placing reliance on the judgment of Hyderabad Tribunal in Hyderabad Stock Exchange Vs ADIT [10 taxmann.com 132], Ld. AO denied the said exemption to the assessee and computed total taxable income at Rs.290.72 Lacs being amount received / earned by the assessee during impugned AY.
3. Aggrieved, the assessee contested the same without any success before Ld. CIT(A) vide impugned order dated 20/01/2016 and inter-alia contended that the investment in subsidiary were in conformity with Section 11(5) read with Rule 17C of Income Tax Rules and therefore, the assessee was eligible to claim the said exemption. However, not convinced, the Ld. CIT(A) confirmed the stand of Ld. AO against which the assessee is in second appeal before us.
4. The Ld. Counsel for Assessee [AR], while drawing our attention to the documents placed in the paper book contended that the investments in subsidiary was in conformity with the directions of Securities & Exchange Board of India [SEBI] and the same was one of the prescribed mode of investment as per Section 11(5) read with rule Rule-17C of Income Tax Rules and therefore, the case of the assessee was not at all hit by the provisions of Section 11(5) and 13(1)(d)(iii). 4.1 The Ld. AR further drew our attention to the fact that the shareholders of the assessee trust were public sector / government entities and the board of directors of assessee company was constituted mainly by nominee directors and the assessee did not extended any benefit either to its shareholders or to its directors and therefore, lower authorities seriously erred in concluding that the assessee extended 6 ITA No.2625 & 2626/Mum/2016 OTC Exchange of India Assessment Year 2010-11 & 2011-12 benefits in violation of the statutory provisions as contained in Section 13(2) & 13(3). The Ld. AR asserted that the assessee created the subsidiary company in accordance with the guidelines issued by SEBI and the conduct of the assessee as well subsidiary was subject to strict government rules / regulations and control and adequate mechanism was provided not to advance any benefit to the shareholders / directors etc. The assessee, through the instrumentality of subsidiary provided only additional facility / benefit to its members to avail the trading facility of the bigger stock exchanges which was in tune with SEBI guidelines for revival of small exchanges. The membership of the assessee trust could be obtained by public at large after fulfilling the stipulated conditions and the members of the assessee trust, in turn, could become member of OSL subject to fulfillment of complying with further independent stipulations as to securities / margins etc. and therefore, it was wrong to infer that the membership of OSL was available to select few only and Ld. AO by wrong assumption of facts and conclusion, erred in denying the impugned exemption to the assessee. 4.2 The Ld. AR further contended that creation of subsidiary was totally in tune with the directions of SEBI and it was settled position of law that the activity of stock exchange per se was charitable in nature and the object clause of the assessee was wide enough to encompass in its ambit the creation of subsidiary for the promotion of interest of its members. The said position has been accepted by the revenue in all the earlier years and therefore, now debarred from taking a different stand on identical set of facts.
7ITA No.2625 & 2626/Mum/2016 OTC Exchange of India Assessment Year 2010-11 & 2011-12 4.3 The Ld. AR also assailed the stand of the revenue on rule of consistency by contending that the wholly owned subsidiary company was floated by the assessee in financial year 1999-2000 with no further change in the same whatsoever and the revenue accepted the exemption claim of the assessee over preceding several years in several assessments u/s 143(3) / 143(1) and therefore, was not justified in denying the same in impugned AY, there being no change in facts or circumstances of the case.
4.4 Proceeding further, the Ld. AR drew our attention to the ledger account of OSL to assert that the amount outstanding at year end towards reimbursement of expenses represented only the outstanding of the last month of the relevant financial year and the same was settled in a short span of time in the very next financial year and therefore, no finance facility was provided by the assessee to OSL and there was no justification to charge the interest against the same and therefore, Ld. AO erred in concluding that the assessee was required to charge interest against the same.
4.5 The case laws of the Hyderabad Stock exchange relied upon by the revenue was distinguished by pointing out that in that case there was clear cut finding that huge amount was spent by the assessee towards the benefit of its members which led to denial of impugned exemption and therefore, the ratio of the same do not apply to assessee's case. 4.6 Per contra Ld. DR supported the stand taken by lower authorities and contended that benefit was extended to select few by floating the subsidiary and no interest was charged on outstanding amount activity.
8ITA No.2625 & 2626/Mum/2016 OTC Exchange of India Assessment Year 2010-11 & 2011-12 Further, the creation of subsidiary to carry out the trust object was not in accordance with memorandum of the assessee trust. Ld. DR further contended that the principles of res judicata could not be applied to Income Tax Proceedings and therefore, the Ld. AO as well as Ld. CIT(A) after elaborate discussion reached the correct conclusion.
5. We have heard the rival contentions and perused relevant material on record. The basic facts are not in dispute. As far as the violation of Section 11(5) is concerned, we find that this section prescribes modes of investment / depositing of trust money. As per clause (xii) of the said Section 11(5), the investment could be made 'in any other form or mode of investment or deposit as may be prescribed'. This other form of investment or deposit has been prescribed in Rule 17C of the income Tax Rules and clause (v) of the said Rule as inserted by Income Tax (Tenth Amendment) Rules, 2006 with retrospective effect from 26/11/1999 reads as follows:-
(v) investment made by a recognised stock exchange referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter referred to as investor) in the equity share capital of a company (hereafter referred to as investee) (A) which is engaged in dealing with securities or mainly associated with the securities market;
(B) whose main object is to acquire the membership of another recognised stock exchange for the sole purpose of facilitating the members of the investor to trade on the said stock exchange through the investee in accordance with the directions or guidelines issued under the Securities and Exchange Board of India Act, 1992 (15 of 1992) by the Securities and Exchange Board of India established under section 3 of that Act; and (C) in which at least fifty-one per cent of equity shares are held by the investor and the balance equity shares are held by members of such investor;] Admittedly, the facts reveal that the assessee has made investment in its wholly owned subsidiary company in accordance with the directions 9 ITA No.2625 & 2626/Mum/2016 OTC Exchange of India Assessment Year 2010-11 & 2011-12 of SEBI. The main object of subsidiary was to acquire the membership rights of the BSE / NSE so as to facilitate the members of the investor. The assessee is a recognized stock exchange by Central Government in terms of Section 4 of the Securities Contract Regulation Act. Therefore, on these facts we find that the investment in subsidiary was in tune with the requirement of Section 11(5) read with Rule 17C and there was no violation of the same and therefore, the assessee could not be visited with consequential disallowance u/s 13(1)(d)(iii). 5.2 Proceedings further, we find that the shareholders of the assessee consist only of public sector undertaking / government undertaking as evident from Page Nos. 65 of the paper book and the directors of assessee company were largely nominee directors as per Annual Return of the company as placed on Page Nos. 66 to 84 of the paper book. As per Clause IIIA of Memorandum & Articles of Association of the assessee as placed in Page Nos. 3 to 56 of the paper book, the main object of the assessee was to promote and assist dealings in securities of any nature issued by limited companies in India. Further, clause V of the said memorandum contained restrictive conditions as to distribution of dividend / bonus/ profits / remuneration / fees whatsoever to its members and the income / property of the assessee was to be applied solely for the promotion of its objects. Further, the assessee company was governed by its by-laws and chapter XV-A of the said by-laws dealt with code of ethics for directors and functionaries of exchanges and put several restrictive conditions upon directors to obtain any sort of benefits / pecuniary advantages by using their position as directors.
10ITA No.2625 & 2626/Mum/2016 OTC Exchange of India Assessment Year 2010-11 & 2011-12 5.3 The case of the revenue is that the assessee was hit by the provisions of Section 13(2) & 13(3) since it extended benefit to select few members of the exchange and further no interest has been charged on the outstanding amount. However, we find that that the assessee was registered stock exchange governed by strict government / SEBI rules & regulations and the membership of the assessee exchange could be obtained by the public at large subject to fulfillment of certain entry conditions as to margins / safety / securities etc. The members of the assessee, in turn, could become sub-broker of the subsidiary company subject to fulfillment of further conditions which was in tune with the scheme framed by SEBI as evident from its letter dated 26/11/1999 titled as Floating of a subsidiary / company by a stock exchange to acquire the membership of other Stock Exchange which is placed on Page Nos. 210 to 211 of the paper book, a portion of which is extracted below:-
DIVISION CHIEF SECONDARY MARKET DEPARTMENT SMD-ll/POLICY/CIR-37/99 November 26. 1999 To.
The Executive Directors/Managing Directors of all( the Stock Exchanges Dear Sir/Madam.
Subject: Gloating of a Subsidiary/Company by a Stock Exchange to acquire the membershipof other Stock Exchange.
A meeting at a Group on Revival of Small Stock Exchanges was held on September
8. 1999,to discuss the suggestions/revival plans forwarded by the small exchanges by Their revival. the Group considered the suggestions/revival plans submitted by the small stock exchanges and recommended that small stock exchanges may be 11 ITA No.2625 & 2626/Mum/2016 OTC Exchange of India Assessment Year 2010-11 & 2011-12 permitted to promote a subsidiary which can acquire membership rights of larger stock exchanges viz. NSE/BSE/CSE/OSE or any other exchange subject to usual conditions applicable to the other' members.
In this connection, it has been decided that small stock exchanges may promote/float a subsidiary/company to acquire membership rights of other stock exchange subject to the under noted conditions:
1. The subsidiary/company shall be 100% owned by the stock exchange promoting/floating such a subsidiary/company. The name of the subsidiary company shall not contain the words 'Stock Exchange".
2. The members of the Stock Exchange shall register themselves as sub-brokers of the subsidiary/company to enable them trade through the subsidiary/company
3. The subsidiary/company shall not undertake any dealing in securities on its Own account.
4. The subsidiary/company shall register only the members of the stock exchange, which is promoting the subsidiary/Company as its sub-broker and no other client/sub-broker shall be entertained by the subsidiary/company
5. the sub-brokers of the subsidiary/company shall maintain separate deposit with the subsidiary/company. the Bose Minimum Copilot deposited by the sub-broker with the promoting stack exchange shall not be transferred to the subsidiary/company. This deposit to be maintained with the subsidiary/company shall be in the form of cash
6. The trading /exposure limit of the .sub-brokers; shall be based on the deposit received by the subsidiary/company from the sub-brokers and these limits shall not exceed the limits as prescribed by the stock exchange of which the subsidiary/company is a member.
7. The subsidiary/company shall collect margins from the sub-brokers for the payment of margins to the respective slack exchanges of which the subsidiary/ company is a member. The margin imposed by the subsidiary/company on its sub-
brokers shall not be less than the margin payable to the stock exchanges of which the subsidiary/company is the member.
8. The stock exchange shall incorporate the above mentioned conditions in the Memorandum of Association/Articles of Association of the subsidiary/company.
It is quite evident that the floating of subsidiary company was in tune with SEBI directions and contradicts the stand of the revenue that the sub-broker membership of the subsidiary was open to select few and not to public at large and the benefit to select few was extended by the assessee. It is an admitted position that the assessee was being reimbursed on actual basis by the subsidiary for various services and 12 ITA No.2625 & 2626/Mum/2016 OTC Exchange of India Assessment Year 2010-11 & 2011-12 therefore, it was wrong to infer that the assessee extended benefits as mentioned in Section 13(2) to class of persons enumerated in Section 13(3) which prima-facie weakens the conclusion of the revenue that the case of the assessee was hit by the provisions of Section 13(2) & 13(3). 5.4 It is further noted that the assessee stood gain by the rule of consistency also since the said investment in subsidiary was made by the assessee way back in FY 1999-2000 and there was no change either in shareholding pattern or activities of the assessee or its subsidiary since then. The scrutiny assessment orders for AY 2004-05 & 2005-06 as placed on Page Nos. 187 to 193 reveals that the revenue has accepted the exemption claim of the assessee in quantum assessment. Although, we are conscious of the fact that the principles of res judicata do not apply to Income Tax Proceedings yet there being no change in facts or circumstances, the revenue is debarred from shifting stands without any cogent reasons in view of rule of consistency. This is well supported by the observation of Hon'ble Apex Court rendered in Radhasoami Satsang vs. CIT [193 ITR 321] which reads as under:-
"Strictly speaking, res judicata does not apply to income-tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year; where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year."
Thus, it can be stated that although the principle of res judicata is not generally applicable to Income Tax Proceedings since an assessment 13 ITA No.2625 & 2626/Mum/2016 OTC Exchange of India Assessment Year 2010-11 & 2011-12 for a particular year is final and conclusive between the parties only in relation to the assessment for that year and it is not binding either on the assessee or the Department in a subsequent year. However, if the earlier decision is not arbitrary or perverse or if it had been arrived at after due inquiry then the revenue is not permitted to deviate from its earlier stand.
5.5 Lastly, the revenue has alleged that the assessee failed to charge interest on the amount remaining outstanding at year-end. However, a perusal of ledger extract as produced in the paper book reveals that the same represent reimbursement of the last month of the relevant financial year which has been settled subsequently within a short span of time thereafter and hence, there was no occasion / justification to charge the interest against the same which further negates this stand of the revenue that the assessee extended pecuniary benefits to its subsidiaries in contravention of law.
5.6 The revenue has placed reliance on the decision of Hyderabad Stock Exchange Vs ADIT [supra]. However, as rightly pointed out by Ld. AR, the same is distinguishable on facts since in that case, there was clear cut finding that the assessee spent huge amount of Rs.10.41 crores for providing additional infrastructural facilities to its member brokers. The said infrastructural facilities included development of screen based trading system, terminals, netscape, browsers, computers and other accessories for participating in the Screen Based Trading System. The assessee spent further amount towards insurance of the members and setting up of interconnected stock exchange India Ltd.
14ITA No.2625 & 2626/Mum/2016 OTC Exchange of India Assessment Year 2010-11 & 2011-12 However, the same is not the case here rather the present assessee, in tune with the agreement with its subsidiary, is being reimbursed on actual basis for various services rendered by him and therefore, distinguishable.
5.7 The totality of above discussion leads us to an inevitable conclusion that the revenue was not justified in denying the said exemption to the assessee. Therefore, we are inclined to hold that the assessee was entitled for the said exemption u/s 11 / 12 and the appeal of the assessee stands allowed.
6. Now, we take up assessee's appeal ITA No. 2626 for AY 2011-12 where the Ld. AO, while denying the impugned exemption has determined the total income at Rs.341.62 Lacs which upon, confirmation by Ld. CIT(A) vide impugned order dated 21/01/2016 has been further contested before us. Since, we have already allowed assessee's appeal for AY 2010-2011 as above on the facts of the case, the issue being identical in all respect except for figures and minor variations, our observations / conclusions mutatis mutandis apply to the same which results into assessee's appeal being allowed by us.
7. Resultantly, both the appeals filed by the assessee stands allowed.
Order pronounced in the open court on 28th July, 2017.
Sd/- Sd/-
(D.T. Garasia) (Manoj Kumar Aggarwal)
ाियक सद / Judicial Member लेखा सद / Accountant Member मुं बई Mumbai; िदनां क Dated : 28.07.2017 Sr.PS:- Thirumalesh 15 ITA No.2625 & 2626/Mum/2016 OTC Exchange of India Assessment Year 2010-11 & 2011-12 आदे श की ितिलिप अ ेिषत/Copy of the Order forwarded to :
1. अपीलाथ" / The Appellant
2. #$थ" / The Respondent
3. आयकर आयु,(अपील) / The CIT(A)
4. आयकर आयु, / CIT - concerned
5. िवभागीय #ितिनिध, आयकर अपीलीय अिधकरण, मुं बई / DR, ITAT, Mumbai
6. गाड/ फाईल / Guard File आदे शानुसार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, मुं बई / ITAT, Mumbai