TaxTMI 
TaxTMI 
2024 (6) TMI 456
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....re Settlement Guarantee Fund (Core SGI), and the reasons assigned for doing so are wrong and contrary to facts and circumstances of the case, the provisions of the Income Tax Act. 1961 and the default Rules made thereunder. (b) The Id CIT(A), NFAC erred in not adhering to the judicial discipline as the issue of allowability of claim for deduction of Contribution to Core SGF was considered as allowable being crystalized liability by the judgement of jurisdictional Mumbai ITAT in the case of BSE Ltd. The Id lower authorities erred in holding (i) that Core SGF is in the nature of contingent reserve to meet contingent liability of appellant company: (ii) Contribution is de-facto the part of the net-worth of the contributing Clearing Corporation; (iii) the ownership of the funds remains with appellant company for contribution to the fund; (iv) contribution to core SGF is only an appropriation out of appellant company own funds as there is no diversion of income by overriding title; (v) contribution to Core SGF is similar to Cash Reserve Ratio maintained by the banks with the Reserve Bank of India; which is wrong and....
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....Rs. 1,05,72,994/- being maintenance and other charges recovered from the licensees towards facilities and other services provided by the appellant as separate charges over and above the rental charges as per the terms of the agreement, cannot be taken as annual value of property i.e., rental income from House Property though inadvertently considered as rental income under the head 'Income from House property' in the return of income filed by the appellant. (c) Without prejudice, the ld. CIT(A), NFAC ought to have allowed maintenance and other charges of Rs. 77,80,386/- being expenses specifically incurred as deduction from annual letting value chargeable to income under the head 'Income from House Property having treated Rs. 1,05,72,994/-recovered from licensees as rental income and the reasons assigned for not doing so is wrong and contrary to the facts of the case, the provisions of the Income Tax Act. 1961 and the Rules made thereunder. (d) Without prejudice, the ld. CIT(A), NFAC erred in not considering the amount of Rs. 77,80, 386/- being the expenses incurred as deduction from the charges of Rs. 1,05,72,994/- recovered from licensees specifically....
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....poration runs a Risk Test every month determining the quantum of corpus Any increase in the corpus, has to be contributed by the Stock Exchange, the Clearing Corporation and the Clearing members in the prescribed ratio in accordance with the SEBI directions. The objective of the Core SGF as described in the aforesaid circular is as follows - "5. Clearing Corporation (CC) shall have a fund called Core SGF for each segment of each Recognised Stock Exchange (SE) to guarantee the settlement of trades executed in respective segment of the SE In the event of a clearing member (member) failing to honour settlement commitments, the Core SGF shall be used to fulfill the obligations of that member and complete the settlement without affecting the normal settlement process." With respect to the Corpus of Core SGF, the aforesaid circular states as follows- "6. The corpus of the fund should be adequate to meet out all the contingencies arising on account of failure of any members) The risk or liability to the fond depends on various factors such as trade volume, delivery percentage, maximum settlement liability of the members the history of defaults, capital ....
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....e 18) and highest of such numbers shall be taken as worst case loss number for the day. iv) Average of all the daily worst case loss numbers determined in (a) above shall be calculated. v) The MRC for next month (i.e, March as per example in (ii) above) shall be higher of the average arrived in at step iv above and the segment MRC as per previous review (i.e. review done on 15th January for the month of February)" With respect to share in Contribution to Core SGF, the circular lays down as follows- 8. At any point of time, the contributions of various contributors to Core SG of any segment shall be as follows a) Clearing Corporation contribution CC contribution to Core SGF shall be at least 30% of the MRC CC shall make this contribution from its own funds CC contribution to core SGF's shall be considered as part of its net worth. b) Stock Exchange contribution Stock Exchange contribution to Core SGF shall be at least 25% of the MRC can be adjusted against transfer of profit by Stock Exchange as per Regulation 33 of SECC Regulations, which may be reviewed in view of these guidelines). c) Clearing Member primary contr....
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....ent.** VIII. Any remaining lots to be covered by way of pro-rata haircut to payouts.**" The AO has summed up the submission of the assessee as under: "1. The contribution to MRC of Core SGF is statutory obligation casted upon NSE as per SEBI mandate promulgated as per regulations. 2. The amount, contribution, investment, utilization, use of Core SGF is cabined and cribbed at times by the SEBI that regulates the Cere SGF and assessee company have no domain or control over theall material funds sequestered in the Core SGF. 3. The amount once contributed or set aside is beyond the control and domain of the assessee company. 4. The amount of Core SGF can only become greater as the time goes by and never reduce. 5. This amount is not dependent on the existence of profits in the books of assessee company. 6. This is statutory diversion at source as the sum sequestered are not available for the use of NSE and NSE in no manner remained the beneficiary of the said funds. 7. The case of NSE is of diversion of Income by Overriding Title as it looses the control and domain over the funds." 4. The core SGF has been cr....
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....specific to the deductibility of contribution for specified purposes. The extract to the extent relevant is as under: Section 36 'Other Deductions' (IV) any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund (iva) any sum paid by the assessee as an employer by way of contribution towards a pension scheme, as referred to in section 80CCD, on account of an employee............. (v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust. (va) any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply. if such sum is credited by the to the employee's account in the relevant fund or funds on or before the due date. (viii) in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent of the profits derived from eligible business computed under the head "Profits and gains of busines....
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.... Merely because the contribution constitutes income which is exempt, the corollary that such contribution constitutes admissible expenditure is incorrect for the reason that the same is not sanctioned by section 28 to 43B of the Act. The Hon'ble ITAT while deciding the appeal against the order of the CIT(A) in the case of Bombay Stock Exchange, was not shared with the full information relevant to the facts of the case by either party while deciding the appeal in favour of the assessee- appellant. Therefore, much reliance cannot be placed on the same. The claims that the appellant lost control and domain over the money and therefore there is diversion at source, are not correct for the following reasons: 1. In the initial years, 25% of the profit after tax was transferred to provisions for contribution to Core SGF out of the book profits forthe year ended 31.3.2013 and 31.3.2014. 2. In the financial year ended 31.3.2016 the provisions made as above were reversed and credited to the profit and loss account balance and the same was tapped for making contribution with corresponding debit to the profit and loss account as an item above the ....
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....sits, cash equivalents and other collaterals standing to the credit of the defaulting clearing member. Therefore, to this extent the liability of the appellant is contingent on the date of making the contribution and becomes crystallised at a later date and the quantum of liability also is ascertained only to the extent of the Clearing Corporation's shortfall in making good the default by any of the clearing members. 11. Another disturbing fact is that the balance standing to the credit of the contributory is transferrable in an inter operable scenario where the stock exchange resorts to the clearing facility of another clearing corporation. 12. The Clearing Corporation (which is the wholly owned subsidiary of the appellant with a minimum commitment of 50% as compared to 25% from the assessee) has treated the contribution only as appropriation and not as charge to the profit and loss account. 13. The SECC regulations cannot be differently interpreted by each of the contributories - in other words, the clearing corporation treating the contribution as appropriation out of profits and the assessee- appellant treating the same as charge to the profit and....
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.... 21. The Fund and the investments and income therefrom belong to the respective contributories with their specific shares and therefore the contention that the identity of the share of contribution still remains intact, which goes against the contention of the appellant 22. The contributions do not enjoy the same sanction given to other statutory contributions by assessees which are specifically held tobe admissible deductions under specific provisions 2) If the legislature intended to give a different interpretation and tax treatment to the contribution [as has been done to the Core SGF by inserting section 10(23EE)], it would have done so. In the absence of the same it is not an admissible expenditure under section 37 for it is application of income as per the directives of SEBI for a specific purpose, similar to CSR and CRR as mentioned by the AO. For the impugned assessment year, in view of the fact that the contribution made by the appellant and claimed as expenditure is only by reversing the provisions of the earlier years 31.3.2013 and 31.3.2014 and therefore it clearly constitutes an appropriation out of the accumulated profits, which is an undisputed fact....
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....lso referred the decision of Hon'ble Bombay High Court in the case of CIT Vs. Bombay State Road Transport Corporation (1977) 106 ITR 303 (Bom) regarding allowability of deduction u/s 37(1) in respect of statutory Contribution. The ld. Counsel has also placed reliance on the decision of Hon'ble Supreme Court in the case of Metal Box Company of India Ltd. Vs. Their Workmen dated August 20, 1968 on the propositions that even if the liability is a contingent provided the liability is ascertainable the same is to be considered to ascertain the income. On the similar proposition he also placed reliance on the decision of Hon'ble Supreme Court in the case of Rotork Controls India P. Ltd. Vs. CIT (2009) 314 ITR 62 (SC). 8. On the other hand, the ld. D.R submitted that the assessee has not incurred any revenue expenditure and the nature of the expenditure incurred by the assessee was of capital in nature which are not allowable as a deduction. He supported the order of lower authorities. 9. Heard both the sides and perused the material on record. During the course of assessment the assessing officer has disallowed the claim of deduction of Rs. 761.52 crores being statutory contributio....
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.... in the stress testing and the risk management practices of different clearing corporations especially with regard to the default of members." 12. As per the SEBI guidelines the Corpus of the fund should be adequate to meet out all the contingency arising on account of failure of any member and in estimating the risk or liability of the fund and assessing a fair quantum of the corpus of the core SGF. The clear corporation of the stock exchange would consider the risk management system in force current and projected volume/turnover to be cleared and settled by clearing corporation on guaranteed basis and track record of defaultsof members with regard to number and amount. 13. We have perused the circular number CIR/MRD/DRMNP/25/2014dated 27.08.2014 issued by the SEBI relevant to the establishment and management of the Core Settlement Guarantee Fund and relevant extracts are reproduced as under: CIRCULAR CIR/MRD/DRMNP/25/2014 August 27, 2014 To All recognized Clearing Corporations/Stock Exchanges Dear Sir / Madam, Sub: Core Settlement Guarantee Fund, Default Waterfall and Stress Test 1) Vide circular no. SMD/POLI....
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....September 04, 2013, SEBI required FMIs under its regulatory purview to comply with the PFMIs applicable to them. The FMI principles, inter-alia, include standards regarding participant default rules and procedures, minimum financial resources to cover credit and liquidity exposure of central counterparties and testing (stress testing, reverse stress testing, back testing). 4) Based on deliberations in the Risk Management Review Committee of SEBI and further discussions with clearing corporations, stock exchanges and market participants, it has been decided to issue granular norms related to core settlement guarantee fund, stress testing and default procedures which would bring greater clarity and uniformity as well as align the same with international best practices while enhancing the robustness of the present risk management system in the clearing corporations. These norms are aimed at achieving mainly the following objectives: a) create a core fund (called core settlement guarantee fund), within the SGF, against which no exposure is given and which is readily and unconditionally available to meet settlement obligations of clearing corporation in case of clearin....
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....ject to the following: i) The MRC shall be fixed for a month. ii) By 15th of every month, CC shall review and determine the MRC for next month based on the results of daily stress tests of the preceding month. (For example, by 15th February, CC shall determine MRC for March based on results of various stress tests conducted in January). CC shall also review and determine by 15th of every month, the adequacy of contributions made by various contributors and any further contributions to the Core SGF required to be made by various contributors (as per clause 8) for the next month. iii) For every day of the preceding month (i.e., January as per example in (ii) above), uncovered loss numbers shall be estimated by the various stress tests for credit risk conducted by the CC for the segment (as per clause 18) and highest of such numbers shall be taken as worst case loss number for the day. iv) Average of all the daily worst case loss numbers determined in (iii) above shall be calculated. v) The MRC for next month (i.e., March as per example in (ii) above) shall be higher of the average arrived in at step iv above and the segment MRC as per prev....
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....ce which may be issued by SEBI from time to time in this regard. Management of Core SGF 12) The Defaulter's Committee/SGF utilization Committee of the Clearing Corporation shall mange the Core SGF. The CCs shall follow prudential norms of Investment policy for Core SGF corpus and establish and implement policies and procedures to ensure that Core SGF corpus is invested in highly liquid financial instruments with minimal market and credit risk and is capable of being liquidated rapidly with minimal adverse price effect. The instruments in which investments may broadly be made are Fixed Deposit with Banks (only those banks which have a net worth of more than INR 500 Crores and are rated A1 (or A1+) or equivalent, , Treasury Bills, Government Securities and money market/liquid mutual funds subject to suitable transaction/investment limits and monitoring of the same. The CCs shall further ensure that the financial instruments in which the Core SGF corpus is invested remain sufficiently diversified at all times. SEBI may prescribe the investment norms in this regard from time to time. Access to Core SGF 13) CC may utilis....
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....ribution to core SGFs of other segments) are more than INR 100 Crore. **CC shall limit the liability of non-defaulting members towards additional contribution to a multiple of their required primary contribution to Core SGF and the framework regarding the same should be disclosed. In case of shortfall in recovery of assessed amounts from non-defaulting members, further loss can be allocated to layer 'VI' with approval of SEBI. ***In case loss allocation is effected through haircut to payouts, any subsequent usage of funds shall be with prior SEBI approval. Further, any exit by CC post using this layer shall be as per the terms decided by SEBI in public interest. Stress testing and back testing 17) CC shall effectively measure, monitor, and manage its credit exposures to its participants and those arising from its payment, clearing, and settlement processes. 18) Stress test for credit risk: CC shall carry out daily stress testing for credit risk using at least the standardized stress testing methodology prescribed for each segment viz. equity, equity derivatives and currency derivatives in the Annexure. Apart from the stress scena....
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....ng cleared and settled in every segment to assess appropriateness of its margining models. 22) Adequacy of financial resources: CC shall ensure that it maintains sufficient financial resources to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their associates that would potentially cause the largest aggregate credit exposure to the CC in extreme but plausible market conditions. Thus, CC shall continuously monitor the adequacy of financial resources (as available in its default waterfall) against the uncovered loss estimated by the various stress tests conducted by the CC and take steps to beef up the same in case of shortfall. 23) On at least a monthly basis, CC shall perform a comprehensive and thorough analysis of stress testing scenarios, models, and underlying parameters and assumptions used to ensure they are appropriate for determining the CCP's required level of default protection in light of current and evolving market conditions. CC shall perform this analysis of stress testing more frequently when the products cleared or markets served display high volatility, become le....
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....oration minimum 50%, Stock Exchange minimum 25% and Clearing members minimum 25% of the MRC (minimum Required corpus of Core SGF (MRC) for each segment of each stock exchange. The assessee claimed that under the aforesaid regulatory requirement laid down by the SEBI it had made statutory contributions of Rs. 761.52 cr. to Core Settlement Guarantee Fund and it has no control & domain over the such contribution and utilised only in the manner as laid down by SEBI in this behalf. 15. The ld. Counsel as referred supra in this order submitted that ITAT Mumbai has allowed the similar statutory deduction u/s 37 on the identical issues and facts in the case of BSE Ltd. (Bombay Stock Exchange) vide ITA No. 1790/Mum/2019 dated 04.10.2019 as per the copy of order placed at page no. 1 to 29 of the legal Paper Book filed With the assistance of the ld. Representative we have gone through the decision of coordinate bench in the case of BSE Ltd. Vs. The Pr.CIT-2 as referred supra wherein the identical issue on similar facts has been adjudicated while deciding the appeal u/s 263 of the Act. The relevant extract of the operating para of the decision is reproduced as under: "12. In view of t....
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....y the AO during the course of assessment. Moreover, the contribution to the Investors Service Fund is being made by BSE from 1992 onwards and has been claimed as expense under section 37 of the Act. The said claim has been allowed and accepted by the department till date and there is no change in facts compared to earlier years. If there are no changes in the facts or circumstances over the years, then it would not be appropriate on part of the department to change the opinion in subsequent years. The details are as under: - Sr. No. AY Contribution to Investor Service Fund Whether order u/s 143(3) was passed Whether Contribution was allowed 1. 2006-07 1,75,00,000 Yes Yes 2. 2007-08 2,99,00,000 Yes Yes 3. 2008-09 3,13,00,000 Yes Yes 4. 2009-10 3,13,00,000 Yes Yes 5. 2010-11 3,95,00,000 Yes Yes 6. 2011-12 3,99,00,000 Yes Yes 7. 2012-13 5,59,00,000 Yes Yes 8. 2013-14 6,05,00,000 Yes Yes 9. 2014-15 6,40,00,000 Yes Yes 10. 2015-16 12,3,00,000 Yes Yes (since revised u/s 263) The contribution has been made by assessee....
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....d to the decision of the jurisdictional High Court in the case of CIT v/s. Gabriel India Limited (203 ITR 108) wherein upholding the order of the Tribunal, which had set aside the revision order of the CIT, held as under: - "The power of suo motu revision under subsection (1) is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of revision under this sub-section, viz., (i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interests of the Revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. We find that the expressions "erroneous", "erroneous assessment" and "erroneous judgment" have been defined in Black's Law Dictionary. According to the definition, "erroneous" means "involving error; deviating from the law". "Erroneous assessment" refers to an assessment that deviates from the law and is, therefore, invalid, and is a defect that is jurisdictional in its nature and does not refer to the judgment of the Assessing Officer in f....
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....m [19571 31 ITR 872 (Cal), "the words" "prejudicial to the interests of the Revenue" have not been defined, but it must mean that the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the State has not been realized or cannot be realized. It can mean nothing else". The aforesaid observations were also applied by the Gujarat High Court in Addl. CIT v. Mukur Corporation [1978] 111 ITR 312. We are of the opinion that the aforesaid interpretation given by the Calcutta High Court to the expression "prejudicial to the interests of the Revenue" is the correct interpretation." 16. We have also gone through the judgment of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v/s CIT 243 ITR 83 (SC). Wherein Hon'ble Court has stated that the provision of Sec. 263 of the Act cannot be invoked to correct each and every type of mistake or error committed by the AO and that it is only when the order is erroneous that the section would be attracted. In other words, what has been emphasized by the Hon'ble Supreme Court is that every loss of revenue as a consequence of an order of the AO ....
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....stor Protection Fund set up by a recognised stock exchange or a commodity exchange or a depository. However, where any amount standing to the credit of the Fund and not charged to income-tax during any previous year is shared, either wholly or in part with the specified person, the whole of the amount so shared shall be deemed to be the income of the previous year in which such amount is shared. 17. We have also perused the provisions of section 10 of the act.Section 10 under the IT Act is a provision that lists various types of incomes that are exempt from income tax in India. The section provides a list of incomes that are not of taxable nature for an individual or entity. These exemptions are provided to encourage certain activities or to provide relief to certain categories of taxpayers. Section 10(23EA) provide that Any income in the form of contributions received from recognized stock exchanges and the members of an investor protection fund is exempt. However, if any amount is shared with a recognized stock exchange, it becomes taxable.SimilarlySection 10(23EE) specified that income of a core settlement guarantee fund that is set up by a clearing corporation is provided ex....
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....ettlement Guarantee Fund;] 19. Similar to the provision of section 10(23EA), the provision of section 10(23EE) is introduced to provide exemption under section 10 of the act in respect of specified income of the Core Settlement Guarantee Fund. 20. As per provision of Section 10 (23EE) as reproduced above for claiming exemption, 'specified income' would include the following - (i) the Income by way of contribution received from specified persons (ii) the income through penalties imposed by the recognized clearing corporation and credited to the Core Settlement Guarantee Fund or (iii) the income from investments made by the fund. 21. As per the provision, for the purpose of the exemption, 'specified person' would include the following;- 1. A recognized clearing corporation which has established the Fund and maintains it 2. A recognized stock exchange which is a shareholder of the recognized clearing corporation or which contributes to the Fund 3. Any clearing member who contributes to the Fund. 22. Section 10(23EE) exempt specify income and the specify income also include any income by way of contribution received from....
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....e MMRDA and had paid lease premium of Rs. 90,60,60,000/-. The assessee had to pay annual ground rent as follows: "The appellant has to pay nominal amount of annual ground rent as follows:- (Clause 7 on Page 10 of the agreement). From Commencement of the term of lease upto the end of 3 years Nil From 4th year upto the 20th year of the term of lease 1% of the premium amount From the 21st year upto the 50th year of the term of lease 2% of the premium amount From the 51st year of term of lease upto the end of the term of lease 3% of the premium amount As the lease period is of 80 years the aforesaid premium has been amortized over the said period and proportionate amount of Rs. 129,52,158/- i.e for the period 01.04.2015 to 31.03.2016 debited to accounts has been claimed as deduction. 15. The assessee submitted before the AO that the lease premium of Rs. 90,60,60,000/- paid to MMRDA was rent paid in advance. The assessee also mentioned the opinion of the expert commissioner of ICAI regarding amortization of the lump-sum payment over the period of lease. However, the AO has not agreed with the submission of the assessee and stated that asse....
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....age for carrying on the business by paying nominal rent of the land and by obtaining the land on lease, the capital structure of the assessee did not undergo any change. Keeping in view all these findings of fact recorded by the Tribunal, which were not specifically disputed by the Revenue, the Hon'ble Gujarat High Court did not find any infirmity in the order of the Tribunal deleting the disallowance made on account of lease rent paid by the assessee to GIC treating the same as Revenue expenditure. In our opinion, before the ratio of the decision of Hon'ble Gujarat High Court in the case of Sun Pharmaceuticals Ind. Ltd. (supra) is applied in the present case, the relevant facts are required to be verified, we therefore restore this issue to the file of the A.O. for deciding the same afresh in the light of the decision of Hon'ble Gujarat High Court in the case of Sun Pharmaceuticals Ind. Ltd. (supra) after verifying the relevant facts. Ground No. 4 & 5 of the assessee's appeal are accordingly treated as allowed for statistical purpose." 3.2. Respectfully following the same, we restore this issue to the file of ld. AO for deciding the issue in the light of decision ....
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....1 being maintenance charges recovered from the licenses as "income from house property". Para 99. The relevant material facts are like this. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has let out a part of its premises to various persons like QNGC, SEBI. National Securities Clearing Corp Ltd etc, and earned rental income from the same. The Assessing Officer further noticed that the total rentals received from these persons included rent (Rs. 12,05,13,061), maintenance charges (Rs. 1,39,91,621) and municipal taxes (Rs. 2,43,72,366), but the assessee has not shown the amount of Rs. 1,39,91,621 in the computation of income from house property. This amount was instead taken to the profits and gains from business and was shown as reduced from expenditure for maintenance, and only the net amount (excess of expenses over this receipt) was taken to the profit and loss account. The stand of the assessee was that the maintenance charges recovered was nothing but a reimbursement of expenses, and in fact a partial reimbursement. However, the Assessing Officer did not accept the said plea and included the maintenance expenses in the com....
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....e with the law and after giving a due and fair opportunity to the assessee." 32. In view of the facts, provision of law and findings of the ITAT Mumbai on the similar issue and identical facts as referred above we restore this issue to the file of the ld. CIT(A) for deciding a fresh by way of speaking order after taking into consideration the detailed submission made by the assessee. Therefore, this ground of appeal is allowed for statistical purpose. 33. In the result ground no.1 of the appeal of the assessee is allowed and grounds no.2 to 3 of the appeals of the assessee are allowed for statistical purposes. ITA No. 731/Mum/2023 Ground No.1: regarding disallowance of Rs. 1,34,07,00000 as contribution to Core Settlement Guarantee Fund. 34. Since the facts and issue involved in this appeal is similar to the ITA No. 730/Mum/2023 as adjudicated supra therefore applying the finding of ITA No.730/Mum/2023 as mutatis mutandis this ground of appeal of the assessee is also allowed. Ground No. 3: regarding disallowance of Rs. 129,52,158/- being proportionate amortized amount of lease premium: 35. This ground of appeal is based on similar issue and identical facts as we....