INDIAN CLEARING CORPORATION LIMITED,MUMBAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX, MUMBAI -1, MUMBAI

PER OM PRAKASH KANT, AM This appeal by the assessee is directed against revision order dated 25th March 2026 passed by the Ld. Principal Commissioner of Income Tax, Mumbai-1 (in short ‘the Ld. PCIT) for Assessment Year 2020-23, raising following grounds:

1) The Learned Principal Commissioner of Income Tax-1 ("Ld. PCIT - 1") erred in initiating revision proceedings under section 263 of the Income Tax Act, 1961 ("the Act"). Your Appellants submit that the initiation of proceedings under section 263 of the Income Tax Act, 1961 is illegal and bad in law and the order of the Ld. PCIT-1 be quashed. 2) The Ld. PCIT-1 erred in stating that the order passed by the then Learned Assessing Officer ("Ld. AO") for A.Y. 2022-23 is erroneous and prejudicial to the interest of the revenue and setting aside the Assessment Order on the ground that Ld. AO had passed the Assessment Order without proper inquiry or verification. Looking into the facts & circumstances of your Appellant and in law, specific queries with respect to contribution made to Settlement Guarantee Fund were raised by the Ld. AO in his notices dated 19/10/2023, 06/12/2023 & 18/12/2023. In response your Appellant on 09/11/2023,11/12/2023 & 26/12/2023 uploaded the necessary details alongwith the Annexures. Thereafter Ld. AO after due application of his mind and in accordance with law, passed the assessment order by accepting the claim/ explanation of your Appellant. Therefore assessment order passed is not erroneous & prejudicial to the interest of the revenue and proceedings under section 263 of the Income Tax Act, 1961 is illegal, bad in law and the order of the Ld. PCIT-1 be quashed. 3) The Ld. PCIT-1 erred in stating that contribution of Rs 29,05,00,000/- made to Core Settlement Guarantee Fund is in the nature of a contingent liability/reserve created to meet possible future settlement obligations and does not represent a present and ascertained business liability incurred during the year and therefore not allowable as deduction under 37(1) of the Income Tax Act, 1961 and directed the Assessing Officer specifically to examine the allowability of the contribution to the Core Settlement Guarantee Fund in the light of AS-29/Ind AS-37, ICDS X and the judicial pronouncements. Looking into the facts & circumstances of your Appellant and in law, contribution by ICCL to ICCL-CSGF is a mandatory payment as directed by SEBI (statutory obligation) and is neither based on a substantial degree of estimation nor on a probable outflow of resources based on occurrence or non-occurrence of some event. The contribution to ICCL-CSGF is a "crystalized liability" derived based on the methodology prescribed by SEBI. The amount contributed to ICCL-CSGF of ICCL has not only accrued & arisen but also incurred in F.Y. 2021-22. Accordingly, the said contribution is neither in the nature of any "contingent liability" nor "provision but is incurred wholly & exclusively for the purpose of business of ICCL and therefore allowable u/s. 37 of the Income Tax Act, 1961. The Ld. AO had raised specific query in notice dated 19/10/2023 and all these facts were submitted to him. The Ld. AO examined these facts regarding allowability of contribution of Rs 29,05,00,000/- made to Core Settlement Guarantee Fund in detail and after due application of his mind and in accordance with law, passed the assessment order. Therefore assessment order passed by the Ld. AO is not erroneous & prejudicial to the interest of the evenue and proceedings under section 263 of the Income Tax Act, 1961 is illegal, pad in law and the order of the Ld. PCIT - 1 be quashed. 4) The Ld. PCIT - 1 erred in stating that the assessment order does not contain any finding on the nature and allowability of the contribution to Core SGF and there is nothing on record to show that the Ld. AO examined the SEBI Circulars regulatory framework governing Core SGF etc. Looking into the facts & circumstances of your Appellant and in law, the assessment order passed by the Ld. AO is a speaking order where the Ld. AO has clearly pointed out the issue of claim of large expenses including Contribution to Core SGF have been examined in view of the genuineness and found correct. After applying his mind, he further came to conclusion that the submission and supporting document filed by ICCL were adequate and satisfactory and he has no adverse inference. Therefore Ld. PCIT - 1 has no jurisdiction u/s 263 of the Act as the order passed by Ld. AO is in accordance with law and the order of the Ld. PCIT - 1 be quashed. 5) The Appellant craves to add to or amend or alter the aforesaid grounds before the disposal of appeal as they may think fit by themselves or by their representatives.” 2. Briefly stated facts of the case are that the assessee company is fully owned subsidiary of Bombay Stock Exchange Limited (In short ‘BSE’) incorporated to facilitate, setup and carry on the business of clearing and settlement of shares, Stocks, Debentures, Bonds, Units, Deposit Certificates, notes, warrants and other Securities of all kinds including securities defined under the Securities Contract (Regulation) Act, 1956 and all other instruments of any kind traded and to ensure completion and guarantee of settlement and to facilitate, promote, assist regulate and manage dealings in securities and instruments. The assessee (ICCL) also facilitates, promotes, assists, undertakes and manages all activities in relation to stock exchanges, Money Markets, Financial Markets, Securities Markets, Capital Markets, Custodial and depository Services, including but not limited to taking measures for ensuring greater liquidity, facilitating intra and inter market dealing and generally facilitating clearing and settlement of transactions in securities and instruments of all kinds.

2.1 The assessee filed its return of income for the year under consideration electronically on 29th October 2022 declaring total 3 income at Rs. 49,05,60,500/-. The return filed by the assessee was processed under section 143(1) of the Income Tax Act, 1961 (in short 'the Act') accepting the returned income. Thereafter, the case was selected for complete scrutiny and statutory notices under the Act were issued and served upon the assessee. The case was selected for scrutiny for verification inter-alia: (i) Claim of large value refund; (ii) High ratio of refund to TDS; (iii) Large refund claimed out of advance tax; (iv) High liability as compared to low income/receipt; and (v) Large other expenses claimed.

2.2 The Assessing Officer issued notices under section 142(1) on various dates including 19th October 2023, 6th December 2023, 18th December 2023, and 27th December 2023. The details, explanation and other supporting documents filed by the assessee were considered. After discussion, the Ld. Assessing Officer accepted the returned income filed by the assessee in his order dated 27th February 2024 passed under section 143(3) of the Act.

“ 2. It is noted from the assessment order that the assessee's claim of expense on account of Contribution to Core SGF at Rs.29,05,00,000/-has been allowed as deduction. This amount has been claimed as deduction in the ITR under the head 'other expenses'. It is also noted from the past assessment order that in the assessee’s own case disallowance on account of Contribution to Core SGF have been made in A.Y.2017-18 and 2018-19. However, in the instant assessment year it has not been done. It is also submitted here that this case was not selected for scrutiny for A.Y.2019-20, 2020-21 and 2021-22.

“ 5. Show cause notice and assessee's submissions 5.1 Accordingly, a show cause notice under section 263 was issued to the assessee, setting out the above facts and proposing to treat the assessment order as erroneous and prejudicial to the interests of the revenue on the ground that the AO had allowed deduction of Rs. 29,05,00,000/- towards contribution to Core SGF though the same is in the nature of a contingent liability/reserve and not an ascertained business liability allowable under section 37(1). 5.2 In response, the authorised representative of the assessee appeared and filed written submissions, inter alia, contending that:  contribution to Core SGF is mandated by SEBI circulars and therefore constitutes business expenditure incurred wholly and exclusively for the purposes of business;  the obligation to contribute to Core SGF is a present obligation and not a contingent liability; and MEN  Core SGF is part of the risk-management mechanism of the clearing corporation and similar claims have been allowed in earlier years; further, income of Core SGF enjoys a specific tax exemption. 5.3 The submissions of the assessee have been duly considered. However, for the reasons discussed in the subsequent paragraphs, the same are not acceptable. 6. Scope of revision under section 263 6.1 Section 263(1) of the Act empowers the Principal Commissioner or Commissioner to call for and examine the record of any proceeding under the Act, and if he considers that any order passed by the AO is erroneous in so far as it is prejudicial to the interests of the revenue, to pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment.itatonline+1 6.2 The Supreme Court in Malabar Industrial Co. Ltd. v. CIT has held that the Commissioner must be satisfied of two conditions, namely, (i) that the order of the AO sought to be revised is erroneous, and (ii) that it is prejudicial to the interests of the revenue; if one of them is absent, recourse to section 263 is not permissible. It has further been recognised that an incorrect assumption of facts or an incorrect application of law will make the order erroneous, and if such error results in loss of tax, the order is also prejudicial to the interests of the revenue. 6.3 By insertion of Explanation 2 to section 263 by the Finance Act, 2015, an order passed by the AO shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner, inter alia:  the order is passed without making inquiries or verification which should have been made: or  the order is passed allowing any relief without inquiring into the claim. Judicial authorities have clarified that where the AO accepts a claim on a material issue without making any enquiry, such an order is amenable to revision under section 263 post Explanation 2. 7. Contingent liabilities under accounting norms 7.1 Accounting Standard (AS) 29 on "Provisions, Contingent Liabilities and Contingent Assets" defines a contingent liability as: (a) a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or (b) a present obligation that arises from past events but is not recognised because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or a reliable estimate of the amount of the obligation cannot be made. 7.2 AS 29 (and its converged standard Ind AS 37) further provides that contingent liabilities are not recognised as liabilities in the financial statements but are only disclosed, unless the possibility of an outflow of resources embodying economic benefits is remote. Only a present obligation which is probable and can be estimated reliably is recognised as a provision. 7.3 Thus, under generally accepted accounting principles, a distinction is drawn between:  a "provision" representing a present obligation which is probable and estimable: and  a "contingent liability which is either a possible obligation, or a present obligation which is not probable or cannot be estimated reliably. The latter is not recognised as a liability, but only disclosed. 8. ICDS X-provisions, contingent liabilities and contingent assets 8.1 ICDS X, notified under section 145(2), applies for computation of income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" and deals with provisions, contingent liabilities and contingent assets. 8.2 ICDS X defines "provision" as a liability which can be measured only by using a substantial degree of estimation, and "liability" as a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits. 8.3 Under ICDS X, a provision shall be recognised only when all the following conditions are satisfied:  there is a present obligation as a result of a past event;  it is reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation; and  a reliable estimate can be made of the amount of the obligation. 8.4 ICDS X clarifies that contingent liabilities and contingent assets are generally not recognised; contingent assets are recognised only when it becomes reasonably certain that an inflow of economic benefits will arise. Therefore, for tax computation, a deduction can be claimed only where the item qualifies as a "provision" for a present obligation meeting the above test; a mere contingent liability is not allowable. 9. Judicial position on provisions vs contingent liabilities 9.1 In Bharat Earth Movers v. CIT, the Supreme Court held that if a business liability has definitely arisen in the accounting year, the deduction should be allowed, although the liability may have to be quantified and discharged at a future date. The Court laid down that what must be certain is the incurring of the liability and that it should be capable of being estimated with reasonable certainty; if these conditions are satisfied, the liability is not contingent but is in present, even though it will be discharged in future. 9.2 In Rotork Controls India (P) Ltd. v. CIT, while dealing with provision for warranty. the Supreme Court approved deduction where (i) the enterprise has a present obligation as a result of past events; (ii) it is probable that an outflow of resources will be required; and (iii) a reliable estimate can be made on the basis of past experience and a scientific method. The Court distinguished such a scientific provision from a mere reserve for future losses or expenses, holding that an unscientific or purely contingent provision is not allowable under section 37(1). 9.3 In Shree Sajjan Mills Ltd. v. CIT, the Supreme Court, in the context of gratuity, reiterated that a mere reserve created for meeting a liability which has not actually arisen in the accounting year is not deductible and distinguished between a provision for an accrued liability and a reserve for a contingent liability. 9.4 Earlier, in Indian Molasses Co. (P.) Ltd. v. CIT, the Supreme Court held that setting apart a sum to meet a liability which may arise in future is only an appropriation of profits and not expenditure incurred, and that anticipated or contingent liabilities do not qualify for deduction in computing business income. 9.5 Collectively, these judgments make it clear that only a present and ascertained (or reasonably estimable) business liability incurred during the year is allowable; amounts set aside to meet possible future losses or claims, dependent on uncertain future events, are contingent liabilities/reserves and are not deductible. 10. SEBI/Income-tax framework for Core SGF 10.1 SEBI, by circular CIR/MRD/DRMNP/25/2014 dated 27.08.2014 and subsequent circulars, has prescribed norms relating to Core Settlement Guarantee Fund, default waterfall and stress tests for recognised clearing corporations. The circular lays down the methodology for computing the Minimum Required Corpus (MRC) of Core SGF. contribution to Core SGF by various stakeholders and circumstances in which excess contribution may be returned on a pro-rata basis, with SEBI's approval. 10.2 The Core SGF is a fund created and maintained to meet settlement obligations in the event of failure of a clearing member and forms part of the default waterfall to absorb potential losses; the fund is drawn upon only upon occurrence of such default events. Until such utilisation, the corpus is invested and earns income such as interest, which is credited to the fund. 10.3 The Finance Act, 2015 also introduced a specific exemption for the income of the Core SGF of clearing corporations arising from contributions received, investments made and penalties imposed, subject to conditions, thereby recognising the distinct tax treatment accorded to the fund's income as compared to regular business income of the clearing corporation. 10.4 This framework clearly shows that Core SGF is a segregated fund to meet potential future losses in the event of default by clearing members and that contributions thereto are structurally different from ordinary revenue expenditure incurred in the normal course of business. 11. Application to the assessee's contribution of Rs. 29,05,00,000/- 11.1 The contribution of Rs. 29,05,00,000/- made by the assessee to Core SGF during the previous year relevant to AY 2022-23 is an amount transferred to a segregated fund intended to meet possible settlement obligations in case of default by clearing members. The utilisation of this corpus is contingent upon occurrence of future defaults, which are uncertain events not wholly within the control of the assessee. 11.2 There is no material on record to show that any such default occurred during the relevant previous year resulting in an ascertained liability on the assessee to discharge settlement obligations out of its own funds. On the contrary, the records show that the assessee earned interest on the opening balance already lying in the fund, evidencing the existence of a substantial accumulated corpus and establishing that the contribution during the year was merely an addition to that corpus, not a discharge of any present liability. 11.3 On these facts, the obligation which the Core SGF seeks to meet is, at best, a possible obligation, the existence and quantum of which will be confirmed only by the occurrence or non-occurrence of future defaults by clearing members. As per AS- 29/Ind AS-37 and ICDS X, such an obligation squarely falls within the definition of "contingent liability and not a present liability qualifying as a provision. 11.4 The assessee's argument that the contribution is mandatory by virtue of SEBI regulations does not, by itself, convert a future and uncertain obligation into a present ascertained liability. Regulatory compulsion to maintain a fund to guard against potential future losses is in the nature of a requirement to create a contingency reserve, as distinguished from incurring expenditure in discharge of an existing liability in praesenti. The Supreme Court decisions cited above clearly hold that such reserves for future or anticipated liabilities are not allowable deductions. 11.5 In the facts of this case, the contribution of Rs. 29,05,00,000/- is in the nature of an appropriation to a fund to meet possible future defaults, and no corresponding present obligation to any identified party has arisen during the year; therefore, the amount is a contingent liability/reserve and not an allowable business expenditure under section 37(1) of the Act.taxguru+6 12. Error in the assessment order and prejudice to the revenue 12.1 The assessment order for AY 2022-23 does not contain any discussion or finding on the nature and allowability of the contribution to Core SGF. There is nothing on record to show that the AO examined:  the SEBI circulars and regulatory framework governing Core SGF;  the accounting treatment under AS-29/Ind AS-37;  the requirements of ICDS X; and  the binding judicial precedents of the Supreme Court on distinction between present scientific liabilities, liabilities/reserves.webtel+9 provisions and contingent 12.2 By allowing deduction of Rs. 29,05,00,000/- without any enquiry or verification on the above aspects, the AO has passed an order "without making inquiries or verification which should have been made" and has allowed relief "without inquiring into the claim" within the meaning of clause (a) of Explanation 2 to section 263. Such an order is deemed to be erroneous in so far as it is prejudicial to the interests of the revenue. 12.3 The error is prejudicial because an amount of Rs. 29,05,00,000/-, being in the nature of contingent liability/reserve, has been wrongly allowed as deduction, directly resulting in under-assessment of income and short levy of tax to that extent. 12.4 The twin conditions laid down by the Supreme Court for assumption o jurisdiction under section 263, namely that the order must be erroneous and that must be prejudicial to the interests of the revenue, are thus clearly satisfied in the present case. 13. Conclusion and directions 13.1 In view of the foregoing discussion, it is held that: a. The contribution of Rs. 29,05,00,000/- made by the assessee to the Core Settlement Guarantee Fund during the previous year relevant to AY 2022-23 is in the nature of a contingent liability/reserve created to meet possible future settlement obligations and does not represent a present and ascertained business liability incurred during the year. b. The said contribution is, therefore, not allowable as deduction under section 37(1) of the Act, having regard to AS-29/Ind AS-37, ICDS X and the judicial precedents of the Supreme Court. c. The assessment order for AY 2022-23, in so far as it allows deduction of Rs. 29,05,00,000/- towards contribution to Core SGF without proper enquiry or verification, is erroneous in so far as it is prejudicial to the interests of the revenue within the meaning of section 263 read with Explanation 2. 13.2 Accordingly, in exercise of the powers conferred under section 263 of the Income- tax Act, 1961, the assessment order for AY 2022-23 is set aside on limited issue with the following directions to the Assessing Officer:

 to enquire on the above issues in accordance with law after affording adequate opportunity of being heard to the assessee; and  specifically to examine the allowability of the contribution of Rs. 29,05,00,000/-to the Core Settlement Guarantee Fund in the light of AS- 29/Ind AS-37, ICDS X and the judicial pronouncements discussed above and, unless the assessee is able to demonstrate on the basis of cogent evidence that any part of the amount represents a present ascertained liability accrued and incurred during the year, to disallow the said amount and bring it to tax. 14. This order is passed under section 263 of the Income-tax Act, 1961. 4. Before us, the learned counsel for the assessee filed a paper book containing pages 1 to 169. The learned counsel stated that the Assessing Officer had accepted the explanation of the assessee after making proper enquiry on the issue in dispute. He referred to paper book page 47, which is a copy of notice under section 142(1) issued by the Assessing Officer on 19th October 2023. The learned counsel referred to the question number 6 raised in the annexure of the said notice, available on paper book pages 49 to 50.

“6. Please submit the details and complete documentary evidences of the expenses of Rs.29.05 crores debited under the head "Contribution to Core SGF" in ITR filed for the year under consideration. Kindly justify allowabiity of these deductions with supporting documents and legal arguments with respect of specific sections under Income Tax Act.” 4.1 The Ld. Counsel further submitted that the assessee responded to the said notice and filed details, which are placed on paper book pages 104 to 108 and acknowledgment of which is available on paper book page 53. The relevant reply filed by the assessee is reproduced as under:

Please submit the details and Refer Annexure 18 attached complete documentary evidences of herewith the expenses of :: Rs.29.05 crores debited under the head "Contribution to Core SGF" in ITR filed for the year under consideration. Kindly justify allowability of these deductions with supporting documents and legal arguments with respect of specific sections under the Income tax Act; 4.2 The relevant Annexure 18 is placed on paper book pages 83 to 88, explaining how the contribution to Core Settlement Guarantee Fund (SGF) was allowable expenditure. For ready reference, said submission is reproduced as under: (Page 83 to Page 88 of the paper book).

Annexure 18 Point no 6- Explanation on how the contribution to core settlement guarantee fund (Core SGF) (AY-2022-23) of Rs. 29,05,00,000/- is allowable expenditure, [In continuation to note no 8 and 9 of the statement of Income (Annexure 3)] 1. Objective of the Core SGF: In order to protect the interest of the investors in securities & to regulate the securities market, Securities and Exchange Board of India (SEBI) vide circular CIR/MRD/DRMNP/25/2014 dated August 27, 2014 (Annexure A) directed the Clearing Corporation (CC) to create a fund called Core Settlement Guarantee Fund (Core SGF) for each segment of each Recognized 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 fulfil obligations of that member and complete the settlement without affecting the normal settlement process. 2. Corpus of Core SGF: As per SEBI Circular, the corpus of the fund should be adequate to meet out all the contingencies arising on account of failure of any member(s). The risk or liability to the fund depends on various factors such as trade volume, delivery percentage, maximum settlement liability of the members, the history of defaults, capital adequacy of the members, and the degree of safety measures employed by the CC/SE etc. A fixed formula, therefore, cannot be prescribed to estimate the risk or liability of the fund. However, in order assess the fair quantum of the corpus of Core SGF, CC should consider the following factors:

 Risk management system in force.  Current and projected volume/turnover to be cleared and settled by the CC on guaranteed basis.  Track record of defaults of members (number of defaults, amount in default) However, the Minimum Required Corpus of Core SGF (MRC) for each segment of each stock exchange shall be subject to the following: 1. The MRC shall be fixed for a month 2. By 15th of every month CC shall review and determine the MRC for the next month based on results of the daily stress test of the preceding month. 3. For every day of the preceding month uncovered loss numbers shall be estimated by the various stress tests for credit risk conducted by the CC for the segment and highest of such numbers shall be taken as worst case loss number for the day. 4. Average of all the daily worst case loss numbers determined in (3) above. 5. The MRC for next month shall be higher of the average arrived in at step 4 above and the segment MRC as per the previous review. 3 Contribution to Core SGF: At any point of time, the contributions of various contributors to Core SGF of any segment shall be as follows: a) Clearing corporation shall contribute at least 50% of the MRC from its own funds which shall be considered as part of its Net worth. b) Stock Exchange shall contribute at least 25% of the MRC (can be adjusted against transfer of profit by Stock Exchange as per Regulation 33 of SECC Regulations). c) The clearing corporation has the option to collect the remaining 25% of MRC from clearing members. The clearing corporation also has the option to contribute the balance 25% from its own funds.  Any penalties levied by CC (as per Regulation 34 of SECC Regulations shall be credited to Core SGF corpus.  Interest on cash contribution to core SGF shall also accrue to the core SGF and prorata attributed to the contributors in proportion to their cash contribution.  CC shall ordinarily accept cash collateral from Core SGF contributions. However, CC may accept clearing member contribution in the form of bank FDs too. CC shall adhere to specific guidance which may be issued by SEBI from time to time in this regard.

“In continuation to Note No. 8 and 9 of Statement of Income (Annexure 3) and Explanation on contribution to Core SGF (Annexure 18), it is further stated as follows: As per Para No. 8 of circular dated 27/08/2014 issued by SEBI (Refer Annexure 18A) Contribution by Various Contributors to Core SGF: At any point of time, the contributors of various contributors to Core SGF of any segment shall be as follows: a) Clearing corporation shall contribute at least 50% of the Minimum Required Corpus (MRC) from its own funds which shall be considered as part of its Net Worth. b) Stock Exchange shall contribute at least 25% of the MRC (can be adjusted against transfer of profit by Stock Exchange as per Regulation 33 of SECC Regulations). c) The Clearing Corporation has the option to collect the remaining 25% of the MRC from clearing members. The clearing corporation also has the option to contribute the balance 25% from its own funds.  Any penalties levied by Clearing Corporation (as per Regulation 34 of SECC Regulations) shall be credited to Core SGF corpus.  Interest on cash contribution to Core SGF shall also accrue to the core SGF and prorate attributed to the contributors in proportion to their cash contribution.

 Clearing Corporation shall ordinarily accept cash collateral from Core SGF contributors, However, Clearing Corporation may accept clearing member contribution in the form of bank FDs too. Clearing Corporation shall adhere to specific guidance which may be issued by SEBI form time to time in this regard. Accordingly, during the year, ICCL has contributed Rs. 6.18 crores, 8,97 crores, 1.91 rores and 11.99 crores totaling to Rs. 29.05 crores based on the formula prescribed by the circular issued by SEBI keeping in mind Minimum Contribution and existing Contribution for the period ended 30th June 2021, 30th November 2021, 31st January 022 and 28th February 2022 respectively. Working of contribution is enclosed as Annexure 29A along with copy of ledger account of Core SGF (Annexure 29B). Please note that ICCL is governed by the rules and regulations formed by SEBI for carrying on its business of Clearing and Settlement of Securities. Therefore ICCL as per the circular is statutorily required to contribute to the Core SGF on which ICCL has no control. Please note since AY 2015-16, ICCL has been regularly contributing to the Core SGF and claiming it as an allowable expenditure. Please note that this contribution has been incurred wholly and exclusively in the course of carrying on its business. Therefore allowable u/s 37(1) of the Act. It is further stated that Core SGF has filed separate Return of Income u/s 139(4C) of the Act for AY 2022-23 (Copy Enclosed as Annexure 29C). As per Section 10(23EE) of the Act, contribution received and income earned on that is exempt in the hands of Core SGF.” 4.4 Further, the learned counsel submitted that Assessing Officer in Para 8 to 8.3 of the impugned assessment order has mentioned of examining the expenses including the contribution to Core SGF and has recorded as why he accepted the said explanation of the assessee. For ready reference, said part of the assessment order is reproduced as below:

8.1. During the course of assessment proceedings, it was observed that the other expenses have been abnormally increased in the year under consideration as compared to the expenses incurred in preceding years. Hence, the assessee vide notice u/s 142(1) dated 06.12.2023 was specifically asked about Large other expenses claimed. 8.2 In response thereto, the assessee filed its response on 11.12.2023 and submitted that: Expenses Head F.Y. 2021-22 F.Y. 2020-21 Increased Remark Expenses Head F.Y. 2021-22 F.Y. 2020-21 Increased Remark 10,28,52,833 7,11,85,288 3,14,67,545 Increased due to technical support in the existing system. a) Computer Technology Related Expenses b) Contribution to Core SGF 29,05,00,000 6,19,00,000 22,86,00,000 1) Clearing Corporations are required to contribute to the Core Settlement Guarantee Fund ("Core SGF") maintained by the clearing corporations on a monthly basis as per the SEBI circular no. CIR/MRD/DRMN P/25/2014, dated August 27, 2014 on “Core Settlement Guarantee Fund, Default Waterfall and Stress Test” and SEBI Master Circular for Commodity Derivatives Market dated September 7, 2018. 2) On a monthly basis, the Clearing Corporations review and determine the Minimum Required Corpus (MRC) of the Core SGF for the next month based on the results of daily stress tests of the preceding month. Kindly refer Annexure 18 supporting attached. c) Clearing House Charges 11,37,047 8,74,269 2,62,778 Increased due to warehouse rent for commodity segment. d) Directors Sitting Fees 10,60,000 16,50,000 -5,90,000 Expense depending upon committee held meeting during the year. 16,517 16,518 -1 e) Membership & Subscription Fees f) Maintenance Expenses 5,10,280 6,15,582 -1,05,302 Due to increase in housekeeping charges. 47,10,000 54,10,000 -7,00,000 Expense depending upon committee held meeting during the year. g) Committee Meeting Sitting Fees h) Miscellaneous Expenses 4,25,063 8,75,175 -4,50,112 Few expenses shown under separate head in F.Y. 2021-22, while same expense showing in Miscellaneous expense head in F.Y. 2020-21. i) Legal Fees 35,01,155 4,77,723 30,23,432 Increased due legal opinion for SEBI matter. Supporting attached. j) Contribution to CSR 51,20,000 55,54,000 -3,84,000 Due to change in average profit. Supporting attached. - 7,85,770 -7,85,770 Expense for rates and taxes, excluding taxes on income – ₹3,80,803/- k) Rates and taxes, excluding taxes on income showing in ITR under head “44 (iv)(vi) Rates and taxes, paid or payable to Government or any local body (excluding taxes on income)” in F.Y. 2021- 22. - 47,40,334 -47,40,334 Expense for Stamp duty, registration charges & regulatory fees – l) Stamp duty, registration charges & regulatory fees ₹16,74,037/- showing in ITR under head “44 (iv)(ix) Rates and taxes, paid or payable to Government or any local body (excluding taxes on income)” in F.Y. 2021-22. Total 40,96,62,895 15,40,84,659 25,55,78,236

The assessee further filed the details of various expenses like contribution to core SGF, Computer Technology related expenses, etc. called for through various notices. 8.3 The assessee has provided the justification in respect of increase of other expenses in comparison to earlier periods with documentary evidence and found justified and reasonable in view of the turnover of the assessee shown for the year under consideration. The assessee has also provided details of expenses under different heads during the course of assessment proceedings which has also been examined in view of the genuineness and found correct. The assessee has also deducted TDS properly on the expenses incurred for the year under consideration and deposited the same in government accounts. Further, the submission and supporting documents filed by the assessee are found to be adequate and satisfactory with regards to the issue, hence, no adverse inference has been drawn.” 4.5 Further, the learned counsel submitted that the Coordinate Bench of Tribunal in the case of BSE Ltd. vs. PCIT in 1790/Mum/2019 for assessment year 2015-16, has quashed the revision order by the PCIT on the identical issue of contribution to ‘SGF’. The relevant finding of the Coordinate Bench is reproduced as below:

“12. In view of the above, we noted that the PCIT observed in para 4.1(a) of Show Cause Notice that the contribution is in the nature of deposit/ contingency reserve. According to us, the said issues were already examined by the AO during the course of assessment proceedings. During the course of assessment proceedings, it was explained that contribution by BSE to Core SGF is a mandatory payment and expenditure is neither of capital in nature nor it has any enduring benefit or personal in nature but incurred wholly and exclusively for the purpose of business and therefore allowable under section 37 of the Act. We are of the view that contingency means a future event or circumstances which is possible but cannot be predicted with certainty. In the present case the liability to pay/ contribute is certain and accrued as per the Circular of SEBI. The said amount is transferred to CSGF and has not remained with BSE: therefore, it cannot be said to be in a nature of contingency reserve. Secondly, the contribution cannot also be termed as deposit. Oxford dictionary defines deposit as "place (something) somewhere for safekeeping". In the present case the amount is transferred to CSGF of Indian Clearing Corporation Limited (ICCL) and has not been kept for safekeeping. The amount transferred will be utilized by ICCL as per the guidelines provided by SEBI from time to time. Therefore, the contribution is revenue in nature and not an asset or deposit. ICCL has also confirmed vide letter dated 7.12.2017 (refer Annexure 3) that BSE has contributed a sum of Rs. 25,78,84,501/- to CSGF and no amount has been shared with BSE as on 31.03.2015. BSE has no right over the amount already contributed to CSGF. We are of the view that the assessee is able to prove beyond doubt that the contribution to CSGF is not in the nature of any deposit/contingency reserve. Thirdly, on the contribution the circular itself says that it is "transfer of profit". We noted and are of the view that SEBI has prescribed the methodology to arrive at a figure of contribution to CSGF and therefore it's not an appropriation of profit as alleged. This fact was already explained before the AO and has also been considered in the assessment order. 13. We noted from the observations made in para 4.1(b) of Show Cause Notice with respect to the amount set aside toInvestor Service Fund that the said issue was already examined by 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:

Contribution to Whether order u/s Whether Contribution was Sr. No. AY Service Investor 143(3) was passed allowed Service Fund 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 12,30,00,000 Yes Yes (since revised u/s 263) The contribution has been made by assessee even in prior years and never disallowed by Department. For this proposition of consistency, Ld Counsel drew our attention to the decision of Hon'ble Supreme Court in the case of Radhasoami Satsang v/s CIT 193 ITR 321(SC), wherein it was held as under: "13. We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where 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. 14. On these reasonings in the absence of any material change justifying the revenue to take a different view of the matter-and if there was no change it was in support of the assessee-we do not think the question should have been reopened and contrary to what had been decided by the Commissioner in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed, and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under sections 11 and 12'. We also noted that the PCIT in para 4.2 of Show Cause Notice noted that the facts and circumstances of the case for A.Y. 2015-16 being same as A.Y. 2016-17, allowing the claim of contribution to the two funds as business expenditure makes the assessment order for A.Y. 2015-16 erroneous. In this connection, Ld Counsel submitted that during the assessment proceedings for A.Y. 2015-16 the AO had specifically enquired on both the relevant issues and after due application of his mind and considering the relevant provisions of the law accepted the stand of the BSE. Therefore, revision u/s 263 of the Act cannot be made on the basis of the assessment order passed u/s 143(3) of the Act of the subsequent assessment year. Hence, the order passed by the AO is in accordance with law and cannot be considered as erroneous and prejudicial to the interest of the revenue.

6.1 It is well settled that the jurisdiction under section 263 is a supervisory jurisdiction of a limited and circumscribed character, exercisable only where twin conditions are satisfied: (i) that the order under revision is erroneous, and (ii) that such error has occasioned prejudice to the interests of the Revenue, neither condition, standing alone, being sufficient to sustain the exercise of the power, as the Hon'ble Supreme Court has held in Malabar Industrial Co. Ltd. v. CIT [(2000) 243 ITR 83 (SC)]. It is equally well settled, as the Hon'ble Jurisdictional High Court explained in CIT v. Gabriel India Limited [(1993) 203 ITR 108 (Bom)], that an order cannot be branded as erroneous merely because the Commissioner, examining the very same material, would himself have arrived at a different conclusion; the power of revision is not a licence to substitute one plausible view for another where the Assessing Officer has applied his mind, made such enquiries as were called for, and taken a view sustainable in law. Where, however, Explanation 2 to section 263 is attracted—as where the order has been passed ‘without making inquiries or verification which should have been made’, or a claim has been allowed ‘without inquiring into’ it—the order stands deemed to be erroneous and prejudicial, not because the ultimate view taken is shown to be wrong, but because the process by which that view was arrived at falls short of what the law requires of an Assessing Officer. 6.2 Tested against this standard, we are unable to accept that the present case is answered by the width of the inquiry that was, in fact, undertaken. The difficulty, as we see it, is not one of quantity but of direction. What the Assessing Officer examined, on the face of his own recorded reasoning at paragraphs 8.1 to 8.3 of the assessment order, was the reasonableness of the year- on-year increase in the assessee's other expenses, the genuineness of the outgo, and the regularity of tax deduction at source, an inquiry entirely appropriate to the reason for which the case had been selected for scrutiny, namely, the large other expenses claimed. What does not appear anywhere in that reasoning, notwithstanding that Annexure 18 placed the entire legal edifice of the assessee's claim before him in terms, is any engagement whatsoever with the anterior and more fundamental question that Annexure 18 itself squarely raised, whether a statutorily compelled contribution of this description answers, in point of accounting and legal characterisation, to a present and ascertained business liability, or to a reserve set apart to meet a contingency that may or may not eventuate. A claim may be genuine, properly vouched, and free of any element of tax evasion, and yet remain, in point of law, a contingent liability rather than an allowable deduction; genuineness of the outgo and allowability in law are, after all, two distinct inquiries, and the assessment order before us addresses only the former. 6.3 That this distinction was not an idle or academic one for the year before us, is placed beyond doubt by two circumstances, each independently significant and, taken together, conclusive. The first is that the very claim, on materially identical facts, stood disallowed in the assessee's own case for Assessment Years 2017- 18 and 2018-19, a history of which the Assessing Officer, examining the assessee's own case file, could not have remained unaware, and which, at the very least, called for some indication in the assessment order as to why a different view was now being taken. We do not go so far as to hold, as a general proposition, that an Assessing Officer is bound to perpetuate an earlier year's disallowance merely because it was made; that would trench upon the very principle of independent application of mind which Gabriel India (supra) protects. But where the Department's own settled position on an identical claim is reversed in a subsequent year without a word of explanation, the silence itself becomes a fact calling for inquiry, and it is precisely such silence, and not any presumption in favour of the earlier view, that we find wanting here. 6.4 The second, and more telling, circumstance is the one identified by the ld. PCIT and pressed before us by the ld. DR: that the assessee has, on its own record, earned and returned interest income on the very corpus said to represent a contribution wholly and definitively parted with. A liability that has, in the assessee's own words, ‘accrued, arisen and been incurred’ in the year, so as to extinguish any further claim of the contributor upon the sum contributed, sits uneasily with the continued accrual, to that very contributor, of income upon the accumulated fund. We do not say that this circumstance forecloses the assessee's claim; that is a question which the Assessing Officer must now examine, and on which we express no final opinion; but it is, at the least, a circumstance capable of bearing upon the true character of the contribution, and it is a circumstance that finds no mention, and betrays no sign of having been considered, anywhere in the assessment order.

6.5 The learned counsel for the assessee has placed considerable reliance upon the decision of the coordinate Bench in the case of BSE Ltd. v. PCIT (supra). We have carefully considered the said decision. The learned Departmental Representative, however, has pointed out a material factual distinction between that case and the case before us. In the case of BSE Ltd. (supra), according to the learned Departmental Representative, there was no finding regarding interest income earned on the amount lying in the Core SGF, whereas, in the present case, the learned PCIT has specifically noticed that interest income was being earned on the accumulated balance lying in the Core SGF. The relevant part of his observation is reproduced as under:

“ 4. Background and examination of record 4.1 ……………….. 4.2 …………….. 4.3 ……………….. 4.4 It is further seen from the records that the assessee has earned interest income on the opening balance lying in the ICCL-SGF/Core SGF fund account, which clearly evidences that a substantial corpus already stood accumulated in the fund during the year to meet any future settlement obligations in case of default by clearing members. The earning of interest on such accumulated corpus indicates that, as regards the contribution of Rs. 29,05,00,000/- made during the year, no specific liability accrued or crystallised in praesenti; the payment is only towards augmenting a corpus meant to meet possible future defaults of clearing members. 4.5 The assessment order is silent on the nature and allowability of this contribution. There is no discussion on (a) the SEBI framework for Core SGF; (b) the accounting treatment under Accounting Standard (AS) 29 / Ind AS 37; or (c) the Income Computation and Disclosure Standard X ("ICDS X") on provisions, contingent liabilities and contingent assets. There is also no indication on record that the AO examined whether the said contribution constitutes an allowable business expenditure representing a present ascertained liability, or is merely a contingent liability/reserve not allowable under section 37(1) of the Act. 4.6 …………….

6.6 In BSE Ltd. (supra), the contributor exchange had, on the Tribunal's finding, no further right of any kind over the sums once transferred to the clearing corporation's fund, and earned no income thereon; the assessee before us, by contrast, is itself the clearing corporation which both administers the Core SGF and continues to derive income from the very corpus which it claims to have parted with as an ascertained business expense. Whether that distinction ultimately survives scrutiny on the merits is a matter for the Assessing Officer to determine in the first instance; what matters for our present purpose is only that it presented a live and material question which the original assessment order does not show to have been asked, let alone answered.

6.7 The fact that the contribution was made pursuant to the regulatory framework prescribed by SEBI, by itself, could not conclude the question of its allowability under section 37(1) of the Act. What was required to be examined was the nature and character of the payment, whether it represented expenditure incurred in discharge of a liability which had accrued and crystallised during the relevant previous year, or whether it represented an amount transferred to a segregated corpus maintained to meet an obligation which might arise upon the happening of an uncertain future event. That distinction goes to the very root of the allowability of the claim.

6.8 The material placed before us shows that the Core SGF represented an accumulated corpus maintained for meeting settlement obligations which may arise upon the occurrence of a default by a clearing member. The contribution made during the year was, therefore, not shown to have been appropriated towards discharge of any identified liability which had arisen during the 27 relevant previous year. On the contrary, the learned PCIT, on examination of the record, noticed that the assessee had earned interest on the opening balance lying in the ICCL-SGF/Core SGF account. The existence of such accumulated corpus, coupled with the absence of any material demonstrating the occurrence of a default during the relevant previous year resulting in an ascertained liability, was a circumstance which required examination by the Assessing Officer before accepting the claim as an allowable business expenditure.

6.9 It is true that the Assessing Officer had issued a notice under section 142(1) and had called upon the assessee to furnish the details and documentary evidence in respect of the contribution of Rs.29.05 crores to the Core SGF and to justify its allowability. The assessee, in response thereto, furnished its explanation together with the relevant documents. The assessment order, however, does not disclose any examination by the Assessing Officer of the material aspects which subsequently constituted the basis of the revision proceedings, namely, the character of the Core SGF, the nature of the obligation for which the corpus was maintained, the significance of the accumulated corpus and interest earned thereon, and the distinction between a present liability and an obligation dependent upon the occurrence of a future default.

6.10 A mere calling for information and placing the assessee's explanation on record cannot, in every case, be regarded as a substitute for the enquiry which the nature of the claim demands. At the same time, section 263 cannot be invoked merely because the assessment order does not contain an elaborate discussion on every piece of material placed before the Assessing Officer. The jurisdiction under section 263 is attracted only where the record demonstrates that the order suffers from an error which is prejudicial to the interests of the Revenue. The question, therefore, is whether, on the facts of the present case, the enquiry undertaken by the Assessing Officer was sufficient to constitute a proper examination of the claim.

6.11 In the present case, the answer has to be considered in the light of the particular nature of the claim. The assessee had claimed a substantial sum of Rs.29.05 crores as deduction. The contribution was admittedly made to a segregated fund intended to meet settlement obligations arising upon the default of clearing members. The fund already carried an accumulated balance and the assessee was earning interest thereon. Yet, the assessment order contains no discernible consideration as to whether the payment represented a liability which had accrued and crystallised during the relevant previous year or merely an augmentation of a corpus intended to meet possible future obligations.

6.12 It is this omission which assumes significance in the context of Explanation 2 to section 263. The statutory requirement is not that the Assessing Officer should merely issue a notice or obtain a response; the enquiry must be commensurate with the issue arising for determination. Where the very nature of the expenditure is such that its allowability depends upon the distinction between an existing liability and a possible future obligation, that distinction cannot be left unexamined.

6.13 In the present case, the learned PCIT has not merely proceeded on the ground that he would have taken a different view on the same material. He has identified the nature of the Core SGF contribution, the absence of any demonstrated crystallisation of liability during the relevant year, the existence of an accumulated corpus and the earning of interest thereon, and has thereafter held that the assessment order suffered from lack of the requisite enquiry. The resulting prejudice is also not merely theoretical, since the deduction of Rs.29.05 crores was allowed in computing the taxable income of the assessee.

6.14 We would only add, so that our reasoning is not mistaken for something it is not, that we express no concluded view on whether the contribution of Rs.29,05,00,000/- is or is not an allowable deduction under section 37(1) of the Act. That question, involving as it does an application of Accounting Standard 29/Ind AS 37, ICDS X, and the line of authority running through Indian Molasses Co. (P.) Ltd. (supra), Shree Sajjan Mills Ltd. (supra), Bharat Earth Movers (supra) and Rotork Controls India (supra) to the particular facts of the assessee's fund structure, is precisely the inquiry that the ld. PCIT has directed the Assessing Officer to undertake afresh, and it would be inappropriate for us, at this threshold stage, to pre-empt that inquiry by expressing any view, one way or the other, on its outcome. Our findings are confined to the anterior and narrower question of whether the original assessment order was passed without the inquiry that the circumstances of the case demanded; for the reasons set out above, we hold that it was, and that the twin conditions of error and prejudice within the meaning of section 263 read with Explanation 2(a) thereto stand satisfied.

6.15 We, therefore, find that the present case falls within the principle governing cases where the Assessing Officer was required to make further enquiry into a material aspect of the claim but failed to do so. The fact that certain information was called for cannot, in the circumstances of the present case, by itself, cure the absence of a proper examination of the very issue which determined the allowability of the claim. The learned PCIT was, therefore, justified in invoking the revisional jurisdiction under section 263 of the Act.

6.16 We accordingly find no infirmity in the order of the learned PCIT in holding that the assessment order, insofar as it allowed the deduction of Rs.29,05,00,000/- towards contribution to Core SGF without the requisite enquiry and verification, was erroneous in so far as it was prejudicial to the interests of the Revenue.

6.17 It is also necessary to clarify that, having regard to the limited scope of the proceedings before us, we are concerned at this stage principally with the validity of the assumption of jurisdiction under section 263. The revisional order does not itself finally determine the allowability of the contribution merely by setting aside the assessment on the issue and directing the Assessing Officer to examine the claim in accordance with law. The Assessing Officer, while giving effect to the revisional order, shall accordingly examine the claim independently and in 31 accordance with law, after affording the assessee adequate opportunity of being heard.

6.18 In light of the foregoing, we find no infirmity in the order of the ld. PCIT setting aside the assessment order on the limited issue of the allowability of the contribution to Core SGF, with a direction to the Assessing Officer to examine the matter afresh in accordance with law and after affording the assessee adequate opportunity of being heard. The order passed by the learned PCIT under section 263 is, accordingly, upheld.

6.19 Grounds No. 1, 2 and 4 raised by the assessee are accordingly dismissed. Ground No. 3, which invites us to pronounce upon the ultimate allowability of the contribution, does not arise for our consideration at this stage and is left open, to be agitated, if the assessee be so advised, before the Assessing Officer in the set-aside proceedings and, if necessary, thereafter.

Order pronounced in the open Court on 30/09/2026.

Sd/- Sd/- (ANIKESH BANERJEE) (OM PRAKASH KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 30/09/2026 Saumya , Sr. P.S. Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT