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Facts
The assessee, NSE Clearing Ltd., made mandatory contributions to the Core Settlement Guarantee Fund (Core SGF) as directed by SEBI for Assessment Years 2015-16 and 2017-18. The assessee claimed these contributions as business expenditure, but the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) (CIT(A)) disallowed the claim, treating it as a contingent reserve or appropriation of profit.
Held
The Income Tax Appellate Tribunal (ITAT) held that the contributions to Core SGF are allowable as business expenditure under Section 37(1) of the Income Tax Act. The Tribunal found that the Core SGF is a separate entity with its own PAN and its income is exempt under Section 10(23EE), the contributions are mandated by SEBI, and the assessee loses control over the funds. The decision was further supported by a precedent in a similar case involving National Stock Exchange of India Ltd.
Key Issues
Whether the mandatory contributions made by the assessee to the Core Settlement Guarantee Fund, as directed by SEBI, are allowable as business expenditure under Section 37(1) of the Income Tax Act.
Sections Cited
10(23EE), 37, 143(3), 263
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PER B.R. BASKARAN, A.M : Both the appeals filed by the assessee are directed against the orders passed by the Ld.CIT(A), NFAC, Delhi and they relate to the Assessment Years (AYs.) 2015-16 and 2017-18. Both the appeals were heard together and are being disposed of by this common order, for the sake of convenience. 2. In AY 2015-16, the assessee has also challenged the validity of reopening of assessment and the validity of assessment order in the absence of DIN. However, the Ld A.R did not press the DIN ground and did not argue on the validity of reopening of assessment. Accordingly, both these grounds are not adjudicated and they are left open. The only surviving common issue urged by the assessee in both the years is related to the rejection of claim of contribution to Core Settlement Guarantee Fund (Core SGF) as business expenditure.
3. The assessee is a clearing corporation and is wholly owned subsidiary of National Stock Exchange of India Ltd (NSE). The assessee was earlier known as “National Securities Clearing Corporation Ltd” (NSCCL). It is responsible for clearing and settlement of all trades executed on NSE and also carries on collateral management and risk management functions. The assessee is bound by the rules, regulations, directives, circulars, guidelines etc., issued by the Securities and Exchange Board of India (SEBI), which is the statutory authority formed by the Central Government to protect the interests of investors in the securities and to promote development & regulate the securities market. The SEBI, in exercise of its powers granted u/s.11 of SEBI Act and in terms of Regulation 39 of Securities Contracts (Regulations) (SECC) Regulations, 2012 issued guidelines by way of Circular dated 27-08-2014 for the setting up a “Core Settlement Guarantee Fund” (Core SGF). The above said Circular contains guidelines with regard to - --the objective of Core SGF, --Corpus of Core SGF, --Minimum Required Corpus (MRC), --Contribution to Core SGF. --Management of Core SGF, --Access to (i.e., utilization of) funds of Core SGF, --Default waterfall mechanism for meeting the defaults of trading members, --Analysis of Credit risk through stress testing and back testing etc.
The Ld A.R submitted that the MRC of Core SGF shall be fixed for a month and it shall be reviewed by 15th of every month and fresh level of MRC of Core SGF shall be determined on certain parameters. Following persons shall contribute to MRC of core SGF as mentioned below:- a. The Clearing Corporation (the assessee herein) Minimum 50% b. The stock Exchange (here NSE) Minumum - 25% c. The trading members - Maximum - 25% --------- Total 100% ======= The object of Core SGF is to ensure availability of sufficient funds against which there would be no exposure, so that it would be readily and unconditionally available to meet settlement obligations of a Clearing Corporation in case of a clearing member failing to honour settlement obligations. Accordingly, as per the directions issued by SEBI, the assessee created a “Core SGF” in its books of accounts.
During the years relevant to AYs.2015-16 and 2017-18, the assessee credited the Core SGF with an amount of Rs.344.88 crores and Rs.37.12 crores respectively by transferring funds from its General Reserves, i.e., the above said amounts were not debited to the profit and loss account of the relevant year. Besides its own contribution, the assessee also received contributions from National Stock Exchange of India Ltd., and other trading members. All the contribution was shown as part of liabilities of the assessee in the Balance sheet. The assessee claimed the amounts contributed by it in the above said years were claimed as deduction while computing total income under the Income tax Act of the respective years. The assessing officer took the view that the Core SGF is in the nature of contingent reserve creative by the assessee, i.e., a reserve to meet the contingent liability of the Stock Exchange and the Clearing Corporation (assessee) that may arise in the eventuality of default by a clearing member. Accordingly, the AO took the view that the deduction shall only be allowed on the basis of actual occurrence of the default and that too, to the extent of liability borne by the assessee. It was noticed by the AO that there was no default by any of the trading members during these two years under consideration. The AO also took the view that the ownership of funds remains with the assessee and it is similar to Cash Reserve Ratio maintained by the Scheduled banks. Accordingly, he took the view that the contribution made by the assessee to core SGF cannot be considered as business expenditure. He also observed that the assessee has not declared this amount as expenditure in the Profit and Loss account of the respective year. Accordingly, the AO disallowed the above said claim of the assessee in both the years under consideration. The Ld.CIT(A) also confirmed the disallowances made in both the years. Aggrieved, the assessee has filed these appeals.
We heard the parties and perused the record. We notice that the assessee herein, besides its own contribution to Core SGF, is also receiving contributions from NSE and trading members towards Core SGF. As noticed earlier, the assessee has shown Core SGF fund as a liability in the Balance Sheet of the assessee. The Ld A.R submitted that the funds so received towards Core SGF are invested separately, i.e., the identity of the fund and the corresponding investments are maintained, even though they are reflected in the Balance Sheet of the assessee. The details of the contribution and the corresponding investments have been disclosed by the assessee in the annual report. For the sake of convenience, we extract below the disclosure made in the Annual report for the year ending 31-03-2015 in Note number 23:-
“23. Securities and Exchange Board of India, vide circular CIR/MRD/DRMNP/25/2014 dated August 27, 2014, interlia, has issued norms related to the computation of the computation and contribution to the Core Settlement Guarantee Fund (Core SGF) by the Clearing Corporation (minimum 50%), Stock Exchange (minimum 25%) and members (maximum 25%) for each segment. Details of Core SGF as on 31-Mar-2015 are as follows:
*Net of applicable corporate tax Rs. 9.38 Crs, on cash basis.
Identical disclosure has been made by the assessee in its Annual report for the year ending 31-03-2017 also.
The Ld A.R submitted that the funds accumulated for “Core SGF” cannot be considered as the funds belonging to the assessee. He submitted that the above said fund has been recognized as a “separate assessee” by the Income tax department. In this regard he submitted that the Core SGF has been allotted a Permanent Account Number viz., “AAAJN1131F” with the name of “NSCCL Core Settlement Guarantee Fund”. Further, the “Core SGF” has been notified by the CBDT u/s 10(23EE) of the Income tax Act. The said notification reads as under:- “Notification No. SO 2184(E)(F No.197/39/2015-ITA-I) dated 23-06-2016 In exercise of the powers conferred by clause (23EE) of section 10 of the Income tax Act, 1961 (43 of 1961), the Central Government hereby notifies the Core Settlement Guarantee Fund set up by National Securities Clearing Corporation Limited (NSCCL), Mumbai, a recognized clearing corporation, for the purposes of the said clause for the assessment year 2016-17 and subsequent assessment years.”
Accordingly, the income generated by the Core SGF is exempt from Income tax. In our view, all these facts would show that the Core SGF fund is separate entity for the purposes of Income tax Act. Though the financial transactions relating to the same are incorporated in the books of the assessee, yet the discussions made above would show that assessee is not using the money belonging to Core SGF for its business purposes. The identity of contributions received and the corresponding investments made are maintained distinctly, which fact is adequately disclosed in its annual reports. Hence, we are of the opinion that it cannot be said that the assessee is the owner of the Core SGF, as observed the AO.
Further, it is noticed that the Core SGF has been created as per the directions given by the Stock market regulatory authority, i.e., SEBI. The assessee, NSE and other trading members, being part of operation of Stock market, are regulated by the SEBI and hence they are bound to follow the directions/guidelines issued by the above said regulatory authority. The Circular dated August 27, 2014 issued by SEBI mentions the objective of creation of Core SGF as under:-
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 clearing member(s) failing to honour settlement obligation . Thus, we notice that it appears to be intended that the “Core SGF” will act as akin to insurance mechanism in order to protect the stock market from the failures of the clearing members in settling their respective obligations.
We noticed earlier that the contributors to Core SGF are the assessee, NSE and other trading members. When the contributions are made by so many persons, it is difficult to accept the proposition of the AO that the assessee is the actual owner of all those funds. Further, the funds so received have been invested separately and their identity is well maintained. There cannot be any dispute that the funds available with Core CGF could be utilized only for the stated purposes, i.e., the assessee cannot use them for its own purposes. Further, as noticed earlier, the Core CGF has been recognized as a distinct and separate assessee by the Income tax department by allotting a separate Permanent Account Number. Further, a separate notification has been issued by the CBDT in order to exempt the income of Core CGF from AY 2016-17 onwards. Hence, we are of the view that the assessee is actually acting as a trustee of those funds, even though the relevant financial transactions are maintained in its books of accounts.
All these facts would show that the contribution made by the assessee to the MRC of Core CGF cannot be considered as an item of mere appropriation of profit by the assessee. Further, it is not a voluntary contribution made by the assessee, i.e., it is contribution made as per the directions given by SEBI and such directions has got statutory force.
When a contribution is made to a fund as per the requirement of the direction given by the SEBI, which is regulating the business of the assessee and when the assessee loses its control over that contribution and further when the amount so accumulated could be used only for the stated purposes, in our view, the said contribution would go permanently out of the hands of the assessee. Since it is being contributed in furtherance of the business of the assessee, in our view, it can only be considered as a business expenditure in the hands of the assessee.
11. We notice that this dispute is no more res integra. We noticed that one of the contributors to Core CGF was National Stock Exchange of India Ltd (NSE). The NSE had also claimed the contribution so made by it as normal business expenditure. The AO of NSE disallowed the same and the Ld.CIT(A) has also confirmed the same. However, the Co-ordinate Bench of Tribunal has decided the issue in favour of NSE in the appeal filed by it for AY 2016-17 and 2017-18 in & 731/Mum/2023, vide its order dated 26-10-2023 holding that the it is allowable as business expenditure. The relevant observations made and decision taken by the Co-ordinate Bench is extracted below:-
“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 contribution made to Core Settlement Guarantee Fund (Core SGF) on the reasoning that no default was made during the year by the clearing members. The assessee company is a stock exchange recognised by Central Government u/s 4 r.w.s 8A of Securities Contract (Regulations) Act 1956. The securities and Exchange Board of India under the SEBI Act, 1992 protect the interest of investors in securities and to promote the development, regulate the securities market which is statutory regulatory authority which regulates the functions and activities of recognised stock exchanges in India and also clearing corporations.
SEBI as a regulator or Stock exchanges and clearing corporations in exercising of its power granted u/s 11 of SEBI Act keeps on issuing various directives/guidelines/circulars to the stock exchange and clearing houses to protect the interest of investors in securities and to promote the development and to regulate the security markets and the said directives are binding on the stock exchange and clear corporations. Vide circular dated 27.08.2014 in terms of Regulation 39 of Security Contracts (Regulations) 2001 notified on 20.06.2012 the SEBI has issued guidelines for setting up of Core Settlement Guarantee Fund specifying the default waterfall and stress test, norms for MRC on Core SGF contributions and utilisation. The purpose of creation of the said fund was to achieve 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 clearing member(s) failing to honour settlement obligation. b) align stress testing practices of clearing corporations with FMI principles (norms for stress testing for credit risk, stress testing for liquidity risk and reverse stress testing including frequency and scenarios). c) capture in stress testing, the risk due to possible default in institutional trades, d). harmonise default waterfalls across clearing corporations, e) limit the liability of non-defaulting members in view of the Basel capital adequacy requirements for exposure towards Central Counterparties (CCPs). f) ring-fence each segment of clearing corporation from defaults in other segments, and g) bring in uniformity in the stress testing and the risk management practices of different clearing corporations especially with regard to the default of members."
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.
We have perused the circular number CIR/MRD/DRMNP/25/2014 dated 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: ………………… (Entire SEBI Circular has been extracted here) 14. At para 8 of the Circular as referred supra in this order the assessee as Stock Exchange shall contribute at least 25% of the MRC (minimum Required Corpus which can be adjusted against transfer of profit by Stock Exchange as per Regulation 33 of SECCL Regulation. The SEBI vide the aforesaid mention circular dated 27.08.2014 vide para 8 of the circular has issued norms related to the computation and contribution to the Core Settlement Guarantee Fund by the Clearing Corporation 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.
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 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 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 P a g e | 26 & 731/Mum/2023 National Stock Exchange of India Ltd. Vs. DCIT, Circle 7(1)(1) 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 withcertainty. 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 to Investor 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: - …. (Yearwise contribution to Investor Service Fund and the fact the same was allowed in the order passed u/s 143(3) is stated here) 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.
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 a!!owed, 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' 14. 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.
15. In this respect, our attention was invited 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 fixing the amount of valuation of the property. Similarly, "erroneous Judgment" means "one rendered according to course and practice of court, but contrary to law, upon mistaken view of law, or upon erroneous application of legal principles. From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order, unless the decision is held to be erroneous. Cases may be visualized where the Incometax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Incometax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, viz., that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interests of the Revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of revision because the second requirement also must be fulfilled. As observed in Dawjee Dadabhoy and Co. vs. S. P. Jam [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."
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 cannot be construed to be prejudicial to the interests of the revenue, unless it can be established that the assessment order is erroneous in as much as the same is unsustainable in law. Hence, we are also of the view that in order to set aside an order under section 263 there must exist two circumstances to enable your honor to exercise the power of revision, viz; the order passed by the AO has to be erroneous and by virtue of the order being erroneous should be prejudicial to the interest of the revenue. From the facts as stated in the earlier paragraphs, it is very well established that the AO has not only applied his mind after proper enquiries but has examined and considered various details submitted during the course of assessment. Hence, the order passed by the AO is neither erroneous nor prejudicial to the interest of revenue i.e. involving any error or it is deviating from law. (as defined in Black's Law Dictionary). Since, the AO has acted in accordance with law and passed the assessment order, the same cannot be considered as erroneous and prejudicial to revenue, simply because AO has not elaborated various things in the body of the assessment order. Hence, we quash the revision order passed by PCIT and allow the appeal of the assessee on this issue.
In the result, the appeal of the assessee is allowed.” 16. Apart of the above we have gone the through the Finace Bill 2015 which provide Exemption to income of Core Settlement Guarantee Fund (SGF) of the Clearing Corporations Under the provisions of Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 (SECC) notified by SEBI, the Clearing Corporations are mandated to establish a fund, called Core Settlement Guarantee Fund (Core SGF) for each segment of each recognized stock exchange to guarantee the settlement of trades executed in respective segments of the exchange. Under the existing provisions, income by way of contributions to the Investor Protection Fund set up by recognised stock exchanges in India, or by commodity exchanges in India or by a depository shall be exempt from taxation. On similar lines, it is proposed to exempt the income of the Core SGF arising from contribution received and investment made by the fund and from the penalties imposed by the Clearing Corporation subject to similar conditions as provided in case of Investor 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. Similarly Section 10(23EE) specified that income of a core settlement guarantee fund that is set up by a clearing corporation is provided exemption from tax under this section. However, in case where any amount standing to the credit of the Fund and not charged to income-tax is shared with the specified person, the amount so shared shall be deemed to be the income and shall be chargeable to income-tax.
The sub clauses of provision of section 10(23EE) are as under:-
[(23EE):- any specified income of such Core Settlement Guarantee Fund, set up by a recognised clearing corporation in accordance with the regulations, as the Central Government may, by notification in the Official Gazette, specify in this behalf: Provided that 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 so shared and shall, accordingly, be chargeable to income-tax. Explanation.--For the purposes of this clause,-- (i) "recognised clearing corporation" shall have the same meaning as assigned to it in clause (o) of sub-regulation (1) of regulation 2 of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 201249 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the Securities Contracts (Regulation) Act, 1956 (42 of 1956); (ii) "regulations" means the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012* made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the Securities Contracts (Regulation) Act, 1956 (42 of 1956); (iii) "specified income" shall mean,-- (a) the income by way of contribution received from specified persons; (b) the income by way of penalties imposed by the recognised clearing corporation and credited to the Core Settlement Guarantee Fund; or (c) the income from investment made by the Fund; (iv) "specified person" shall mean,-- (a) any recognised clearing corporation which establishes and maintains the Core Settlement Guarantee Fund; (b) any recognised stock exchange, being a shareholder in such recognised clearing corporation, or a contributor to the Core Settlement Guarantee Fund; and (c) any clearing member contributing to the Core Settlement 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.
As per provision 0f 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.
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
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 specified person. 23. The specify person in the section under clause 10(23EE)(iv)(b)also include any recognised stock exchange, being a shareholder in such recognised clearing corporation, or a contributor to the Core Settlement Guarantee Fund therefore assessee being a Stock Exchange is a specified person. 24. The provision of the section 10 as referred above clearly put the contribution made by the specified person to the Core Settlement Guarantee Fund in the category of income therefore corresponding claim of treating such contribution as expenditure in the hands of specified person cannot be simply brushed aside without any relevant reason. 25. We have also considered the findings of the coordinate bench in the case of BSE Ltd. at para 12 of this order on the issue of similar statutory contributions made by the Bombay Stock Exchange to the Core Settlement Guarantee Fund in accordance with the circular of the SEBI holding that assessee is able to prove beyond doubt that the contribution to Core SGF is not in the nature of any deposit/contingency/reserve. In that decision it is further held that the contribution to the Investor Service Fund was made by the BSE from 1992 onwards claimed as deduction u/s 37 of the Act which had been allowed by the department till date. Further in terms of the circular dated 27th August, 2014 issued by SEBI as reproduced supra in this order it is beyond any doubt that the assessee is governed by the rules and regulations framed by the SEBI for carrying on its business of stock exchange in India. The assessee is bound by the mandatory Rules and Regulations issued by the SEBI. Therefore, following the findings of the coordinate bench, rules/regulations of the SEBI and the provisions of section 10 as discussed supra, we consider that statutory contributions made by the assessee to the Core SGF on which it had no control is allowable u/s 37(1) of the Act as the same has been incurred exclusively in the course of carrying on its business. Therefore, this ground of appeal of the assessee is allowed.”
12. In view of the foregoing discussions, we are of the view that the contribution made by the assessee to core SGF is allowable as business expenditure in both the years under consideration. Accordingly, we set aside the order passed by the Ld.CIT(A) and direct the AO to delete the impugned disallowance made in both the years under consideration.
13. In the result, the appeal filed by the assessee for AY.2015-16 is partly allowed and the appeal of the assessee for AY.2017-18 is allowed.