BSE LTD,MUMBAI vs. PR.COMMISSIONER OF INCOME TAX -2, MUMBAI

आदेश / O R D E R महावीर ससुंह, न्याययक सदस्य/ PER MAHAVIR SINGH, JM:

1. The Learned Principal Commissioner of Income Tax - 2 ("Ld. PCIT - 2") 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 —2 be quashed.

2. The Ld. PCIT - 2 erred in stating that the order passed by the then Learned Assessing Officer ("Ld. AO") for A.Y. 2015-16 is erroneous and prejudicial to the interest of the revenue on the ground that, Ld. AO had passed the Assessment Order without making inquiries and verification which were required and directing the Ld. AO to disallow the amount of ₹25,78,84,501/- and ₹6,75,00,000/- contributed towards 3 | P a g e Settlement Guarantee Fund and Investor Service Fund respectively. Looking into the facts and circumstances of your Appellant, it is submitted that specific queries with respect to contribution made to Settlement Guarantee Fund and Investor Service Fund were raised by the Ld. AO in his notices dated November 23, 2017 and December 9, 2017. In response your Appellant vide acknowledgement nos. 15121710015292, 30111710012737 and 1512171005310 uploaded the necessary details along with the Annexures. Thereafter Ld. AO after due application of his mind and in accordance with law, passed the assessment order by accepting the claim. Therefore, assessment order passed is not erroneous and 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 - 2 be quashed.

3. The Ld. PCIT —2 erred in deciding the fate of the issues himself, by directing the Ld. AO to disallow the expenditure instead of setting aside the order and 4 | P a g e Ld. AO to make fresh assessment. Thereby, violating the basic provisions of Sec. 263 of the Income Tax Act, 1961. Therefore, the proceedings under section 263 of the Income Tax Act, 1961 is illegal and bad in law and the order of the Id. PCIT - 2 be quashed.”

3. Brief facts are that the assessee filed its return of income on 27.11.2015 declaring total income of Rs.24,48,63,440/-. Subsequently, it revised its return of income declaring the same income on 19.01.2016. The assessment u/s 143(3) of the Act was completed on 29.12.2017 assessing the total income at Rs.31,05,79,241/- by making disallowance of Rs. 5,45,68,743/- on account of disallowance u/s 14A and an amount of Rs. 1,1 1,47,058/- on account of depreciation of assets (in the form of server). Subsequently, the PCIT, on examination of records, noted that the assessment order dated 29.12.2017, passed by the Assessing Officer is erroneous and prejudicial to the interest of the revenue due to the reasons stated here under: - “a) Rs.25,78,84,501/- had been reduced while computing taxable income as 'contribution towards settlement guarantee fund'. b) Rs.6.75 Crore had been debited to P&L a/c as contribution towards investors service fund.”

6 | P a g e Based on the details is has been held in the assessment order that a) Contribution towards settlement / core settlement guarantee fund is in the nature of deposit / contingency reserve for the assessee. The SEBI Circular on the contribution itself says that It is 'transfer of profit'. Hence, it cannot be allowed as business expenditure. b) Contribution towards investors service fund is Just set-aside amount as mandated by SEBI. This set-aside amount cannot be allowed as deductible business expenditure unless it was actually spent during the year for the purpose of business." 4.2 In view of the above, since the facts and circumstances of the case for A. Y. 2015-16 ore same, allowing the claim of contribution to the two funds as business expenditure makes the assessment order for A.Y. 2015-16 erroneous. This has resulted in under-assessment of income 7 | P a g e Rs. 32.53 crore which is prejudicial to the interest of revenue.”

9 | P a g e August 27, 2014 (Annexure 22.1) (presently refer annexure 3) directed the Clearing Corporation (CC) to create a fund coiled 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 fulfill obligations of that member and complete the settlement without affecting the normal settlement process. 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/BSE etc. A fixed formula, 10 | P a g e 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 (MAC) for each segment of each stack exchange shall be subject to the following:

1. 1. The MRC shall be fixed for a month.

2. By 15th of every month CC shall review and determine the MAC for the next month based on results of the daily stress test of the preceding month.

4. Average of all the daily worst case loss numbers determined in (3) above. 5. The MAC for next month shall be higher of the average arrived in at step 4 above and the segment MAC as per the previous review. 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 MAC from its own funds which shall be considered as part of its Networth.

12 | P a g e b. Stock Exchange shall contribute at least 25% of the MAC (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 MAC 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 pro- rota 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 FD5 too. CC shall adhere to specific guidance which may be issued by SEBI from time to time in this regard.

As mandated by Circular CIR/MRD/DRMNP/25/2014 dated August 27, 13 | P a g e 2014 (refer Annexure 22.1) (presently refer annexure 3), BSE, implemented the provisions of this circular with effect from December 1, 2014 and contributed to the "Core SGF" of Indian Clearing Corporation Ltd (ICCL) total amount of 25,78,84,501/- as at March 31, 2015. At the time of finalizing the accounts for FY 2014-15, since there was no clarity regarding the regulation and its implementation, the said amount of 25,78,84,501/- contributed by SSE Limited to the Core SGF of Indian Clearing Corporation Limited was shown as "Contribution to Settlement Guarantee Fund" under the head "Other Current Assets". After receiving necessary clarification that the amount mandatorily contributed including the income earned on the said Core SGF belongs to Core SGF of ICCL and in view of Sec. 10(23EE) of the Income Tax Act, 1961 and as per the SEBI circular, BSE Ltd has been prohibited from sharing this fund either wholly or partly for its normal business purpose. Hence in view of the above, it is submitted that the contribution mode to SGF is nothing, but the expenditure incurred wholly & exclusively for the purpose of business of SSE & accordingly has been claimed as a revenue expenditure.

14 | P a g e As per Sec 10 (23EE), the said amount contributed will become income of the BSE Ltd only when such fund has been shared for the purpose of its business and will be considered BSE'S income for that particular assessment year and not otherwise. it therefore presupposes that contribution by BSE to Core SGF of ICCL is a statutory payment and hence an allowable expenditure in the hands of BSE Limited. It may be noted that BSE ltd has not gained any advantage of enduring nature or any capital asset is acquired as a result of contribution made mandatorily. The expenditure is incurred wholly & exclusively for the purpose of business of BSE. It is submitted that, if the said amount is not allowed in this A. Y. then the same amount will be taxed twice; i.e. one when the amount contributed is disallowed and second when the said amount in whole or in part is shored with BSE Limited in subsequent assessment year when it is shared. In view of the above facts and in law, the said sum of 25,78,84,501/- contributed during the year is an allowable expenditure under Sec 37 (1) of the Income Tax Act, 1961 and has been claimed accordingly. A confirmation from the Indian Clearing Corporation Ltd. is attached as Annexure 15 | P a g e 22.2 (presently refer annexure 3). It may be noted that, in subsequent year i.e. F. Y. 2015-16 the said amount of Rs. 25,78,84,501/- contributed by BSE Limited to the Care SGF has been debited in the profit & loss A/c under the head "Prior period item" and accordingly disallowed in the computation of income for FY 2015-16 Copy of computation is attached as Annexure 22.3 (presently refer annexure 3)” BSE claimed before us that the above detail was once again re-uploaded online on the Income Tax Portal on 20.12.2018 (refer Annexure 4 filed in the Assessee Paper Book).

Particulars Amount (₹) Annual Listing Fees (Equity 57,69,87,668 and Debt capital) Annual Listing Fees (Mutual 1,78,31,073 Fund) Further Listing Fees (Equity 2,32,16,768 17 | P a g e Debt Capital) Total Annual Listing Fees 61,80,35,509 received The Exchange has charged all direct expenses incurred towards Investors Services to contribution to investor service fund and has also charged on a pro- rata basis other relevant expenses. It may be noted that this contribution to Investor Services Account is regulatory requirement and compulsory for stock exchange business operation since the issue of SEBI circular no Ref. SE/10118 dated October 12, 1992. The details of contribution of Investor Service Fund are as under:

Particulars Amount (₹) Annual Listing fees for the year 61,80,35,509 29% of the above (as per SEBI requirement) 12,36,07,102 Expenditure incurred towards investor service 5,60,92,345 activities (Charged to respective nature of expenses) Charged to contribution to investor service 6,75,14,757 fund Total 12,36,07,102 These details were once again re-uploaded online by BSE on the Income Tax Portal on 20.12.2018 (refer Annexure 5).

SEBl, vide its Circular No. MDR/DA/C&D/84135/07 doted 09th January 2007 and vide its Circular No. MDR/OOP/SE/Cir-38/2004 dated 28" October 2004 (attached as Annexure 29.1) directed the exchange to contribute 10% of the listing fees collected during the quarter, within 15 days of end of each quarter of a financial year to SEW and 1% of the listing fee received during the quarter to Investor Protection Fund (IPF) respectively.

Accordingly, as a practice for the past many years, BSE Limited has been making these timely contributions to SEBI & IPF on quarterly basis and thus, paid ₹6,22,80,123 to SEBI and ₹62,28,013 to IPF for the financial year 2014-2015.

*Note: The details of the Investors Service Fund during financial year 2014-15 has already been uploaded in reply to Point 24 of 19 | P a g e 142(1) of the Income Tax Act, 1961 dated November 23, 2017."

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: - 22 | P a g e "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 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'

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 25 | P a g e 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 Income- tax 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 Income- tax 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 26 | P a g e 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 27 | P a g e Revenue" is the correct interpretation."