THE CALCUTTA STOCK EXCANGE LTD.,KOLKATA vs. DCIT, CIR-4(1), KOLKATA, KOLKATA

ORDER SHRI M.BALAGANESH, AM

This appeal of the assessee arises out of the order of the Learned CIT, Kolkata- 2, Kolkata passed u/s 263 of the Act on 27.2.2015 treating the order passed by the Learned AO, u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’), as erroneous and prejudicial to the interest of the revenue.

2) For that on the facts and in the circumstances of the case, the order of the CIT u/s 263 be held to be bad in law since the CIT did not even remotely dealt with the assessee's submissions against the show cause notice and the said order being a non speaking one deserves to be cancelled.

3) For that on the facts and in the circumstances of the case, the order of the CIT passed u/s 263 be cancelled since the CIT considered the assessment order to be erroneous on the grounds and the reasons for which no show cause notice was issued.

4) For that on the facts and in the circumstances of the case, the CIT was not justified in initiating the revision proceedings u/s 263 because in the assessment order the AO had followed one of the legally permissible view & which the revenue authorities had followed consistently in the assessments of the past several years and in that view of the matter the order of the assessment could not be held to be erroneous within the meaning of Sec. 263.

5) For that on the facts and in the circumstances of the case, the conclusion & the finding of the CIT in his order u/s 263 for holding the assessment to be erroneous being entirely different from the reasons for which show cause notice was issued, the order of revision passed u/s 263 be cancelled.

-C AM 2 The Calcutta Stock Exchange Ltd

6) For that on the facts and in the circumstances of the case, the order of the CIT passed u/s 263 be cancelled and the order of the Assessing Officer passed u/s 143(3) be restored.

7) For that the appellant craves leave to submit additional grounds and/or amend or alter the grounds already taken either at the time of hearing of the appeal or before.

4.1. In response to this, the Learned AR argued that the assessee is a company which is a self regulatory body operating a stock exchange which is recognized by the Securities Exchange Board of India (SEBI in short). The assessee company is a notified stock exchange which is controlled and managed by its Board of Directors and functions in conformity with rules and regulations which are approved by SEBI and provisions of Securities Contract (Regulation) Act. We find from the records that the principal objective of the assessee is to assist, regulate and control the business of buying, selling and dealing in securities. The assessee is required to regulate and maange dealing in securities so as to protect the public interest, in dealings of all securities notified under the Securities Contract (Regulation) Act, 1956 and to ensure trading is conducted in a transparent, fair and open manner. One of the foremost objective of the assessee is to develop and promote healthy trading practices and -C AM 3 The Calcutta Stock Exchange Ltd facilitate convenient and timely settlement of trades amongst members and investors. The bye laws of the assessee have been framed in conformity with the regulations of SEBI and the assessee is statutorily required to abide by the same. Chapter III of the bye laws of Calcutta Stock Exchange (assessee herein) clearly state that the SEBI may prescribe regulations from time to time for the functioning and operations of the Stock Exchange and to regulate the functioning and operations of the trading members of the Stock Exchange. Chapter XII of the said bye laws contain provisions relating to Settlement Guarantee Fund which the assessee is compulsorily required to maintain with itself. The said bye laws have been framed having regard to the Circulars issued by SEBI and the Settlement Guarantee Fund maintained by the assessee was notified by the Government of India vide Notification No. SMD/PKB/VM/7252/98 dated 10.3.1998. In the year 1997, SEBI had issued directive dated 9.6.1997 to all the recognized stock exchanges in India under the instructions of the Government of India. In the said directive, the stock exchanges were instructed to create and maintain a Settlement Guarantee Fund (SGF) for the benefit of the general public and investors. The purpose of SGF was to guarantee settlement of all transactions of members of the exchange conducted through and inter-se the stock exchange. In the event when any of the member fails to honour his obligation / commitment, that the assessee intervenes and utilizes the SGF to fulfil the commitment of the defaulting member and completes the settlement without disturbing the normal settlement process. The directive dated 9.6.1997 contained detailed guidelines for setting up, maintaining and administering the SGF. The said guidelines made clear that the SGF shall be formed from contributions by the members and shall be utilized only for settling bad deliveries or failures of members on the floor of the stock exchange. It further provided that the fund shall be administered by an independent committee comprising of members and outsiders. In terms of the aforesaid directives, the assessee forwarded a proposal on 29.10.1997 to the SEBI for setting up a separate and independent Settlement Guarantee Fund. It was then agreed that the assessee would transfer at least Rs 5 crores from its net income each year to the Fund until its corpus reached Rs 100 crores. SEBI -C AM 4 The Calcutta Stock Exchange Ltd in its in-principle approval letter dated 12.1.1998 instructed that all the settlements made through SGF shall be routed through the Clearing House and strict adherence will be given to the bye laws and instructions of SEBI. Subsequently after various correspondences, the ‘Settlement Guarantee Fund’ set up by the assesse was given statutory approval on 10.3.1998.

4.2. We find from the aforesaid explanation and documents which are enclosed in pages 17 to 45 of the paper book filed by the assessee , it could be observed that the SGF was constituted in the year 1998 in conformity with the directives of SEBI and it was constituted to meet the specified objects. Since then the SGF maintained by the assessee has been used only to settle bonafide transactions of trading members which form part of the Stock Exchange’s settlement system so as to ensure timely completion of Settlements and thereby protect the interest of the investors and also inculcate confidence in the minds of investors regarding the expeditious and timely completion of settlements on the Stock Exchange. The corpus of SGF comprises of donations, contributions , levies, charges obtained from the trading members of the Stock Exchange. The said corpus is invested in notified investments and securities and the income generated also forms part of the corpus of the said Fund. The bye laws and rules of the SGF maintained by the assessee are framed strictly in accordance and in compliance with the guidelines issued by SEBI and Government of India and these are subject to modifications / amendments as brought in by SEBI from time to time. We find from Paragraph 8 of Chapter XVII that SGF lays down the rules which state the objects and purposes for which the corpus and the income of the Fund can be applied and utilized. The said paragraph clearly and categorically provides that the SGF can be utilized only for the following purposes :-

(a) The SGF maintained by the Stock Exchange may be utilized for meeting the shortage arising out of the non-fulfillment / partial fulfillment of the funds obligations by the members in a settlement before declaring the concerned member as defaulter.

-C AM 5 The Calcutta Stock Exchange Ltd

(b) To defray the expenses of creation, maintenance, administration and repayment of SGF.

(c ) To meet premium on insurance cover which the relevant authority may take from time to time.

(d) To meet shortfall and deficiencies arising out of the clearing and settlement of the deals as provided in the bye laws and regulations.

(e) To satisfy any loss or liability of the clearing house arising out of clearing and settlement of deals as provided in the bye laws and regulations.

(f) To any other purpose of the SGF as may be specified by the Defaulters’ Committee from time to time.

4.3. The above rules make it evidently clear that the SGF maintained by the assessee can only be applied and utilized for the purposes as specified in the bye laws. It cannot be utilsied or appropriated by the assessee itself for its own purposes or at its own free will nor the assessee is entitled or permitted to appropriate any part of the corpus of income of SGF for its own use or purpose treating it to be its own property. In fact the rules contained in Paragraph 8 goes on to categorically caveat that “Save as otherwise expressly provided in the Bye-laws and Regulations, the Settlement Guarantee fund shall not be utilized for any other purpose.” It further caveats that “No income of SGF would be distributed or paid to any member or person as part of profit or as dividend or distribution of profit save and except as discharge of liability of SGF under these Bye-laws.”

4.4. The above highlighted extracts from the rules contained in Paragraph 8 of Chapter XVII dealing with provisions relating to SGF clearly show that the SGF is solely and exclusively maintained and operated by the assessee for the benefit and purpose of the members, investors and general public. The assessee does not exercise any domain or control over the SGF. The Fund cannot be applied to meet the -C AM 6 The Calcutta Stock Exchange Ltd expenses of the assessee nor can it be appropriated as income of the assessee. The assessee is not free to utilize and apply the Fund in the manner as it deems fit for its own benefit or meet its business obligations / commitments. Further Paragraph 30 of the said Chapter further prevents the trading members of the exchange to draw any remuneration from the Fund and only the expenses for creation, administration and management of Fund including fees of lawyers, auditors, advisers etc and other related costs can be charged to the Fund. This further evidences that no monetary benefit in any form whatsoever can be availed by the assessee or its trading members from SGF.

4.5. Given this factual background, the issue as to whether deduction for Rs. 6,21,77,737/- allowed in the assessment u/s 143(3) of the Act resulted in any erroneous order being passed by the Learned AO. We find that the sum of Rs. 6,21,77,737/- debited in the profit and loss account consisted of following two components :-

Expenses attributable to Actual expenses incurred by the SGF Rs. 45,70,115 assessee in relation to SGF Elimination of income Income of SGF credited under the head Earned by SGF Rs. 5,76,07,622 “Interest / Dividend” eliminated by way of debit to P&L under the head “Contribution to SGF”.

As regards the first component of Rs. 45,70,115/- it was submitted that this amount comprises of specific expenses which were attributable to the operation, management and administration of SGF. The expenses of Rs. 45,70,115/- was attributed in accordance with Rule 30 contained in Chapter XVII of the bye-laws of the Stock Exchange. The assessee company identified the expenses which were attributable to the management of SGF and charged the same to it. The detailed break up of the expenses are as below:- -C AM 7 The Calcutta Stock Exchange Ltd Salary 34,83,812 Staff Welfare 2,12,010 Rent and other Expenses 1,20,000 Electric Charges 20,408 Telephone Charges 18,000 Computer Service Expenses 1,229 Legal and Professional Charges 6,74,656 Website Expenses 40,000 ---------------------- 45,70,115 ---------------------- We find from the aforesaid expenses, the same does not represent any provision but were actual expenses incurred by the assessee in connection with managing and operating the SGF. The version of the Learned CIT in the section 263 order that these expenses are in the nature of ‘provision’ is factually incorrect. Hence we hold that initiation of proceedings u/s 263 of the Act based on incorrect facts is not justified.

4.6. Apropos the balance sum of Rs. 5,76,07,622/- debited to profit and loss account under the head ‘Contribution to SGF’, we find that the said amount represents the aggregate amount of income earned by the Corpus of SGF and which is credited as income to the assessee’s profit and loss account. By debiting the same amount of Rs. 5,76,07,622/-, the assessee has only eliminated the income of Rs. 5,76,07,622/- earned by the corpus of SGF and it becomes revenue neutral. We find that this act of elimination of income by the assessee is justified as the assessee does not have any right and dominion over the said income belonging to the Fund. In this regard, the decision of the Hon’ble Bombay High Court relied upon by the Learned AR in the case of Rajkot District Gopalak Co-op. Milk Prducers’ Union Ltd vs CIT reported in 204 ITR 590 (Bom) is very well placed. In this case, the High Court observed that the assessee was running a project under the directive of the State Government. It was maintaining separate set of books for the said project and the profits earned from the project was reflected separately under the head ‘Reserves’. Such profits however did -C AM 8 The Calcutta Stock Exchange Ltd not constitute ‘income’ of the assessee in real sense. Reason being that the assessee did not and could not exercise domain or control over such incoe and the ame has to be applied in the specified manner and for the specified purpose as agreed with the State Government. In the circumstances , such income was directed to be excluded while computing the taxable profits of the assessee. We find that the ratio laid down in the above decision is squarely applicable to the facts of the assessee’s case. The assessee herein , as stated above, is desired to maintain a SGF in conformity with the prescribed guidelines and bye-laws approved by SEBI and Government of India. The said Fund is statutory in nature and has not been set up by the assessee on its own volition. The Fund can be utilized only for the specified purpose of settling bad deliveries of members on the floor of the Stock Exchange. The corpus of the Fund and the income earned therefrom is not under the control or domain of the assessee. The assessee is only statutorily required to maintain and administer the Fund in terms of the bye-laws framed by SEBI. We find that the assessee had therefore rightly eliminated the sum of Rs. 5,76,07,622/- earned by the corpus of SGF which was admittedly not under the control of the assessee and which could not be utilized or appropriated by the assessee.

4.7. It was submitted that this Fund has been in existence from 1998 onwards wherein the contributions and transfers to the Fund have been invested in notified securities and the income earned thereon has been consistently credited in the said Fund and such income was always excluded while computing the taxable income of the assessee. It was further submitted that in all the earlier years, the Learned AO had accepted this accounting practice of the assessee and allowed the deduction. In this regard, we hold that the principle of res judicata though not strictly applicable in income tax proceedings, yet the established rule of consistency must also be followed on factual matters permeating through the years. It is a well settled legal position that factual mattes which permeate through more than one assessment year, if the revenue has accepted a particular view or proposition in the past, it is not open for the revenue to take a entirely contrary or different stand in a later year on the same issue, involving -C AM 9 The Calcutta Stock Exchange Ltd identical facts unless and until a cogent case is made out by the Learned AO on the basis of change in facts, position or in law. We place reliance in this regard on the decision of the Hon’ble Apex Court in the case of Radhasoami Satsang vs CIT reported in 193 ITR 321 (SC) , wherein it was held :-

“where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and the 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.”

4.8. At this juncture, we find it appropriate to reproduce the show cause notice issued u/s 263 of the Act by the Learned CIT as below:- “OFFICE OF THE COMMISSIONER OF INCOM TAX, KOLKATA-II, KOLKATA, AAYAKAR BHAWAN, 3RD'FLOOR, P·7, CHOWRINGHEE SQUARE, KOL·700 069 F.No. Revision 14-15/263/11/The Calcutta Stock Exchange/CIT-II/Kol/ 4333 Dated: 08.09.2014 To, The Principal Officer, M/s. The Calcutta Stock Exchange Ltd. 7, Lyons Range, Kolkata-700 001. Sub.: Proceedings u/s263 of the Income Tax Act, 1961 in the case of M/s. The Calcutta Stock Exchange Ltd., PAN: AABCT8138N in respect of order passed u/s143(3) on 08-03 -2013 for the A.Y. 2010-11- regarding. Please refer to the above. A perusal of the assessment record shows that an amount of Rs.6,21,77,737/- has been debited in the P&L account for the ending 31-03-2010 towards "Contribution to Settlement Guarantee Fund". As the amount contributed for Settlement Guarantee Fund (SGF) is a provision in nature and is for use as and when any settlement arises during the course of business, the expenditure related to SGF cannot be treated as business expenditure and is required to be added back to the total income. Thus allowance of this expenditure has resulted in an under assessment of income to the tune of Rs.6,21, 77,737/- which involves under charge of tax for Rs.2,11,34,213/-. I am therefore of opinion that prima facie, the order dated 08-03-2013 passed u/s 143(3) of the I.T. Act 1961 is erroneous in so far as it is prejudicial to the interest of revenue. Your are therefore, requested to appear personally or through your authorized representative before the undersigned at Aayakar Bhawan, 3rd Floor, Room No.61, P-7, Chowringhee Square, Kolkata - 700 069, on 16-09-2014 at 01-45 P,M, along with your -C AM 10 The Calcutta Stock Exchange Ltd written submission as above, if any, to show as to why the assessment made u/s.143(3) on 08- 03-2013 should not be revised u/s.263 of the I. T. Act 1961. Please note that no further adjournment will be given unless there IS a valid reason and failure to comply with the requirement of the notice will lead to decision on merit.

Sd/- (KAVITA JHA) CIT, Kol-II, Kolkata.

\ We find from the above show cause notice , the Learned CIT had not stated the following:- a) That no enquiries were made by the Learned AO on the impugned issue. b) That how the order passed by the Learned AO is erroneous in as much as it is prejudicial to the interest of revenue.

4.8.1. We hold that the order passed by the Learned CIT u/s 263 of the Act cannot be different from the ground on which the show cause notice was issued u/s 263 of the Act. In this regard, we place reliance on the co-ordinate bench decision of this tribunal in the case of Vesuvius India Limited vs CIT in for Asst year 2002-03 dated 30.3.2012, wherein it was held that :-

“9. Having said so, we may also make it clear that in view of the judgement of the Hon’ble Delhi High Court in the case of CIT vs Vee Gee Enterprises (99 ITR 375) , an assessment order is rendered erroneous and prejudicial to the interest of revenue in a situation in which Assessing Officer remains passive in the face of a return which is apparently in order but calls for further enquiry. However, the facts of the present case are distinct from this judicial precedence on two material counts. Firstly , in the present case, proceedings were not initiated on the grounds that adequate enquiries were not carried out. The Commissioner has not alleged in the show cause notice that adequate enquiries were not carried out, and again, it is elementary that no person can be condemned unheard, and therefore, the assessee not having been heard on the -C AM 11 The Calcutta Stock Exchange Ltd question whether or not adequate enquiries were carried out, learned Commissioner could not have subjected the re-assessment order to revision proceedings on the ground that adequate enquiries were not carried out. Secondly, there is nothing on record to provoke an enquiry, which has not been carried out in the instant case. Learned Commissioner has not pointed out any reason as to why the Assessing Officer should have made further enquiry, which was apparently left out. In view of this discussion an entirety of the case, we uphold the grievance of the assessee and quash the impugned revision order.

4.9. We place reliance on the decision of the Hon’ble Bombay High Court in the case of CIT vs Gabriel India reported in (1993) 203 ITR 108 (Bom) wherein it was held that the Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. There must be material on record to show that tax which was lawfully exigible has not been imposed if the claim was allowed by the ITO. On being satisfied with the explanation of the assessee, such decision of the ITO cannot be held to be ‘erroneous’ simply because in his order he did not make an elaborate discussion in that record. The Hon’ble Bombay High Court observed in the said case that when the CIT himself, eve after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous , he simply asked the AO to re-examine the matter, that was not permissible.

4.10. We find that the decision relied upon by the Learned DR on the Jurisdictional High Court in the case of CIT vs Maithan International reported in 375 ITR 123 (Cal) does not support the facts of the instant case. In the case before the Hon’ble Calcutta High Court, it was held that where it was established on record that credits shown by the assessee were based on laon from parties who were not possessed of sufficient means and the AO had not made sufficient enquiries regarding the creditworthiness of the parties, then the Commissioner was justified in exercising his power u/s 263 of the Act and directing the AO to make enquiries about the -C AM 12 The Calcutta Stock Exchange Ltd creditworthiness of the parties. In the instant case, there was nothing on record that would enable the Learned CIT on his examination to come to a conclusion that the Learned AO had allowed an illegitimate claim towards ‘Contribution to SGF’ and the accounting treatment done by the assessee with regard to the same. It is not in dispute that the assessee had duly credited the profit and loss account by the same figure of Rs. 5,76,07,622/- and had only tried to eliminate the said income attributable to the Fund by debiting the same in its profit and loss account and therefore it becomes revenue neutral. Hence it can be safely concluded that the order passed by the Learned AO is also not prejudicial to the interest of the revenue.