Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “D” BENCH, CHENNAI
Before: SHRI B.R. BASKARAN & SHRI S.S. GODARA
आदेश /O R D E R
PER B.R. BASKARAN, ACCOUNTANT MEMBER:
The appeal filed by the Revenue and the cross-objection filed by the assessee are directed against the order dated 25.10.2013 passed by Ld. Commissioner of Income Tax (Appeals)- IV, Chennai and they relate to assessment year 2010-11.
The grounds urged by the Revenue relate to the following two issues:-
Addition of listing fee of `1.34 crores (a) Addition of `32.01 lakhs relating to the amount (b) transferred to Investor Protection Reserve, etc.
The assessee has filed the cross-objection supporting the order of the Ld. CIT(Appeals).
The facts relating to the case are stated in brief. The assessee-company is running a stock exchange. During the course of assessment proceedings, the A.O. noticed that the assessee has disclosed listing fee income only to the tune of `1.15 Crores, where as it was seen that aggregate amount of listing fee receivable by the assessee was `2.49 Crores. The A.O. further noticed that the assessee has appropriated following amounts out of the listing fee receipts and accordingly disclosed the listing fee net of these amounts.
(a) Investor Service Reserve `23,16,889 `1,15,844 (b) Investors Protection Reserve `12,58,445 (c) Contribution to SEBI Further, the assessee had received a sum of `7,69,238/- as interest income out of the deposits made from the amounts received from the companies at the time of their listing. The assessee had transferred the above said interest also to Investor Service Reserve account. The assessee did not disclose the above said interest income also as its income. The submission of the assessee in this regard was that the above said amounts have been diverted by overriding title as per the directions issued by Securities & Exchange Board of India (SEBI) and hence they shall not constitute income of the assessee. The Assessing Officer did not accept the contentions of the assessee. During the pendency of assessment proceedings, the assessee approached the Joint Commissioner of Income Tax seeking directions under Section 144A of the Income- tax Act, 1961 (in short 'the Act'). The Ld. JCIT held that the entire listing fee of `2.49 Crores has to be assessed in the hands of the assessee on accrual basis, since the assessee is following mercantile system of account. Thus, the Ld JCIT concurred with the view taken by the Assessing Officer on the issue relating to Listing fee. With regard to the amounts transferred to various Reserves, the Ld. JCIT concurred with the view taken by the Assessing Officer that they are mere appropriation of income and not diversion of income by overriding title. With regard to the contribution made to SEBI, the Ld. JCIT directed the Assessing Officer to verify the facts and decide the issue accordingly.
Pursuant to the directions issued by the Ld. JCIT, the Assessing Officer assessed the entire amount of `2.49 Crores as income of the assessee which has resulted in an addition of `1.34 Crores in the listing fee receipts. The Assessing Officer assessed the amount transferred to Investors Protection Reserve and Investor Reserve Fund (including interest income) aggregating to `32.01 lakhs as income of the assessee. With regard to the contribution made to SEBI, the Assessing Officer examined the same and made certain disallowance by invoking provisions of Section 43B of the Act.
In the appeal filed by the assessee, Ld. CIT(Appeals) deleted the additions relating to the listing fee receipts and amounts transferred to Reserve funds. Aggrieved, the Revenue has filed this appeal challenging the order of the Ld. CIT(Appeals) on the above two issues.
The first issue relates to the addition made in the Listing fee receipts. The Ld D.R submitted that the assessee is following mercantile system of accounting and it is collecting the listing fee from the companies listed in its stock exchange at a prescribed rate.
Since the companies continue to be listed in the stock exchange, they are obliged to pay the listing fee as per the listing agreement and hence the assessee would get the right to collect the same.
Since the assessee is following mercantile system of accounting, the assessee is obliged to account for the listing fees receivable as
per the listing agreement. The assessee has, however, accounted for the listing fee on cash basis, which is against the concept of mercantile system of accounting followed by the assessee. The Ld D.R further submitted that the assessee has been collecting the listing fee from various companies for the past several years and hence the claim of uncertainty over its collection is not tenable.
On the contrary, the Ld A.R submitted that the assessee is collecting listing fee every year from various companies listed in the Stock exchange run by the assessee. However, the assessee was constrained to suspend its trading platform due to technical advancements and hence the stock exchange has no trading platform since 2003 onwards. This situation occurred mainly due to formation of digital stock exchanges like BSE and NSE. Hence, the companies listed in the stock exchange of the assessee are not getting effective benefits of a Stock exchange. Hence, the assessee was not in a position to enforce the payment of listing fee from its members lest they should delist their company from the Stock exchange. However, the companies still remain attached with the assessee due to various services, advices and guidance provided by the assessee to the companies listed with it like conducting investor awareness/education program etc. In this practical situation, there was uncertainty about the continuity of the companies and also about the payment of listing fee. Hence, the assessee has been following the method of accounting of the listing fee as and when the listing fees are received. The Ld A.R submitted that the said system of accounting is also in accordance with the Accounting Standard, viz., AS-9 relating to revenue recognition, which provides that the revenue should not be recognized if the recovery of the same is uncertain. The Ld A.R submitted that the assessee is following the very same method of accounting for accounting the Listing fee for the past several years.
The Ld A.R also submitted that even if the listing fee is recognized as income, the deduction of the equal amount as “Bad debts” is required to be made leaving the said exercise as tax neutral.
Accordingly, the Ld A.R submitted that the LdCIT(Appeals) was justified in deleting the addition relating to listing fee.
We heard the parties and perused the record. There is no dispute with regard to the fact that the aggregate amount of listing fee receivable by the assessee for the year under consideration was `2.49 crores and the assessee has disclosed the receipts only to the extent of `1.15 crores. According to the assessee, there is uncertainty over the collection of balance amount of`1.34 crores and hence the same was not recognized as income as per the Accounting Standard 9 relating to Revenue recognition issued by the Institute of Chartered Accountants of India. Even though, we agree with the contention of the assessee in principle, yet we notice that the assessee has failed to demonstrate the existence of the element of “uncertainty” over the collection of the listing fees. We also notice that the Ld.CIT(Appeals) has also failed to examine this aspect and he has simply accepted the contentions of the assessee. There should not be any dispute with regard to the fact that the element of “Uncertainty” has to be measured on the basis of conduct of the company listed with the assessee. We may quote an example here, i.e, the belated payment received from a company cannot be brought into the ambit of “Uncertainty”. However delinquent companies which are in the habit of committing consistent default would fall in the category of “Uncertainty”.
Since the assessee and the company have entered into a listing agreement, the company is expected to abide by the terms and conditions of the same, which includes payment of listing fee also. Hence, as contended by the Ld D.R, the assessee would automatically get an enforceable right over the collection of the listing fee in terms of the agreement entered between them. At the same time, there is also merit in the submission of the assessee that there is no uncertainty over the continuation of the listing agreement due to the emergence of digital stock exchanges like BSE and NSE. However, we are of the view that the responsibility to show that there was uncertainty over the collection of the listing fee lies with the assessee. Hence, in our view, the assessee should furnish the company wise details relating to `1.34 crores and also demonstrate the existence of “Uncertainty” over its collection.
In the absence of the explanations of the assessee as to how the element of uncertainty exists in respect of listing fee receivable from each of the company, it may not be possible for the Tribunal to adjudicate this issue. Accordingly, we are of the view that this issue requires fresh examination at the end of the assessing officer.
Accordingly, we set aside the order of Ld.CIT(Appeals) on this issue and restore the same to the file of the assessing officer with the direction to examine the same afresh by duly considering the explanations and information that may be furnished by the assessee. We also direct the assessee to furnish necessary evidences / explanations to the assessing officer to demonstrate the existence of the element of “uncertainty” over the collection of the listing fees from each of the companies.
The next issue relates to the addition of `32.01 lakhs relating to the amount transferred to various Reserve accounts from out of the listing fees received by the assessee. As noted earlier, the assessee directly transferred the following amounts from listing fee receipts to the respective Reserve account:-
(a) Investor Service Reserve `23,16,889 (b) Investor Protection Reserve `1,15,844 (c) Interest income transferred to above reserves `7,69,238 `32,01,971 Accordingly, the assessee disclosed the Listing fee receipts net of the above said transfers, i.e., the assessee claimed that the above said receipts should not be considered as its income. The assessee claimed that the above transfers were mandated by the orders of SEBI and hence the same constituted “diversion of income by overriding title”. The Assessing Officer did not accept the said contentions and accordingly assessed the above said amounts as income of the assessee. However, the Ld. CIT(Appeals) accepted the contentions of the assessee and accordingly, deleted the impugned addition. For the sake of convenience, we extract the relevant observations made by the Ld. CIT(Appeals):-
“59. I have carefully gone through the assessment order and the various submissions made by the AR at the appellate hearings. I have also gone through the guidelines and notifications of the SEBI filed at the time of hearing and the decisions relied upon both by the assessing officer and by the AR and am inclined towards the broad arguments put forth by the AR as supra.
The expression “reserve” appears to have been misunderstood by the A.O., since such reserves are not available for the benefit of the company, as in the case of normal reserves of any Company. This was an appropriation, which was required to be utilized in the manner specifically directed by the Securities Exchange Board of India (SEBI) as per their guidelines. Actually, the nomenclature for such “reserves” should have been ‘funds’, so that the nature of the amounts could be understood as funds and not reserves. SEBI had clearly stipulated its treatment vide its Circular dated 23.08.2001 giving comprehensive guidelines to set up Investor Protection Fund and Investor Service Fund. Actually appropriation at the stipulated rate in the guidelines from 1% of the listing fees had to be transferred to Investor Protection Fund/Customer Protection Fund and 10% to Investor Service Fund on a quarterly basis along with 100% of the interest earned on such amounts kept as deposit for own use from prescribed services, and these were bound to be utilized as per SEBI guidelines communicated for the following purposes:-
(i) The IPF should not be utilized for any purpose other than meeting the legitimate investment claims of the clients of the defaulting members that were not speculative in nature. (ii) The interest earned on the IPF could be utilized only for the purpose of investor education, awareness and research and any unutilized interest for the financial year, should be transferred back to the IPF. (iii) The ISF should not be utilized for unrelated activities such as website development and maintenance, advertisements in the nature of brand building and advertisements in association with brokers etc. (iv) Any expenditure from the IPF/ISF which was not conformity with the government/ SEBI norms should be credited back to IPF/ISF immediately.
The fact that interest income should also belong to the fund and not available for the assessee clearly indicates the character of the receipt. None of the purpose for which the amounts were appropriated were for the benefit of the appellant, but was for the benefit of the investing public or customers. It was under these circumstances, that there was clearly diversion by overriding title, in that, the amount which had necessarily to be appropriated against every receipt of listing fees was so taken to the Funds, as reserves which did not belong to the assessee, even at the time of collection.
There is a difference between normal reserves and reserves which are statutorily required to be set apart. It is true that merely because the reserve may be statutorily required to be made does not mean that it could be treated as a charge on the Profit & Loss account. But where there was a diversion by overriding title with a third party interest on such amounts, as was in the case of the appellant, the inference had to be different. This is the ratio set by the Supreme Court in CIT vs New Horizon Sugar Mills Pvt. Ltd. 269 ITR 397 wherein the Apex court affirmed the decision of the jurisdictional High Court in the same case reported 244 ITR 738 (Mad). This decision was followed by the Apex court in rejecting the SLP in the case of CIT vs Ambur Co-operative Sugar Mills Ltd. 269 ITR 398.
After taking into careful consideration all the details and facts obtained in the assessee’s case, I am of the considered opinion that the transfer of funds of `23,16,889/- towards contribution to Investors Service Reserve, `1,15,844/- for contribution to Investor Protection Reserve and `7,69,328/- interest on listing deposits amounting in all to `32,01,971/- are transfer from receipts and not from profits or revenue accruing to the appellant for the assessment year under consideration. The said transfers are for specific purposes, the utilization of which the appellant had no actual control. Hence, the above amounts did not belong to appellant by overriding title in favour of SEBI and requires to be reduced from the trading receipts, as has been rightly done by the appellant for the assessment year under consideration and hence the addition of ` 32,01,971/- on the same being therefore untenable, is directed to be deleted.”
Before us, the Ld. counsel appearing for the assessee placed reliance on various case laws, more particularly, the decision rendered by Hon'ble jurisdictional High Court in the case of CIT v.
Salem Co-operative Sugar Mills Ltd. (229 ITR 285) (Mad.). He further submitted that the ratio of the said decision has since been approved by the Hon'ble Supreme Court in the case of CIT v.
Ambur Co-operative Sugar Mills Ltd. (269 ITR 398) (SC). He submitted that in the above said cases, the portion of sale proceeds of molasses separately accounted for as per the Molasses Cotrol (Amendment) Order for construction of storage tanks was considered as “Diverted at source” and hence not includible in assessee’s income. The Ld A.R submitted that the ratio of the above said decisions shall equally apply to the present case also, since the assessee has transferred a portion of Listing fee receipts to the Reserve accounts as per the order of SEBI. He further submitted that the status of the assessee was considered in the assessee's own case [CIT v. Madras Stock Exchange Ltd. And Others (105 ITR 546) (Mad.)] and the Hon'ble jurisdictional High Court held that the assessee is carrying on a statutory function, i.e. to control and regulate the contracts relating to shares and securities. Accordingly, the Hon'ble Madras High Court held that the listing fees received by the assessee cannot be said to be an activity for profit within the meaning of then existing provisions of Section 2(15) of the Act. The Ld. counsel submitted that the fact that the assessee is carrying on statutory function stands established by the above said decision. The Ld. counsel further submitted that the assessee has set aside a part of listing fees for providing reserves to the investing public as per the orders of SEBI and the said direction is required to be mandatorily carried out by the assessee. Accordingly he contended that the amounts so appropriated cannot be said to have reached the assessee at all, i.e., the same was diverted at source itself. Accordingly, the Ld. counsel contended that the amounts transferred to Investors reserve account ought to be considered as diversion of income by overriding title and hence the Ld. CIT(Appeals) was justified in holding that the above said amounts shall not form part of income of the assessee.
On the contrary, the Ld. D.R. submitted that the claim of diversion of income at source by overriding title does not have any substance, since the assessee has appropriated the amounts towards various Reserve accounts, only after the income has reached the hands of the assessee. He submitted that the SEBI has not placed upon any lien over the listing fees received by the assessee and the SEBI has only directed the assessee to set aside at least 10% of the listing fees for providing services to the investing public. The Ld D.R submitted that letter issued by the SEBI would show that the same was mere direction and the expression “atleast 10% of listing fees” would show that the same was only directory in nature. Accordingly, the Ld D.R submitted that the compliance of the directions issued by SEBI would not make mere appropriation of profit into a case of diversion of income at source. Accordingly, the Ld. D.R. submitted that the Assessing Officer was justified in assessing the impugned amount as income of the assessee.
We heard the parties on this issue and perused the record.
Before us, the Ld A.R placed reliance on the decision rendered by the jurisdictional High Court in the case of Salem Co-operative Sugar Mills Ltd (supra) to contend that there was diversion of income by overriding title. However, a perusal of the facts prevailing in the above said case would show that the assessee therein was directed to collect certain amount along with the sale price fixed for alcohol under the Molasses Control (Amendment)
Order. Even before the collection of the amount as per the direction, the assessee was directed to keep this amount under a separate account under the head ‘molasses storage fund’. The said collection was seen to belong to the molasses storage fund and the same could be utilized only for constructing storage tank only. It was further noticed that, if the assessee fails to collect such amount as directed by the Molasses Control (Amendment) Order, the Central Government will construct a molasses storage tank and recoup the construction charges from the assessee. Thus, it was seen that the assessee did not have any control and domain over the amount so collected and it could not also utilize the same for business purposes. Under these set of facts, it was held that the amount so collected did not reach the assessee and got diverted by overriding title at the source itself.
The facts prevailing in the instant case are that the assessee herein was not directed to collect any amount separately along with the listing fee. The Molasses Control (Amendment) Order was issued by the Central Government, whereas in the instant case, the SEBI has issued directives, which read as under:-
“The Exchange is directed to set aside atleast 10% of the listing fees for providing services to the investing public…”
A perusal of the above said direction would show that it was only a direction and the assessee has been given discretion to determine the quantum of amount to be set aside, with a minimum of 10% of the listing fees. We may note here that the very purpose of existence of the assessee and also its objective is to facilitate the investors in their trading activity and the SEBI has only directed to appropriate funds towards investors awareness and protection, which otherwise the assessee is required to incur in the ordinary course of its activities. Hence, in our considered view, the direction issued by the SEBI only prescribes the minimum monetary limit for spending the funds towards investor education and protection activities. At this juncture, we feel it pertinent to extract the following observations made by the Hon’ble Supreme Court in the case of CIT VS. Sitaldas Tirathdas (1961)(41 ITR 367):-
“10…… Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one’s own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it does so, not as part of his income, but for and on behalf of the person to whom it is payable.”
In the instant case, we have already noticed that the assessee was required to carry out the activities like facilitating investors, educating them, protecting them etc. in the ordinary course of its activities. In our considered opinion, by issuing the direction (referred above), the SEBI has only prescribed the minimum amount that should be spent for such purposes. The direction issued by SEBI nowhere states that the amount should be appropriated out of listing fees or it should be kept in separate account disabling the assessee from using it. The direction nowhere states that the SEBI would spend the money towards the specific purposes and recover the same from the assessee, if the assessee fails to spend the same. Hence, we are of the view that the assessee cannot take support of the decision rendered by Hon’ble jurisdictional High Court in the case of Salem Co-operative Sugar Mills Ltd (supra), since the facts prevailing in the instant case are totally different. Accordingly we are of the view that the assessee has only appropriated the listing fees after it reached its hands and the purpose of such transfer was only to earmark the income for spending the same for specific purposes. Hence the same should be considered as mere appropriation of income of the assessee. Hence, we are of the view that the accounting treatment adopted by the assessee to transfer the amount directly from listing fee receipts would not make the same as diversion of income by overriding title at the source. Accordingly, we are of the view that the assessing officer was justified in assessing the income so appropriate to investors reserve account etc., as income of the assessee. In view of the foregoing discussions, we are unable to sustain the order passed by Ld CIT(Appeals) on this issue and accordingly set aside the same.
The Ld A.R submitted that the amount so transferred to Investors reserve account etc., if not considered as diversion of income at source, then the expenditure incurred from out of such reserve accounts should be allowed as deduction. We find merit in the said contentions. However, the Ld D.R submitted that the Assessing Officer assessed only the net amount, i.e., net of expenses only. However, a perusal of the assessment order would show that the same was not clear on this issue. Accordingly, we are of the view that this issue requires examination at the end of the assessing officer. Accordingly, we restore this matter to the file of the assessing officer with the direction to examine the alternative claim of the assessee and take appropriate decision in accordance with the law, after affording necessary opportunity of being heard to the assessee.
The assessee has filed the cross objection only to support the order of Ld CIT(Appeals). Hence the grounds urged therein do not require any adjudication.
20 C.O. No. 126/Mds/2014 18. In the result, the appeal filed by the revenue is treated as allowed for statistical purposes and the cross objection filed by the assessee is dismissed.
Order pronounced on the 4th day of February, 2015 at Chennai.