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OTC Exchange of India Versus Assistant Director of Income Tax (Exemption) -II (1) , Mumbai

2017 (9) TMI 807 - ITAT MUMBAI

Denying exemption u/s 11 & 12 - assessee has made investment in its wholly owned subsidiary company in accordance with the directions of SEBI - main object of assessee trust - Held that:- The main object of subsidiary was to acquire the membership rights of the BSE / NSE so as to facilitate the members of the investor. The assessee is a recognized stock exchange by Central Government in terms of Section 4 of the Securities Contract Regulation Act. Therefore, on these facts we find that the inves .....

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/ fees whatsoever to its members and the income / property of the assessee was to be applied solely for the promotion of its objects. Further, the assessee company was governed by its by-laws and chapter XV-A of the said by-laws dealt with code of ethics for directors and functionaries of exchanges and put several restrictive conditions upon directors to obtain any sort of benefits / pecuniary advantages by using their position as directors. - It is quite evident that the floating of subsidi .....

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in Section 13(3) which prima-facie weakens the conclusion of the revenue that the case of the assessee was hit by the provisions of Section 13(2) & 13(3). - Revenue has alleged that the assessee failed to charge interest on the amount remaining outstanding at year-end - Held that:- A perusal of ledger extract as produced in the paper book reveals that the same represent reimbursement of the last month of the relevant financial year which has been settled subsequently within a short span of t .....

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2 and the appeal of the assessee stands allowed. - I.T.A. No. 2625 And 2626/Mum/2016 - Dated:- 28-7-2017 - SHRI D.T. GARASIA, JM AND SHRI MANOJ KUMAR AGGARWAL, AM For The Assessee : V.Mohan, Ld. AR For The Revenue : Rajat Mittal, Ld. DR ORDER Per Manoj Kumar Aggarwal (Accountant Member) 1. The captioned appeals by assessee for Assessment Years [AY] 2010-11 & 2011-12 assails separate order of Ld. Commissioner of Income Tax (Appeals)-1 [CIT(A)], Mumbai on various grounds of appeal. Since, the .....

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exemption u/s 11 & 12 and we proceed to deal with the same in succeeding paragraphs. 2. Briefly stated, the assessee being a corporate entity registered u/s 25 of the Companies Act, 1956 and registered Trust u/s 12A vide Registration No. INS/29014 dated 01/04/1991, hitherto, enjoying exemption as Trust u/s 11 & 12 of the Income Tax Act, 1961 has been denied the said exemption during impugned AYs and the same is the subject matter of these appeals. 2.1 The assessee is a public charitable .....

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oceedings, Ld. Assessing Officer [AO] noted that the assessee held 42.50 Lacs equity shares of ₹ 10/- each in its 100% subsidiary concern namely OTCEI Securities Ltd. [OSL] since financial year 1999-2000. Since, OSL was not public sector company, the case of the assessee, in the opinion of Ld. AO, was hit by the provisions of Section 11(5) & 13(1)(d)(iii) and therefore the impugned exemption was not available to the assessee. 2.3 The Ld. AO further noted that OSL obtained membership ri .....

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ms, software hardware and expertise etc. and therefore availed certain benefits from the assessee, which makes assessee ineligible to claim the said exemption. 2.4 The Ld. AO after perusing the agreement between assessee company and OSL further noted that the assessee trust provided various services like infrastructure, maintenance, day-to-day expenses, capital expenses manpower services, capital & commercial expertise etc. to OSL and the same was reimbursable to assessee on actual basis. Ho .....

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ding at year-end and no interest was charged thereupon and hence, the assessee extended further benefit to OSL. 2.5 Ld. AO further opined that the assessee trust carried on the business of stock broking through OSL and the activity of sub-broking was nowhere mentioned in the Memorandum of the assessee trust and therefore, the same was not in accordance with the objects of the trust and since assessee engaged in commercial profit making activity through its subsidiary, the membership of which was .....

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Tribunal in Hyderabad Stock Exchange Vs ADIT [10 taxmann.com 132], Ld. AO denied the said exemption to the assessee and computed total taxable income at ₹ 290.72 Lacs being amount received / earned by the assessee during impugned AY. 3. Aggrieved, the assessee contested the same without any success before Ld. CIT(A) vide impugned order dated 20/01/2016 and inter-alia contended that the investment in subsidiary were in conformity with Section 11(5) read with Rule 17C of Income Tax Rules an .....

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r Section 11(5) read with rule Rule-17C of Income Tax Rules and therefore, the case of the assessee was not at all hit by the provisions of Section 11(5) and 13(1)(d)(iii). 4.1 The Ld. AR further drew our attention to the fact that the shareholders of the assessee trust were public sector / government entities and the board of directors of assessee company was constituted mainly by nominee directors and the assessee did not extended any benefit either to its shareholders or to its directors and .....

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rectors etc. The assessee, through the instrumentality of subsidiary provided only additional facility / benefit to its members to avail the trading facility of the bigger stock exchanges which was in tune with SEBI guidelines for revival of small exchanges. The membership of the assessee trust could be obtained by public at large after fulfilling the stipulated conditions and the members of the assessee trust, in turn, could become member of OSL subject to fulfillment of complying with further .....

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of the assessee was wide enough to encompass in its ambit the creation of subsidiary for the promotion of interest of its members. The said position has been accepted by the revenue in all the earlier years and therefore, now debarred from taking a different stand on identical set of facts. 4.3 The Ld. AR also assailed the stand of the revenue on rule of consistency by contending that the wholly owned subsidiary company was floated by the assessee in financial year 1999-2000 with no further cha .....

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t month of the relevant financial year and the same was settled in a short span of time in the very next financial year and therefore, no finance facility was provided by the assessee to OSL and there was no justification to charge the interest against the same and therefore, Ld. AO erred in concluding that the assessee was required to charge interest against the same. 4.5 The case laws of the Hyderabad Stock exchange relied upon by the revenue was distinguished by pointing out that in that case .....

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ot in accordance with memorandum of the assessee trust. Ld. DR further contended that the principles of res judicata could not be applied to Income Tax Proceedings and therefore, the Ld. AO as well as Ld. CIT(A) after elaborate discussion reached the correct conclusion. 5. We have heard the rival contentions and perused relevant material on record. The basic facts are not in dispute. As far as the violation of Section 11(5) is concerned, we find that this section prescribes modes of investment / .....

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of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter referred to as investor) in the equity share capital of a company (hereafter referred to as investee) (A) which is engaged in dealing with securities or mainly associated with the securities market; (B) whose main object is to acquire the membership of another recognised stock exchange for the sole purpose of facilitating the members of the investor to trade on the said stock exchange through the investee in .....

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ections of SEBI. The main object of subsidiary was to acquire the membership rights of the BSE / NSE so as to facilitate the members of the investor. The assessee is a recognized stock exchange by Central Government in terms of Section 4 of the Securities Contract Regulation Act. Therefore, on these facts we find that the investment in subsidiary was in tune with the requirement of Section 11(5) read with Rule 17C and there was no violation of the same and therefore, the assessee could not be vi .....

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3 to 56 of the paper book, the main object of the assessee was to promote and assist dealings in securities of any nature issued by limited companies in India. Further, clause V of the said memorandum contained restrictive conditions as to distribution of dividend / bonus/ profits / remuneration / fees whatsoever to its members and the income / property of the assessee was to be applied solely for the promotion of its objects. Further, the assessee company was governed by its by-laws and chapter .....

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that the assessee was registered stock exchange governed by strict government / SEBI rules & regulations and the membership of the assessee exchange could be obtained by the public at large subject to fulfillment of certain entry conditions as to margins / safety / securities etc. The members of the assessee, in turn, could become sub-broker of the subsidiary company subject to fulfillment of further conditions which was in tune with the scheme framed by SEBI as evident from its letter date .....

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tock Exchange. A meeting at a Group on Revival of Small Stock Exchanges was held on September 8. 1999, to discuss the suggestions/revival plans forwarded by the small exchanges by Their revival. the Group considered the suggestions/revival plans submitted by the small stock exchanges and recommended that small stock exchanges may be permitted to promote a subsidiary which can acquire membership rights of larger stock exchanges viz. NSE/BSE/CSE/OSE or any other exchange subject to usual condition .....

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lves as sub-brokers of the subsidiary/company to enable them trade through the subsidiary/company 3. The subsidiary/company shall not undertake any dealing in securities on its Own account. 4. The subsidiary/company shall register only the members of the stock exchange, which is promoting the subsidiary/Company as its sub-broker and no other client/sub-broker shall be entertained by the subsidiary/company 5. the sub-brokers of the subsidiary/company shall maintain separate deposit with the subsi .....

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er. 7. The subsidiary/company shall collect margins from the sub-brokers for the payment of margins to the respective slack exchanges of which the subsidiary/ company is a member. The margin imposed by the subsidiary/company on its subbrokers shall not be less than the margin payable to the stock exchanges of which the subsidiary/company is the member. 8. The stock exchange shall incorporate the above mentioned conditions in the Memorandum of Association/Articles of Association of the subsidiary .....

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mentioned in Section 13(2) to class of persons enumerated in Section 13(3) which prima-facie weakens the conclusion of the revenue that the case of the assessee was hit by the provisions of Section 13(2) & 13(3). 5.4 It is further noted that the assessee stood gain by the rule of consistency also since the said investment in subsidiary was made by the assessee way back in FY 1999-2000 and there was no change either in shareholding pattern or activities of the assessee or its subsidiary since .....

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bservation of Hon ble Apex Court rendered in Radhasoami Satsang vs. CIT [193 ITR 321] which reads as under:- Strictly speaking, res judicata does not apply to income-tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year; where a 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 .....

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if it had been arrived at after due inquiry then the revenue is not permitted to deviate from its earlier stand. 5.5 Lastly, the revenue has alleged that the assessee failed to charge interest on the amount remaining outstanding at year-end. However, a perusal of ledger extract as produced in the paper book reveals that the same represent reimbursement of the last month of the relevant financial year which has been settled subsequently within a short span of time thereafter and hence, there was .....

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