2010 (2) TMI 637 - AT - Income Tax

Exemption u/s 11 - Prohibited category of persons u/s 13 - Expenditure - assessee not made the claim of the income and expenditure account as the assessee shown the net receipt in the income and expenditure account by reducing the impugned amount from gross receipts and thereby shown the corresponding receipts by way of transfer from incomes received under various heads were kept out of such accounts and were reflected in the balance sheet directly - ground raised by the assessee is rejected - CIT(A) has followed his order for the assessment year 2001-02 while deciding this issue for the assessment year 2006-07 - appeals of the assessee dismissed

Summary

Issues Involved:
1. Non-granting of Exemption under section 11 of the Income-tax Act, 1961.
2. Addition made on the transfer to the Investors Service Cell, Investors Protection Fund, and Trade Guarantee Funds.

Issue-wise Detailed Analysis:

1. Non-granting of Exemption under section 11 of the Income-tax Act, 1961:

The primary grievance for the assessment year 2001-02 was the non-granting of exemption under section 11 of the Income-tax Act, 1961. The assessing officer observed that the assessee incurred significant expenditure for providing additional infrastructural facilities to the Member Brokers, which included the development of screen-based trading systems, terminals, Netscape browsers, computers, and other accessories. The officer noted a substantial increase in expenditure without a corresponding increase in subscription and fees collected from brokers. It was concluded that the assessee used a substantial portion of its income and property for the benefit of prohibited persons under section 13(1)(c) read with section 13(1)(3) of the Act, thus denying exemption under section 11.

On appeal, the CIT(A) upheld the assessing officer's decision, stating that the income of the assessee had to be computed on commercial lines. The assessee contended that it was a registered stock exchange enjoying exemption under section 11 for several years and that the infrastructural facilities were mandated by SEBI to benefit investors by introducing transparency and speed in the execution of orders. The assessee argued that the investments in infrastructure did not create any undue benefit to brokers but rather eliminated dubious practices.

The Tribunal acknowledged that the stock exchange's objective was to serve the general public utility and had been recognized as a charitable institution entitled to exemptions under section 11. However, it was emphasized that any activity carried out solely for the benefit of members, ex-members, employees, or their dependents, and not for the general public, would disqualify the assessee from exemption under section 11. The Tribunal found that the assessee's expenditures on infrastructure, insurance policies, and investments in subsidiaries benefited individual stock members and the Governing Board, violating sections 11 and 13 of the Act. Consequently, the exemption under section 11 was denied.

2. Addition made on the transfer to the Investors Service Cell, Investors Protection Fund, and Trade Guarantee Funds:

The assessing officer added Rs. 58,48,334 for the assessment year 2001-02, representing transfers to the Investors Service Cell, Investors Protection Fund, and Trade Guarantee Fund. The assessee argued that these funds were established as per SEBI and government directives and should be treated as application of income in furtherance of the assessee's objects.

The CIT(A) observed that these amounts were reduced from gross receipts and shown as net receipts in the income and expenditure account. The CIT(A) directed the assessing officer to examine the genuineness of the claim and allow such expenditure under section 29 read with section 37(1) of the Act. The Tribunal upheld the CIT(A)'s decision, confirming that the amounts transferred to the respective funds constituted application and should be reflected in the balance sheet directly.

Conclusion:

The Tribunal dismissed both appeals of the assessee, confirming the denial of exemption under section 11 for the assessment year 2001-02 and the addition made on transfers to specified funds. The Tribunal emphasized that the activities benefiting individual members or the Governing Board violated the provisions of sections 11 and 13 of the Income-tax Act, thereby disqualifying the assessee from the claimed exemptions.