2015 (2) TMI 539 - AT - Income Tax

Accrual of listing fee income - transfer to Investor Protection Reserve, etc. - accounting treatment - Held that - 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, this issue requires fresh examination at the end of the assessing officer. - matter remanded back - Decided in favour of revenue for statistical purposes. Diversion of listing fee by overriding title - Addition to transfer to Investor Protection Reserve, etc.- CIT(Appeals) deleted the additions - Held that - In the instant case, as 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 no where 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. 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 AO was justified in assessing the income so appropriate to investors reserve account etc., as income of the assessee. - Decided against assessee. A.R submition 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 is acceptable - 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.

Summary

Issues Involved:

1. Addition of listing fee of Rs. 1.34 crores.
2. Addition of Rs. 32.01 lakhs relating to the amount transferred to Investor Protection Reserve, etc.

Issue-wise Detailed Analysis:

1. Addition of Listing Fee of Rs. 1.34 Crores:

The Revenue contended that the assessee, following the mercantile system of accounting, should have accounted for the entire listing fee of Rs. 2.49 crores on an accrual basis. The assessee disclosed only Rs. 1.15 crores, citing uncertainty in the collection of the remaining amount due to the suspension of its trading platform and competition from digital stock exchanges like BSE and NSE. The assessee argued that recognizing the uncertain listing fee would violate Accounting Standard 9 (AS-9) on revenue recognition. The CIT(Appeals) accepted the assessee's contention without examining the element of "uncertainty."

The Tribunal noted that the assessee failed to demonstrate the uncertainty over the collection of the listing fees. The Tribunal emphasized that the assessee must provide company-wise details and evidence of uncertainty for the Rs. 1.34 crores. The Tribunal set aside the CIT(Appeals)'s order and remanded the issue to the Assessing Officer for fresh examination, directing the assessee to furnish necessary explanations and evidence.

2. Addition of Rs. 32.01 Lakhs Transferred to Investor Protection Reserve, etc.:

The assessee transferred amounts from the listing fee receipts to various reserve accounts, claiming these transfers were mandated by SEBI and constituted "diversion of income by overriding title." The Assessing Officer disagreed, treating these transfers as the assessee's income. The CIT(Appeals) sided with the assessee, noting that the reserves were not for the company's benefit but for investor protection and education as directed by SEBI, thus constituting a diversion by overriding title.

The Tribunal, however, found that the SEBI's directives were not stringent enough to constitute a diversion of income at source. It held that the amounts transferred to the reserve accounts were appropriations of income after reaching the assessee. The Tribunal cited the Supreme Court's observation in CIT vs. Sitaldas Tirathdas, emphasizing the distinction between income diverted before reaching the assessee and income applied to discharge an obligation after reaching the assessee. The Tribunal concluded that the amounts transferred to the reserves were mere appropriations and upheld the Assessing Officer's inclusion of these amounts as the assessee's income.

The Tribunal also addressed the assessee's alternative claim that if the transfers were not considered diversions, the expenses incurred from the reserve accounts should be deductible. The Tribunal remanded this matter to the Assessing Officer for examination and appropriate decision.

Conclusion:

The Tribunal allowed the Revenue's appeal for statistical purposes, remanding both issues to the Assessing Officer for fresh examination. The cross-objection filed by the assessee, supporting the CIT(Appeals)'s order, was dismissed.