2015 (6) TMI 68 - AT - Income Tax

Deduction of Interest income on account of transfer to Trade Guarantee Fund, Broker s Contingency Fund etc. - Fund established as per guidelines laid down by SEBI - Interest income required to be transferred to such funds as directed by SEBI - Held that - We have perused the compilation filed before us in the light of the case laws cited. We are able to trace an account in the compilation pertained to brokers contingency fund in which the Assessee has credited the interest on loan as granted by the Assessee as well as debited an amount given as loan to members. Rest of the accounts were not found in the compilation although it was specifically asked to refer but learned AR has failed to indicate that account. The issue has to be decided in the light of the facts that if there was an overriding title of SEBI then the accrual interest cannot be taxed from the assessee. The Assessee is expected to place on record the SEBI guidelines to substantiate the creation of the fund. The Assessee is therefore directed to place all the three accounts to establish that the interest was made part and parcel of the fund and no part of the interest so accrued was the income of the Assessee. We, therefore, restore this issue back to the stage of the AO to consider all these three accounts and if it is demonstrated that the interest is accrued but funds were taken out for the purpose of the benefit of the members and the assessee has no benefit of accrual of interest then naturally in the absence of the element of income the additions so made deserves to be deleted. With these remarks the grounds may be treated as allowed but for statistical purpose being restored back for denovo consideration by the AO. - Appeal is allowed for statistical purpose.

Summary

Issues Involved:
1. Whether the interest income transferred to various funds as per SEBI guidelines is an allowable deduction.
2. Whether the interest income is taxable in the hands of the assessee or the respective funds.

Detailed Analysis:

Issue 1: Allowability of Deduction for Interest Income Transferred to Funds
The primary issue revolves around whether the interest income amounting to Rs. 23,64,489/- transferred to various funds such as the Trade Guarantee Fund, Broker's Contingency Fund, and others, is an allowable deduction. The assessee argued that these transfers were mandatory as per SEBI guidelines and were utilized for specific purposes, thus should not be treated as income.

The Assessee explained that the Trade Guarantee Fund and Broker's Contingency Fund were created as per SEBI guidelines and were utilized to safeguard the interests of members and investors. The funds were considered liabilities of the Stock Exchange and the interest earned was transferred to these funds as per SEBI's directions.

However, the AO disallowed the deduction, stating that the interest income was not taxed anywhere else and since these funds were reflected in the books of the assessee, the onus was on the assessee to pay tax on such interest. The AO concluded that the interest income should be treated as the income of the assessee.

Issue 2: Taxability of Interest Income
The CIT(A) upheld the AO's decision, stating that the interest income on these funds is not taxable elsewhere if not taxed in the hands of the assessee. The CIT(A) emphasized that any income received or earned by any person is taxable unless specifically exempt. The CIT(A) noted that the funds were maintained in the books of the assessee, and there was no overriding title that would exempt the income from being taxed in the hands of the assessee.

The CIT(A) also dismissed the relevance of the dropping of proceedings under section 263 in the assessment year 2004-05, stating that each year is a separate proceeding and res judicata does not apply to income tax proceedings. Therefore, the CIT(A) confirmed the addition made by the AO.

Appellate Tribunal's Decision:
The Tribunal considered the arguments from both sides. The Assessee's representative highlighted that the funds were created as per SEBI guidelines and that interest income was transferred to these funds as mandated. The representative also pointed out that in past assessments, similar claims were upheld by the Appellate Authority.

On the other hand, the Revenue's representative argued that if the income is not taxed in the hands of the assessee, it would not be taxed at all, and there was no overriding title to exempt the interest income under any provisions of the IT Act.

The Tribunal directed the Assessee to place on record the SEBI guidelines and all relevant accounts to substantiate that the interest was part of the fund and not the income of the Assessee. The Tribunal restored the issue back to the AO for denovo consideration, directing the AO to verify if the interest was accrued but utilized for the benefit of the members without any benefit to the assessee.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to reconsider the issue based on additional evidence and guidelines provided by SEBI. The decision emphasizes the need for clear evidence of the utilization of interest income as per SEBI guidelines to determine its taxability.