2017 (9) TMI 807 - AT - Income Tax

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 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 visited with consequential disallowance u/s 13(1)(d)(iii). 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 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 subsidiary company was in tune with SEBI directions and contradicts the stand of the revenue that the sub-broker membership of the subsidiary was open to select few and not to public at large and the benefit to select few was extended by the assessee. It is an admitted position that the assessee was being reimbursed on actual basis by the subsidiary for various services and therefore, it was wrong to infer that the assessee extended benefits as 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). 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 time thereafter and hence, there was no occasion / justification to charge the interest against the same which further negates this stand of the revenue that the assessee extended pecuniary benefits to its subsidiaries in contravention of law. The totality of above discussion leads us to an inevitable conclusion that the revenue was not justified in denying the said exemption to the assessee. Therefore, we are inclined to hold that the assessee was entitled for the said exemption u/s 11 / 12 and the appeal of the assessee stands allowed.

Summary

Issues Involved:
1. Denial of exemption under Sections 11 and 12 of the Income Tax Act, 1961.
2. Alleged violation of Sections 11(5) and 13(1)(d)(iii).
3. Alleged violation of Sections 13(2)(a), 13(2)(b), 13(2)(d), and 13(2)(g).
4. Rule of consistency in tax assessments.
5. Non-charging of interest on outstanding amounts.

Issue-Wise Detailed Analysis:

1. Denial of Exemption under Sections 11 and 12:
The assessee, a corporate entity registered under Section 25 of the Companies Act, 1956, and a registered Trust under Section 12A, was denied exemption under Sections 11 and 12 for the Assessment Years 2010-11 and 2011-12. The primary contention was that the assessee held 42.50 Lacs equity shares in its 100% subsidiary, OTCEI Securities Ltd. (OSL), which was not a public sector company. This led the Assessing Officer (AO) to conclude that the assessee's case was hit by the provisions of Sections 11(5) and 13(1)(d)(iii), thus denying the exemption.

2. Alleged Violation of Sections 11(5) and 13(1)(d)(iii):
The AO noted that the investment in OSL was not in conformity with the prescribed modes of investment under Section 11(5). However, the Tribunal found that the investment was made in accordance with SEBI's directions and was one of the prescribed modes under Rule 17C of the Income Tax Rules. Therefore, the investment did not violate Section 11(5) and the consequential disallowance under Section 13(1)(d)(iii) was not justified.

3. Alleged Violation of Sections 13(2)(a), 13(2)(b), 13(2)(d), and 13(2)(g):
The AO claimed that the assessee extended benefits to OSL by not charging interest on outstanding amounts and by providing various services. However, the Tribunal noted that the assessee was reimbursed on an actual basis for services rendered to OSL. The outstanding amounts at year-end were settled in a short span of time in the next financial year, negating the need to charge interest. Additionally, the creation of the subsidiary was in line with SEBI guidelines, and the membership of the assessee trust was open to the public, not restricted to a select few.

4. Rule of Consistency in Tax Assessments:
The assessee argued that the investment in the subsidiary was made in the financial year 1999-2000, and the revenue had accepted the exemption claim in previous years. The Tribunal upheld this argument, citing the rule of consistency and the Supreme Court's observation in Radhasoami Satsang vs. CIT, which states that the revenue should not deviate from its earlier stand without cogent reasons.

5. Non-Charging of Interest on Outstanding Amounts:
The AO's objection regarding non-charging of interest on outstanding amounts was dismissed by the Tribunal. It was found that the outstanding amounts represented reimbursements for the last month of the financial year and were settled promptly in the next financial year. Therefore, there was no justification for charging interest.

Conclusion:
The Tribunal concluded that the revenue was not justified in denying the exemption under Sections 11 and 12 to the assessee. The investments and the creation of the subsidiary were in compliance with SEBI guidelines and the Income Tax Rules. The rule of consistency also supported the assessee's claim for exemption. Consequently, the appeals for both Assessment Years 2010-11 and 2011-12 were allowed.

Order Pronounced:
The order was pronounced in the open court on 28th July, 2017.