2024 (6) TMI 411 - AT - Income Tax

Revision u/s 263 - Accrual of interest income - interest earned on the contribution made by the assessee towards Core Settlement Guarantee Fund - as per CIT AO erred in not examining the taxability of accrued interest income being investment income of the assessee before allowing its application in the accounts - HELD THAT - As ssessment order passed u/s. 143(3) is reviewed by Ld PCIT which was passed after due scrutiny by the AO after collecting information through various notices issued to the assessee. The AO has verified the issue of contributions to Core Settlement Guarantee Fund (Core SGF) set upon the direction of SEBI. This issue was under dispute in the previous assessment year also. The contribution to this funds are under the control of ICCL. The above funds were created to safeguard the interest of investors and any income accrued to this funds are exempt u/s. 10(23EE) of the Act. Assessee is only a contributor to the funds and it is under control of ICCL. The above funds can be considered as part of assessee s operation. The income accrued out of funds in the control of ICCL is chargeable to tax in their hands and ICCL has already submitted a letter indicating that this income was duly declared by them as their income and they have claimed that as exempt. That being so, the Ld PCIT has not brought on record how the share of income earned by the ICCL are chargeable to tax in the hands of the assessee We observe from the record that Assessing Officer has collected the information from the assessee and as per the assessment records there is no evidences to show that Assessing Officer has not verified the same in detail. However, the assessee has submitted all the relevant information, the basis of allocation and adjustment of exempt income before the Assessing Officer. Even otherwise if we consider that Assessing Officer has not verified the adjustment of exempt income claim made by the assessee it can be considered as erroneous order. However, in order to invoke provisions of section 263 of the Act, both conditions has to be satisfied, not just erroneous, even the condition, prejudicial to the revenue. But, we do not agree with the Ld. Pr.CIT that the condition of prejudicial to the interest of the Revenue is satisfied - Decided in favour of assessee.

Summary

Issues Involved:
1. Examination of taxability of accrued interest income.
2. Validity of the order passed u/s 263 of the Income-tax Act, 1961.

Summary:

1. Examination of Taxability of Accrued Interest Income:
The Ld. Pr.CIT observed that the Assessing Officer (AO) erred in not examining the taxability of accrued interest income of Rs. 2.79 crores being investment income of the assessee before allowing its application in the accounts. The Ld. Pr.CIT noted that the SGF remained unutilized, and the investment income should have been routed through the profit and loss account. The failure of the AO to examine this aspect rendered the assessment erroneous and prejudicial to the interest of the revenue within the meaning of Section 263 of the Act.

2. Validity of the Order Passed u/s 263 of the Income-tax Act, 1961:
The assessee contended that the issue of taxability of contribution and income thereon was already examined by the AO during the proceedings u/s 143(3) of the Act. The AO had considered the detailed submissions and explanations provided by the assessee, including the SEBI circular and the provisions of Section 10(23EE) of the Act, which exempt the specified income of the Core Settlement Guarantee Fund (SGF). The assessee argued that the interest income on contributions made to the Core SGF belongs to the SGF and not to the assessee, and hence, is not liable for tax in the hands of the assessee.

The Tribunal observed that the AO had scrutinized the issue of contributions to the Core SGF and the related interest income during the assessment proceedings. The income accrued to the SGF was exempt u/s 10(23EE) of the Act in the hands of the Indian Clearing Corporation Limited (ICCL), and the assessee had no right over this income. The Tribunal noted that the Ld. Pr.CIT did not demonstrate how the income earned by ICCL was chargeable to tax in the hands of the assessee. The Tribunal concluded that the assessment order was not prejudicial to the interest of the revenue as the income was exempt in the hands of ICCL, and the contribution made by the assessee was allowable as an expense.

The Tribunal held that both conditions for invoking revision proceedings u/s 263'erroneous and prejudicial to the interest of the revenue'were not satisfied. Therefore, the order passed u/s 263 was set aside, and the appeal filed by the assessee was allowed.

Conclusion:
The appeal filed by the assessee was allowed, and the order passed u/s 263 was set aside as the conditions of being erroneous and prejudicial to the interest of the revenue were not met. The interest income on contributions to the Core SGF was exempt in the hands of ICCL, and the contribution made by the assessee was allowable as an expense.