2025 (4) TMI 328 - AT - Income Tax

Revision u/s 263 - AO allowed the contribution made by the assessee to Core SGF which as per the PCIT is a contingent liability and therefore held that the assessment order is based on wrong assumption of facts and incorrect application of law - assessee has contributed an amount towards Contribution to NSCCL Core Settlement Guarantee Fund ( Core SGF ) and debited the same in the Profit Loss account under the head Office Expenses which is a contingent liability of the assessee and therefore is not permissible deduction u/s 37 HELD THAT - From the perusal of the notices issued by the AO during the assessment proceedings and the reply filed by the assessee thereto we find that the issue of the claim of contribution to Core SGF was specifically raised during the scrutiny assessment proceedings and the same was duly replied to by the assessee. No basis in the findings of the PCIT that the claim of the assessee was allowed without conducting a proper inquiry and verification. Accordingly the reliance placed on the provisions of clause (a) of Explanation 2 to section 263(1) of the Act is completely misplaced in the present case. As regards the findings of the PCIT that the order passed by the AO is based on a wrong assumption of facts and wrong application of law since the contribution made by the assessee to Core SGF was allowed despite being a contingent liability we find in assessee s own case in National Exchange of India Ltd. 2024 (6) TMI 456 - ITAT MUMBAI after considering the SEBI s circular as noted in the foregoing paragraphs held that the statutory contribution made by the assessee to the Core SGF is allowable under section 37(1) of the Act as the said contribution has been made exclusively during the course of carrying on its business as a stock exchange. Since the view taken by the AO has also been affirmed by the Co-ordinate Bench of the Tribunal in the assessee s own case in subsequent years there cannot be any dispute that the same is a plausible view. Therefore PCIT has erred in concluding that the assessment order is based on a wrong assumption of facts and a wrong application of law - grounds raised by the assessee are allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

1. Whether the initiation of revision proceedings under section 263 of the Income Tax Act, 1961, by the Principal Commissioner of Income Tax (PCIT) was justified.

2. Whether the assessment order allowing the deduction of Rs. 170 crore contributed to the NSCCL Core Settlement Guarantee Fund (Core SGF) was erroneous and prejudicial to the interest of the revenue.

3. Whether the contribution to the Core SGF constitutes a contingent liability and thus is not allowable as a deduction under section 37 of the Income Tax Act, 1961.

ISSUE-WISE DETAILED ANALYSIS

1. Justification of Revision Proceedings under Section 263

Relevant legal framework and precedents: Section 263 of the Income Tax Act, 1961, allows the PCIT to revise an assessment order if it is erroneous and prejudicial to the interest of the revenue. The Explanation 2 to section 263(1) specifies conditions under which an order is deemed erroneous.

Court's interpretation and reasoning: The Tribunal examined whether the Assessing Officer (AO) conducted a proper inquiry into the contribution to the Core SGF. The Tribunal found that during the assessment proceedings, the AO specifically raised the issue and the assessee provided detailed responses with supporting documents.

Key evidence and findings: The AO had issued notices under section 142(1) asking for details related to the contribution, to which the assessee responded with a detailed note and relevant SEBI circulars.

Application of law to facts: The Tribunal concluded that the AO conducted a proper inquiry and verification, making the reliance on Explanation 2 to section 263(1) by the PCIT misplaced.

Treatment of competing arguments: The Tribunal found no basis for the PCIT's assertion that the AO's inquiry was inadequate, thus rejecting the PCIT's grounds for revision.

Conclusions: The Tribunal held that the initiation of revision proceedings under section 263 was not justified as the AO had conducted a proper inquiry.

2. Deductibility of Contribution to Core SGF

Relevant legal framework and precedents: Section 37(1) of the Income Tax Act, 1961, allows for deductions of expenses incurred wholly and exclusively for the purpose of business. The Tribunal also referenced its own decision in the assessee's case for subsequent years.

Court's interpretation and reasoning: The Tribunal observed that the contribution to the Core SGF was made as per SEBI's circular, which mandates such contributions for stock exchanges.

Key evidence and findings: The assessee had made a declaration in its financial statements regarding the contribution, and the SEBI circular was part of the assessment records.

Application of law to facts: The Tribunal found that the contribution was a statutory requirement and was made during the ordinary course of business, thus qualifying as a deductible business expense under section 37(1).

Treatment of competing arguments: The PCIT's argument that the contribution was a contingent liability was countered by the Tribunal's reliance on its own precedents, which recognized the contribution as a legitimate business expense.

Conclusions: The Tribunal concluded that the contribution to the Core SGF was not a contingent liability and was allowable as a deduction under section 37(1).

SIGNIFICANT HOLDINGS

The Tribunal held that:

"The initiation of revision proceedings under section 263 of the Act was not justified as the AO had conducted a proper inquiry into the contribution to the Core SGF."

"The statutory contribution made by the assessee to the Core SGF is allowable under section 37(1) of the Act as the said contribution has been made exclusively during the course of carrying on its business as a stock exchange."

The Tribunal set aside the impugned order passed under section 263 of the Act, thereby allowing the appeal of the assessee.