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TMI Blog2010 (2) TMI 637X X X X Extracts X X X X X X X X Extracts X X X X ..... 6-07. Since the issues involved in these two appeals are common in nature, they are clubbed together, heard together and disposed of vide this common order for the sake of convenience. 2. First we will take up the issue involved for the assessment year 2001-02. The main grievance in this assessment year 2001-02 is with regard to non-granting of the Exemption under section 11 of the Income-tax Act, 1961. 3. Brief facts are for the year under consideration is that the assessing officer has observed that the assessee has incurred expenditure to the extent of Rs. 10,41,99,227 during the period from 1.4.1996 to 31.3.2001 for providing additional infrastructural facilities to the Member Brokers. Such infrastructural facilities include development of screen based training system, terminals, Netscape browsers, computers and other accessories for participating in the Screen Based Trading System (SBTS). Besides this, the Member Brokers were insured to the extent of Rs. 10 lakhs each through contribution to Stock Brokers' Insurance Policy. Further, an amount of Rs. 82 lakhs were spent for setting up of Interconnected Stock Exchange India Ltd. (ICSI) for the benefit of its Members. It is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or had to book their orders at the private office of brokers, the brokers had to execute the same at the trading platform provided by the exchange at its premises. The investors were not allowed into the trading platform for monitoring the execution and confirmation of their orders. The investor cannot witness the actual price at which a script is purchased or sold. As per the directions of SEBI, online trading/screen based trading system was introduced. In this system of trading, the brokers will operate the trading from the terminals provided at their office premises. The investors are also allowed to the brokers office for placing their orders. The investors are able to witness the prices of the shares and transactions at which they are bought during the entire day on any system. Transparency and speed in the execution of order are the main benefit of the screen based trading system. 7. He submitted that in the outcry system, order of the investors was confirmed only at the last evening by the brokers to their clients. Most of the time the price of the script were volatile varying upto 5% to 10% and some time more during the intraday. Investors were put to loss and brokers wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l association formed for the purpose of protecting the public interested in securities, to support and protect the character and status of brokers and dealers, to assist regulate and control the trade or business in securities, to maintain high standards of commercial honour and integrity, to promote and inculcate honourable practices and just and equitable principles of trade and business, to discharge and suppress malpractices, to settle disputes and to decide all questions of usage, custom or courtesy in the conduct of trade and business by pooling the resources from members. 10. It was also submitted that in the year 1995, a large number of new members were enrolled and an amount of Rs. 13.93 crores was received and in the subsequent years, this amount was utilized for a building at Somajiguda because with the increase of members, a larger building would be necessary and also for introduction of screen based trading as per the directions of SEBI. In addition, various deposits such as members security deposit, remiseries security deposit, deposit for space in the new building, and capital adequacy deposit were also collected from members which were available for providing addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that insofar as section 13(1) is concerned, the provision of facilities to the member brokers is a primary purpose of the exchange and HSE being an institution created before 1-4-62 the user of the facilities provided is a way of compliance with the mandatory term of the trust or mandatory rule governing the institution. As regards, the issue whether the benefit provided to the members is for their sole benefit or for public interest, the decision of Andhra Pradesh High Court were brought to the notice of the assessing officer wherein the AP HC discussed in detail the activity of the exchange and observed that the stock exchange is eligible for exemption under section 11. It was submitted that the stock brokers insurance policy, was taken up in pursuance of the direction issued by the Ministry of Finance vide letter No.F.No.l/71/SE/91 dt. 25.9.1991. As regards floating of subsidiary, viz., Hyderabad Stock Exchange Securities Ltd., it was submitted that SEBI as per their letter dated 26.11.1999 allowed the subsidiary concept as part of revival and survival strategy to the regional stock exchanges and members and to cater to the needs of small investors by acquiring membership rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use any property of the institution for the undue benefit of the limited corpus of persons. The purpose of section 13(3) was to prevent diversion of funds of the institution for the benefit of a few members or other relatives. In the present case, there is no such diversion and the use of funds is a legitimate application of funds to achieve the primary purpose of the exchange. 15. Further he submitted that only income of the institution and not corpus can be taxed in case of contravention of the provisions of section 13 It was submitted that there was substantial contribution to the corpus of the institution and it was these funds that were utilized to meet the capital expenses on construction of building, provision of screen based trading system, investment in HSE Securities Limited and advanced to Interconnected Stock Exchange of India etc. The assessing officer however, completed the assessments denying exemption under section 11 and treated the assessee as taxable entity for the assessment year 2001-02. 16. He relied on the judgment of the Hon ble High Court of AP in the case of Hyderabad Stock Exchange Ltd. v. CIT (66 ITR 195 AP) wherein held that : "We are unable to ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tility but has also a charitable purpose". 17. He submitted that in the light of the above decision of the Hon'ble HC, the CIT(A) ought to have held that as long as the provision of facilities to the members have the ultimate object of serving the general public, such provision is not caught within the mischief of section 13 of the IT Act whether it is 13(1)(c)(ii) or 13(2)(a) or (b). 18. It was bought to our notice that Shri Badri Narayan Rathi ceased to be a member in the year 1984 and he is not a person covered under section 13(3)(a) of the Act. The CIT(A) ought to have appreciated that the member brokers are not caught within the mischief of section 13(3)(a) to (e). A reference to clause 2 of the Memorandum of Association as per which the stock exchange shall be constituted of those persons who are and hereafter be duly admitted as members of the exchange. Articles 29 and 30 of the Memorandum and Articles of Association fixes the entrance and membership fee. Payment of entrance fee or membership fee cannot be termed as contribution within the meaning of section 13(3)(b). Even otherwise no case has been made by the assessing officer to show that there has been substantial co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that Central Board of Direct Tax has amended Rule 17(c ) by introducing sub-rule (v) w.e.f. 26.11.1997 to accommodate the investment made by the stock exchange in its wholly owned subsidiary. Therefore there is no violation of section 11(5) of the Act. 22. He drew out attention to sub-clause (v) of Rule 17(c) of IT Rules, 1962 which is reproduced hereunder : (v) investment made by the recognized stock exchange referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter referred as to investor) in the equity share capital of a company (hereafter referred to as investee). (A) Which is engaged in dealing with securities or mainly associated with the securities market (B) Whose main object is to acquire the membership of another recognized stock exchange for the sole purpose of facilitating the members of the investor to trade on the said stock exchange through the investee in accordance with the directions or guidelines issued under the Securities and Exchange Board of India Act, 1992 (15 of 1992) by the Securities and Exchange Board of India established under section 3 of the Act and (C) In which at least fifty one pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding the learned departmental representative the member brokers are covered within the meaning of provisions of section 13(3)(3)(cc) of the Act. The claim of the assessee is that such members were non executive directors who did not receive any remuneration or sitting fees and hence does not make any difference to their being prohibited persons. According to him, the assessee extended the benefit to the interested persons without adequate compensation. Even if it is presumed that the equipment etc. were lent to the members 'user licence' basis, yet the same was done without adequate security or adequate interest. Since nothing was collected from the members for providing benefits to them, there is a clear violation of provisions of section 13(2a) and section 13(2b) and section 13(cc) of the Act. Further, he submitted that the Article 115(1) of the Assessee company clearly provided for collection of separate and additional charges or fees over and above the dues and charges provided for in the Rules, Bylaw and Regulations of the Exchange from the members for the 'use of equipment or facilities or any particular service or privileges granted'. He submitted that the Governing Board o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the definition of 'Charitable purpose' contained under section 2(15) of the IT Act. Once the institution has been registered under section 12A, it is for the assessing officer to find out whether the income of the institution has been applied for the objects of the institution and the statutory conditions as contained under sections 11 to 13 are fulfilled by the assessee. To avail benefit under section 11, the activity carried out by the assessee to be for the benefit of general public. The main object shall aim at maintaining high standards of commercial honour and integrity providing hon ble practices discouraging and suppressing malpractices, settling disputes among brokers, dealers and jobbers, deciding all questions of usage, custom or courtesy in conducting the business of brokers, dealers and jobbers in stocks, shares and like securities were to lead to the advancement or promotion of trade, commerce and industry resulting in economic prosperity endured for the benefit of general public. The main object to be attend by the assessee are to be promote trade, commerce and industry leading to the economic prosperity of the people at the large and such object fall within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the interest of the exchange as well as the compliance of the provisions of Act to avail the exemption under section 11. The members of the assessee exchange cannot get undue advantages at the cost of assessee exchange. The members of the exchange being the integral part of the constitution of the exchange who are interested persons as per the provisions of section 13(1)(c) of the Act and they are precluded taking any undue advantages from the assessee exchange. As seen from the facts of the case, the assessee has incurred an additional expenditure of Rs. 10,64,33,816 for providing infrastructure facilities in the form of screen based trading system, on line connectivity, CMS inter connectivity, trading facility in National Stock Exchange and Bombay Stock Exchange and also insurance cover under stock brokers Insurance Policy. The benefits of these expenditures have been gone to the individual stock members of the assessee and also to be members of the Governing Board which cannot be permitted under the provision of section 11. Further, it is also fact that the assessee invested its fund in its wholly owned subsidiary viz., HSE Securities Ltd., advanced interest free loan to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the learned AR, it is not proper to CIT(A) to hold that when the assessee's income is to be determined on commercial lines, these receipts have to form part of assessee's receipts. He submitted that the CIT(A) wrongly held that a part of the receipts were to be applied for the welfare of the investors and trades could not make any difference as far as application of accounting principles are concerned. It is submitted by the learned AR that the CIT(A) should have held that these amounts constituted application of income and accordingly, the accounting method adopted by the assessee ought to have been accepted because the amounts transferred to the respective fund viz., investor service cell, investor protection fund and settlement guarantee fund constitute application and hence constitute receipts and applications at the same time. The learned DR relied on the order of the CIT(A). 30. We have heard both the parties on this issue. The CIT(A) has given direction on this issue to the assessing officer that the claim of the assessee to be examined and allow such expenditure after being satisfied about the genuineness of the claim keeping in view the provisions of section 29 r.w.s. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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