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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 ..... 001 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 also noted that the assessee has received 100% subsidy HSE Securities Ltd. which could become the Broker of National Stock Exchange and Bombay Stock Exchange and the member of the assessee's stock exchange became sub-broker in order to trade at NSE & BSE through instrumentality of the subsidiary. It is also observed by the assessing officer that there was substantial increase in the expenditure incurred by the assessee without any corresponding increase in the subscription and fees collected from the brokers. According to the assessing officer, the assessee used the substantial portion of its income as well as propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 were benefited, when the brokers confirmed the lower rate for the seller and higher rates for the buyers. In the SBT system, the investors can view their order by sitting before the system itself and get confirmation on the same within no time online. Therefore misleading the investors which was resulting in huge profits to the brokers by mischievous methods is totally eliminated. Further, SEBI introduced unique client code for the benefit of investors. The brokers have to assign a unique client code for each investor. At the time of execution of transaction, the brokers have to feed the client code which is available with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 additional facilities to members to carry on activity of stock broking. On the issue of screen based trading facilities provided, it was submitted that SEBI vide letters dated 11.12.1995 and 19.1.1996 directed all stock exchanges to introduce on line stock trading system in the place of age old out cry system. Thus it has become mandatory requirement on the part of the HSE to provide the facility in the form of screen based trading system enabling the members to carry out the trading electronically in a more transparent manner to serve the interest of the investors. The facilities provided to the members are mandatory in nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change 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 rights of larger stock exchanges like NSE/BSE. A condition was stipulated that the subsidiary was to be wholly owned by the stock exchange. Accordingly, with the approval of SEBI vide their letter dated 1.2.2000, the assessee has collected refundable deposit of Rs.3 lakhs from each member and has invested the said amount in the subsidiary towards share capital in order to maintain the required net and to main the character of wholly owned subsidiary. It was submitted that the investment was application of the funds of the assessee institution to meet the requirement of the institution and does not confer any undue benefit to any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 accept the view of the Tribunal or that of the ITO that stock exchanges are only meant for the benefit of the brokers. This view, which in our opinion is too narrow, does not really appreciate the significance or purpose of such bodies. As. Mr. WTC King, the well known author on economics, has said" without the stock exchange, the savings of the community the sinews of economic progress and productive efficiency would be used much less completely, and much more wastefully, than they are now". In a modern complex society, particularly in a country like ours which is very fast trying to be industrialized, the need for stock exchanges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contribution to the assessee company by any of the members. Similarly members of the Governing Board have been erroneously held as falling within the scope of section 13(3)(cc). In this connection kind attention is invited to the extracts of the definition of the word 'Manager' as appearing in the 16th edition of the commentary on Companies Act by A. Ramaiah. In order to qualify as manager, a person has to have management of the whole or substantially the whole, of the affairs of a company and includes a director if he occupies the position of such manager, in such case of the assessee company, the governance of the company is not wholl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 percent of equity shares are held by the investor and the balance equity shares are held by members of such investors. 23. He drew our attention to Article 115(i) which deals with the administrative powers of governing board wherein sub-Articles deals with fee and charges. This article is to be imposed and implemented as per the requirements of the exchange and as per the discretion of the governing board. In this regard it is respectfully submitted that the revenue cannot enter into the arm chair of the governing board and decide that the collections should have been made to compensate the provisions of infrastructure facilities. The issue ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the assessee Exchange was not only empowered to collect such fees/charges, but also were expected to collect the same in order to protect the interest of the Exchange as well as to comply with the provisions of the Act to avail the benefit under section 11 of the Act. 26. The learned DR relied on the following judgments : 1. Action for welfare and Awakening in Rural Environment (AWARE) v. DCIT (2003) (AP) 263 ITR 13. 2. Director of Income-tax v. Bharat Diamond Bourse (2002) (S C) 259 ITR 280). 3. Agappa Child Centre v. CIT (1996) 226 ITR 211 (Ker.). 4. Ideal Public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nour 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 the purview of the expression 'object of general public utility' . Any act carried on by the assessee for the benefit of members of the assessee's exchange only and not for the benefit of public at large, then the assessing officer has to examine the availability of exemption under section 11 of the IT Act. The activities carried on by the assessee directly or indirectly which help its individual members , then its activities goes out of the spirit of charity and are detrimental to and destructive of the primary or main objects. If the assessee is having uncontrolle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,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 subsidiary and also mortgaged its immovable property worth Rs. 81.74 lakhs at Hymayat Nagar and pledged fixed deposits worth Rs. 35.61 lakhs to Canara Bank against bank guarantee to HSE Securities Ltd. These are contrary to the provisions of section 11 r.w.s. 13 of the IT Act. The assessee being registered under section 12A of the IT Act, the benefit of the assessee Exchange shall be for the public at large and not for the benefit of individual stock brokers or members of Governing Board of the assessee exchange. In our opinion, provisions of section 13(1)(c) r.w.s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. 37(1) of the IT Act. He has given this direction because the assessee has not made the claim of this in the income and expenditure account as the assessee shown the net receipt in the income and expenditure account by reducing the impugned amount from gross receipts and thereby shown the corresponding receipts by way of transfer from incomes received under various heads were kept out of such accounts and were reflected in the balance sheet directly. Accordingly, we confirm the order of the CIT(A) on this issue. The ground raised by the assessee is rejected. The CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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