DCIT, CHENNAI V. Madras Stock Exchange Ltd., CHENNAI

ITA 2546/CHNY/2014

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 8757 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-02-2015
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2010-2011
• Appeal Filed On: 07-10-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: N MADHAVAN
• Assessee Lawyers: V S JAYAKUMAR
• Keywords: Opportunity of being heard; Diversion of income
• Section: 43B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI .. , . . !' , #$% BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI S.S. GODARA, JUDICIAL MEMBER ./ ITA NO.2546/MDS/2014 & C.O. NO. 126/MDS/2014 # & '& / ASSESSMENT YEAR : 2010-11 THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE IV(1), CHENNAI - 600 034. V. M/S MADRAS STOCK EXCHANGE LTD., EXCHANGE BUILDING, POST BOX NO.183, NEW NO.30, SECOND LINE BEACH, CHENNAI - 600 001. PAN : AAACM 7611 E ()*/ APPELLANT) (,-)*/ RESPONDENT& CROSS-OBJECTOR) )* . / / APPELLANT BY : SHRI N. MADHAVAN, JCIT ,-)*./ / RESPONDENT BY : SHRI V.S. JAYAKUMAR, ADVOCATE 0 .1 / DATE OF HEARING : 28.01.2015 2'' .1 / DATE OF PRONOUNCEMENT : 04.02.2015 / O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THE APPEAL FILED BY THE REVENUE AND THE CROSS-OBJ ECTION FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDE R DATED 25.10.2013 PASSED BY LD. COMMISSIONER OF INCOME TAX (APPEALS)- IV, CHENNAI AND THEY RELATE TO ASSESSMENT YEAR 2010 -11. 2 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 2. THE GROUNDS URGED BY THE REVENUE RELATE TO THE F OLLOWING TWO ISSUES:- (A) ADDITION OF LISTING FEE OF ` 1.34 CRORES (B) ADDITION OF ` 32.01 LAKHS RELATING TO THE AMOUNT TRANSFERRED TO INVESTOR PROTECTION RESERVE, ETC. THE ASSESSEE HAS FILED THE CROSS-OBJECTION SUPPORTI NG THE ORDER OF THE LD. CIT(APPEALS). 3. THE FACTS RELATING TO THE CASE ARE STATED IN BRI EF. THE ASSESSEE-COMPANY IS RUNNING A STOCK EXCHANGE. DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. NOTICED THAT TH E ASSESSEE HAS DISCLOSED LISTING FEE INCOME ONLY TO THE TUNE OF ` 1.15 CRORES, WHERE AS IT WAS SEEN THAT AGGREGATE AMOUNT OF LISTING FEE RECEIVABLE BY THE ASSESSEE WAS ` 2.49 CRORES. THE A.O. FURTHER NOTICED THAT THE ASSESSEE HAS APPROPRIATED FOLLOWING AMOUNTS OUT OF THE LISTING FEE RECEIPTS AND ACCORDINGLY DISCLOSED THE LISTING FEE NET OF THESE AMOUNTS. (A) INVESTOR SERVICE RESERVE ` 23,16,889 (B) INVESTORS PROTECTION RESERVE ` 1,15,844 (C) CONTRIBUTION TO SEBI ` 12,58,445 FURTHER, THE ASSESSEE HAD RECEIVED A SUM OF ` 7,69,238/- AS INTEREST INCOME OUT OF THE DEPOSITS MADE FROM THE AMOUNTS RE CEIVED FROM THE COMPANIES AT THE TIME OF THEIR LISTING. THE AS SESSEE HAD 3 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 TRANSFERRED THE ABOVE SAID INTEREST ALSO TO INVESTO R SERVICE RESERVE ACCOUNT. THE ASSESSEE DID NOT DISCLOSE THE ABOVE S AID INTEREST INCOME ALSO AS ITS INCOME. THE SUBMISSION OF THE A SSESSEE IN THIS REGARD WAS THAT THE ABOVE SAID AMOUNTS HAVE BEEN DI VERTED BY OVERRIDING TITLE AS PER THE DIRECTIONS ISSUED BY SE CURITIES & EXCHANGE BOARD OF INDIA (SEBI) AND HENCE THEY SHALL NOT CONSTITUTE INCOME OF THE ASSESSEE. THE ASSESSING OFFICER DID NOT ACCEPT THE CONTENTIONS OF THE ASSESSEE. DURING THE PENDENCY O F ASSESSMENT PROCEEDINGS, THE ASSESSEE APPROACHED THE JOINT COMM ISSIONER OF INCOME TAX SEEKING DIRECTIONS UNDER SECTION 144A OF THE INCOME- TAX ACT, 1961 (IN SHORT 'THE ACT'). THE LD. JCIT H ELD THAT THE ENTIRE LISTING FEE OF ` 2.49 CRORES HAS TO BE ASSESSED IN THE HANDS OF THE ASSESSEE ON ACCRUAL BASIS, SINCE THE ASSESSEE IS FO LLOWING MERCANTILE SYSTEM OF ACCOUNT. THUS, THE LD JCIT CO NCURRED WITH THE VIEW TAKEN BY THE ASSESSING OFFICER ON THE ISSUE RE LATING TO LISTING FEE. WITH REGARD TO THE AMOUNTS TRANSFERRED TO VA RIOUS RESERVES, THE LD. JCIT CONCURRED WITH THE VIEW TAKEN BY THE A SSESSING OFFICER THAT THEY ARE MERE APPROPRIATION OF INCOME AND NOT DIVERSION OF INCOME BY OVERRIDING TITLE. WITH REGARD TO THE CON TRIBUTION MADE TO SEBI, THE LD. JCIT DIRECTED THE ASSESSING OFFICER T O VERIFY THE FACTS AND DECIDE THE ISSUE ACCORDINGLY. 4 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 4. PURSUANT TO THE DIRECTIONS ISSUED BY THE LD. JCI T, THE ASSESSING OFFICER ASSESSED THE ENTIRE AMOUNT OF ` 2.49 CRORES AS INCOME OF THE ASSESSEE WHICH HAS RESULTED IN AN ADD ITION OF ` 1.34 CRORES IN THE LISTING FEE RECEIPTS. THE ASSESSING OFFICER ASSESSED THE AMOUNT TRANSFERRED TO INVESTORS PROTECTION RESE RVE AND INVESTOR RESERVE FUND (INCLUDING INTEREST INCOME) AGGREGATIN G TO ` 32.01 LAKHS AS INCOME OF THE ASSESSEE. WITH REGARD TO TH E CONTRIBUTION MADE TO SEBI, THE ASSESSING OFFICER EXAMINED THE SA ME AND MADE CERTAIN DISALLOWANCE BY INVOKING PROVISIONS OF SECT ION 43B OF THE ACT. 5. IN THE APPEAL FILED BY THE ASSESSEE, LD. CIT(APP EALS) DELETED THE ADDITIONS RELATING TO THE LISTING FEE RECEIPTS AND AMOUNTS TRANSFERRED TO RESERVE FUNDS. AGGRIEVED, THE REVEN UE HAS FILED THIS APPEAL CHALLENGING THE ORDER OF THE LD. CIT(APPEALS ) ON THE ABOVE TWO ISSUES. 6. THE FIRST ISSUE RELATES TO THE ADDITION MADE IN THE LISTING FEE RECEIPTS. THE LD D.R SUBMITTED THAT THE ASSESSEE I S FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND IT IS COLLECTIN G THE LISTING FEE FROM THE COMPANIES LISTED IN ITS STOCK EXCHANGE AT A PRESCRIBED RATE. SINCE THE COMPANIES CONTINUE TO BE LISTED IN THE ST OCK EXCHANGE, 5 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 THEY ARE OBLIGED TO PAY THE LISTING FEE AS PER THE LISTING AGREEMENT AND HENCE THE ASSESSEE WOULD GET THE RIGHT TO COLLE CT THE SAME. SINCE THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM O F ACCOUNTING, THE ASSESSEE IS OBLIGED TO ACCOUNT FOR THE LISTING FEES RECEIVABLE AS PER THE LISTING AGREEMENT. THE ASSESSEE HAS, HOWEV ER, ACCOUNTED FOR THE LISTING FEE ON CASH BASIS, WHICH IS AGAINST THE CONCEPT OF MERCANTILE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASS ESSEE. THE LD D.R FURTHER SUBMITTED THAT THE ASSESSEE HAS BEEN CO LLECTING THE LISTING FEE FROM VARIOUS COMPANIES FOR THE PAST SEV ERAL YEARS AND HENCE THE CLAIM OF UNCERTAINTY OVER ITS COLLECTION IS NOT TENABLE. 7. ON THE CONTRARY, THE LD A.R SUBMITTED THAT THE A SSESSEE IS COLLECTING LISTING FEE EVERY YEAR FROM VARIOUS COMP ANIES LISTED IN THE STOCK EXCHANGE RUN BY THE ASSESSEE. HOWEVER, THE A SSESSEE WAS CONSTRAINED TO SUSPEND ITS TRADING PLATFORM DUE TO TECHNICAL ADVANCEMENTS AND HENCE THE STOCK EXCHANGE HAS NO TR ADING PLATFORM SINCE 2003 ONWARDS. THIS SITUATION OCCURR ED MAINLY DUE TO FORMATION OF DIGITAL STOCK EXCHANGES LIKE BSE AND N SE. HENCE, THE COMPANIES LISTED IN THE STOCK EXCHANGE OF THE ASSES SEE ARE NOT GETTING EFFECTIVE BENEFITS OF A STOCK EXCHANGE. HE NCE, THE ASSESSEE WAS NOT IN A POSITION TO ENFORCE THE PAYME NT OF LISTING FEE FROM ITS MEMBERS LEST THEY SHOULD DELIST THEIR COMP ANY FROM THE 6 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 STOCK EXCHANGE. HOWEVER, THE COMPANIES STILL REMAIN ATTACHED WITH THE ASSESSEE DUE TO VARIOUS SERVICES, ADVICES AND G UIDANCE PROVIDED BY THE ASSESSEE TO THE COMPANIES LISTED WI TH IT LIKE CONDUCTING INVESTOR AWARENESS/EDUCATION PROGRAM ETC . IN THIS PRACTICAL SITUATION, THERE WAS UNCERTAINTY ABOUT TH E CONTINUITY OF THE COMPANIES AND ALSO ABOUT THE PAYMENT OF LISTING FEE . HENCE, THE ASSESSEE HAS BEEN FOLLOWING THE METHOD OF ACCOUNTIN G OF THE LISTING FEE AS AND WHEN THE LISTING FEES ARE RECEIVED. THE LD A.R SUBMITTED THAT THE SAID SYSTEM OF ACCOUNTING IS ALS O IN ACCORDANCE WITH THE ACCOUNTING STANDARD, VIZ., AS-9 RELATING T O REVENUE RECOGNITION, WHICH PROVIDES THAT THE REVENUE SHOULD NOT BE RECOGNIZED IF THE RECOVERY OF THE SAME IS UNCERTAIN . THE LD A.R SUBMITTED THAT THE ASSESSEE IS FOLLOWING THE VERY S AME METHOD OF ACCOUNTING FOR ACCOUNTING THE LISTING FEE FOR THE P AST SEVERAL YEARS. THE LD A.R ALSO SUBMITTED THAT EVEN IF THE LISTING FEE IS RECOGNIZED AS INCOME, THE DEDUCTION OF THE EQUAL AMOUNT AS BA D DEBTS IS REQUIRED TO BE MADE LEAVING THE SAID EXERCISE AS TA X NEUTRAL. ACCORDINGLY, THE LD A.R SUBMITTED THAT THE LDCIT(AP PEALS) WAS JUSTIFIED IN DELETING THE ADDITION RELATING TO LIST ING FEE. 8. WE HEARD THE PARTIES AND PERUSED THE RECORD. THE RE IS NO DISPUTE WITH REGARD TO THE FACT THAT THE AGGREGATE AMOUNT OF LISTING 7 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 FEE RECEIVABLE BY THE ASSESSEE FOR THE YEAR UNDER C ONSIDERATION WAS ` 2.49 CRORES AND THE ASSESSEE HAS DISCLOSED THE RECE IPTS ONLY TO THE EXTENT OF ` 1.15 CRORES. ACCORDING TO THE ASSESSEE, THERE IS UNCERTAINTY OVER THE COLLECTION OF BALANCE AMOUNT O F ` 1.34 CRORES AND HENCE THE SAME WAS NOT RECOGNIZED AS INCOME AS PER THE ACCOUNTING STANDARD 9 RELATING TO REVENUE RECOGNITI ON ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. E VEN THOUGH, WE AGREE WITH THE CONTENTION OF THE ASSESSEE IN PRINCI PLE, YET WE NOTICE THAT THE ASSESSEE HAS FAILED TO DEMONSTRATE THE EXI STENCE OF THE ELEMENT OF UNCERTAINTY OVER THE COLLECTION OF THE LISTING FEES. WE ALSO NOTICE THAT THE LD.CIT(APPEALS) HAS ALSO FAILE D TO EXAMINE THIS ASPECT AND HE HAS SIMPLY ACCEPTED THE CONTENTIONS O F THE ASSESSEE. THERE SHOULD NOT BE ANY DISPUTE WITH REG ARD TO THE FACT THAT THE ELEMENT OF UNCERTAINTY HAS TO BE MEASURE D ON THE BASIS OF CONDUCT OF THE COMPANY LISTED WITH THE ASSESSEE. W E MAY QUOTE AN EXAMPLE HERE, I.E, THE BELATED PAYMENT RECEIVED FRO M A COMPANY CANNOT BE BROUGHT INTO THE AMBIT OF UNCERTAINTY. HOWEVER DELINQUENT COMPANIES WHICH ARE IN THE HABIT OF COMM ITTING CONSISTENT DEFAULT WOULD FALL IN THE CATEGORY OF U NCERTAINTY. 9. SINCE THE ASSESSEE AND THE COMPANY HAVE ENTERED INTO A LISTING AGREEMENT, THE COMPANY IS EXPECTED TO ABIDE BY THE TERMS 8 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 AND CONDITIONS OF THE SAME, WHICH INCLUDES PAYMENT OF LISTING FEE ALSO. HENCE, AS CONTENDED BY THE LD D.R, THE ASSES SEE WOULD AUTOMATICALLY GET AN ENFORCEABLE RIGHT OVER THE COL LECTION OF THE LISTING FEE IN TERMS OF THE AGREEMENT ENTERED BETWE EN THEM. AT THE SAME TIME, THERE IS ALSO MERIT IN THE SUBMISSION OF THE ASSESSEE THAT THERE IS NO UNCERTAINTY OVER THE CONTINUATION OF THE LISTING AGREEMENT DUE TO THE EMERGENCE OF DIGITAL STOCK EXC HANGES LIKE BSE AND NSE. HOWEVER, WE ARE OF THE VIEW THAT THE RESPONSIBILITY TO SHOW THAT THERE WAS UNCERTAINTY OVER THE COLLECT ION OF THE LISTING FEE LIES WITH THE ASSESSEE. HENCE, IN OUR VIEW, T HE ASSESSEE SHOULD FURNISH THE COMPANY WISE DETAILS RELATING TO ` 1.34 CRORES AND ALSO DEMONSTRATE THE EXISTENCE OF UNCERTAINTY OVE R ITS COLLECTION. IN THE ABSENCE OF THE EXPLANATIONS OF THE ASSESSEE AS TO HOW THE ELEMENT OF UNCERTAINTY EXISTS IN RESPECT OF LISTING FEE RECEIVABLE FROM EACH OF THE COMPANY, IT MAY NOT BE POSSIBLE FOR THE TRIBUNAL TO ADJUDICATE THIS ISSUE. ACCORDINGLY, WE ARE OF THE VIEW THAT THIS ISSUE REQUIRES FRESH EXAMINATION AT THE END OF THE ASSESS ING OFFICER. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD.CIT(APPEA LS) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE ASSESSING O FFICER WITH THE DIRECTION TO EXAMINE THE SAME AFRESH BY DULY CONSID ERING THE EXPLANATIONS AND INFORMATION THAT MAY BE FURNISHED BY THE ASSESSEE. WE ALSO DIRECT THE ASSESSEE TO FURNISH N ECESSARY 9 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 EVIDENCES / EXPLANATIONS TO THE ASSESSING OFFICER T O DEMONSTRATE THE EXISTENCE OF THE ELEMENT OF UNCERTAINTY OVER THE COLLECTION OF THE LISTING FEES FROM EACH OF THE COMPANIES. 10. THE NEXT ISSUE RELATES TO THE ADDITION OF ` 32.01 LAKHS RELATING TO THE AMOUNT TRANSFERRED TO VARIOUS RESER VE ACCOUNTS FROM OUT OF THE LISTING FEES RECEIVED BY THE ASSESSEE. AS NOTED EARLIER, THE ASSESSEE DIRECTLY TRANSFERRED THE FOLLOWING AMO UNTS FROM LISTING FEE RECEIPTS TO THE RESPECTIVE RESERVE ACCOUNT:- (A) INVESTOR SERVICE RESERVE ` 23,16,889 (B) INVESTOR PROTECTION RESERVE ` 1,15,844 (C) INTEREST INCOME TRANSFERRED TO ABOVE RESERVES ` 7,69,238 ` 32,01,971 ACCORDINGLY, THE ASSESSEE DISCLOSED THE LISTING FEE RECEIPTS NET OF THE ABOVE SAID TRANSFERS, I.E., THE ASSESSEE CLAIME D THAT THE ABOVE SAID RECEIPTS SHOULD NOT BE CONSIDERED AS ITS INCOM E. THE ASSESSEE CLAIMED THAT THE ABOVE TRANSFERS WERE MAND ATED BY THE ORDERS OF SEBI AND HENCE THE SAME CONSTITUTED DIVE RSION OF INCOME BY OVERRIDING TITLE. THE ASSESSING OFFICER DID NOT ACCEPT THE SAID CONTENTIONS AND ACCORDINGLY ASSESSED THE ABOVE SAID AMOUNTS AS INCOME OF THE ASSESSEE. HOWEVER, THE LD. CIT(APPEA LS) ACCEPTED THE CONTENTIONS OF THE ASSESSEE AND ACCORDINGLY, DE LETED THE 10 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 IMPUGNED ADDITION. FOR THE SAKE OF CONVENIENCE, WE EXTRACT THE RELEVANT OBSERVATIONS MADE BY THE LD. CIT(APPEALS): - 59. I HAVE CAREFULLY GONE THROUGH THE ASSESSMENT ORDER AND THE VARIOUS SUBMISSIONS MADE BY THE AR AT THE APPEL LATE HEARINGS. I HAVE ALSO GONE THROUGH THE GUIDELINES AND NOTIFICATIONS OF THE SEBI FILED AT THE TIME OF HEAR ING AND THE DECISIONS RELIED UPON BOTH BY THE ASSESSING OFFICER AND BY THE AR AND AM INCLINED TOWARDS THE BROAD ARGUMENTS PUT FORTH BY THE AR AS SUPRA. 60. THE EXPRESSION RESERVE APPEARS TO HAVE BEEN MISUNDERSTOOD BY THE A.O., SINCE SUCH RESERVES ARE NOT AVAILABLE FOR THE BENEFIT OF THE COMPANY, AS IN THE CASE OF NORMAL RESERVES OF ANY COMPANY. THIS WAS AN APPROP RIATION, WHICH WAS REQUIRED TO BE UTILIZED IN THE MANNER SPE CIFICALLY DIRECTED BY THE SECURITIES EXCHANGE BOARD OF INDIA (SEBI) AS PER THEIR GUIDELINES. ACTUALLY, THE NOMENCLATURE F OR SUCH RESERVES SHOULD HAVE BEEN FUNDS, SO THAT THE NA TURE OF THE AMOUNTS COULD BE UNDERSTOOD AS FUNDS AND NOT RESERV ES. SEBI HAD CLEARLY STIPULATED ITS TREATMENT VIDE ITS CIRCU LAR DATED 23.08.2001 GIVING COMPREHENSIVE GUIDELINES TO SET U P INVESTOR PROTECTION FUND AND INVESTOR SERVICE FUND. ACTUALL Y APPROPRIATION AT THE STIPULATED RATE IN THE GUIDELI NES FROM 1% OF THE LISTING FEES HAD TO BE TRANSFERRED TO INVESTOR PROTECTION FUND/CUSTOMER PROTECTION FUND AND 10% TO INVESTOR S ERVICE FUND ON A QUARTERLY BASIS ALONG WITH 100% OF THE IN TEREST EARNED ON SUCH AMOUNTS KEPT AS DEPOSIT FOR OWN USE FROM PRESCRIBED SERVICES, AND THESE WERE BOUND TO BE UTI LIZED AS PER SEBI GUIDELINES COMMUNICATED FOR THE FOLLOWING PURP OSES:- (I) THE IPF SHOULD NOT BE UTILIZED FOR ANY PURPOSE OTHER THAN MEETING THE LEGITIMATE INVESTMENT 11 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 CLAIMS OF THE CLIENTS OF THE DEFAULTING MEMBERS THAT WERE NOT SPECULATIVE IN NATURE. (II) THE INTEREST EARNED ON THE IPF COULD BE UTILIZ ED ONLY FOR THE PURPOSE OF INVESTOR EDUCATION, AWARENESS AND RESEARCH AND ANY UNUTILIZED INTEREST FOR THE FINANCIAL YEAR, SHOULD BE TRANSFERRED BACK TO THE IPF. (III) THE ISF SHOULD NOT BE UTILIZED FOR UNRELATED ACTIVITIES SUCH AS WEBSITE DEVELOPMENT AND MAINTENANCE, ADVERTISEMENTS IN THE NATURE OF BRAND BUILDING AND ADVERTISEMENTS IN ASSOCIATION WITH BROKERS ETC. (IV) ANY EXPENDITURE FROM THE IPF/ISF WHICH WAS NOT CONFORMITY WITH THE GOVERNMENT/ SEBI NORMS SHOULD BE CREDITED BACK TO IPF/ISF IMMEDIATELY. 61. THE FACT THAT INTEREST INCOME SHOULD ALSO BELO NG TO THE FUND AND NOT AVAILABLE FOR THE ASSESSEE CLEARLY IND ICATES THE CHARACTER OF THE RECEIPT. NONE OF THE PURPOSE FOR WHICH THE AMOUNTS WERE APPROPRIATED WERE FOR THE BENEFIT OF T HE APPELLANT, BUT WAS FOR THE BENEFIT OF THE INVESTING PUBLIC OR CUSTOMERS . IT WAS UNDER THESE CIRCUMSTANCES, THAT THERE WAS CLEARLY DIVERSION BY OVERRIDING TITLE, IN THAT, THE AMOUNT WHICH HAD NECESSARILY TO BE APPROPRIATED AGAINST EV ERY RECEIPT OF LISTING FEES WAS SO TAKEN TO THE FUNDS, AS RESERVES WHICH DID NOT BELONG TO THE ASSESSEE, EVEN AT THE TIME OF COLLECTION . 62. THERE IS A DIFFERENCE BETWEEN NORMAL RESERVES AND RESERVES WHICH ARE STATUTORILY REQUIRED TO BE SET A PART. IT IS TRUE THAT MERELY BECAUSE THE RESERVE MAY BE STATUTORILY REQUIRED TO BE MADE DOES NOT MEAN THAT IT COULD BE TREATED AS A CHARGE ON THE PROFIT & LOSS ACCOUNT. BUT WHERE THERE WAS A D IVERSION BY 12 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 OVERRIDING TITLE WITH A THIRD PARTY INTEREST ON SUC H AMOUNTS, AS WAS IN THE CASE OF THE APPELLANT, THE INFERENCE HAD TO BE DIFFERENT. THIS IS THE RATIO SET BY THE SUPREME CO URT IN CIT VS NEW HORIZON SUGAR MILLS PVT. LTD. 269 ITR 397 WHERE IN THE APEX COURT AFFIRMED THE DECISION OF THE JURISDICTIO NAL HIGH COURT IN THE SAME CASE REPORTED 244 ITR 738 (MAD). THIS DECISION WAS FOLLOWED BY THE APEX COURT IN REJECTING THE SLP IN THE CASE OF CIT VS AMBUR CO-OPERATIVE SUGAR MILLS LTD. 269 I TR 398. 63. AFTER TAKING INTO CAREFUL CONSIDERATION ALL THE DETAILS AND FACTS OBTAINED IN THE ASSESSEES CASE, I AM OF THE CONSIDERED OPINION THAT THE TRANSFER OF FUNDS OF ` 23,16,889/- TOWARDS CONTRIBUTION TO INVESTORS SERVICE RESERVE, ` 1,15,844/- FOR CONTRIBUTION TO INVESTOR PROTECTION RESERVE AND ` 7,69,328/- INTEREST ON LISTING DEPOSITS AMOUNTING IN ALL TO ` 32,01,971/- ARE TRANSFER FROM RECEIPTS AND NOT FROM PROFITS OR REVE NUE ACCRUING TO THE APPELLANT FOR THE ASSESSMENT YEAR UNDER CONS IDERATION. THE SAID TRANSFERS ARE FOR SPECIFIC PURPOSES, THE U TILIZATION OF WHICH THE APPELLANT HAD NO ACTUAL CONTROL. HENCE, THE ABOVE AMOUNTS DID NOT BELONG TO APPELLANT BY OVERRIDING T ITLE IN FAVOUR OF SEBI AND REQUIRES TO BE REDUCED FROM THE TRADING RECEIPTS, AS HAS BEEN RIGHTLY DONE BY THE APPELLANT FOR THE ASSE SSMENT YEAR UNDER CONSIDERATION AND HENCE THE ADDITION OF ` 32,01,971/- ON THE SAME BEING THEREFORE UNTENABLE, IS DIRECTED TO BE DELETED. 11. BEFORE US, THE LD. COUNSEL APPEARING FOR THE AS SESSEE PLACED RELIANCE ON VARIOUS CASE LAWS, MORE PARTICUL ARLY, THE DECISION RENDERED BY HON'BLE JURISDICTIONAL HIGH COURT IN TH E CASE OF CIT V. SALEM CO-OPERATIVE SUGAR MILLS LTD. (229 ITR 285) ( MAD.). HE FURTHER SUBMITTED THAT THE RATIO OF THE SAID DECISI ON HAS SINCE BEEN APPROVED BY THE HON'BLE SUPREME COURT IN THE CASE O F CIT V. 13 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 AMBUR CO-OPERATIVE SUGAR MILLS LTD. (269 ITR 398) ( SC). HE SUBMITTED THAT IN THE ABOVE SAID CASES, THE PORTION OF SALE PROCEEDS OF MOLASSES SEPARATELY ACCOUNTED FOR AS PER THE MOL ASSES COTROL (AMENDMENT) ORDER FOR CONSTRUCTION OF STORAGE TANKS WAS CONSIDERED AS DIVERTED AT SOURCE AND HENCE NOT IN CLUDIBLE IN ASSESSEES INCOME. THE LD A.R SUBMITTED THAT THE R ATIO OF THE ABOVE SAID DECISIONS SHALL EQUALLY APPLY TO THE PRE SENT CASE ALSO, SINCE THE ASSESSEE HAS TRANSFERRED A PORTION OF LIS TING FEE RECEIPTS TO THE RESERVE ACCOUNTS AS PER THE ORDER OF SEBI. HE FURTHER SUBMITTED THAT THE STATUS OF THE ASSESSEE WAS CONSI DERED IN THE ASSESSEE'S OWN CASE [CIT V. MADRAS STOCK EXCHANGE L TD. AND OTHERS (105 ITR 546) (MAD.)] AND THE HON'BLE JURISD ICTIONAL HIGH COURT HELD THAT THE ASSESSEE IS CARRYING ON A STATU TORY FUNCTION, I.E. TO CONTROL AND REGULATE THE CONTRACTS RELATING TO S HARES AND SECURITIES. ACCORDINGLY, THE HON'BLE MADRAS HIGH C OURT HELD THAT THE LISTING FEES RECEIVED BY THE ASSESSEE CANNOT BE SAID TO BE AN ACTIVITY FOR PROFIT WITHIN THE MEANING OF THEN EXIS TING PROVISIONS OF SECTION 2(15) OF THE ACT. THE LD. COUNSEL SUBMITTE D THAT THE FACT THAT THE ASSESSEE IS CARRYING ON STATUTORY FUNCTION STANDS ESTABLISHED BY THE ABOVE SAID DECISION. THE LD. CO UNSEL FURTHER SUBMITTED THAT THE ASSESSEE HAS SET ASIDE A PART OF LISTING FEES FOR PROVIDING RESERVES TO THE INVESTING PUBLIC AS PER T HE ORDERS OF SEBI 14 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 AND THE SAID DIRECTION IS REQUIRED TO BE MANDATORIL Y CARRIED OUT BY THE ASSESSEE. ACCORDINGLY HE CONTENDED THAT THE AM OUNTS SO APPROPRIATED CANNOT BE SAID TO HAVE REACHED THE ASS ESSEE AT ALL, I.E., THE SAME WAS DIVERTED AT SOURCE ITSELF. ACCO RDINGLY, THE LD. COUNSEL CONTENDED THAT THE AMOUNTS TRANSFERRED TO I NVESTORS RESERVE ACCOUNT OUGHT TO BE CONSIDERED AS DIVERSION OF INCOME BY OVERRIDING TITLE AND HENCE THE LD. CIT(APPEALS) WAS JUSTIFIED IN HOLDING THAT THE ABOVE SAID AMOUNTS SHALL NOT FORM PART OF INCOME OF THE ASSESSEE. 12. ON THE CONTRARY, THE LD. D.R. SUBMITTED THAT TH E CLAIM OF DIVERSION OF INCOME AT SOURCE BY OVERRIDING TITLE D OES NOT HAVE ANY SUBSTANCE, SINCE THE ASSESSEE HAS APPROPRIATED THE AMOUNTS TOWARDS VARIOUS RESERVE ACCOUNTS, ONLY AFTER THE IN COME HAS REACHED THE HANDS OF THE ASSESSEE. HE SUBMITTED TH AT THE SEBI HAS NOT PLACED UPON ANY LIEN OVER THE LISTING FEES RECEIVED BY THE ASSESSEE AND THE SEBI HAS ONLY DIRECTED THE ASSESSE E TO SET ASIDE AT LEAST 10% OF THE LISTING FEES FOR PROVIDING SERV ICES TO THE INVESTING PUBLIC. THE LD D.R SUBMITTED THAT LETTER ISSUED BY THE SEBI WOULD SHOW THAT THE SAME WAS MERE DIRECTION AND THE EXPRE SSION ATLEAST 10% OF LISTING FEES WOULD SHOW THAT THE SAME WAS O NLY DIRECTORY IN NATURE. ACCORDINGLY, THE LD D.R SUBMITTED THAT THE COMPLIANCE OF 15 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 THE DIRECTIONS ISSUED BY SEBI WOULD NOT MAKE MERE A PPROPRIATION OF PROFIT INTO A CASE OF DIVERSION OF INCOME AT SOURCE . ACCORDINGLY, THE LD. D.R. SUBMITTED THAT THE ASSESSING OFFICER WAS J USTIFIED IN ASSESSING THE IMPUGNED AMOUNT AS INCOME OF THE ASSE SSEE. 13. WE HEARD THE PARTIES ON THIS ISSUE AND PE RUSED THE RECORD. BEFORE US, THE LD A.R PLACED RELIANCE ON THE DECISI ON RENDERED BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF SALEM CO-OPERATIVE SUGAR MILLS LTD (SUPRA) TO CONTEND THAT THERE WAS D IVERSION OF INCOME BY OVERRIDING TITLE. HOWEVER, A PERUSAL OF THE FACTS PREVAILING IN THE ABOVE SAID CASE WOULD SHOW THAT T HE ASSESSEE THEREIN WAS DIRECTED TO COLLECT CERTAIN AMOUNT ALON G WITH THE SALE PRICE FIXED FOR ALCOHOL UNDER THE MOLASSES CONTROL (AMENDMENT) ORDER. EVEN BEFORE THE COLLECTION OF THE AMOUNT AS PER THE DIRECTION, THE ASSESSEE WAS DIRECTED TO KEEP THIS A MOUNT UNDER A SEPARATE ACCOUNT UNDER THE HEAD MOLASSES STORAGE F UND. THE SAID COLLECTION WAS SEEN TO BELONG TO THE MOLASSES STORA GE FUND AND THE SAME COULD BE UTILIZED ONLY FOR CONSTRUCTING STORAG E TANK ONLY. IT WAS FURTHER NOTICED THAT, IF THE ASSESSEE FAILS TO COLLECT SUCH AMOUNT AS DIRECTED BY THE MOLASSES CONTROL (AMENDMENT) ORD ER, THE CENTRAL GOVERNMENT WILL CONSTRUCT A MOLASSES STORAG E TANK AND RECOUP THE CONSTRUCTION CHARGES FROM THE ASSESSEE. THUS, IT WAS 16 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 SEEN THAT THE ASSESSEE DID NOT HAVE ANY CONTROL AND DOMAIN OVER THE AMOUNT SO COLLECTED AND IT COULD NOT ALSO UTILI ZE THE SAME FOR BUSINESS PURPOSES. UNDER THESE SET OF FACTS, IT WA S HELD THAT THE AMOUNT SO COLLECTED DID NOT REACH THE ASSESSEE AND GOT DIVERTED BY OVERRIDING TITLE AT THE SOURCE ITSELF. 14. THE FACTS PREVAILING IN THE INSTANT CASE ARE THAT THE ASSESSEE HEREIN WAS NOT DIRECTED TO COLLECT ANY AMOUNT SEPAR ATELY ALONG WITH THE LISTING FEE. THE MOLASSES CONTROL (AMENDMENT) ORDER WAS ISSUED BY THE CENTRAL GOVERNMENT, WHEREAS IN THE IN STANT CASE, THE SEBI HAS ISSUED DIRECTIVES, WHICH READ AS UNDER:- THE EXCHANGE IS DIRECTED TO SET ASIDE ATLEAST 10% OF THE LISTING FEES FOR PROVIDING SERVICES TO THE INVESTING PUBLIC A PERUSAL OF THE ABOVE SAID DIRECTION WOULD SHOW TH AT IT WAS ONLY A DIRECTION AND THE ASSESSEE HAS BEEN GIVEN DISCRETIO N TO DETERMINE THE QUANTUM OF AMOUNT TO BE SET ASIDE, WITH A MINIM UM OF 10% OF THE LISTING FEES. WE MAY NOTE HERE THAT THE VERY P URPOSE OF EXISTENCE OF THE ASSESSEE AND ALSO ITS OBJECTIVE IS TO FACILITATE THE INVESTORS IN THEIR TRADING ACTIVITY AND THE SEBI HA S ONLY DIRECTED TO APPROPRIATE FUNDS TOWARDS INVESTORS AWARENESS AND P ROTECTION, WHICH OTHERWISE THE ASSESSEE IS REQUIRED TO INCUR I N THE ORDINARY 17 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 COURSE OF ITS ACTIVITIES. HENCE, IN OUR CONSIDERED VIEW, THE DIRECTION ISSUED BY THE SEBI ONLY PRESCRIBES THE MINIMUM MONE TARY LIMIT FOR SPENDING THE FUNDS TOWARDS INVESTOR EDUCATION AND P ROTECTION ACTIVITIES. AT THIS JUNCTURE, WE FEEL IT PERTINEN T TO EXTRACT THE FOLLOWING OBSERVATIONS MADE BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SITALDAS TIRATHDAS (1961)(41 ITR 36 7):- 10 WHERE BY THE OBLIGATION INCOME IS DIVERTED BEF ORE IT REACHES THE ASSESSEE, IT IS DEDUCTIBLE; BUT WHERE T HE INCOME IS REQUIRED TO BE APPLIED TO DISCHARGE AN OBLIGATIO N AFTER SUCH INCOME REACHES THE ASSESSEE, THE SAME CONSEQUENCE, IN LAW, DOES NOT FOLLOW. IT IS THE FIRST KIND OF PAYM ENT WHICH CAN TRULY BE EXCUSED AND NOT THE SECOND. THE SECOND PA YMENT IS MERELY AN OBLIGATION TO PAY ANOTHER A PORTION OF ONES OWN INCOME, WHICH HAS BEEN RECEIVED AND IS SINCE APPLIE D. THE FIRST IS A CASE IN WHICH THE INCOME NEVER REACHES T HE ASSESSEE, WHO EVEN IF HE WERE TO COLLECT IT DOES SO , NOT AS PART OF HIS INCOME, BUT FOR AND ON BEHALF OF THE PE RSON TO WHOM IT IS PAYABLE. 15. IN THE INSTANT CASE, WE HAVE ALREADY NOTIC ED THAT THE ASSESSEE WAS REQUIRED TO CARRY OUT THE ACTIVITIES L IKE FACILITATING INVESTORS, EDUCATING THEM, PROTECTING THEM ETC. IN THE ORDINARY COURSE OF ITS ACTIVITIES. IN OUR CONSIDERED OPINIO N, BY ISSUING THE DIRECTION (REFERRED ABOVE), THE SEBI HAS ONLY PRESC RIBED THE MINIMUM AMOUNT THAT SHOULD BE SPENT FOR SUCH PURPOS ES. THE 18 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 DIRECTION ISSUED BY SEBI NOWHERE STATES THAT THE AM OUNT SHOULD BE APPROPRIATED OUT OF LISTING FEES OR IT SHOULD BE KE PT IN SEPARATE ACCOUNT DISABLING THE ASSESSEE FROM USING IT. THE DIRECTION NOWHERE STATES THAT THE SEBI WOULD SPEND THE MONEY TOWARDS THE SPECIFIC PURPOSES AND RECOVER THE SAME FROM THE ASS ESSEE, IF THE ASSESSEE FAILS TO SPEND THE SAME. HENCE, WE ARE O F THE VIEW THAT THE ASSESSEE CANNOT TAKE SUPPORT OF THE DECISION RE NDERED BY HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF SA LEM CO-OPERATIVE SUGAR MILLS LTD (SUPRA), SINCE THE FACTS PREVAILING IN THE INSTANT CASE ARE TOTALLY DIFFERENT. ACCORDINGLY WE ARE OF THE V IEW THAT THE ASSESSEE HAS ONLY APPROPRIATED THE LISTING FEES AFT ER IT REACHED ITS HANDS AND THE PURPOSE OF SUCH TRANSFER WAS ONLY TO EARMARK THE INCOME FOR SPENDING THE SAME FOR SPECIFIC PURPOSES. HENCE THE SAME SHOULD BE CONSIDERED AS MERE APPROPRIATION OF INCOME OF THE ASSESSEE. HENCE, WE ARE OF THE VIEW THAT THE ACCOU NTING TREATMENT ADOPTED BY THE ASSESSEE TO TRANSFER THE AMOUNT DIRE CTLY FROM LISTING FEE RECEIPTS WOULD NOT MAKE THE SAME AS DIVERSION O F INCOME BY OVERRIDING TITLE AT THE SOURCE. ACCORDINGLY, WE AR E OF THE VIEW THAT THE ASSESSING OFFICER WAS JUSTIFIED IN ASSESSING TH E INCOME SO APPROPRIATE TO INVESTORS RESERVE ACCOUNT ETC., AS I NCOME OF THE ASSESSEE. IN VIEW OF THE FOREGOING DISCUSSIONS, WE ARE UNABLE TO 19 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 SUSTAIN THE ORDER PASSED BY LD CIT(APPEALS) ON THIS ISSUE AND ACCORDINGLY SET ASIDE THE SAME. 16. THE LD A.R SUBMITTED THAT THE AMOUNT SO TRAN SFERRED TO INVESTORS RESERVE ACCOUNT ETC., IF NOT CONSIDERED A S DIVERSION OF INCOME AT SOURCE, THEN THE EXPENDITURE INCURRED FRO M OUT OF SUCH RESERVE ACCOUNTS SHOULD BE ALLOWED AS DEDUCTION. W E FIND MERIT IN THE SAID CONTENTIONS. HOWEVER, THE LD D.R SUBMITTE D THAT THE ASSESSING OFFICER ASSESSED ONLY THE NET AMOUNT, I.E ., NET OF EXPENSES ONLY. HOWEVER, A PERUSAL OF THE ASSESSMEN T ORDER WOULD SHOW THAT THE SAME WAS NOT CLEAR ON THIS ISSUE. AC CORDINGLY, WE ARE OF THE VIEW THAT THIS ISSUE REQUIRES EXAMINATIO N AT THE END OF THE ASSESSING OFFICER. ACCORDINGLY, WE RESTORE THIS MA TTER TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO EXAMINE THE ALTERNATIVE CLAIM OF THE ASSESSEE AND TAKE APPROPRIATE DECISION IN ACCORDANCE WITH THE LAW, AFTER AFFORDING NECESSARY OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 17. THE ASSESSEE HAS FILED THE CROSS OBJECTION ONLY TO SUPPORT THE ORDER OF LD CIT(APPEALS). HENCE THE GROUNDS URGED THEREIN DO NOT REQUIRE ANY ADJUDICATION. 20 I.T.A. NO. 2546/MDS/2014 C.O. NO. 126/MDS/2014 18. IN THE RESULT, THE APPEAL FILED BY THE REVE NUE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES AND THE CROSS OBJE CTION FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED ON THE 4 TH DAY OF FEBRUARY, 2015 AT CHENNAI. SD/- SD/- ( . . !' ) ( .. ) (S.S. GODARA) (B.R. BASKARAN) # /JUDICIAL MEMBER /ACCOUNTANT MEMBER /CHENNAI, ? /DATED, THE 4 TH FEBRUARY, 2015. KRI. @ . ,#1AB CB'1 /COPY TO: 1. )* /APPELLANT 2. ,-)* /RESPONDENT 3. 0 D1 () /CIT(A)-IV, CHENNAI 4. 0 D1 /CIT-IV, CHENNAI 5. BE! ,#1# /DR 6. !& F /GF.