M/s Hyderabad Stock Exchange Ltd., Hyderabad v. ITO, Hyderabad

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B HYDERABAD BEFORE SHRI N.R.S. GANESAN JUDICIAL MEMBER AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER ITA.543/HYD/2005 ASSESSMENT YEAR 2001-02 HYDERABAD STOCK EXCHANGE LTD. HYDERABAD (PAN AAA CT 8871 H) VS THE ADIT (EXEMPTIONS) HYDERABAD (APPELLANT) (RESPONDENT) ITA.467/HYD/2010 ASSESSMENT YEAR 2006-07 HYDERABAD STOCK EXCHANGE LTD. HYDERABAD (PAN AAA CT 8871 H) VS THE ADIT (EXEMPTIONS) HYDERABAD (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI V. SIVAKUMAR RESPONDENT BY : SHRI AMLAN TRIPATHY O R D E R PER CHANDRA POOJARI ACCOUNTANT MEMBER: THESE TWO APPEALS PREFERRED BY THE ASSESSEE ARE DIRECTED AGAINST THE DIFFERENT ORDER PASSED BY THE CIT(A) V & III HYDERABAD AND PERTAINS TO THE ASSESSMENT YEARS 2001-02 & 2006-07. SINCE THE ISSUES INVOLVED IN THESE TWO APPEALS ARE COMMON IN NATURE THEY ARE CLUBBED TOGETHER HEARD TOGETHER AND DISPOSED OFF 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 ASSESSMEN T YEAR 2001-02 IS WITH REGARD TO NON GRANTING OF THE EXEMPTION U/S 11 OF THE INCOME TAX ACT 1961. ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 2 2 3. BRIEF FACTS ARE FOR THE YEAR UNDER CONSIDERAT ION IS THAT THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HA S INCURRED EXPENDITURE TO THE EXTENT OF RS.10 41 99 227/- DURING THE PERIO D FROM 1.4.1996 TO 31.3.2001 FOR PROVIDING ADDITIONAL INFRASTRUCTURAL FACILITIES TO THE MEMBER BROKERS. SUCH INFRASTRUCTURAL FACILITIES INCLUDE DE VELOPMENT OF SCREEN BASED TRAINING SYSTEM TERMINALS NETSCAPE BROWSERS COMPUTERS AND OTHER ACCESSORIES FOR PARTICIPATING IN THE SCREEN BASED T RADING SYSTEM (SBTS). BESIDES THIS THE MEMBER BROKERS WERE INSURED TO TH E EXTENT OF RS.10 LAKHS EACH THROUGH CONTRIBUTION TO STOCK BROKERS I NSURANCE POLICY. FURTHER AN AMOUNT OF RS.82 LAKHS WERE SPENT FOR SE TTING UP OF INTERCONNECTED STOCK EXCHANGE INDIA LTD. (ICSI) FOR THE BENEFIT OF ITS MEMBERS. IT IS ALSO NOTED THAT THE ASSESSEE HAS RE CEIVED 100% SUBSIDY HSE SECURITIES LTD. WHICH COULD BECOME THE BROKER O F NATIONAL STOCK EXCHANGE AND BOMBAY STOCK EXCHANGE AND THE MEMBER O F THE ASSESSEES STOCK EXCHANGE BECAME SUB BROKER IN ORDER TO TRADE AT NSE & BSE THROUGH INSTRUMENTALITY OF THE SUBSIDIARY. IT IS A LSO OBSERVED BY THE ASSESSING OFFICER THAT THERE WAS SUBSTANTIAL INCREA SE 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 SUBSTANTIA L PORTION OF ITS INCOME AS WELL AS PROPERTY FOR THE BENEFIT OF THE PROHIBIT ED CATEGORY OF PERSONS REFERRED TO IN SEC. 13(1)(C ) READ WITH SEC.13(1)(3 ) OF THE ACT. AS SUCH EXEMPTION U/S 11 WAS NOT GRANTED TO THE ASSESSEE. 4. ON APPEAL THE CIT(A) HELD THAT THE ASSESSEE I S NOT ENTITLED FOR EXEMPTION U/S 11 OF THE INCOME TAX ACT AND THE INC OME OF THE ASSESSEE HAS TO BE COMPUTED ON COMMERCIAL LINES. AGAINST TH IS THE ASSESSEE IS IN APPEAL BEFORE US. ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 3 3 5. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS A COMPANY REGISTERED AS STOCK EXCHANGE. IT WAS INCORPORATED IN THE YEAR 1943. THE ASSESSEE WA S ALSO GRANTED REGISTRATION U/S 12A OF THE IT ACT AND HAS BEEN ENJ OYING EXEMPTION U/S 11 FOR THE PAST SEVERAL YEARS WITHOUT INTERRUPTION TIL L ASSESSMENT 2000-01. FOR THE ASSESSMENT 2001-02 THE ASSESSEE FILED ITS R ETURN DECLARING INCOME OF RS.3 54 511/- AND CLAIMED THE SAME AS EXEMPTION U/S 11 OF THE ACT. THE ASSESSING OFFICER DENIED THE EXEMPTION CLAIMED U/S 11 AS CLAIMED BY THE ASSESSEE AND ASSESSED ON TOTAL INCOME OF RS.62 02 745/-. 6. IT WAS SUBMITTED THAT DURING THE COURSE OF AS SESSMENT PROCEEDINGS THE ASSESSING OFFICER FOUND THAT DURING THE PERIOD FROM 1.4.1996 TO 31.3.2001 THE ASSESSEE INCURRED AN ADDI TIONAL EXPENDITURE OF RS.10.64 CRORES FOR PROVIDING ADDITIONAL INFRASTRUC TURE FACILITIES FOR THE PURPOSE OF ONLINE TRADING TO REPLACE THE OUTCRY SYS TEM OF TRADING IN SHARES. THE ASSESSING OFFICER ALLEGED THAT THE CREATION OF INFRASTRUCTURE FACILITIES RESULTED DIRECT BENEFITS TO THE MEMBERS. THE ONLIN E TRADING SYSTEM INTRODUCED FOR TRADING OF SHARES AND SECURITIES. P RIOR TO INTRODUCTION OF ON LINE TRADING SYSTEM THE BUSINESS WAS CARRIED BY THE OUTCRY SYSTEM OF TRADING. IN THIS SYSTEM THE INVESTOR HAD TO BOOK T HEIR ORDERS AT THE PRIVATE OFFICE OF BROKERS THE BROKERS HAD TO EXECUTE THE S AME AT THE TRADING PLATFORM PROVIDED BY THE EXCHANGE AT ITS PREMISES. THE INVESTORS WERE NOT ALLOWED INTO THE TRADING PLATFORM FOR MONITORIN G 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 INTR ODUCED. IN THIS SYSTEM OF TRADING THE BROKERS WILL OPERATE THE TRA DING FROM THE TERMINALS PROVIDED AT THEIR OFFICE PREMISES. THE INVESTORS A RE ALSO ALLOWED TO THE BROKERS OFFICE FOR PLACING THEIR ORDERS. THE INVES TORS ARE ABLE TO WITNESS THE PRICES OF THE SHARES AND TRANSACTIONS AT WHICH THEY ARE BOUGHT DURING ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 4 4 THE ENTIRE DAY ON ANY SYSTEM. TRANSPARENCY AND SPE ED IN THE EXECUTION OF ORDER ARE THE MAIN BENEFIT OF THE SCREEN BASED TRAD ING SYSTEM. 7. HE SUBMITTED THAT IN THE OUTCRY SYSTEM ORDER OF THE INVESTORS WAS CONFIRMED ONLY AT THE LAST EVENING BY THE BROKE RS TO THEIR CLIENTS. MOST OF THE TIME THE PRICE OF THE SCRIPT WERE VOLAT ILE VARYING UPTO 5% TO 10% AND SOME TIME MORE DURING THE INTRADAY. INVEST ORS WERE PUT TO LOSS AND BROKERS WERE BENEFITED WHEN THE BROKERS CONFIR MED THE LOWER RATE FOR THE SELLER AND HIGHER RATES FOR THE BUYERS. IN TH E SBT SYSTEM THE INVESTORS CAN VIEW THEIR ORDER BY SITTING BEFORE TH E SYSTEM ITSELF AND GET CONFIRMATION ON THE SAME WITHIN NO TIME ONLINE. TH EREFORE MISLEADING THE INVESTORS WHICH WAS RESULTING IN HUGE PROFITS TO TH E BROKERS BY MISCHIEVOUS METHODS IS TOTALLY ELIMINATED. FURTHER SEBI INTRODUCED UNIQUE CLIENT CODE FOR THE BENEFIT OF INVESTORS. T HE BROKERS HAVE TO ASSIGN A UNIQUE CLIENT CODE FOR EACH INVESTOR. AT THE TI ME OF EXECUTION OF TRANSACTION THE BROKERS HAVE TO FEED THE CLIENT CO DE WHICH IS AVAILABLE WITH THE EXCHANGE. AFTER THE INTRODUCTION OF UNIQUE CLI ENT CODE MISLEADING THE INVESTOR BY THE BROKER WAS TOTALLY REMOVED AT THE T IME OF EXECUTION OF ORDER ALL THESE STEPS WERE POSSIBLE ONLY ON ACCOU NT OF INTRODUCTION OF ONLINE TRADING SYSTEM. THEREFORE HE SUBMITTED THAT THE ONLINE TRADING SYSTEM WHICH IS INTRODUCED AS PER THE GUIDELINES OF THE SEBI IS IN FACT RESULTED FOR THE BENEFIT OF INVESTORS AND PUT AN EN D TO SUM OF THE PRACTICES OF BROKERS UNDER THE EARLIER SYSTEM. THIS IS IN A WAY IS BENEFICIAL TO THE INVESTOR AND DISADVANTAGEOUS TO THE BROKERS. THERE FORE THE INVESTMENTS IN INFRASTRUCTURE FACILITY HAS NOT CREATED ANY BENEFIT TO THE BROKERS AND IN FACT IT HAS ELIMINATED THE DUBIOUS METHODS SOME TIMES FO LLOWED BY SOME BROKERS. 8. HE SUBMITTED THAT THE ASSESSEE PROVIDED INSUR ANCE COVERAGE TO COVER THE LOSS ON ACCOUNT OF FRAUD OR LOSS IN TR ANSIT OF SHARE CERTIFICATES ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 5 5 WHICH IS STATED TO HAVE INFRINGED THE PROVISIONS OF THE ACT. HE ALSO STATED THAT THE ASSESSEE FLOATED A SUBSIDIARY CALLED HSE SECURITIES LTD WHICH BECAME BROKERS OF NSE AND BSE AND THE MEMBERS O F THE ASSESSEE BECAME SUB BROKERS O THE SAID SUBSIDIARY IN ORDER T O TRADE IN NSE AND BSE. THIS WAS ALLEGED TO HAVE SECTION 11(5) OF THE ACT. HE STATED THAT THE ASSESSEE SPENT AMOUNTS TOWARDS SETTING UP OF ANOTHE R EXCHANGE CALLED INTER CONNECTED STOCK EXCHANGE OF INDIA LTD. (ICSE ). THE ASSESSING OFFICER POINTED OUT THAT THERE WAS SUBSTANTIAL INCR EASE IN EXPENDITURE WITHOUT ANY CORRESPONDING INCREASE IN SUBSCRIPTION AND FEE COLLECTED FROM MEMBERS. IN THE OPINION OF THE ASSESSING OFFICER T HE ABOVE ACTIONS OF THE EXCHANGE RESULTED BENEFITS TO THE MEMBERS THEREBY ATTRACTING THE PROVISIONS OF SECTION 13(1)(C ) R.W.S. 13(1)(3) OF THE ACT. 9. IT WAS SUBMITTED THAT THE HSE WAS A MUTUAL ASS OCIATION FORMED FOR THE PURPOSE OF PROTECTING THE PUBLIC INT ERESTED IN SECURITIES TO SUPPORT AND PROTECT THE CHARACTER AND STATUS OF BRO KERS AND DEALERS TO ASSIST REGULATE AND CONTROL THE TRADE OR BUSINESS I N SECURITIES TO MAINTAIN HIGH STANDARDS OF COMMERCIAL HONOUR AND INTEGRITY TO PROMOTE AND INCULCATE HONOURABLE PRACTICES AND JUST AND EQUITAB LE PRINCIPLES OF TRADE AND BUSINESS TO DISCHARGE AND SUPPRESS MALPRACTICE S TO SETTLE DISPUTES AND TO DECIDE ALL QUESTIONS OF USAGE CUSTOM OR COU RTESY IN THE CONDUCT OF TRADE AND BUSINESS BY POOLING THE RESOURCES FROM ME MBERS. 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 W AS UTILIZED FOR A BUILDING AT SOMAJIGUDA BECAUSE WITH THE INCREASE OF MEMBERS A LARGER BUILDING WOULD BE NECESSARY AND ALSO FOR INTRODUCTI ON OF SCREEN BASED TRADING AS PER THE DIRECTIONS OF SEBI. IN ADDITION VARIOUS DEPOSITS SUCH AS MEMBERS SECURITY DEPOSIT REMISERIES SECURITY DE POSIT DEPOSIT FOR SPACE ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 6 6 IN THE NEW BUILDING AND CAPITAL ADEQUACY DEPOSIT W ERE ALSO COLLECTED FROM MEMBERS WHICH WERE AVAILABLE FOR PROVIDING ADDITION AL 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 E XCHANGES TO INTRODUCE ON LINE STOCK TRADING SYSTEM IN THE PLACE OF AGE OL D 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 T RANSPARENT MANNER TO SERVE THE INTEREST OF THE INVESTORS. THE FACILITIE S PROVIDED TO THE MEMBERS ARE MANDATORY IN NATURE WITHOUT CREATING OWNERSHIP RIGHTS AND THEREBY TO SERVE THE INTEREST OF THE INVESTORS IN THE STATE OF ANDHRA PRADESH. THE COMPUTERS PROVIDED WERE CONNECTED TO THE STOCK EXCH ANGE AND THE MEMBERS ARE MERELY ALLOWED USE OF THE EQUIPMENT AND IN THE EVENT OF DISCONTINUANCE OF TRADING THE COMPUTERS ARE TO BE R ETURNED TO THE STOCK EXCHANGE. IT WAS SUBMITTED THAT THE EXCHANGE HAD O BTAINED AN AFFIDAVIT FROM THE MEMBERS INDICATING THAT THE COMPUTERS WERE ALLOWED ON THE BASIS OF LICENSE TO USE FOR A SPECIFIC. THE MEMBERS WERE CHARGED TURNOVER FEE FOR THE USE OF THE COMPUTERS. ALL THE OTHER EXPENSES S UCH AS LEASED LINE CHARGES ETC. ARE PAID BY THE MEMBERS ONLY. 11. ACCORDING TO HIM THE GOVERNANCE OF EXCHANGE A ND THE FUNCTIONAL ACTIVITIES ARE TOTALLY CONTROLLED BY SEB I AND THE ADMINISTRATION IS RUN UNDER THE SUPERVISION AND GUIDANCE OF THE GO VERNING BOARD WHICH IS CONSTITUTED WITH A COMPOSITION AS PER RULES AND REGULATIONS OF SEBI. THE GOVERNING BOARD CONSISTS OF 13 DIRECTORS TWO OF WHOM ARE SEBI NOMINEES. FOUR ARE PUBLIC REPRESENTATIVES. ONE IS AN EXECUTIVE DIRECTOR APPOINTED BY SEBI AND 6 DIRECTORS ARE ELECTED FROM THE MEMBERS OF THE EXCHANGE. FURTHER THE FACILITIES ARE PROVIDED TO ALL THE MEMBERS UNIFORMLY IN THE INTEREST OF THE INVESTORS AND THE EXCHANGE A ND NOT TO ANY CLASS OR ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 7 7 GROUP OF MEMBERS. THUS ALL THE MEMBERS ARE NOT COV ERED BY UNDER SEC.13(3) (A) AUTHOR OF THE TRUST OR THE FOUNDER OF THE INSTITUTION 13(3)(CC) ANY TRUSTEE OF THE TRUST OR THE MANAGER OF THE INST ITUTION AND 13(3)(D) ANY RELATIVE OF SUCH AUTHOR FOUNDER PERSONAL AS AFORE SAID AND THE FACILITIES PROVIDED TO ALL MEMBERS WAS TO CARRY ON STOCK BROKI NG ACTIVITY AS ENVISAGED IN THE MEMORANDUM OF THE COMPANY IS BEYON D THE SCOPE OF SECTION 13(3) OF THE IT ACT. 12. HE SUBMITTED THAT IN SO FAR AS SEC.13(1) IS CO NCERNED THE PROVISION OF FACILITIES TO THE MEMBER BROKERS IS A PRIMARY PURPOSE OF THE EXCHANGE AND HSE BEING AN INSTITUTION CREATED BEFOR E 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 INSTITUTI ON. AS REGARDS THE ISSUE WHETHER THE BENEFIT PROVIDED TO THE MEMBERS I S FOR THEIR SOLE BENEFIT OR FOR PUBLIC INTEREST THE DECISION OF ANDHRA PRAD ESH HIGH COURT WERE BROUGHT TO THE NOTICE OF THE ASSESSING OFFICER WHER EIN THE AP HC DISCUSSED IN DETAIL THE ACTIVITY OF THE EXCHANGE AND OBSERVED THAT THE STOCK EXCHANGE IS ELIGIBLE FOR EXEMPTION U/S 11. IT WAS SUBMITT ED 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.1/71/SE/91 DT. 25.9.1991. AS REGARDS FLOATING OF SUBSIDIARY VIZ. HYDERABAD STO CK EXCHANGE SECURITIES LTD. IT WAS SUBMITTED THAT SEBI AS PER THEIR LETTE R DATED 26.11.1999 ALLOWED THE SUBSIDIARY CONCEPT AS PART OF REVIVAL A ND SURVIVAL STRATEGY TO THE REGIONAL STOCK EXCHANGES AND MEMBERS AND TO CAT ER TO THE NEEDS OF SMALL INVESTORS BY ACQUIRING MEMBERSHIP RIGHTS OF L ARGER STOCK EXCHANGES LIKE NSE/BSE. A CONDITION WAS STIPULATED THAT THE SUBSIDIARY WAS TO BE WHOLLY OWNED BY THE STOCK EXCHANGE. ACCORDINGLY W ITH THE APPROVAL OF SEBI VIDE THEIR LETTER DATED 1.2.2000 THE ASSESSEE HAS COLLECTED REFUNDABLE DEPOSIT OF RS.3 LAKHS FROM EACH MEMBER A ND HAS INVESTED THE SAID AMOUNT IN THE SUBSIDIARY TOWARDS SHARE CAPITAL IN ORDER TO MAINTAIN ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 8 8 THE REQUIRED NET AND TO MAIN THE CHARACTER OF WHOLL Y OWNED SUBSIDIARY. IT WAS SUBMITTED THAT THE INVESTMENT WAS APPLICATION O F THE FUNDS OF THE ASSESSEE INSTITUTION TO MEET THE REQUIREMENT OF THE INSTITUTION AND DOES NOT CONFER ANY UNDUE BENEFIT TO ANY MEMBER OTHER TH AN THE ACTIVITY THAT THE EXCHANGE HAS BEEN FORMED FOR. IT WAS FURTHER S UBMITTED THAT THE GOVERNING BOARD OF THE SUBSIDIARY IS ALSO ON THE SI MILAR LINES AS THAT OF THE EXCHANGE CONSISTING OF 13 MEMBERS VIZ. A CHIEF EXE CUTIVE OFFICER APPOINTED BY SEBI 6 SEBI PUBLIC REPRESENTATIVE DIR ECTORS DRAWN FROM VARIOUS FIELDS OF EXPERTISE APPOINTED BY SEBI AND 6 MEMBER DIRECTORS APPOINTED BY THE EXCHANGE. ALL THE DECISIONS RELAT ING TO THE SUBSIDIARY ARE TAKEN BY THE GOVERNING BOARD IN A FAIR AND TRANSPAR ENT MANNER IN CONSONANCE WITH THE GUIDELINES OF SEBI NSE AND BSE IN THE OVERALL INTEREST OF THE SUBSIDIARY AND THE ASSESSEE EXCHANG E. 13. HE FURTHER SUBMITTED THAT THE INTER CONNECTED STOCK EXCHANGE OF INDIA WITH THE EMERGENCE OF NSE USING SCREEN BASED TRADING SYSTEM THE REGIONAL STOCK EXCHANGES IN INDIA LIKE HSE FACED SEVERE COMPETITION AND LOST BUSINESS TO NSE AND BSE. THER EFORE ALL THE REGIONAL STOCK EXCHANGES (14) IN INDIA TO KEEP THEMSELVES AF LOAT IN THE CHANGED SCENARIO DECIDED TO COME TOGETHER AND FORM A NEW EX CHANGE AS APPROVED BY SEBI IN THE NAME AND STYLE OF INTER CONNECTED ST OCK EXCHANGE. THE REQUIRED EXPENDITURE FOR SETTING UP ICSE WAS MET BY ALL THE 14 PARTICIPATING REGIONAL EXCHANGES. THE MEMBERSHIP O F THIS EXCHANGE TO ENABLE THE MEMBER BROKERS TO CARRY ON THEIR ACTIVIT Y AS ENVISAGED IN THE MEMORANDUM OF ASSOCIATION IN ORDER TO SERVE THE INV ESTORS. 14. IT WAS ALSO SUBMITTED BY THE LEARNED AR THA T ALL THE FACILITIES MENTIONED ABOVE WERE FOR USE OF ALL THE MEMBERS OF THE ASSESSEE AND NOT FOR THE AUTHOR OR FOUNDER OF THE INSTITUTION OR FOR THE TRUSTEE OR MANAGER OF THE INSTITUTION OR THEIR RELATIVES. IT WAS SUBMITT ED THAT THE PROVISIONS OF ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 9 9 FACILITIES TO THE MEMBER BROKERS DOES NOT CONSTITUT E PROVIDING FACILITIES TO USE ANY PROPERTY OF THE INSTITUTION FOR THE UNDUE B ENEFIT OF THE LIMITED CORPUS OF PERSONS. THE PURPOSE OF SECTION 13(3) WA S TO PREVENT DIVERSION OF FUNDS OF THE INSTITUTION FOR THE BENEFIT OF A FE W MEMBERS OR OTHER RELATIVES. IN THE PRESENT CASE THERE IS NO SUCH D IVERSION AND THE USE OF FUNDS IS A LEGITIMATE APPLICATION OF FUNDS TO ACHIE VE 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 SEC.13 IT WAS SUBMITTED THAT THERE WAS SUBSTANTIAL CONTRIB UTION TO THE CORPUS OF THE INSTITUTION AND IT WAS THESE FUNDS THAT WERE UT ILIZED TO MEET THE CAPITAL EXPENSES ON CONSTRUCTION OF BUILDING PROVISION OF SCREEN BASED TRADING SYSTEM INVESTMENT IN HSE SECURITIES LIMITED AND AD VANCED TO INTERCONNECTED STOCK EXCHANGE OF INDIA ETC. THE A SSESSING OFFICER HOWEVER COMPLETED THE ASSESSMENTS DENYING EXEMPTIO N U/S 11 AND TREATED THE ASSESSEE AS TAXABLE ENTITY FOR THE ASSE SSMENT YEARS 2001-02. 16. HE RELIED ON THE JUDGEMENT OF THE HONBLE HI GH COURT OF AP IN THE CASE OF HYDERABAD STOCK EXCHANGE LTD. VS. 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 T HE BROKERS. THIS VIEW WHICH IN OUR OPINION IS TOO NARROW DOES NOT REALLY APPRECIATE THE SIGNIFICANCE OR PURPOSE OF SUCH BODIES. AS. MR. WT C KING THE WELL KNOWN AUTHOR ON ECONOMICS HAS SAID WITHOUT THE STOCK EX CHANGE THE SAVINGS OF THE COMMUNITY THE SINEWS OF ECONOMIC PROGRESS AND P RODUCTIVE EFFICIENCY WOULD BE USED MUCH LESS COMPLETELY AND MUCH MORE W ASTEFULLY THAN THEY ARE NOW. IN A MODERN COMPLEX SOCIETY PARTICULARL Y IN A COUNTRY LIKE OURS WHICH IS VERY FAST TRYING TO BE INDUSTRIALIZED THE NEED FOR STOCK EXCHANGES WHICH ATTRACT INVESTORS IN BUSINESS AND INDUSTRY AN D PROVIDE EMPLOYMENT TO MILLIONS IN SUCH INDUSTRIES CANNOT BE OVER EMPHASIZ ED. AS WE HAVE SEEN THE MEMORANDUM OF ASSOCIATION ITSELF SHOWS THAT THE OBJECT OF THE EXCHANGE IS NOT ONLY TO FURTHER THE INTERESTS BOTH OF THE BR OKERS AND DEALERS BUT ALSO OF THE PUBLIC INTERESTED IN SECURITIES TO ASSIST REGULATE AND CONTROL THE ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 10 10 TRADE OR BUSINESS IN SECURITIES TO MAINTAIN HIGH S TANDARDS OF COMMERCIAL HONOUR AND INTEGRITY TO PROMOTE AND INCULCATE HONO URABLE PRACTICES AND JUST AND EQUITABLE PRINCIPLES OF TRADE AND BUSINESS TO DISCOURAGE AND TO SUPPRESS MALPRACTICES TO SETTLE DISPUTES AND TO DE CIDE ALL QUESTIONS OF USAGE CUSTOM OR COURTESY IN THE CONDUCT OF TRADE A ND BUSINESS THE PROFIT WHICH THIS EXCHANGE EARNS ARE NOT TO BE DISTRIBUTED BETWEEN THE MEMBERS BUT ARE TO BE UTILIZED FOR THE PUBLIC AS PROVIDED I N CLAUSE V(B) OF THE MEMORANDUM OF ASSOCIATION. IT PRO IDES AS FOLLOWS: THE PROPERTY CAPITAL AND INCOME OF THE EXCHANGE WHENSOEVER DERIVED SHALL BE APPLIED SOLELY TOWARDS THE PROMOTI ON OF THE OBJECTS OF THE EXCHANGE AND NO PORTION THEREOF SHALL BE PAID BY WA Y OF BONUS OR OTHERWISE TO THE MEMBERS IN CASE OF DISSOLUTION OR WINDING U P ANY PROPERTY OR ASSETS WHICH REMAIN AFTER SATISFYING ALL THE DEBTS AND LIA BILITIES OF THE EXCHANGE INCLUDING THE DEPOSITS OF MEMBERS AND AFTER RETURN ING TO THE MEMBERS THE FACE VALUE OF THEIR CARD FEE SHALL BE DEVOTED TO A NY ACTIVITY HAVING THE SAME OR SIMILAR OBJECTS AS AN EXCHANGE OR BE DISTRIBUTED IN CHARITY AS MAY BE DETERMINED BY THE EXCHANGE AND IN THE EVENT OF THEI R FAILURE TO DO SO BY THE HC OF JUDICATURE. ] THERE COULD BE LITTLE DOUBT FROM WHAT WE HAVE SAID ABOVE THAT THE OBJECT OF THE STOCK EXCHANGE IS NOT ONLY TO SERVE A GENERAL P UBLIC UTILITY BUT HAS ALSO A CHARITABLE PURPOSE. 17. HE SUBMITTED THAT IN THE LIGHT OF THE ABOVE D ECISION OF THE HONBLE HC THE CIT(A) OUGHT TO HAVE HELD THAT AS L ONG AS THE PROVISION OF FACILITIES TO THE MEMBERS HAVE THE ULTIMATE OBJECT OF SERVING THE GENERAL PUBLIC SUCH PROVISION IS NOT CAUGHT WITHIN THE MIS CHIEF OF SEC.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 N ARAYAN RATHI CEASED TO BE A MEMBER IN THE YEAR 1984 AND HE IS NO T A PERSON COVERED U/S 13(3)(A) OF THE ACT. THE CIT(A) OUGHT TO HAVE APPRECIATED THAT THE MEMBER BROKERS ARE NOT CAUGHT WITHIN THE MISCHIEF O F SECTION 13(3)(A) TO(E). A REFERENCE TO CLAUSE 2 OF THE MEMORANDUM OF ASSOCI ATION AS PER WHICH THE STOCK EXCHANGE SHALL BE CONSTITUTED OF THOSE PE RSONS WHO ARE AND HEREAFTER BE DULY ADMITTED AS MEMBERS OF THE EXCHAN GE. ARTICLE 29 AND 30 OF THE MEMORANDUM AND ARTICLES OF ASSOCIATION FIXES THE ENTRANCE AND MEMBERSHIP FEE. PAYMENT OF ENTRANCE FEE OR MEMBERS HIP FEE CANNOT BE ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 11 11 TERMED AS CONTRIBUTION WITHIN THE MEANING OF SECTIO N 13(3)(B). EVEN OTHERWISE NO CASE HAS BEEN MADE BY THE ASSESSING O FFICER TO SHOW THAT THERE HAS BEEN SUBSTANTIAL CONTRIBUTION TO THE ASSE SSEE COMPANY BY ANY OF THE MEMBERS. SIMILARLY MEMBERS OF THE GOVERNING BO ARD HAVE BEEN ERRONEOUSLY HELD AS FALLING WITHIN THE SCOPE OF SEC TION 13(3)(CC). IN THIS CONNECTION KIND ATTENTION IS INVITED TO THE EXTRACT S OF THE DEFINITION OF THE WORD MANAGER AS APPEARING IN THE 16 TH EDITION OF THE COMMENTARY ON COMPANIES ACT BY A. RAMAIAH. IN ORDER TO QUALIFY A S MANAGER A PERSON HAS TO HAVE MANAGEMENT OF THE WHOLE OR SUBSTANTIALL Y 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 WHOLLY OR SUBSTANTIALLY LEFT IN THE HANDS OF THE DIRECTORS BECAUSE THERE ARE 13 DIRECTORS INCLUDING NOMINEES OF THE SEBI. 19. ACCORDING TO THE LEARNED AR THE EXPENDITURE H AS TO BE JUDGED W.R.T. THE OBJECTIVE RATHER THAN IMMEDIATE DESTINAT ION. WHERE EXPENDITURE WAS INCURRED AT THE INSTANCE OF THE STATE ON MODEL VILLAGES TO PROMOTE INFRASTRUCTURAL FACILITIES AND NEW MARKETS IN VILLA GES THE SAID EXPENDITURE WAS HELD ALLOWED U/S 37 AS HELD BY THE KARNATAKA HI GH COURT IN THE CASE OF CIT VS. KARNATAKA FINANCIAL CORPORATION (326 ITR 355). THE ASSESSEE IN THIS CASE SPENT MONIES AS A SCHEME CALLED SWASTHI GRAMA YONAJA PROMOTED BY THE ZILLA PARISHAD FOR DEVELOPING MODEL VILLAGES BY PROVIDING FACILITIES LIKE DEVELOPING ROADS TO NEW MARKETS OR GANIZING SELF HELP GROUPS COMMUNITY CENTERS AND DEVELOPMENT OF INFRASTRUCTURA L FACILITIES. THE HIGH COURT REASONED THAT IT IS ONLY IF SUCH ESTABLISHMEN TS THERE IN VILLAGES THE KARNATAKA FINANCIAL CORPORATION CAN LEND LOANS. 20. ACCORDING TO HIM IN THE LIGHT OF THE DECISIO N OF THE HONBLE HC OF AP IN THE ASSESSEES OWN CASE AND THE DECISION O F THE HONBLE KARNATAKA HIGH COURT THE IMPUGNED EXPENDITURE ON PROVISION OF SCREEN BASED TRADING ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 12 12 FACILITIES THE PROVISION OF THE INSURANCE FACILITI ES FORMATION OF THE SUBSIDIARY COMPANY VIZ. HSE SECURITIES LTD. AND TH E EXPENDITURE TOWARDS SETTING UP OF ANOTHER EXCHANGE CALLED INTER CONNEC TED STOCK EXCHANGE OF INDIA LTD. WERE ALL ACTIVITIES THAT WERE IN HARMON Y WITH THE CHARITABLE HARMONIOUS AND OTHER ITEMS OF EXPENDITURE CANNOT BE SAID TO BE VIOLATIVE OF SEC.13 INCOME TAX ACT SINCE THE MOTIVE WAS NOT T O BENEFIT THE PROHIBITED PERSONS BUT TO FURTHER THE OBJECTS OF THE ASSESSEE VIZ. 21. IN RESPECT OF CREATION OF SUBSIDIARY IT IS AL SO SUBMITTED 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 INVE STMENT MADE BY THE STOCK EXCHANGE IN ITS WHOLLY OWNED SUBSIDIARY. THE REFORE THERE IS NO VIOLATION OF SECTION 11(5) OF THE ACT. 22. HE DREW OUT ATTENTION TO SUB CLAUSE (V) OF RU LE 17C OF IT RULES 1962 WHICH IS REPRODUCED HEREUNDER: (V) INVESTMENT MADE BY THE RECOGNIZED STOCK EXCHANG E REFERRED TO IN CLAUSE (F) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGUL ATION) ACT 1956 (42 OF 1956) (HEREAFTER REFERRED AS TO INVESTOR) IN THE EQ UITY SHARE CAPITAL OF A COMPANY (HEREAFTER REFERRED TO AS INVESTEE). (A) WHICH IS ENGAGED IN DEALING WITH SECURITIES OR MAIN LY ASSOCIATED WITH THE SECURITIES MARKET (B) WHOSE MAIN OBJECT IS TO ACQUIRE THE MEMBERSHIP OF A NOTHER RECOGNIZED STOCK EXCHANGE FOR THE SOLE PURPOSE OF F ACILITATING THE MEMBERS OF THE INVESTOR TO TRADE ON THE SAID STOCK EXCHANGE THROUGH THE INVESTEE IN ACCORDANCE WITH THE DIRECTIONS OR G UIDELINES ISSUED UNDER THE SECURITIES AND EXCHANGE BOARD OF INDIA AC T 1992 (15 OF 1992) BY THE SECURITIES AND EXCHANGE BOARD OF INDIA ESTABLISHED U/S 3 OF THE ACT AND (C) IN WHICH AT LEAST FIFTY ONE PERCENT OF EQUITY SHARE S ARE HELD BY THE INVESTOR AND THE BALANCE EQUITY SHARES ARE HELD BY MEMBERS OF SUCH INVESTORS. ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 13 13 23. HE DREW OUR ATTENTION TO ARTICLE 115(I) WHI CH DEALS WITH THE ADMINISTRATIVE POWERS OF GOVERNING BOARD WHEREIN SU B 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 DISCRET ION 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 HAS BEEN SETT LED IN SEVERAL CASES IN RESPECT OF BUSINESS IN EXPENDITURE WHERE IN THE SUP REME COURT HAS STATED THAT REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM CHAIR OF THE BUSINESS MAN OR IN THE POSITION OF THE BOARD OF DIR ECTORS AND ASSUME THE ROLE OF BUSINESS MAN. (SA BUILDERS LTD. VS. CIT 28 8 ITR 1). IN THE LIGHT OF THIS LEGAL POSITION THE LEARNED AR THAT THE CIT(A ) ERRED IN HOLDING THAT THE COMPANY VIOLATED THE LEGAL PROVISIONS AS ALSO THE R ULES MADE BY ITSELF. IN THIS CONNECTION IT IS SUBMITTED BY THE LEARNED AR T HAT THE SUPPORT TAKEN BY THE CIT(A) FROM THE DECISION OF THE HONBLE HC O F AP IN THE CASE OF ACTION FOR WELFARE AND AWAKENING IN RURAL ENVIRONME NT (AWARE) VS. DCIT (263 ITR 13) IS MISPLACED BECAUSE THE SECURIT Y OFFERED IN THE ASSESSEES CASE IS NOT FOR PRIVATE GAIN OF ANY INTE RESTED PERSON AND THE PURPOSE WAS IN FURTHERANCE OF ADVANCING THE CHARITA BLE OBJECTS OF THE ASSESSEE. 24. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REP RESENTATIVE SUBMITTED THAT THE ASSESSEE HAS VIOLATED PROVISIONS OF SECTION 13(1) OF THE ACT. THE INCOME OF THE TRUST CANNOT BE DETERMINED FOR THE BENEFIT OF THE PROHIBITED PERSONS WHEN THE ASSESSEE HAS DERIVED TH E INCOME FOR ANY PURPOSE OTHER THAN THE PERSON AUTHORISED BY THE TRU ST AND HENCE THE EXEMPTION CANNOT BE GRANTED. ACCORDING TO LEARNED DEPARTMENTAL REPRESENTATIVE THE MEMBER BROKERS OF THE HSE ARE IN TEGRAL PART OF THE CONSTITUTIONAL IN THE EXCHANGE AND ARE ENTRUSTED PE RSONS. HE PLACED ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 14 14 RELIANCE ON THE ARTICLE 2 OF THE ARTICLES OF ASSOCI ATION OF THE COMPANY READS AS UNDER: 2. THE STOCK EXCHANGE (HEREINAFTER REFERRED TO AS THE EXCHANGE) SHALL BE CONSTITUTED OF THOSE PERSONS WHO ARE AND S HALL HERE AFTER BE DULY ADMITTED AS MEMBERS OF THE EXCHANGE . 25. ACCORDING THE LEARNED DEPARTMENTAL REPRESENTA TIVE THE MEMBER BROKERS ARE COVERED WITHIN THE MEANING OF PR OVISIONS OF SECTION 13(3)(3)(CC ) OF THE ACT. THE CLAIM OF THE ASSESS EE IS THAT SUCH MEMBERS WERE NON EXECUTIVE DIRECTORS WHO DID NOT RECEIVE AN Y 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 COMPENSATIO N. EVEN IF IT IS PRESUMED THAT THE EQUIPMENT ETC. WERE LENT TO THE M EMBERS USER LICENCE BASIS YET THE SAME WAS DONE WITHOUT ADEQUATE SECU RITY OR ADEQUATE INTEREST. SINCE NOTHING WAS COLLECTED FROM THE MEM BERS FOR PROVIDING BENEFITS TO THEM THERE IS A CLEAR VIOLATION OF PRO VISIONS OF SECTION 13(2A) AND SEC.13(2B) AND SEC.13(CC) OF THE ACT. FURTHER HE SUBMITTED THAT THE ARTICLE 115(1) OF THE ASSESSEE COMPANY CLEARLY PROV IDED FOR COLLECTION OF SEPARATE AND ADDITIONAL CHARGES OR FEES OVER AND AB OVE THE DUES AND CHARGES PROVIDED FOR IN THE RULES BYLAW AND REGULA TIONS OF THE EXCHANGE FROM THE MEMBERS FOR THE USE OF EQUIPMENT OR FACIL ITIES OR ANY PARTICULAR SERVICE OR PRIVILEGES GRANTED. HE SUBMITTED THAT THE GOVERNING BOARD OF THE ASSESSEE EXCHANGE WAS NOT ONLY EMPOWERED TO COL LECT 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 W ITH THE PROVISIONS OF THE ACT TO AVAIL THE BENEFIT U/S 11 OF THE ACT. 26. THE LEARNED DR RELIED ON THE FOLLOWING JUDGEM ENTS: ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 15 15 1. ACTION FOR WELFARE AND AWAKENING IN RURAL ENVIRONME NT (AWARE) VS. DCIT (2003) (AP) 263 ITR 13 2. DIRECTOR OF INCOME TAX VS. BHARAT DIAMOND BOURSE (2 002) (S C) 259 ITR 280). 3. AGAPPA CHILD CENTRE VS. CIT (1996) (KER.) 226 ITR 2 11 4. IDEAL PUBLICATIONS TRUST VS. CIT (KER.) (305 ITR 1 43) 5. REGIONAL COMPUTER CENTRE VS. CIT (2009) 311 ITR 182 (P&H) 6. INVESTORS CLUB TRICHUR VS. CIT (2008-09) (318 ITR 427 (KER.) 27. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIALS AVAILABLE ON RECORD. THE ASSESSEE HEREIN IS A REC OGNIZED STOCK EXCHANGE UNDER THE SECURITIES CONTRACTS (REGULATION) ACT 1 956 AND HAS BEEN CONSTITUTED FOR THE PURPOSE OF DEVELOPING THE STOCK MARKET. THERE IS NO DISPUTE REGARDING THE PROPOSITION THAT THE BASIC OB JECTIVE OF THE STOCK EXCHANGE BEING DEVELOPMENT OF THE STOCK MARKET IS C OVERED UNDER THE DEFINITION OF CHARITABLE PURPOSE AS CONTAINED U/S 2(15) OF THE IT ACT. WITH THE FAST PACE OF INDUSTRIALIZATION AND THE E MERGING RECENT TREND OF LIBERALIZATION AND GLOBALIZATION IN THE NATIONAL EC ONOMIC CAPITAL MARKET AND OBVIOUSLY BE A POTENT TOOL FOR GIVING AN IMPET US TO DEVELOPMENT OF COMMERCE AND INDUSTRY. STOCK MARKET WHILE REGULAT ING AND CONTROLLING THE BUSINESS OF BUYING AND SELLING OF SHARES DEBEN TURES AND OTHER SECURITIES CONSIDERABLY FACILITATE RESOURCES MOBIL IZATION BY THE INDUSTRIAL SECTOR. THE INFLOW OF PRIVATE SAVINGS INTO THE COR PORATE SECTOR AS WELL AS THE INFLOW OF FOREIGN CAPITAL INTO THE VARIOUS SECT ORS OF INDUSTRY ARE AIDED AND PROMOTED BY AN EFFICIENT AND DEVELOPED CAPITAL MARKET. IN VIEW OF THIS MATTER VARIOUS STOCK EXCHANGES HAVE BEEN RECO GNIZED AS CHARITABLE INSTITUTES ENTITLED TO EXEMPTIONS U/S 11 OF THE IT ACT. THUS THE DOMINANT OBJECTIVE OF THE ASSESSEE EXCHANGE IS COVERED AS A CHARITABLE OBJECT FOR THE PURPOSE OF EXEMPTION U/S 11 OF THE IT ACT. REGIS TRATION U/S 12A HAS BEEN GRANTED TO THE ASSESSEE BY THE DEPARTMENT ON T HE REASON THAT THE ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 16 16 ASSESSEE IS A CHARITABLE INSTITUTION AND ITS OBJECT S ARE COVERED AS CHARITABLE AS PER THE DEFINITION OF CHARITABLE PUR POSE CONTAINED U/S 2(15) OF THE IT ACT. ONCE THE INSTITUTION HAS BEEN REGIS TERED U/S 12A IT IS FOR THE ASSESSING OFFICER TO FIND OUT WHETHER THE INCOM E OF THE INSTITUTION HAS BEEN APPLIED FOR THE OBJECTS OF THE INSTITUTION AND THE STATUTORY CONDITIONS AS CONTAINED U/S 11 TO 13 ARE FULFILLED BY THE ASSE SSEE. TO AVAIL BENEFIT U/S 11 THE ACTIVITY CARRIED OUT BY THE ASSESSEE TO BE FOR THE BENEFIT OF GENERAL PUBLIC. THE MAIN OBJECT SHALL AIM AT MAINT AINING HIGH STANDARDS OF COMMERCIAL HONOUR AND INTEGRITY PROVIDING HONOUR ABLE PRACTICES DISCOURAGING AND SUPPRESSING MALPRACTICES SETTLING DISPUTES AMONG BROKERS DEALERS AND JOBBERS DECIDING ALL QUESTION S OF USAGE CUSTOM OR COURTESY IN CONDUCTING THE BUSINESS OF BROKERS DEA LERS 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 PUBLI C. THE MAIN OBJECT TO BE ATTEND BY THE ASSESSEE ARE TO BE PROMOTE TRADE COM MERCE AND INDUSTRY LEADING TO THE ECONOMIC PROSPERITY OF THE PEOPLE AT THE LARGE AND SUCH OBJECT FALL WITHIN THE PURVIEW OF THE EXPRESSION O BJECT OF GENERAL PUBLIC UTILITY . ANY ACT CARRIED ON BY THE ASSESSEE FOR THE BENEFIT OF MEMBERS OF THE ASSESSEES EXCHANGE ONLY AND NOT FOR THE BENEFI T OF PUBLIC AT LARGE THEN THE ASSESSING OFFICER HAS TO EXAMINE THE AVAI LABILITY OF EXEMPTION U/S 11 OF THE IT ACT. THE ACTIVITIES CARRIED ON BY TH E ASSESSEE DIRECTLY OR INDIRECTLY WHICH HELP ITS INDIVIDUAL MEMBERS THEN ITS ACTIVITIES GOES OUT OF THE SPIRIT OF CHARITY AND ARE DETRIMENTAL TO AND D ESTRUCTIVE OF THE PRIMARY OR MAIN OBJECTS. IF THE ASSESSEE IS HAVING UNCONTR OLLED POWERS TO CARRY OUT ANY OBJECT WHICH IS TO BENEFIT ITS MEMBERS EMPLOYE ES OR EX-EMPLOYEES THEN EXEMPTION U/S 11 SHOULD NOT BE AVAILABLE TO TH E ASSESSEE THOUGH AT THE SAME TIME PRIMARY DOMINANT PURPOSE OF THE ASSES SEE IS OF THE NATURE OF GENERAL PUBLIC UTILITY. THE ASSESSEE CANNOT C ARRY ON ANY ACTIVITIES FOR THE EXCLUSIVE BENEFIT OF THE MEMBERS OR EMPLOYEES O R EX-MEMBERS OR EX- ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 17 17 EMPLOYEES OR THEIR DEPENDANTS AT THE COST OF THE AS SESSEES FUND. THE ASSESSEE IS NOT UNDER ANY OBLIGATION TO ESTABLISH F UND OR TRUST FOR THE BENEFIT OF THE MEMBERS OR EMPLOYEES OR EX-MEMBERS O R EX-EMPLOYEES OR THEIR DEPENDANTS. THE ASSESSEE WHEN CARRIED OUT AN Y ACTIVITY FOR THE SOLE BENEFIT OF ITS MEMBERS OR EX-MEMBERS OR EMPLOYEES O R EX-EMPLOYEES OR THEIR DEPENDANTS AND NOT FOR THE BENEFICIAL TO BE G ENERAL PUBLIC WHICH IS DISTINGUISHED FROM THE CLASS OR COMMUNITY CONSISTIN G OF ITS MEMBERS EX- MEMBERS EMPLOYEES OR EX-EMPLOYEES OR THEIR DEPENDA NTS AND CONNECTIONS IT WOULD NOT BE ENTITLED FOR EXEMPTION U/S 11. THE CARRYING OUT OF THE ACTIVITIES FOR THE BENEFICIAL FOR THE ME MBERS EX-MEMBERS EMPLOYEES OR EX-EMPLOYEES OR THEIR DEPENDANTS AND C ONNECTIONS CANNOT BE CONSTRUED AS ANCILLARY OR INCIDENTAL TO THE PRIM ARY OR DOMINANTS OF THE ASSESSEES EXCHANGE. IN THIS BACKGROUND IF WE EXA MINE THE FACTS OF THE PRESENT CASE AS PER ARTICLE 115 (1) OF THE ARTICLE S OF ASSOCIATION PROVIDES FOR COLLECTION OF SEPARATE AND ADDITIONAL CHARGES O R FEES OVER AND ABOVE THE DUES AND CHARGES PROVIDED IN THE RULES BY LAWS AND REGULATIONS OF THE EXCHANGE FROM THE MEMBERS FOR THE USE OF EQUIPMEN T OR FACILITIES OR FOR ANY PARTICULAR SERVICES OR PRIVILEGES GRANTED. TH E GOVERNING BODY OF THE ASSESSEES EXCHANGE WAS NOT ONLY EMPOWERED TO COLLE CT SUCH FEES/CHARGES BUT ALSO WERE EXPECTED TO COLLECT THE SAME IN ORDER TO PROTECT THE INTEREST OF THE EXCHANGE AS WELL AS THE COMPLIANCE OF THE PR OVISIONS OF ACT TO AVAIL THE EXEMPTION U/S 11. THE MEMBERS OF THE ASSESSE E EXCHANGE CANNOT GET UNDUE ADVANTAGES AT THE COST OF ASSESSEE EXCHANGE. THE MEMBERS OF THE EXCHANGE BEING THE INTEGRAL PART OF THE CONSTITUTIO N OF THE EXCHANGE WHO ARE INTERESTED PERSONS AS PER THE PROVISIONS OF SEC TION 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 PRO VIDING INFRASTRUCTURE FACILITIES IN THE FORM OF SCREEN BASED TRADING SYST EM ON LINE CONNECTIVITY CMS INTER CONNECTIVITY TRADING FACILITY IN NATIONA L STOCK EXCHANGE AND ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 18 18 BOMBAY STOCK EXCHANGE AND ALSO INSURANCE COVER UNDE R STOCK BROKERS INSURANCE POLICY. THE BENEFITS OF THESE EXPENDITURE S HAVE BEEN GONE TO THE INDIVIDUAL STOCK MEMBERS OF THE ASSESSEE AND ALSO T O BE MEMBERS OF THE GOVERNING BOARD WHICH CANNOT BE PERMITTED UNDER THE PROVISION OF SECTION 11. FURTHER IT IS ALSO FACT THAT THE ASSESSEE INV ESTED ITS FUND IN ITS WHOLLY OWNED SUBSIDIARY VIZ. HSE SECURITIES LTD. ADVANC ED INTEREST FREE LOAN TO THE SUBSIDIARY AND ALSO MORTGAGED ITS IMMOVABLE PRO PERTY WORTH RS.81.74 LAKHS AT HYMAYAT NAGAR AND PLEDGED FIXED DEPOSITS W ORTH RS.35.61 LAKHS TO CANARA BANK AGAINST BANK GUARANTEE TO HSE SECURI TIES LTD. THESE ARE CONTRARY TO THE PROVISIONS OF SECTION 11 R.W.S. 13 OF THE IT ACT. THE ASSESSEE BEING REGISTERED U/S 12A OF THE IT ACT TH E BENEFIT OF THE ASSESSEE EXCHANGE SHALL BE FOR THE PUBLIC AT LARGE AND NOT F OR THE BENEFIT OF INDIVIDUAL STOCK BROKERS OR MEMBERS OF GOVERNING BO ARD OF THE ASSESSEE EXCHANGE. IN OUR OPINION PROVISIONS OF SECTION 1 3 (1) ( C) R.W.S. 13(2)(B) AND 13 (3) (CC) IS APPLICABLE TO THE FACT OF THE CA SE. ACCORDINGLY THE ASSESSEE IS NOT ENTITLED FOR EXEMPTION U/S 11 OF TH E IT ACT. ON CONSIDERING ENTIRE FACTS AND CIRCUMSTANCES OF THE CASE WE DISM ISS ALL THE GROUNDS RAISED BY THE ASSESSEE WITH REGARD TO ALLOWABILITY OF EXEMPTION U/S 11 OF THE IT ACT. 28. THE ASSESSEE HAS RAISED COMMON GROUND IN THES E APPEALS ARE WITH REGARD TO ADDITION BEING MADE ON THE TRANSFER TO THE INVESTORS SERVICE CELL INVESTORS PROTECTION FUND AND TRADE GUARANTEE FUNDS. THE ASSESSING OFFICER ADDED AN AMOUNT OF RS.58 48 334/- IN THE ASSESSMENT YEAR 2001-02 REPRESENTING TRANSFERS MADE BY THE ASS ESSEE TO INVESTOR SERVICE CELL INVESTORS PROTECTION FUND AND TRADE G UARANTEE FUND DISREGARDING ASSESSEES SUBMISSION THAT THESE FUNDS WERE ESTABLISHED FOR SPECIFIED PURPOSES OF THE MANDATORY DIRECTIONS OF S EBI AND GOVT. OF INDIA AND HENCE THE SAME SHOULD BE TREATED AS APPLICATION OF INCOME IN FURTHERANCE OF THE OBJECTS OF THE ASSESSEE EXCHANGE . ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 19 19 29. THE LEARNED AR FOR THE ASSESSEE ALSO DREW OUR ATTENTION TO THE SEBIS INSPECTION REPORTS DATED 23.11.1994 AND 28.6 .1996 AS ALSO GOVT. OF INDIA LETTER DATED 20.11.1995 AND ASSESSEES REPORT DATED 6.11.1995 REGARDING CONTRIBUTIONS TO INVESTOR PROTECTION CELL AND INVESTOR PROTECTIONS FUND. HE ALSO DREW OUR ATTENTION TO THE SEBIS G UIDELINES ISSUED VIDE THEIR LETTER DATED 9.6.1997 ABOUT SETTLEMENT GUARAN TEE FUND. HE SUBMITTED THAT INSPITE OF EVIDENCE PRODUCED WHICH S HOWED THAT THE ASSESSEE WAS UNDER AN OBLIGATION TO APPLY THESE AMO UNTS AND THUS CONSTITUTED APPLICATION FOR CHARITABLE PURPOSES TH E CIT(A) OBSERVED THAT THESE AMOUNTS WERE REDUCED FROM THE GROSS RECEIPTS UNDER DIFFERENT HEADS OF RECEIPTS SHOWN IN THE INCOME AND EXPENDITURE ACC OUNT AND ONLY THE NET RECEIPTS WERE SHOWN IN THE SAID ACCOUNT. ACCORDING 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 ASSESSEES 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 L EARNED AR THAT THE CIT(A) SHOULD HAVE HELD THAT THESE AMOUNTS CONSTITUTED APP LICATION OF INCOME AND ACCORDINGLY THE ACCOUNTING METHOD ADOPTED BY T HE ASSESSEE OUGHT TO HAVE BEEN ACCEPTED BECAUSE THE AMOUNTS TRANSFERRED TO THE RESPECTIVE FUND VIZ. INVESTOR SERVICE CELL INVESTOR PROTECTI ON FUND AND SETTLEMENT GUARANTEE FUND CONSTITUTE APPLICATION AND HENCE CON STITUTE RECEIPTS AND APPLICATIONS AT THE SAME TIME. THE LEARNED DR RELI ED 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 OFFI CER THAT THE CLAIM OF THE ASSESSEE TO BE EXAMINED AND ALLOW SUCH EXPENDITURE AFTER BEING SATISFIED ITA NO.543 & 467/H/2005 & 2010 HYDERABAD STOCK EXCHANGE LTD. HYD. 20 20 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 GIV EN 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 TH E INCOME AND EXPENDITURE ACCOUNT BY REDUCING THE IMPUGNED AMOUNT FROM GROSS RECEIPTS AND THEREBY SHOWN THE CORRESPONDING RECEIP TS BY WAY OF TRANSFER FROM INCOMES RECEIVED UNDER VARIOUS HEADS WERE KEPT OUT OF SUCH ACCOUNTS AND WERE REFLECTED IN THE BALANCE SHEET DI RECTLY. ACCORDINGLY WE CONFIRM THE ORDER OF THE CIT(A) ON THIS ISSUE. THE GROUND RAISED BY THE ASSESSEE IS REJECTED. THE CIT(A) HAS FOLLOWED HI S ORDER FOR THE ASSESSMENT YEAR 2001-02 WHILE DECIDING THIS ISSUE FOR THE ASSESSMENT YEAR 2006-07 AS SUCH WE ALSO DO NOT FIND ANY INFIR MITY IN THE ORDER OF THE CIT(A) RELATING TO ASSESSMENT YEAR 2006-07 ON THIS ISSUE SINCE THE FACTS OF THE CASE IS SIMILAR IN THIS YEAR AS IN THE ASSESSM ENT YEAR 2001-02. 31. IN THE RESULT BOTH THE APPEALS OF THE ASSESS EE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COU RT 11.2.2010 SD/- SD/- N.R.S. GANESAN CHANDRA POOJARI JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 11 TH FEBRUARY 2010 COPY FORWARDED TO: 1. M/S M. BHASKARA RAO & CO. CAS 6-3-652 5D 5 TH FLOOR KAUTILYA SOMAJIGUDA HYD.82 2. THE ADIT (EXEMPTIONS)-I HYDERABAD 3. CIT(A)- V & III HYDERABAD. 4. CIT HYDERABAD 5. THE D.R. ITAT HYDERABAD. NP