NOTIFICATION NO. 267/2006, DATED 14-9-2006

In exercise of the powers conferred by section 295 read with clause (xii) of sub-section (5) of section 11 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax rules, 1962, namely:-

1.   (1) These rules may be called the Income-tax (Tenth Amendment) Rules, 2006.

(2) They shall be deemed to have come into force on the 26th day of November, 1999.

2.   In the Income-tax rules, 1962, in Part IV, in rule 17C, after clause (iv), the following clause shall be inserted and shall be deemed to have been inserted with effect from the 26th day of November, 1999, namely :-

“(v) investment made by a recognised stock exchange referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), (hereafter referred to as investor) in the equity share capital of a company (hereafter referred to as investee)-

  1. which is engaged in dealing with securities or mainly associated with the securities market;
  2. whose main object is to acquire the membership of another recognised 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 that Act; and

  3. in which at least fifty one per cent of equity shares are held by the investor and the balance equity shares are held by members of such investor.”.

Explanatory Memorandum :

It is proposed to insert a new clause (v) in rule 17C of the Income-tax Rules, 1962 so as to include investment by a recognized Stock Exchange, in the equity shares of a company promoted by it to acquire the membership rights of other stock exchanges, where at least 51% of the paid-up share capital is held by the Stock Exchange and the balance is held by its members. The amendment is proposed to be made effective retrospectively from the 26th day of November, 1999.

As part of revival of small stock exchanges, the Securities and Exchange Board of India issued guidelines on the 26th day of November, 1999 and the 16th day of December, 1999 allowing all stock exchanges in India to promote subsidiaries, so as to acquire membership rights of larger stock exchanges namely National Stock Exchange/Bombay Stock Exchange and the like. In pursuance to the above guidelines, certain Regional Stock Exchanges floated subsidiaries with investment ranging from 51% to 100% of the equity capital of the subsidiary and thus became members of National Stock Exchange or Bombay Stock Exchange or both.

Hence, a situation arose whereby, in pursuance to the guidelines dated the 26th day of November, 1999 of the Securities and Exchange Board of India, regional stock exchanges had been making share investment in subsidiaries since 1999, whereas sub-section (5) of section 11 read with rule 17C, as they stood, did not permit such investments. As the regional stock exchanges had followed guidelines of Securities and Exchange Board of India on the matter, it became necessary to bring in a convergence between the said guidelines and the relevant tax provisions for the period commencing from the 26th day of November, 1999.

The subsidiaries have been established subsequent to the issue of guidelines dated the 26th day of November, 1999 by the Securities and Exchange Board of India. The above notification is therefore proposed to be made retrospectively from that date.

It is certified that no assessee is likely to be prejudicially affected by this notification being given retrospective effect.

[F. No. 149/118/2006-TPL]

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