TMI Blog2012 (9) TMI 260X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant by : Shri Shashi Bhushan Shukla Sr. DR Respondent by : Shri R.S. Singhvi FCA ORDER PER D.K. TYAGI, J.M:: This is revenue s appeal assailing CIT(A) s order dated 1-4-2011, relating to A.Y. 2005-06. Following grounds are raised: 1. The order of the learned CIT(A) is erroneous contrary to facts and law. 2. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in directing the AO for assessing speculatie income at ₹ 37,04,470/- as against ₹ 18,20,012/-. 2.2. The Ld. CIT(A) ignored the finding recorded by the AO and the fact that the assessee did not adjust any income against speculative income. 3. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in deleting the addition of ₹ 3,72,594/- made on account of interest paid for late deposit of SEBI dues. 3.1. The Ld. CIT(A) ignored the finding recorded by the AO and the fact that the assessee did not pay the SEBI dues in time and interest paid is penal in nature. 4. The appellant craves leave to add, to alter, or amend any grounds of the appeal raised ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On merits, the main issue to be considered is whether Explanation to section 73 is attracted in the present set of facts or not. A bare regarding of Explanation to section 73 would reveal that if following ingredients are fulfilled then Explanation to section 73 would be attracted and secondly, the transactions would be treated as speculative transactions. (i) The part of the business of a company consists of purchase and sale of shares of other companies. (ii) The gross total income of the company does not consist mainly of income which is chargeable under the head Interest on securities , Income from house property , Capital gains and Income from other sources . (iii) The principal business of the company is not that of banking or granting of loans and advances. 5.3 In the present appeal, we are mainly concerned with the first ingredient of Explanation. It is noteworthy that the Legislature itself has used the phrase purchase and sale of shares in the Explanation without any qualification in contradistinction to the term used in section 43(5) where it is specifically stated that the transactions are settled otherwise then by way of actual delivery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eligible for an allowance under the residuary provision of section 37 of the Act, following conditions should be satisfied : a) Expenditure must not be governed by the provisions of search Seizure. 30 to 36; b) The expenditure must have been laid out wholly and exclusively for the purpose of the business of the assessee ; c) The expenditure must not be personal in nature ; d) The expenditure must not be capital in nature ; The Explanation to sub-sec. (1) of sec. 37 has been inserted by the Finance (No. 2) Act. 1998 with full retrospective effect from 1st April, 1962. The Explanation so inserted provides that, for removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purposes, which is an offence or which is prohibited by law, shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. 6.2 The amendment by way of insertion of Explanation to sub-section (1) of section 37 of the Act, is explained in the Board s Circular No. 772 dated 23.12.1998 [(1999) 235 ITR (St) 35 : (1999) 151 CTR (St) 35] as under :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be said to be laid out for the purposes of business of the assessee. In this sense of the term, fines and penalties imposed under a statutes for infraction of law, such as, infraction of excise or customs laws, or sales tax laws or delay in payment of provident fund or penalty for violation of FERA, penalty paid for non-payment of Government dues, penalty for non-payment of arrears of sugarcane cess, sum paid by way of compounding a criminal prosecution or penalty for default in payment of municipal taxes cannot be described as one connected with or arising out of the trade and thus, cannot be allowed. However, it is equally well-settled that the payment which is merely compensatory or in the shape of interest for delayed payment cannot be disallowed and in order to decide the admissibility of the deduction, one has to examine the nature of payment whether it is merely compensatory or in the shape of interest for delayed payment or penal in character. The following observations of the Hon ble Supreme Court in the case of Prakash Cotton Mills Pvt. Ltd. v. CIT [1993] 201 ITR 684 are relevant to the issue :- whenever any statutory impost paid by an assessee by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expediency and the amounts were, therefore, allowable as business expenditure under section 37, expressed thus : what needs to be done by an assessing authority under the Income-tax Act, 1961, in examining the claim of an assessee that the payment made by such assessee was a deductible expenditure under section 37 of the Income-tax Act although called a penalty is to see whether the law or scheme under which the amount was paid required such payment to be made, as penalty or as something akin to penalty, that is imposed by way of punishment for breach or infraction of the law or the statutory scheme. If the amount so paid is found to be not a penalty or something akin to penalty due to the fact that the amount paid by the assessee was in exercise of the option conferred upon him under the very law or scheme concerned, then one has to regard such payment as business expenditure of the assessee, allowable under section 37 of the Income-tax Act, as an incident of business laid out and expended wholly and exclusively for the purposes of the business. However, such payment of the assessee is one which is made in exercise of the option given to such assessee by the law or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of SEBI turnover fees was regularized on payment of interest on turnover fees. The assessee did not carry out any act which may be termed as illegal or contrary to statutory provisions. Interest on turnover fees was paid as per relevant SEBI (Interest Liability Regularization) Scheme 2004. So the amount in question was demanded and paid by the assessee. However, payment is not to cover any act of the assessee which could be termed as breach of some legal provisions. The assessee had not committed any infraction of law or illegality nor was the payment a penalty under any specific statute or agreement or otherwise. In these circumstances, I am unable to agree with the Assessing Officer that expenditure involved was inadmissible in view of Explanation to Section 37 of the Act and, therefore, could not be allowed. In view of the aforesaid it is held that the payment of interest on the delayed payment of the turnover fees to the extent of ₹ 3,72,954/- to SEBI cannot be regarded as expenditure incurred for the purposes, which is an offence or which is prohibited by law within the meaning section 37 read with Explanation thereto. As a result, Grounds of Appeal No. 3, 4 5 are allo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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