TMI Blog2014 (10) TMI 781X X X X Extracts X X X X X X X X Extracts X X X X ..... of administrative/civil actions which includes, interalia, orders of suspension from trading are different from criminal actions - assessee had been suspended from doing trading activity for a period of four months and had not been awarded any monetary fines - the consent application of the asssessee was without admitting or denying the guilt - SEBI has also accepted the application on this basis - Thus, SEBI has accepted the position that guilt may or may not be established at the end of the appellate proceedings - The fee paid cannot therefore, be equated to a "penalty" which must necessarily be a punishment for infraction of a law or a regulation having statutory force - The fee is claimed to have been paid for the purposes of business, to settle a dispute with the regulator SEBI and to be able to conduct its business without interruption – relying upon Commissioner Of Income-Tax Versus Sales Magnesite Private Limited [1994 (11) TMI 38 - BOMBAY High Court] - if the concerned impost is purely compensatory in nature, it is an allowable expense u/s. 37 of the Act – thus, the fee cannot be equated with a penalty and is a payment to enable the assessee to carry on its business in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s recommended for suspension of the Certificate of Registration as Stock broker for a period of nine months for violating the various regulations framed by SEBI. After hearing the assessee, the period of suspension was reduced to four months. The assessee had challenged the said order by filing before the Securities Appellate Tribunal. While the said appeal was pending, the SEBI issued a circular whereby it agreed to settle the disputes in consideration of 'Consent Application' furnished by the assessee on payment of consent fee. Accordingly, the assessee filed a Consent Application before SEBI, wherein it agreed to pay a sum of ₹ 50.00 lakhs without admitting or denying the guilt alleged by SEBI. On its approval, the Security Appellate Tribunal also disposed of the appeal filed by the assessee in terms of Consent terms. The AO took the view that the above said amount of ₹ 50.00 lakhs is a compounding fee paid by the assessee for offences committed under SEBI (Stock Brokers and subbrokers) Regulations, 1992. Accordingly, the AO took the view that this was a penalty paid for infraction of law and hence, disallowed the said claim by invoking the Explanation to Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance. The following table furnished by the assessee shows the purpose and utilization of borrowings made by the assessee, i.e., the nexus between the borrowings and its utilisation. Received amount Utilization Interest paid Interest amount on business loan Interest amount on investment 1,067,500,000 Opg-total 867,500,000 Opg-business purpose 1.4.07 31.03.08 366 86,750,000 13,400,000 ICD to meet regular expenses 25.3.08 31.03.08 7 25,628 60,000,000 ICD to meet regular expenses 31.03.08 31.03.08 1 16,393 (408,000,000) Repaid 13.11.07 31.03.08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 344 (939,891) (15,000,000) Repaid -Reliance Securities Ltd-shares. 1.4.07 24.4.07 343 (1,405,738) (5,000,000) Repaid -Reliance Securities Ltd.-shares 1.4.07 12.05.07 325 (443,989) (12,500,000) Repaid -Reliance Securities Ltd.-shares 1.4.07 14.05.07 323 (1,103,142) (10,000,000) Repaid -Reliance Securities Ltd-shares. 1.4.07 22.05.07 315 (860,656) (94,500,000) Repaid -Reliance Securities Ltd.-shares 1.4.07 23.05.07 314 (8,107,377) 50,000,000 Opt-Reliance Land Pvt.Ltdshares 1.4.07 31.03.08 365 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnished by the assessee in the table extracted above. It is also pertinent to note that the revenue did not find fault with the said workings. Under these circumstances, we are of the view that the ld CIT(A) was justified in holding that the interest disallowance was required to be made under Rule 8D(2)(i) of the I.T Rules and also in confirming the disallowance of interest to the extent of ₹ 29,91,393/-, as worked out by the assessee. Accordingly, we uphold his order on this issue. 9. The next issue relates to the disallowance of Consent fee of ₹ 50.00 lakhs paid by the assessee. The Ld D.R submitted that the assessee has penalty for violation of the provisions of SEBI Act, i.e., the assessee has not followed the various Rules prescribed under the Act. He further submitted that the Consent order passed by the SEBI shall not change the character of violation or penalty initially levied by the Board. On the contrary, the Ld Counsel appearing for the assessee submitted that the SEBI had initiated the action against the assessee in connection with certain technical violations. Such action has been initiated by virtue of powers given to SEBI to take certain administrati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessing officer. 11. The Ld Counsel further submitted that section 15I prescribes the methodology to adjudge the technical violations prescribed in sections 15E to 15H of the Act, i.e., the Board shall appoint any officer not below the rank of Division Chief to be an adjudicating officer for holding an inquiry in the prescribed manner. The said officer shall determine the quntum of penalty by having regard to the amount of disproportionate gain or unfair advantage made as a result of the default etc. The Ld Counsel submitted that this section also clearly shows that the penalties prescribed in sections 15E to 15H are only technical defaults by which the person committing any irregularity might have made undue advantage or disproportionate gain. He submitted that the adjudicting officer appointed to make enquiries about the alleged irregularities committed by the assessee initially recommended for suspension of the assessee for nine months, but later it was reduced to four months. 12. The Ld Counsel, thereafter, invited our attention to Circular No. EFD/ED/Cir-1/2007 dated 20th April 2007 issued by the SEBI, wherein the Guidelines for Consent Orders and for conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifty lakhs only) as an aggregate amount towards settlement charges, legal expenses and administrative expenses in the matter. The Ld A.R further submitted that the SEBI has accepted that the assessee has filed consent application without admitting or denying the guilt. Further it is clearly stated in the Consent Order that the amount of ₹ 50.00 lakhs paid by the assessee was towards settlement charges, legal expenses and administrative expenses. Accordingly, the ld A.R contended that the assessing officer was not correct in presuming that the amount of ₹ 50.00 lakhs paid by the assessee was a penalty for infraction of law as specified in the proviso to section 37(1) of the Act. 14. On consideration of rival submissions, we notice that the case of the Ld A.R was that the amount of ₹ 50.00 lakhs was paid by the assessee by taking into consideration the business interest in order to settle the ongoing dispute and according to Ld A.R, the assessee never admitted or accepted the alleged irregularities. Thus, according to Ld A.R, the assessee has not committed any of the allegation made by the SEBI. Hence the amount of ₹ 50.00 lakhs paid by the assessee can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been found. However, in the event of a serious and intentional violation, the process should not be completed till the fact finding process is completed whether by way of investigation or otherwise. 6.4 The Appellant further submitted that most of the irregularities referred to in the Order are procedural or administrative non-compliances of the various provisions of SEBI Act. The SEBI has been given the power by the Parliament of India to pass consent orders under the SEBI Act and the Depositories Act. It has also been specified that in the event of a serious and intentional violation the process should not be completed till the fact finding process is completed. The Appellant's case was decided without waiting for the final fact findings, suggesting that the case was one of routine abnormality. 6.5 The appellant also submitted that the SEBI while accepting the consent proposal of the Appellant has inter alia stated as under: You had vide consent application and letter dated 15th November, 2007 proposed, without admitting or denying the guilt, to offer 50,00,000/-(Rupees Fifty Lakhs only) as an aggregate amount towards settlement charges, legal expenses and admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e violations were offered by payment of penalty as in the instant case. Therefore, impugned order of the Commissioner (Appeals) did not call for any interference. [Para 10] CASES REEFERED TO CIT v. Gwalior Rayon Silk Manufacturing (Wvg.) Co.Ltd [1999] 237 ITR 253/102 Taxman 433 (Born.) (para 5) and Consolidated Coffee Ltd. v. Agricultural Income-tax Officer [2001] 248 ITR 417 (SC) - The Hon'ble ITAT in the case of Kaira Can Company Ltd. (32 DTR 485) has held that Payment, made under SEBI Regulation scheme, 2002 for failure to make disclosure as required under SEBI (Substantial Acquisition of shares and Takeovers) Regulations 1997 could not be treated as penalty as it is a payment for regularizing the default committed hence such payment can not be disallowed by invoking explanation to s. 37(1)., The Hon'ble Apex Court in the case of CIT Ahmedabad Cotton Mfg. Co. Ltd. [1993] 205 ITR 163 has held that, Penalty paid under option conferred on assessee under the concerned law or scheme itself is deductible What needs to be done by an assessing authority under the Income-tax Act in examining the claim of an assessee that the payment made by such 'assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to section 37 of the Income Tax Act, 1961 is not justified. In our opinion, in the facts and circumstances of the present case, no fault can be found with the decision of the [TAT. Accordingly, the second question cannot be entertained. 6.7 The Appellant submitted that in case of CIT v. Sales Magnesite (P.) Ltd. [1199-51214 ITR 1/81 Taxman 334 (Born.), it was held that, Commercial expediency must be decided from businessman's point of view. Even expenditure incurred voluntarily on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business would be deductible under this section. The question whether it was necessary or commercial expediency or not is a question that has to be decided from the point of view of the businessman and not by the subjective standard of reasonableness of the revenue. 6.8 In view of the above facts and judicial decisions, the Appellant submitted that fees paid to SEBI is allowable as business expense and not a penalty for infraction of law. 6.9 I have gone through the A.O.'s order as well as the appellant's submissions. It is very apparent from the Circular of SEBI as mentioned a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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