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2016 (7) TMI 948 - ITAT PUNE

2016 (7) TMI 948 - ITAT PUNE - TMI - Disallowance towards compounding fees paid by the assessee to the Reserve Bank of India - Held that:- Such a compounding fees charged to the assessee being compensatory in nature as is evident from the fact that though the amount to be charged could be up to ₹ 30.25 crores, the assessee was asked to pay sum of ₹ 45 lakhs in order to meet the ends of justice, established the case of assessee that the same was not in the form of penalty. Where the a .....

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ch was prohibited by law. The Circular of Reserve Bank of India itself provided that where the assessee had committed an irregularity while dealing in foreign earnings or expenditure outgoes, then such an action of applicant could be compounded as per Rules and Regulations provided in the said Circular. It is not a case where the assessee has been held to have committed an offence or the amount has been paid for purpose, which was prohibited in law, hence the provisions of Explanation to section .....

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t year 2007-08 against order passed under section 143(3) r.w.s. 153A of the Income-tax Act, 1961 (in short the Act ). 2. The assessee has raised the following grounds of appeal:- 1. The Ld. Assessing Officer erred in disallowing [and CIT(A) erred in confirming the disallowance of] the expenditure of ₹ 45,00,000/- paid to the Reserve Bank of India towards compounding fee in relation to ECBs obtained by the Assessee Company without complying with one of the conditions, namely, the lenders sh .....

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rising in the present appeal is against disallowance of ₹ 45 lakhs paid by the assessee to the Reserve Bank of India towards compounding fees. 4. Briefly, in the facts of the present case, the assessee was engaged in the business of development and selling of real estate. Search and seizure operations on the premises of assessee were carried out on 11.09.2009. In response to the notice issued under section 153A of the Act, the assessee furnished return of income declaring total loss of  .....

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- by cheque, which in turn, was duly reflected in regular books of account. During the course of assessment proceedings, the assessee was show caused to explain as to why the compounding fees which was shown under the head Rates and Taxes and paid actually to Reserve Bank of India as penalty should not be disallowed. In reply, the assessee explained the nature of said fees paid by it, wherein it was explained that it had raised three External Commercial Borrowings i.e. ECB, from Porto Limited, P .....

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echnical reasons. The Reserve Bank of India had asked the assessee to pay compounding fees of ₹ 45 lakhs as against maximum amount of ₹ 30 crores. The assessee further explained that the said amount of ₹ 45 lakhs was debited to financial expenses - bank charges and since it was incurred during regular course of business, hence, the same was to be allowed as deduction. The Assessing Officer after considering the evidences filed by the assessee was of the view that the communicat .....

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me within mischief of Explanation to section 37(1) of the Act. Where the dictionary meaning of word contravention was an act done in violation of legal condition or obligation, then the same is not to be allowed as deduction in the hands of assessee. 6. The assessee is in appeal against the order of CIT(A). 7. The learned Authorized Representative for the assessee drew our attention to the copy of compounding order passed by the Reserve Bank of India which is placed at pages 1 to 6 of the Paper .....

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pproved the pre-payment of all these three ECB loans for Inward Remittance without prejudice to an action being taken under the Rules, Regulations, Directions of FEMA. The learned Authorized Representative for the assessee stressed that the said loans were sanctioned after the approval was given by Reserve Bank of India and in view of the said LR number being issued to the assessee, the amount was disbursed under the ECB loan agreements. The technical condition was that the assessee could have b .....

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mount was compounded and the assessee was directed to pay ₹ 45 lakhs in order to meet the ends of justice. The learned Authorized Representative for the assessee further referred to the Master Circular on compounding of contravention under FEMA, 1999 issued by Reserve Bank of India, copy of which is placed at pages 7 to 11 of the Paper Book and it was pointed out that the nature of contraventions are recognized by the Reserve Bank of India and where the default is as per clauses (a) and (b .....

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4.3, it is recognized that the contravention shall be compounded in respect of various factors and the clause attracted in the case of assessee was on account of amount of loss caused to any authority / agency / exchequer as a result of contraventions. Our attention was further drawn to the provisions of FEMA Act, 1999 in this regard. The case of the assessee before us was the payment by the assessee on account of compounding fees was compensatory payment and was distinguishable from penalty for .....

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was that no allowance shall be made in respect of any expenditure incurred for any purpose which was an offence or which was prohibited by law. He stressed that the compounding fees paid by the assessee did not fall within either of conditions and hence, the Explanation to section 37(1) of the Act was not attracted. The learned Authorized Representative for the assessee further placed reliance on the ratio laid down by the Hon ble Supreme Court in Prakash Cotton Mills Pvt. Ltd. Vs. CIT (1993) 20 .....

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t that during the course of search, the said information was received by the Revenue and the amount paid by the assessee was on account of compounding of penalty and hence, not to be allowed as deduction. Further, reliance was placed on the decision of Pune Bench of Tribunal in Modi Builders Vs. JCIT (2015) 60 taxmann.com 54 (Pune-Trib). 9. We have heard the rival contentions and perused the record. The issue arising before us is in relation to the claim of expenditure of ₹ 45 lakhs. The a .....

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e had raised ECB loans from M/s. Porto Limited, Porto Louis, Mauritius, which was wholly owned company of Shri Vikas Shaw and Smt. Swetha Shah. The assessee entered into loan agreements and raised ECB loans after receiving the permission from Reserve Bank of India. The first loan agreement was dated 19.11.2004, against LR No.2004846, dated 07.12.2004 was issued by the Reserve Bank of India for grant of loan of US $ 8 lakhs. Further, second loan agreement was dated 09.12.2004, against Reserve Ban .....

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ny. The lender however, assigned all three ECB loans to person resident outside India vide agreement dated 31.01.2006. The Reserve Bank of India after taking note of the arrangement noted that the lender was not the recognized lender in terms of guidelines for ECB under the provisions of FEMA Act, 1999. In view thereof, Reserve Bank of India approved prepayment of all three ECBs raised by the assessee. However, proceedings were initiated against the assessee for non-compliance with the Rules / R .....

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cautionary advise; b. whether the contravention is serious in nature and warrants compounding of the contravention; and c. whether the contravention, prima facie, involves money-laundering, national and security concerns involving serious infringement of the regulatory framework. 10. The contravention as per sub-clauses (a) and (b) of clause 3.5 are to be referred to the Reserve Bank of India and the contravention, if any, under subclause (c) are to be decided by the Enforcement Directorate. As .....

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ain of unfair advantage, wherever quantifiable, made as a result of the contravention and also the amount of loss caused to any authority / agency / exchequer as a result of contravention; and other conditions provided thereunder. 11. It is the case of assessee before us that the compounding in its case was on account of amount of loss caused to any authority / exchequer as a result of such contravention. The perusal of compounding order passed by the authority reflects that the authority had he .....

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though in terms of section 131 of FEMA Act, the penalty could be up to ₹ 30,25,29,000/-, but however, after considering the matter and rationale behind the compounding provisions, submissions of assessee and entire facts and circumstances of the case, a lenient view was taken on the amount for which contravention was to be compounded and it was held that the payment of ₹ 45 lakhs would meet the ends of justice. The perusal of the said order passed by Competent Authority reflects that .....

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ein that the provisions of FEMA Act, 1999 itself provides a measure to be taken by the authorities by charging compounding fees in respect of contravention, if any. Such a compounding fees charged to the assessee being compensatory in nature as is evident from the fact that though the amount to be charged could be up to ₹ 30.25 crores, the assessee was asked to pay sum of ₹ 45 lakhs in order to meet the ends of justice, established the case of assessee that the same was not in the fo .....

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e which was an offence or which was prohibited by law. The Circular of Reserve Bank of India itself provided that where the assessee had committed an irregularity while dealing in foreign earnings or expenditure outgoes, then such an action of applicant could be compounded as per Rules and Regulations provided in the said Circular. It is not a case where the assessee has been held to have committed an offence or the amount has been paid for purpose, which was prohibited in law, hence the provisi .....

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