2009 (1) TMI 766 - AT - Income Tax

Disallowance u/s 37 - penalty paid for infraction of law - Whether the payment made under the scheme framed by the Government under the SEBI Regulations 1997 could be disallowed by the Revenue authorities u/s 37 - CIT(A) noted that the assessee was liable to penalty not exceeding Rs. 5, 000 per day for the default that his non-compliance with SEBI regulations or delaying in making the compliance - he rejected the contention of the assessee that it was a normal payment - CIT(A) uphold the disallowance made by AO. HELD THAT - The contention of ld counsel for the assessee is that the payment has not been made by the assessee u/s 15A of the SEBI Act. According to him the payment was under an option given under the scheme of 2002 and therefore such payment cannot be said to be either as a penalty or akin to penalty. Hence no disallowance could be made On persual of the SEBI Regularization Scheme 2002 for non-compliance with regulations 6 and 8 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 It is clear that once the payments prescribed under the scheme was made the requirements under the 1997 Regulations are treated to be complied with and consequently the provisions of sections 15A and 24 of the SEBI Act could not be enforced against such persons. Therefore in our humble opinion such payments cannot be said to be payment for violation of law and consequently the same cannot be said to be a penalty u/s 15A of the SEBI Act. Following the decision of the hon ble Supreme Court in the case of Ahmedabad Cotton Mfg. Co. Ltd. 1993 (10) TMI 1 - SUPREME COURT if the amount paid is in the nature of penalty or akin to penalty then the amount paid can be disallowed. Otherwise such payment has to be allowed if the payment is incidental to the carrying on of the business. The word penalty has been defined by various dictionaries including Black s Law Dictionary as punishment imposed on a wrongdoer for violation of law. The payment has not been made u/s 15A of the SEBI Act but under a scheme for regularising the default. The object of the scheme was to provide a one-time opportunity to defaulters for regularising the default which might have been committed by oversight or lack of knowledge. The purpose was therefore not to punish the person but to enable him to comply with the provisions of Regulations of 1997. Thus the payments made by the assessee under the scheme of 2002 could not be treated as penalty or akin to penalty. Therefore it is held that the payment could not be disallowed u/s 37. The order of the CIT(A) is therefore set aside on this issue and consequently the disallowance sustained by him is deleted. In the result the appeal of the assessee is partly allowed.

Issues Involved:
1. Disallowance of provisions made for doubtful debts.
2. Addition made to the value of closing stock under Section 145A of the I.T. Act, 1961.
3. Computation of total turnover for the purpose of computing deduction under Section 80HHC.
4. Computation of deduction under Section 80HHC concerning interest income and miscellaneous receipts.
5. Exclusion of interest income from business profits under Clause (baa) to Section 80HHC.
6. Treatment of job work receipts and sale of scrap as part of the total turnover.
7. Disallowance of foreign travel expenses.
8. Disallowance of penalty paid for infraction of law.

Detailed Analysis:

1. Disallowance of Provisions Made for Doubtful Debts:
The issue of disallowance of Rs. 22,33,310/- on account of provisions made for doubtful debts was dismissed as not pressed.

2. Addition to the Value of Closing Stock under Section 145A:
The Tribunal found that adjustments under Section 145A should be made not only with respect to closing stock but also with reference to opening stock, purchases, and sales. This was supported by various Tribunal decisions and the Delhi High Court in CIT v. Mahavir Aluminum Ltd. The orders of the CIT(A) were set aside, and the Assessing Officer was directed to re-compute the profits accordingly.

3. Computation of Total Turnover for Deduction under Section 80HHC:
The issue of whether sales tax forms part of the total turnover was resolved in favor of the assessee. The Tribunal followed the Bombay High Court decision in Sudarshan Chemical Industries Ltd. and the Supreme Court in Laxmi Machine Works, holding that sales tax should not form part of the total turnover. The Assessing Officer was directed to exclude the sales tax amount from the total turnover for computing deduction under Section 80HHC.

4. Computation of Deduction under Section 80HHC:
The Assessing Officer had excluded interest income and miscellaneous receipts from business profits. The CIT(A) held that interest income was assessable as 'Income from Other Sources' and disallowed netting. The Tribunal upheld this view due to the lack of evidence showing a nexus with business activity. Miscellaneous receipts of Rs. 1.93 lakhs were held to be business income under Section 41(1), but 90% was to be excluded from business profits. The Tribunal modified the CIT(A)'s order regarding the sale of scrap, holding it should be part of the turnover and operational income.

5. Exclusion of Interest Income from Business Profits:
The Tribunal upheld the CIT(A)'s decision to exclude interest income of Rs. 10,16,454/- from business profits under Clause (baa) to Section 80HHC, as the assessee failed to provide evidence that the interest income was part of normal business activity.

6. Treatment of Job Work Receipts and Sale of Scrap:
The ground concerning job work receipts was not pressed. The Tribunal upheld the CIT(A)'s decision that sale of scrap should be treated as part of the total turnover, as no contrary decision was provided by the assessee.

7. Disallowance of Foreign Travel Expenses:
The Tribunal found no infirmity in the CIT(A)'s order disallowing 50% of foreign travel expenses, as the assessee failed to prove the business connection with Egypt.

8. Disallowance of Penalty Paid for Infraction of Law:
The Tribunal examined whether the payment under the SEBI Regularization Scheme, 2002, was a penalty for infraction of law. It concluded that the payment was made to regularize defaults due to oversight or lack of knowledge, not as a penalty under Section 15A of the SEBI Act. Therefore, the payment was considered incidental to carrying on business and not disallowable under Section 37. The Tribunal set aside the CIT(A)'s order and deleted the disallowance.

Conclusion:
The appeals were partly allowed, with specific directions provided for re-computation and re-adjudication on certain issues. The Tribunal pronounced the judgment in the open court on 9th January 2009.

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