2011 (12) TMI 622 - AT - Income Tax

Disallowance u/s 40(a)(ia) - expenditure to ISE which is the holding company of the assessee - Held that - The amount in question is only reimbursement of the actual expenses and there is no element of any margin or profit.- Decided in favour of assessee. Penalty for violation of bye laws of Stock Exchange - Held that - As decided in case of Angle Capital & Debit Market Ltd 2014 (5) TMI 584 - BOMBAY HIGH COURT the amount paid as penalty was on account of irregularities committed by the assessee s clients. Such payments were not on account of any infraction of law and hence allowable as business expenditure. In such a case the explanation to section 37a would not apply. Accordingly when the payment made on violation of bye-laws cannot said to be payment of any infraction of law and cannot be disallowed.

Summary

Issues:
1. Disallowance u/s 40(a)(ia) of the I T Act.
2. Disallowance of penalty for violation of bye-laws of Stock Exchange.

Issue 1: Disallowance u/s 40(a)(ia) of the I T Act:
The assessee, a subsidiary of a stock exchange, was disallowed a sum under sec. 40(a)(ia) for non-deduction of tax. The Assessing Officer disallowed the amount, but the CIT(A) deleted the disallowance citing CBDT circular no.715 of 1995, stating that TDS is not required on reimbursement of actual expenses. The Tribunal found that the agreement between the assessee and its holding company involved only reimbursement of actual expenses, following a similar decision by a coordinate Bench. Referencing the decision of the Jurisdictional High Court, the Tribunal ruled in favor of the assessee, upholding the CIT(A)'s order.

Issue 2: Disallowance of penalty for violation of bye-laws of Stock Exchange:
The revenue claimed disallowance of penalty under SEBI rules for violating stock exchange bye-laws. The Assessing Officer supported this claim, but the Tribunal disagreed. Citing a case where the Hon'ble jurisdictional High Court held that penalties for such violations are not on account of any infraction of law, the Tribunal dismissed the revenue's ground, stating that the penalty paid for bye-law violations does not constitute a payment for infraction of law. Therefore, the appeal filed by the revenue was dismissed.

This judgment highlights the importance of distinguishing between reimbursement of actual expenses and penalties for statutory violations, emphasizing that payments made for the former do not attract TDS implications, while penalties for the latter do not constitute payments for infractions of law. The Tribunal's decisions were guided by established legal principles and precedents set by the Jurisdictional High Court, ensuring consistency in their rulings.