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2014 (10) TMI 781 - AT - Income TaxDisallowance of interest made u/s 14A r.w. rule 8D Held that - The AO has to examine the disallowance made by the assessee by having regard to the accounts of the assessee and only thereafter the AO, if he is not satisfied with the correctness of the claim, shall determine the disallowance to be made u/s 14A of the Act in accordance Rule 8D following the decision in Godrej & Boyce Mfg. Co. Ltd 2010 (8) TMI 77 - BOMBAY HIGH COURT - the workings furnished by the assessee for interest disallowance was not examined at all by the AO, whereas he is required to reject the workings furnished by the assessee after having regard to the accounts of the assessee thus, 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 Decided against revenue. Disallowance of consent fee paid to SEBI Fee paid to SEBI cannot be treated as penalty - Held that - CIT(A) rightly was of the view that it is very apparent from the Circular of SEBI that in cases 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 the normal course the order of the CIT(A) is upheld Decided against revenue.
Issues Involved:
1. Disallowance made under Section 14A read with Rule 8D. 2. Disallowance of consent fee paid to SEBI. Detailed Analysis: 1. Disallowance made under Section 14A read with Rule 8D: The assessee company, engaged in share broking, declared a loss of Rs. 1,55,950/- in its return for the assessment year 2008-09. The Assessing Officer (AO) scrutinized the return and noted that the assessee had disclosed dividend income of Rs. 2,13,016/- as exempt but did not make any disallowance under Section 14A. The AO asked the assessee to compute the disallowance, which the assessee calculated as Rs. 29,91,393/- for interest and Rs. 15,58,023/- for expenses. The AO accepted the expense disallowance but not the interest disallowance, instead calculating it as Rs. 2,50,84,476/- under Rule 8D(2)(ii). Thus, the total disallowance was Rs. 2,66,42,967/- (corrected to Rs. 2,66,42,679/-). Upon appeal, the CIT(A) found that the assessee had established a direct nexus between the borrowings and investments, thus requiring disallowance under Rule 8D(2)(i) and not Rule 8D(2)(ii). The CIT(A) directed the AO to restrict the interest disallowance to Rs. 29,91,393/- as computed by the assessee. The Tribunal upheld the CIT(A)'s decision, noting that the AO did not examine the workings furnished by the assessee, which showed a clear nexus between borrowings and investments. The Tribunal referenced the jurisdictional High Court decision in Godrej & Boyce Mfg. Co. Ltd (328 ITR 81) and the Delhi High Court in Maxopp Investment Ltd Vs. CIT (347 ITR 272), emphasizing the necessity for the AO to examine and reject the assessee's claim with cogent reasons before determining the disallowance under Rule 8D. 2. Disallowance of consent fee paid to SEBI: The AO disallowed Rs. 50 lakhs paid by the assessee to SEBI as a consent fee, considering it a penalty for infraction of law under SEBI regulations and thus not allowable under Explanation to Section 37(1) of the Act. The assessee contended that the fee was paid without admitting or denying guilt and was for business purposes to avoid business interruption. The CIT(A) held that the consent fee was not a penalty for infraction of law but a business expenditure. The CIT(A) noted that SEBI's acceptance of the consent application indicated that the charge or guilt may not be established. The CIT(A) referenced several case laws supporting the view that such payments are allowable business expenditures and not penalties. The Tribunal agreed with the CIT(A), noting that the SEBI Circular and the Securities Appellate Tribunal's order described the violations as technical. The Tribunal emphasized that the Rs. 50 lakhs paid was not a penalty but a consent fee for settlement, legal, and administrative expenses, paid without admitting or denying guilt. The Tribunal concluded that the payment was made for commercial expediency and business interests, not for infraction of law. Conclusion: The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on both issues. The interest disallowance was correctly limited to Rs. 29,91,393/- under Rule 8D(2)(i), and the Rs. 50 lakhs paid to SEBI was allowable as a business expenditure. The judgment was pronounced in the open court on 22.10.2014.
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