2016 (12) TMI 1721 - AT - Income Tax

Disallowance u/s 37(1) - payment made to SEBI for infringement of law, which is a fee for compounding an offence - Held that - We find that the ld. CIT(A) has deleted the above addition by following the decision of Co-ordinate Bench of the Tribunal in the case of Reliance Share and Stock Brokers (P) 2014 (10) TMI 781 - ITAT MUMBAI wherein the similar issue has been decided in favour of the assessee as held fee cannot be equated with a penalty and is a payment to enable the assessee to carry on its business in the normal course - Decided in favour of assessee Capital gain computation - Allow indexation benefit from AY 1998-99 and not from AY 2005-06 - shares of BSE were acquired by the assessee in the year 2005-06 only - Held that - We find from the order of ld. CIT(A) that the appeal of the assessee has been allowed by the First Appellate Authority on the basis of ratio laid down in the case of G Das Capital Markets Pvt.Ltd 2014 (9) TMI 164 - ITAT MUMBAI in case of sale of capital asset being equity share allotted to the shareholder of a recognized stock exchange in India under scheme of demutualization, shall be the cost of acquisition of its original membership of the exchange - capital gain computed on sale of shares of BSE by taking the cost of acquisition and allowing indexation thereon as per provisions of law. - Decided against revenue

Summary

Issues Involved:
1. Deletion of disallowance made by the A.O. under section 37(1) on account of payment made to SEBI for infringement of law.
2. Direction to allow indexation benefit from AY 1998-99 and not from AY 2005-06 for shares of BSE.

Issue-wise Detailed Analysis:

1. Deletion of disallowance made by the A.O. under section 37(1) on account of payment made to SEBI for infringement of law:

The first issue concerns the disallowance of payments made by the assessee to SEBI and NSE, which the AO considered as penalties for compounding an offence. The AO disallowed these payments under section 37(1) of the Act, amounting to ?21,31,704/-, on the grounds that they were for compounding an offence.

Upon appeal, the CIT(A) deleted the disallowance, referencing a similar case, Reliance Share and Stock Brokers (P) Ltd., where the ITAT allowed the deduction of consent fees paid to SEBI. The CIT(A) observed that the payments were not penalties but consent fees paid for settlement of disputes without admitting guilt.

The Tribunal upheld the CIT(A)'s decision, reiterating that the payments were administrative or civil actions rather than penalties for infraction of law. The Tribunal emphasized that the payments were made to settle disputes and facilitate business operations, thus qualifying as allowable business expenses under section 37(1). The Tribunal cited various judicial precedents supporting this view, including decisions from the Bombay High Court and the Supreme Court, which distinguished between compensatory payments and penalties.

2. Direction to allow indexation benefit from AY 1998-99 and not from AY 2005-06 for shares of BSE:

The second issue pertains to the indexation benefit for long-term capital gains on the sale of BSE shares. The AO allowed the indexation benefit from AY 2005-06, the year the shares were acquired, rather than from AY 1998-99, the year the BSE card was acquired.

The CIT(A) directed the AO to allow the indexation benefit from AY 1998-99, referencing the case of G. Das Capital Markets Pvt. Ltd., where the ITAT upheld the indexation benefit from the date of original holding of the BSE card. The CIT(A) reasoned that the cost of acquisition should include the period of holding the BSE card, as per the provisions of section 47(xiii) and Explanation 1 to section 2(42A) of the Act, which link indexation to the period of holding the asset.

The Tribunal upheld the CIT(A)'s decision, confirming that the indexation benefit should be allowed from AY 1998-99. The Tribunal reiterated that the law allows for the inclusion of the prior period of holding when computing the capital gains, aligning with the objective of offsetting the effect of inflation.

Conclusion:

The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decisions on both issues. The payments made to SEBI were deemed allowable business expenses, and the indexation benefit for the BSE shares was to be calculated from AY 1998-99. The judgment was pronounced in the open court on 20th Dec, 2016.