2018 (6) TMI 469 - AT - Income Tax

Allowable expenditure u/s 37(1) - Settlement charges paid to SEBI - penalty paid for infraction of law - payment was made without admitting or denying the guilt - Held that - The payment of settlement charges made by the Respondent was neither in the nature of protection money, nor extortion, nor hafta nor bribe. It was also not a payment for a purpose namely, settlement, which can be said to be an offence or which can be said to be prohibited by law . The payment so made by assessee was a payment for the purpose of the profession carried on by the aassessee - to save the time, cost and hassle of a long winded litigation as also to protect the reputation of the assessee. Hence, the payment has to be allowed as an expenditure under section 37(1) of the Act.- Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of disallowance of ?50,00,00,000/- settlement charges paid to SEBI.
2. Nature of settlement charges: Business expenditure or penalty for infraction of law.
3. Applicability of Section 37(1) of the Income Tax Act, 1961.

Comprehensive, Issue-wise Detailed Analysis:

1. Deletion of Disallowance of ?50,00,00,000/- Settlement Charges Paid to SEBI:
The core issue revolves around whether the settlement charges paid by the assessee to SEBI amounting to ?50,00,00,000/- should be considered as a penalty for infraction of law and thereby disallowed under Section 37(1) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed the expenditure, considering it penal in nature. The CIT(A) deleted this disallowance, holding that the settlement charges were not penal but were incurred to settle disputes with SEBI and continue business operations without interruption.

2. Nature of Settlement Charges: Business Expenditure or Penalty for Infraction of Law:
The AO viewed the settlement charges as a penalty for violating SEBI regulations, thus not allowable as business expenditure under Section 37(1). The assessee argued that the settlement charges were not penalties but were paid to avoid lengthy litigation and potential business disruption. The CIT(A) supported this view, citing the SEBI Circular No. EFD/ED/Cir-1/2007, which describes consent orders as a conciliatory process to avoid long litigation rather than a penalty for legal infractions. The CIT(A) further referenced the case of Reliance Share and Stock Brokers (P) Ltd., where similar settlement charges were deemed allowable business expenses.

3. Applicability of Section 37(1) of the Income Tax Act, 1961:
Section 37(1) disallows any expenditure incurred for purposes that are an offense or prohibited by law. The CIT(A) examined whether the settlement charges fell under this prohibition. The explanation to Section 37(1) states that any expenditure incurred for purposes that are an offense or prohibited by law shall not be deemed to have been incurred for business purposes. The CIT(A) found that the settlement charges paid by the assessee did not constitute an expenditure for an offense or an act prohibited by law. The payment was made without admitting or denying guilt, as per the consent order, and was intended to avoid prolonged litigation and business disruption.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, emphasizing that the settlement charges were not penalties for legal infractions but were paid to settle disputes with SEBI and continue business operations. The Tribunal referenced the case of Reliance Share and Stock Brokers (P) Ltd., where similar charges were allowed as business expenses. The appeal filed by the Revenue was dismissed, affirming that the settlement charges were allowable under Section 37(1) of the Income Tax Act, 1961.