2018 (7) TMI 586 - AT - Income Tax

Addition on account of revenue expenditure u/s 37(1) - expenditure on account of consent fee charged by the Security Exchange Board of India SDEBI - CIT-A held it as allowable as legitimate revenue expenditure - Held that - Consent fee paid by the assessee was for non compliance of certain bye-laws/guidelines of SEBI. The fact of payment of consent fee cannot be treated as violation of statutory law. The charges levied by SEBI were in the ordinary course of business of the assessee and it cannot be construed that the payments were made in violation or infringement of any central or state laws. The consent fee paid cannot 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 paid for the purpose of business to settle a dispute with the regulator SEBI and to be able to conduct its business without interruption - no infirmity in the findings of the CIT(A) - decided against revenue Allowance of long term capital loss - Loss was on account of liquidation of its foreign subsidiary company - Held that - Findings of the AO given in A.Y 2005-06 clearly shows that it was during the year under consideration the assessee could make final realisation and, therefore, the difference of actual investments made in the foreign subsidiary company and actual amount realised materialised during the year under consideration and, therefore, the claim of long term capital loss is definitely allowable during the year under consideration. No reason to interfere with the findings of the CIT(A) - Decided against revenue

Summary

Issues:
1. Deletion of addition of ?10,97,280 under section 37(1) of the Income-tax Act, 1961.
2. Allowance of long term capital loss of ?2,39,92,582.

Analysis:

Issue 1: Deletion of addition of ?10,97,280 under section 37(1)
The Revenue challenged the deletion of the addition of ?10,97,280 made by the Assessing Officer (AO) on account of expenditure under section 37(1) of the Income-tax Act, 1961. The AO disallowed this amount as expenditure on account of consent fee charged by the Security Exchange Board of India (SEBI), believing it was in violation of SEBI Act provisions. However, the Commissioner of Income Tax (CIT-A) deleted the addition, accepting the explanation that the fee was paid in settlement of an ongoing dispute and was a legitimate revenue expenditure. The Income Tax Appellate Tribunal (ITAT) upheld the CIT-A's decision, stating that the fee was not a violation of statutory law but a charge in the ordinary course of business to settle a dispute with SEBI. The Tribunal dismissed the Revenue's appeal, emphasizing that the fee was not a penalty but a business expense to maintain operations without interruption.

Issue 2: Allowance of long term capital loss of ?2,39,92,582
The AO disallowed the claim of long term capital loss of ?2,39,92,582, stating that only ?23,53,451 pertained to the relevant assessment year. The assessee justified the loss by explaining it was incurred on investments in a foreign company and realized through another subsidiary, resulting in a net loss. The CIT-A allowed the full claim of ?2,63,46,033, disagreeing with the AO's partial allowance. The ITAT upheld this decision, noting that the final realization of investments made in the foreign subsidiary occurred in the relevant assessment year, making the claim of long term capital loss valid. The Tribunal dismissed the Revenue's appeal, affirming the CIT-A's direction to allow the full claim of long term capital loss.

In conclusion, the ITAT upheld the CIT-A's decisions in both issues, dismissing the Revenue's appeal in its entirety on 6th July 2018.