2007 (2) TMI 241 - AT - Income Tax

Disallowance of Expenditure - incurred for running day-to-day business - Nature of fees and penalty - HELD THAT - In the instant case, it is noticed that the assessee incurred the expenses in the shape of fines during normal course of business and there was no infraction of any statutory law. In such type of business it is beyond the control of share broker to know in advance that the trading volume will increase beyond the fixed exposure limit because trading depends upon the market trend and on certain dates there can be extraordinary increase in trading volume. On that increased trading volume, the concerned member also earns income in the shape of commission, etc. which is taxable so, the fine paid which was co-related with the increase in trading volume which crossed the fixed exposure limit, cannot be considered as infraction of law although irregularities are there, and for those irregularities, the assessee suffered and paid the fine but this payment cannot be termed as penal in nature. Similarly, late submission of margin certificate due to computer software problem, cannot be considered as infraction of law and if any fine is paid for such late submission, due to unavoidable circumstances in the regular course of business that cannot also be termed as penal in nature. We, therefore are of the opinion that in the instant case although some violations of the conditions prescribed by the NSE was there but that violations occurred in the regular course of business and cannot be considered as infraction of any statutory law. So, the expenses incurred by the assessee in regular course of business were allowable. In that view of the matter, we set aside the order of learned CIT(A) and direct the AO the allow the expenses claimed by the assessee. In the result, appeal filed by the assessee is allowed.

Summary

Issues:
Disallowance of expenses incurred on NSE violations and fines/penalties.

Analysis:
The appeal was against the order of the CIT(A) upholding the disallowance of Rs. 68,330 as fees and penalty incurred by the assessee for NSE violations and fines/penalties. The AO disallowed the expenses, but the assessee argued that they were part of the day-to-day business operations and compensatory in nature. The CIT(A) confirmed the disallowance, considering the payments as penal in nature. The assessee contended that the fines were paid in the normal course of business operations, without any intentional infractions of law.

The assessee explained that the fines were related to NSE procedures for monitoring trading members' operations, such as exposure limit violations, late margin certificate submissions, and share delivery deficiencies. The assessee maintained that these expenses were incurred for regular business activities and not due to intentional law violations. The counsel argued that the fines were a result of inadvertent errors in the business operations, not deliberate breaches of law.

The Revenue's representative supported the disallowance, citing SEBI norms applicable to stock exchanges and the consequences of violating these guidelines. The Revenue contended that fines imposed for guideline violations were not allowable as business expenses, as they constituted infractions of law. However, the tribunal found that the fines were incurred during normal business operations without intentional law breaches. The tribunal emphasized that the fines were a result of operational irregularities, not deliberate violations of statutory laws.

The tribunal concluded that the fines paid by the assessee were not penal in nature as they arose from regular business activities and unintentional irregularities. The tribunal noted that the fines were related to increased trading volumes, late submissions due to technical issues, and share delivery deficiencies inherent in the business. Therefore, the tribunal set aside the CIT(A)'s order and directed the AO to allow the claimed expenses. The appeal filed by the assessee was allowed.