2019 (1) TMI 857 - AT - Income Tax

Penalty u/s 271(1)(c) - fees paid by the assessee to SEBI disallowed u/s 37(1) - Held that - For AY 2009-10, wherein the tribunal held that the aforesaid payment of ₹ 2,05,00,000/- paid by the assessee to SEBI under the consent order is not infraction of law and is not hit by Explanation 1 to section 37(1) and the said expenses were held to be an allowable business expenditure. Order of the tribunal was later rectified by an order dated 18.12.2017 passed in miscellaneous application. Once the whole basis of addition itself as made by the AO in quantum has been deleted by the tribunal and expenses were held to be business, we do not find any reason and merit in the penalty being levied by the AO u/s 271(1)(c) on this ground and which was later confirmed by learned CIT(A) on the aforesaid amount of ₹ 2,05,00,000/-. We have also observed that CIT(A) by following the aforesaid order of tribunal against quantum assessment , correctly deleted the penalty. - Revenue fails in this appeal.

Summary

Issues Involved:
1. Legitimacy of the penalty levied under Section 271(1)(c) of the Income-tax Act, 1961.
2. Nature of the consent fees paid to SEBI and its disallowance under Section 37(1) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Legitimacy of the Penalty Levied Under Section 271(1)(c) of the Income-tax Act, 1961:
The primary issue revolves around the penalty of ?69,67,950 levied by the Assessing Officer (AO) under Section 271(1)(c) of the Income-tax Act, 1961, for the assessment year 2009-10. The AO's penalty order was based on the disallowance of the consent fees paid by the assessee to SEBI, which was considered a penalty for an infraction of law and thus disallowable under Section 37(1). The AO initially computed the penalty on an erroneously inflated amount of ?20,50,00,000 instead of the correct amount of ?2,05,00,000, which was later rectified.

The CIT(A) deleted the penalty, following the tribunal's earlier order in ITA No. 3986/Mum/2014, which held that the consent fees paid to SEBI were not in the nature of a penalty for an infraction of law and were allowable as business expenditure. The tribunal in the present appeal upheld the CIT(A)'s decision, confirming that the penalty levied under Section 271(1)(c) was not sustainable since the quantum addition itself was deleted.

2. Nature of the Consent Fees Paid to SEBI and Its Disallowance Under Section 37(1) of the Income-tax Act, 1961:
The assessee, engaged in share and stock broking, paid ?2,05,00,000 to SEBI as part of a consent order to settle allegations of manipulation in stock trading. The AO disallowed this payment under Section 37(1), treating it as a penalty for an infraction of law. However, the tribunal in ITA No. 3986/Mum/2014 found that the consent order was issued before any final adjudication by SEBI and that the payment was made without admitting or denying the charges.

The tribunal observed that the consent fees were for settling disputes and not a penalty for an infraction of law. It cited a similar case, Reliance Shares and Stock Brokers, where such fees were considered for business considerations and not as penalties. The tribunal concluded that the payment was made for mitigating potential consequences and was allowable as business expenditure under Section 37(1).

The CIT(A) followed this reasoning and deleted the penalty, which was upheld by the tribunal in the present appeal. The tribunal reiterated that since the quantum addition was deleted, the penalty under Section 271(1)(c) could not stand.

Conclusion:
The tribunal confirmed the CIT(A)'s order deleting the penalty levied under Section 271(1)(c) of the Income-tax Act, 1961, on the grounds that the consent fees paid to SEBI were not penalties for an infraction of law but were allowable business expenditures. The Revenue's appeal was dismissed, and the penalty was deemed unsustainable.