2024 (10) TMI 703 - AT - Income Tax

Adjustment u/s 143(1)(a)(iv) being penalty or fine - penalty imposed for delayed intimation of institutional trade to custodian and short collection of margins from clients - Though assessee in tax audit report in Form No 3 CD has shown it to be penalty but now it is contested that same is not disallowable expenses u/s 37 (1) - HELD THAT - We find that this issue is squarely covered in favour of the assessee by the decision in case of Angel Capital and Debt Market Limited 2014 (5) TMI 584 - BOMBAY HIGH COURT and also the decision of Stock and bond trading company 2011 (10) TMI 172 - BOMBAY HIGH COURT wherein it has been held that the payments made by the assessee to the stock exchange for violation of the regulation are not on account of an offence or which is prohibited by law and therefore invocation of explanation to Section 37 of the Income Tax Act is not justified. We have also considered the nature of penalty which is also levied for the violation of rules and regulation as well as by laws of the Bombay Stock Exchange and National Stock Exchange. Therefore, the issue is decided in favour of the assessee by directing the learned Assessing Officer to delete the disallowance - Accordingly Ground Nos. 1 and 2 of the appeal of the assessee is allowed

Summary

Issues:
1. Disallowance of penalty amount under Section 143(1)(a)(iv) of the Income Tax Act.
2. Interpretation of penalties paid to stock exchanges as disallowable expenses under Section 37(1) of the Act.

Analysis:

Issue 1: Disallowance of penalty amount under Section 143(1)(a)(iv) of the Income Tax Act
The appellant, a share and stock broking company, filed an appeal against the adjustment of Rs. 112,984 under Section 143(1)(a)(iv) by the Joint Commissioner of Income Tax. The appellant argued that the penalty amount was not indicated in the audit report for disallowance, and therefore, the invocation of Section 143(1)(a)(iv) was incorrect. The appellant contended that the penalty was compensatory in nature and not attractable under Explanation 1 to Section 37. The Central Processing Centre made the addition based on a communication, and the appellant's response was hindered due to portal glitches. The appellate tribunal, after considering the arguments, directed the Assessing Officer to delete the disallowance of Rs. 112,984, allowing the appeal of the assessee.

Issue 2: Interpretation of penalties paid to stock exchanges as disallowable expenses under Section 37(1) of the Act
The Assessing Officer disallowed the penalties paid by the appellant to stock exchanges under Section 37(1) based on Explanation-1 and 3 of the Act. The appellant, in its appeal, argued that the penalties were not in the nature of penalties but compensatory payments. The appellant submitted detailed documents, including tax audit reports, judicial precedents, and circulars from stock exchanges and regulatory authorities, to support its contention. The tribunal noted that similar issues had been decided in favor of other taxpayers by the Bombay High Court in previous cases. It held that the penalties paid by the appellant were for violations of regulations and not offenses prohibited by law, thus not justifying the invocation of Explanation to Section 37. Consequently, the tribunal allowed the appeal, directing the deletion of the disallowance of Rs. 112,984.