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TMI Blog2018 (6) TMI 469X X X X Extracts X X X X X X X X Extracts X X X X ..... he Revenue against the order of CIT(A)- 8, Mumbai dated 25/02/2016 for A.Y.2011-12 in the matter of order passed u/s.143(3) of the IT Act. 2. Following grounds have been taken by the Revenue:- 1. whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) 'is right in deleting the disallowance of ₹ 50,00,00,000/- made by the assessing officer by treating the settlement charges paid by the assessee to Securities Exchange Board of India (SEBI) as a penalty paid for infraction of law not allowable u/s 37(1) of the Income Tax Act, 1961 ? 2. on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in allowing the settlement charges of ₹ 50,00,00,000/- as business expenditure without considering the fact that the assessee has opted for settlement in order to avoid final extreme consequence of the proceedings initiated by SEBI for the violation of provisions of SEBI Act, 1992 and thus charges paid under settlement are akin to penalty which is resulting from violation of rule. 3) The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdingly has made the payment. This establishes the fact that the assessee has admitted that he has violated the SEBI Regulations and paid the charges. No prudent businessman will pay such huge charges in absence of any violation. Thus, the payment made by the assessee of ₹ 50,00,00,000/- to SEBI for violating the SEBI Regulations was held by AO as penal in nature, not allowable as 'Business Expenditure' u/s. 37(1) of the Act. Therefore, the Assessing Officer considering the provisions of section 37(1) of the Act that the expenditure claimed under the head 'settlement charges' of ₹ 50,00,00,000/- is penal in nature in respect of violation of SEBI Regulation, disallowed the amount u/s, 37(1) and added the same to the total income of the assessee. 4. By the impugned order, CIT(A) deleted the addition after observing as under:- 5.1.6 I have given full consideration to the observations of the AO and submissions made by the appellant. Since the AO has not elaborated detailed reasoning for disallowance made under section 37(1), it is to be decided whether any aspect of that section applies to the facts and circumstances of the case. 5.1.7 Section 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to achieve twin goals of appropriate sanction and deterrence without resorting to a long drawn litigation. In this sense it is a conciliatory proceeding that precedes imposition of full legal proceedings under the SEBl Act, 1992. Clearly, in the instant case, it has resulted from prima facie allegation made by SEBl, which was followed by pre-emptive action taken to avoid further legal action that may result in penalty or any other legal sanction by SEBl. Thus, the consent settlement paid by the appellant lies between the point of prime facie the indication of an offence and final culmination in levy of penalty or any other legal sanction/punishment. This intermediate status of Application for Consent between prima facie allegation and final verdict and the acceptance thereof by SEBl needs to be determined as an expenditure for an offence or for an act prohibited by law or otherwise. 5.1.12. Clearly, payment of any kind of settlement/ consent charge under any law in itself is not expenditure made for the purpose of an offence. It has now to be seen whether it is a payment made for an act which is prohibited by law. In the instant case, it is noted that the appellant, in h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the position that guilt may or may not be established at the end of the appellate proceedings. The fee paid cannot therefore, 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 claimed to have been paid for the purposes of business, to settle a dispute with the regulator SEBI and to be able to conduct its business without interruption. It is also worth noting that various decisions have held that an examination of the nature of expenses, reveals that if the concerned impost is purely compensatory in nature, the same is an allowable expense u/s. 37 of the Act. In the circumstances, the fee cannot be equated with a penalty and is a payment to enable the assessee to carry on its business in the normal course. Hence, the disallowance made by the AO of ₹ 50,00,000/- be deleted. Accordingly, this ground is allowed. 17. In view of the foregoing discussions, we are of the view that the Ld CIT(A) was justified in deleting the disallowance of ₹ 50.00 lakhs made by the assessing officer, 18. In the result, the appeal filed by the revenue is dismissed. 5.1.14 In view of a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Committee (HPAC) of the SEBI and the said HPAC recommended the terms of 'Settlement' subject to fulfilment of certain conditions which were accepted by the SEBI, which in turn passed the consent order dated l4.01.2011. AS per the terms of the consent order of the SEBI, the assessee paid the impugned amount of ₹ 50,00,00,000/-( 25,00,00,000/- each in his two companies as directed in the consent order). After such payment, SEBI disposed off the pending proceedings. The assessee claimed this amount of ₹ 50,00,00,000/- as a deduction u/s.37(l) of I.T. Act, 1961 claiming it to be a regular expenditure wholly and exclusively incurred for the purpose of the business of the assessee. 8. As per learned AR the A.O. after detailed discussion held that the above amount is nothing but a penalty for grave statutory violations of various provisions of the SEBI Act and various regulations under the SEBI Act. The A.O further held that the said payments were made for escaping the legal consequences of the defaults committed and also to prevent further penal action. Thus, the A.O. consequently disallowed the impugned amount of ₹ 50,00,00,000/-. 9. In view of the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange, (c) engage in any act, practice, course or business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed in a recognised stock exchange, in contravention of the provisions of this Act or the rules of the regulations made thereunder, * From the above, the Hon'ble ITAT may well appreciate that the above violations are in no manner small violations, but are in the nature of manipulative deceptive devices and schemes or artifices to DEFRAUD in relation to dealing in securities listed or proposed to be listed on a recognised stock exchange. Further, the violations also are of the nature of any act or practise that would operate as FRAUD OR DECEIT upon any person in connection with the issue of shares listed or proposed to be listed on a recognised stock exchange. e. It is thus clear that the only when the assessee was faced with such charges wherein the acts were of the nature of deceit, defraud upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble Tribunal may kindly look into. 11. As per learned DR, reliance placed by the Ld.CIT(A)-8 in the case of Reliance Share 85 Stock Brokers (P.) Ltd. is misplaced. This is because in that case there is clear finding by the Securities Appellate Tribunal (SAT) on the basis of which the consent order was passed by the SEBI, that the violations in that case were technical in nature. In this case, as demonstrated in detail, the violations are not only serious and grave, but also are of the nature of deceit and fraud upon the investors/shareholders. Thus, the ITAT decision in the case of Reliance Share Stock Brokers (P.) Ltd., is indeed well distinguishable since the very nature of the infraction of Law are extremely different from the case at hand. In that case, the breach of Law is technical whereas here it is serious and fundamental violation. 12. As per learned DR, without prejudice to the above submissions, the Revenue also contends that the said payments are also not wholly and exclusively for purpose of business. For this proposition, reliance is placed on the decision of the Hon'ble Apex Court in the case of Indian Aluminium Company Ltd., 79 ITR 514 (SC), wherein i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sarily be a punishment for infraction of a law or a regulation having statutory force. Tribunal has held that the fee is claimed to have been paid for the purpose of business, to settle a dispute with a regulator SEBI and to be able to conduct its business without interruption. 14. Learned AR further invited our attention to Para 7 of the Consent Order (Page 3 of the FPB) wherein the order passing authority has stated that the payment is made without admitting or denying the charges. Likewise, the payment made in Reliance Shares and Stock Broker's case was also without admitting or denying the guilt. Relevant Para 13 from the decision of the Hon'ble Mumbai Tribunal is reproduced as under: 13. The Ld Counsel then invited our attention to the Consent application filed by the assessee, which is placed at pages 13-32 of paper book, more particularly Paragraph 19 of the application which specifies Terms of Consent Proposal . The Ld Counsel submitted that the assessee has clearly stated that the consent application shall not be construed, in any manner, as admission of the findings or the acceptance of the penalty stated in the order. The Ld Counsel submitted that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, such payment could not be disallowed under Explanation to section 37(1) by treating it as penalty, 18. While concluding the appeal, the Hon'ble Tribunal has noted various aspects which are reproduced as under: 22. However, the contention of the learned counsel for the assessee is that the payment has not been made by the assessee under s. 15A of SEBI Act. According to him, the payment was under an option given under the Scheme of 2002 and therefore, such payment cannot be said to be either as a penalty or akin to penalty. Hence, no disallowance could be made as per the decision of the apex Court in the case of Ahmedabad Cotton Mfg. Co. Ltd Ors. (supra). After going through the scheme, we find force in the contention of the learned counsel for the assessee for the reasons given hereafter. In order to appreciate the controversy, it would be appropriate to reproduce the relevant provisions of the scheme as under: SEBl Regularization Scheme, 2002 for non compliance with regulations 6 and 8 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 In terms of Chapter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company. The Scheme will be in operation for a limited period as specified hereinafter. The persons and the companies may, therefore, take full advantage of this Scheme. It is also clarified that after the expiry of the Scheme, SEBI may have to initiate appropriate action against defaulting persons and the companies, which may result in heavy penalties against such persons and companies, as per the provisions of the SEBI Act. Therefore, in exercise of the powers under s. 11 of the SEBI Act read with regns. 6 and 8 of the Takeover Regulations, 1997, SEBI hereby introduces the said Scheme. The salient features of the Scheme are as under : Regularization of the defaults 1. Under the Scheme, the eligible persons and companies may make disclosures and pay the lump sum amount within the period specified under the Scheme. Eligibility 2. Following are eligible for availing benefit under this Scheme- (a) Persons who have failed to comply with or who have complied with the requirements of regulations 6(1), 6(3), 8(1) and 8(2) of the Takeover Regulations, 1997, after expiry of the period specified in the said regulations. (b) The listed com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 37 can be applied to the present case. 19. Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of Asst. CIT Vs. A. K. Menon [1995] 215 ITR 364 (SC), wherein the Hon'ble Supreme Court had an occasion to decide the powers of Special Court to adjudicate appeals to overrule tax authorities. The relevant extract of the decision is reproduced as under: 3. It is clear that the Special Court has no power to sit in appeal over or overrule the orders of the tax authorities, the Tribunal or the Courts in regard to the tax liabilities of notified persons. The only power of the Special Court is to determine the priorities in which claims upon the property under attachment shall be paid. The claims relating to the tax liabilities of a notified person are, along with revenues, cesses and rates entitled to be paid first in the order of priority and in full, as far as may be. In relation to a claim for payment of the tax liability of a notified person, the Special Court has, therefore, only the limited power to determine what, having regard to the funds available, can be paid; that is to say, whether (he claim can be satisfied in full or only in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT v. Delhi Safe Deposit Co. Ltd. (133 ITR 756) (SC) (Page No. 39 to 45 of the LPB) wherein it was held that expenditure incurred to save business reputation is an admissible expenditure. The relevant extract of the decision is reproduced as under: ... The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than of a trader. The assessee incurred the impugned expenditure to avoid any adverse effect on its reputation, to protect the managing agency which was an income earning apparatus and for retaining it with the reconstituted firm in which the interest of the assessee was the same as before. It was likely that but for the expenditure, the fair name of the assessee would have been tarnished or rendered suspicious and the managing agency would have been terminated. The expenditure incurred on the preservation of a profit earning asset of a business has always been held to be a deductible expenditure by the courts. In the circumstances, it was difficult to hold that the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Director, Vice Chairman, whole time Director and Director i.e. persons who at the time of alleged offence was committed were in charge of/ were responsible to, these companies for the conduct of the business of the companies. 27. Based on the basis of investigations carried out, it was alleged in the SCN that the aforesaid entities, i.e. RIL and RNRL were 'prima-facie' responsible for misrepresenting the nature of investments in 'Yield Management Certificates/Deposits (YMCs)' and profit and loss thereof in their annual accounts for the year ended March 2007, March 2008 and March 2009 and thereby misusing the SEBI (Foreign Institutional Investors) Regulations, 1995. 28. From the record we found that in order to avoid long drawn litigation and the consequential expenditure of time and effort as also the likely damage to the reputation by continuing adverse publicity over a long drawn period, the parties to whom the show cause notice had been issued decided to avail of SEBFs Guidelines relating to consent terms and consequently, made an application for consent dated September 9, 2010. The High Powered Advisory Committee (HPAC) of SEBI considered the case to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Ld. C1T(A) the idea of consent orders was borrowed from US Securities and Exchange Commission to achieve twin goals of appropriate sanction and deterrence without resorting to a long drawn litigation. The Ld. CIT(A) held that the process is a conciliatory proceedings which precedes full legal proceedings under the SEBI Act. The Ld. CIT(A) therefore held that the consent settlement paid by the respondent lies between the point of prima facie indication of an offence and final culmination of levy of penalty or other legal sanction / punishment. The Ld. CIT(A) held that this intermediate status of application for consent between prima facie allegation and final verdict and acceptance thereof by SEBI is not an expenditure made for the purpose of an offence. The Ld. CIT(A) also came to conclusion that it is not a payment made which is prohibited by law. The Ld. CIT(A) relied upon consent order dated 14.1.2011 in para 5 where it was stated that the application for consent filed was considered by High Powered Advisory Committee by SEBI which considered the facts and circumstances of the case, material bought before the committee and therefore the denial by the respondent was clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of grave violations could not be allowed. He further submitted that in Reliance Shares and Stock Brokers's (supra) case, the violations were technical violations and in the present appeal, the violations made by the Respondent were grave and more serious in nature and therefore factually different from the decision relied by the Respondent. In this respect we observe that the violations were similar in both the cases. We found that the SEBI had in both the cases initiated action under section 11 of the SEBI Act. It was pointed from Para 4 and 8 of the Consent Order at Page No. 2 and 4of the FPB, respectively, where under it is mentioned that SEBI initiated proceedings under section 11, 11(4) and 11B of the SEBI Act read with Regulations 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations,2003. 35. However, as per para 9 of the order of the Tribunal in case of Reliance Share and Stock Borkers Pvt. Ltd., we found that SEBI has initiated action u/s.11 of the SEBI Act. However, the issue for consideration is not the nature of the alleged offence but, whether there has, in fact, been an offence or a determination by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention of the Ld. DR that there was no voluntary application made by the assessee is factually incorrect. 38. It was also argument of learned DR that in Reliance Shares and Stock Broker's case (supra) no such action was initiated by the SEBI against the respondent. In this regard Para 9 of the order passed in Reliance Shares and Stock Brokers is very much relevant and reads as under: 9. The next issue relates to the disallowance of Consent fee of ₹ 50.00 lakhs paid by the assessee. The Ld D.R submitted that the assessee has penalty for violation of the provisions of SEBI Act, i.e., the assessee has not followed the various Rules prescribed under the Act. He further submitted that the Consent order passed by the SEBI shall not change the character of violation or penalty initially levied by the Board. On the contrary, the Ld Counsel appearing for the assessee submitted that the SEBI had initiated the action against the assessee in connection with certain technical violations. Such action has been initiated by virtue of powers given to SEBI to take certain administrative or civil action. The Ld A.R invited our attention to paragraph 61 of the order dated 11-12-200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, suspended trading activity was not a consequence of violation made by the Respondent. The suspension was a part of the voluntary consent terms offered by the assessees. It was not a punishment imposed by SEBI as wrongly alleged by the AO (Para 6.3, Page No. 3-4 of the assessment order). On the other hand in Reliance Shares and Stock Broker's case, the consequence of violation held by SEBI to have been made by the respondent was suspended trading activity. This is evident from Para 4 of Reliance Shares and Stock Broker's case (Page No. 66 of the LPB). Further, in Para 16 of Reliance Shares and Stock Broker's case (Page No. 75 of the LPB), the Hon'ble Tribunal has reproduced the order of the CIT(A) and it is brought out that the consequence of violation made by the respondent in the said case was suspended trading activity. It was further pointed out that in the facts of the present case, in fact, the SEBI had granted an exception in case of Mutual Funds (Para (a) at Page 3 of the FPB) which was not the case in Reliance Shares and Stock Broker's case. 42. Learned AR further invited our attention to Para 7 of the Consent Order (Page 3 of the FPB) wherein t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the payment made by the Respondent was similar to that of the payment in Reliance Shares and Stock Brokers's case. 44. Learned DR also argued that in the present case the payment is nothing but a payment for compounding charges for violation of law. He therefore submitted that the payment made by the assessee was a payment made for violation of provisions of the SEBI Act was a payment for an offence and hence not allowable under section 37(1) of the Act. The Ld. DR further contended that provisions of the Act do not permit such payments to be claimed and hence the payment made by assessee is not as per the scheme and intent of the provisions of the Act. In this regard, CBDT Circular No. 772 dated December 23, 1998 is very relevant, wherein the scope of 'provision has been explained as under: 20.1 Section 37 of the Income-tax Act is amended to provide that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purposes of business or profession and no deduction or allowance shall be made in respect of such expenditure. This amendment will result in disallowance of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutory obligation, because the assessee was in default, could not constitute expenditure laid out for purposes of its business within meaning of section 10(2)(xv) and hence, same was not allowable under that section. In this regard we observe that under the provisions of the Act, income-tax is not allowable expenditure and therefore question of written off income tax liability is also not allowable expenditure. However, in the present case, the expenditure claimed by the Respondent is not in nature of penalty for any default as in the case before the Hon'ble Supreme Court in the case of Indian Aluminum Co. Ltd. (supra). Hence, the facts of the above decision is not applicable in the present case. Now coming to the argument of learned DR, that the reason for filing the consent application and paying the settlement fee / consent charges is the alleged fact that the assessee was apprehensive of the serious consequences of the offence committed by it is without any basis. There is nothing whatsoever to support this contention except the ipsi dixit of the Revenue. The assessee has always submitted that there was no offence. Even the consent application was filed without admitting gu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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