CIT vs. MCS LTD

IN THE HIGH COURT OF DELHI AT NEW DELHI . 11.11.2010 . Present: Mr. Sanjeev Sabharwal, Sr. Standing Counsel for the Revenue. Ms. Rani Kiyala, Adv. for the respondent. . +ITA No.1744/2010 . The assessee company is engaged, inter alia, in the business of registrar and share transfer agent. In the relevant assessment year, it acted as Registrar of public issues for ONGC and Power Trading Corporation, who had come out with public issue. In respect of this public issue, the assessee was made to pay certain amount on account of settlement of claims, particulars whereof are given in Para 7 of the orders of the Tribunal. The assessee claimed these as allowable expenses. The Assessing Officer disallowed those expenses on the ground that as per Clause (3) in the Memorandum of Understanding (MoU) entered into between the assessee and the ONGC, etc., such a liability was that of ONGC/Power Trading Corporation and the MoU categorically provided that the assessee would not be liable for any such claims of the third party. The CIT (A), however, reversed this decision of the AO and the order of the CIT (A) has been confirmed by the Tribunal vide its impugned decision dated 06.11.2009. The Tribunal has noted that notwithstanding the aforesaid clause in MoU, the MoU also provided vide Clauses (9), (11) and (21) that the assessee was to act with prudence and due diligence. A fining of fact is recorded that since there was a negligence on the part of the assessee in performing its obligation under the aforesaid MoU while acting as Registrar of the issue, the assessee was made to pay the claims qua the third party arising out of the said public issue. In fact, this payment was made after the adjudication of the dispute between the assessee and the ONGC/Power Trading Corporation of India and specific orders having been passed by the Adjudicating Officer of the SEBI held that the assessee as Registrar of the issue is liable to pay the said amount. In these circumstances, when the expenses were incurred and liability was fastened upon the assessee on the basis of orders passed by the competent quasi judicial authority, we see no reason as to why the said expenses were not allowable. The facts analyzed by the Tribunal are as follows: ?68. The learned CIT (A) has also accorded the order passed by the Adjudicating Officer of SEBI in respect of public issue of shares of ONGC and Power Trading Corporation of India in respect of which the assessee was Registrar to the issue and also Registrar and share transfer agent. SEBI found that the assessee did not exercise due skill, care and caution while processing the application forms, allotment procedures, credit of shares to various investors? accounts with the depositories etc. It was also found that the . . assessee uploaded wrong file in the ONGC issue leading to excess allotment of shares. It was also held that as Registrar to issue failed to discharge its duties diligently, the learned CIT(A) after considering the decision cited had held that the loss is incidental to business and hence allowable as such. Even if the nature of agreement as referred to by the Assessing Officer is considered, none of the clause refers to any specific portion of agreement whereby the assessee is not held responsible for failure to act diligently. When the assessee is carrying on work as Registrar to issue and also as share transfer agent, the assessee is expected to render proper services to its clients. If any of its employee plays fraud whereby the clients are incurring losses, the assessee is under obligation to defray such losses. Hon?ble Supreme Court in the case of Abdullahbhai Abdulkadar (supra) held that if the losses spring directly from and are incidental to the business of the assessee, the same are allowable as such. In the case of Commonwealth Trust (India) Ltd. (supra), it was held that if there is direct and proximate nexus between the business operation and the loss, or it is incidental to it, then the loss is deductible. In the present case also it is seen that either because of fraud by its employees or due to delayed data processing order, the assessee was required to compensate or when the respective clients were called upon to pay interest/compensation it, was for the assessee to make good such losses to the respective clients. The agreements with different companies fix the responsibilities of the assessee in case of negligence and hence the claims settled and paid by the assesses were rightly held to be allowable. The Commissioner (Appeals) has not admitted any additional evidence and hence there is no violation of Rule 46A of the Income Tax Rules. We, therefore, hold that the loss was allowable as such.? . The order of the Tribunal is without any blemish. No question of law arises. This appeal is accordingly dismissed. . A.K. SIKRI, J. . SURESH KAIT, J. NOVEMBER 11, 2010 pmc . . #3 and 6