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Income Tax Appellate Tribunal, MUMBAI BENCH “K” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI RAJ KUMAR CHAUHAN
ORDER PER OM PRAKASH KANT, AM
This appeal by the Revenue is directed against order dated 14.04.2025 passed by the Ld. Commissioner of Income-tax (Appeals) – 56, Mumbai [in short ‘the Ld. CIT(A)’] for assessment year 2013-14, raising following grounds:
1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was right in holding that the discount on issue of ESOP is allowable as deduction in computing the income under the head profits and gains of the computing the income under the head profits and gains of the computing the income under the head profits and gains of the business. business.
2. Whether on the facts and in the circumstances of the case Whether on the facts and in the circumstances of the case Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was right in holding that difference and in law, the Ld. CIT(A) was right in holding that difference and in law, the Ld. CIT(A) was right in holding that difference between market price of the shares at the time of grant of between market price of the shares at the time of gran between market price of the shares at the time of gran option and offer price amounts to discount and same has to option and offer price amounts to discount and same has to option and offer price amounts to discount and same has to be treated as remuneration to Employees for their service. be treated as remuneration to Employees for their service. be treated as remuneration to Employees for their service.
3. Whether on the facts and in the circumstances of the case Whether on the facts and in the circumstances of the case Whether on the facts and in the circumstances of the case and in law the Ld. CIT(A) committed error in not examining and in law the Ld. CIT(A) committed error in not examining and in law the Ld. CIT(A) committed error in not examining the scheme of ES the scheme of ESOP from which it is clear that the employees OP from which it is clear that the employees will not get any right in the shares till completion of the will not get any right in the shares till completion of the will not get any right in the shares till completion of the period prescribed and the expenditure claimed is contingent period prescribed and the expenditure claimed is contingent period prescribed and the expenditure claimed is contingent and recorded perverse finding. and recorded perverse finding.
4. Whether on the facts and in the circumstances of the case Whether on the facts and in the circumstances of the case Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was right in holding that the and in law, the Ld. CIT(A) was right in holding that the and in law, the Ld. CIT(A) was right in holding that the penalty was on account of irregularities committed by the penalty was on account of irregularities committed by the penalty was on account of irregularities committed by the assessee's clients without appreciating the fact that non- assessee's clients without appreciating the fact that non assessee's clients without appreciating the fact that non compliance to clearing house trades and client code compliance to clearing house trades and client code compliance to clearing house trades and client code modification are defaults attri modification are defaults attributable to the assessee butable to the assessee company majorly and not company majorly and not to its clients.
Briefly stated, the facts of the case are that the assessee, a Briefly stated, the facts of the case are that the assessee, a Briefly stated, the facts of the case are that the assessee, a Private Limited Company incorporated under the laws of India, is a Private Limited Company incorporated under the laws of India, is a Private Limited Company incorporated under the laws of India, is a wholly owned subsidiary of Goldman Sachs (Mauritius) LLC. The wholly owned subsidiary of Goldman Sachs (Mauritius) LLC. T wholly owned subsidiary of Goldman Sachs (Mauritius) LLC. T assessee is duly registered with the Securities and Exchange Board assessee is duly registered with the Securities and Exchange Board assessee is duly registered with the Securities and Exchange Board of India (SEBI) as a Merchant Banker and is also registered with the of India (SEBI) as a Merchant Banker and is also registered with the of India (SEBI) as a Merchant Banker and is also registered with the National Stock Exchange as a Stock Broker. During the year under National Stock Exchange as a Stock Broker. During the year under National Stock Exchange as a Stock Broker. During the year under consideration, the assessee was engaged in the business of consideration, the assessee was engaged in the busin consideration, the assessee was engaged in the busin providing merchant banking services and carrying on securities providing merchant banking services and carrying on securities providing merchant banking services and carrying on securities transactions in India. transactions in India.
2.1 The assessee filed a revised return of income for the year The assessee filed a revised return of income for the year The assessee filed a revised return of income for the year under consideration on 31.03.2015, declaring a total income of Rs. under consideration on 31.03.2015, declaring a total income of Rs. under consideration on 31.03.2015, declaring a total income of Rs. 4,183,593,840/-. The said return . The said return was selected for scrutiny was selected for scrutiny assessment, consequent to which a notice under section 143(2) of assessment, consequent to which a notice under section 143(2) of assessment, consequent to which a notice under section 143(2) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) was tax Act, 1961 (hereinafter referred to as ‘the Act’) was tax Act, 1961 (hereinafter referred to as ‘the Act’) was issued by the Learned Assistant Commissioner of Income Tax– issued by the Learned Assistant Commissioner of Income Tax issued by the Learned Assistant Commissioner of Income Tax 7(1)(1), Mumbai (hereinafter referred 7(1)(1), Mumbai (hereinafter referred to as ‘the Ld. Assessing to as ‘the Ld. Assessing Officer’). Officer’). Officer’). Having Having Having regard regard regard to to to the the the international international international transactions transactions transactions undertaken by the assessee with its Associated Enterprises (AEs), undertaken by the assessee with its Associated Enterprises (AEs), undertaken by the assessee with its Associated Enterprises (AEs), the Ld. Assessing Officer made a reference to the Learned Transfer the Ld. Assessing Officer made a reference to the Learned Transfer the Ld. Assessing Officer made a reference to the Learned Transfer Pricing Officer (Ld. TPO) for determina Pricing Officer (Ld. TPO) for determination of the arm’s length price tion of the arm’s length price of such transactions. The Ld. TPO, vide order passed under section of such transactions. The Ld. TPO, vide order passed under section of such transactions. The Ld. TPO, vide order passed under section 92CA(3) of the Act dated 28.10.2016, accepted the arm’s length 92CA(3) of the Act dated 28.10.2016, accepted the arm’s length 92CA(3) of the Act dated 28.10.2016, accepted the arm’s length price declared by the assessee and proposed no adjustment. price declared by the assessee and proposed no adjustment. price declared by the assessee and proposed no adjustment. Thereafter, the Ld. Assessing Office Thereafter, the Ld. Assessing Officer completed the assessment r completed the assessment under section 143(3) read with section 144C(1) of the Act on under section 143(3) read with section 144C(1) of the Act on under section 143(3) read with section 144C(1) of the Act on 28.12.2016, assessing the total income at Rs. 5,75,17,34,105/-. 28.12.2016, assessing the total income at Rs. 5,75,17,34,105/ 28.12.2016, assessing the total income at Rs. 5,75,17,34,105/ While doing so, he made the following disallowances: (i) Employee While doing so, he made the following disallowances: (i) Employee While doing so, he made the following disallowances: (i) Employee Stock Option Plan (ESOP) cost of Rs. 5 Stock Option Plan (ESOP) cost of Rs. 56,44,29,191/ 6,44,29,191/-, holding the same to be notional and contingent in nature; and (ii) charges of Rs. same to be notional and contingent in nature; and (ii) charges of Rs. same to be notional and contingent in nature; and (ii) charges of Rs. 37,11,074/- paid to the stock exchanges, treating them as penal in paid to the stock exchanges, treating them as penal in paid to the stock exchanges, treating them as penal in nature and hence not allowable under section 37(1) of the Act. nature and hence not allowable under section 37(1) of the Act. nature and hence not allowable under section 37(1) of the Act.
2.2 Aggrieved, the assessee Aggrieved, the assessee filed appeal before the Ld. CIT(A). T d appeal before the Ld. CIT(A). The Ld. CIT(A) deleted both the additions following the finding of the Ld. CIT(A) deleted both the additions following the finding of the Ld. CIT(A) deleted both the additions following the finding of the ITAT in the case of the assessee in earlier years. Aggrieved with the ITAT in the case of the assessee in earlier years. Aggrieved with the ITAT in the case of the assessee in earlier years. Aggrieved with the order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal by way of raising grounds as reproduced as above. raising grounds as reproduced as above.
The ground Nos. 1 to 3 of the appeal relate s. 1 to 3 of the appeal relate to discount to discount cost on ESOP , which has been , which has been allowed by the Ld. CIT(A) as deduction while allowed by the Ld. CIT(A) as deduction while computing the income under the head ‘profit and grains of the computing the income under the head ‘profit and grains of the computing the income under the head ‘profit and grains of the business’.
4.1 Briefly stated, the facts relevant to the issue in dispute are iefly stated, the facts relevant to the issue in dispute are iefly stated, the facts relevant to the issue in dispute are that Goldman Sachs Group Inc. (hereinafter ‘GSGI’) had formulated that Goldman Sachs Group Inc. (hereinafter ‘GSGI’) had formulated that Goldman Sachs Group Inc. (hereinafter ‘GSGI’) had formulated a global stock award plan, the benefits whereof were extended to a global stock award plan, the benefits whereof were extended to a global stock award plan, the benefits whereof were extended to the employees of its subsidiaries and associated entities, including the employees of its subsidiaries and associated entities, inclu the employees of its subsidiaries and associated entities, inclu the assessee–company. Under the said scheme, the assessee company. Under the said scheme, the assessee company. Under the said scheme, the assessee granted ESOPs of GSGI to its employees. The ESOPs entitled the granted ESOPs of GSGI to its employees. The ESOPs entitled the granted ESOPs of GSGI to its employees. The ESOPs entitled the employees, upon fulfillment of stipulated conditions, to receive employees, upon fulfillment of stipulated conditions, to receive employees, upon fulfillment of stipulated conditions, to receive shares of GSGI. Upon completion of the vesting period, the shares shares of GSGI. Upon completion of the vesting period, the shares shares of GSGI. Upon completion of the vesting period, the shares of GSGI would be delivered to the employees, for which the assessee of GSGI would be delivered to the employees, for which the assessee of GSGI would be delivered to the employees, for which the assessee was required to make payment to GSGI. The quantum payable by was required to make payment to GSGI. The quantum payable by was required to make payment to GSGI. The quantum payable by the assessee to GSGI was determined with reference to the market the assessee to GSGI was determined with reference to the market the assessee to GSGI was determined with reference to the market value of the shares of GSGI on the date of such delivery. value of the shares of GSGI on the date of such delivery. value of the shares of GSGI on the date of such delivery.
4.2 As per the consistently followed global accounting policy of the As per the consistently followed global accounting policy of the As per the consistently followed global accounting policy of the group, the grant price of ESOPs, as on the date of grant, was group, the grant price of ESOPs, as on the date of grant, was group, the grant price of ESOPs, as on the date of grant, was amortized in the books of the assessee over the vesting period of the amortized in the books of the assessee over the vesting period of the amortized in the books of the assessee over the vesting period of the award. At the close of each financial year, the outstanding shares award. At the close of each financial year, the outstandin award. At the close of each financial year, the outstandin were marked to market with reference to the fluctuation in the were marked to market with reference to the fluctuation in the were marked to market with reference to the fluctuation in the stock price vis-à-vis the grant price, and the differential, if any, was vis the grant price, and the differential, if any, was vis the grant price, and the differential, if any, was duly adjusted to the Profit and Loss Account. This method of duly adjusted to the Profit and Loss Account. This method of duly adjusted to the Profit and Loss Account. This method of accounting was in consonance with the applicable accounting accounting was in consonance with the applicable a accounting was in consonance with the applicable a standards in India. The payment so required to be made to GSGI on standards in India. The payment so required to be made to GSGI on standards in India. The payment so required to be made to GSGI on account of ESOPs granted to employees was considered by the account of ESOPs granted to employees was considered by the account of ESOPs granted to employees was considered by the assessee as part of ‘salary cost’ in the year of incurrence, and assessee as part of ‘salary cost’ in the year of incurrence, and assessee as part of ‘salary cost’ in the year of incurrence, and accordingly claimed as revenue expenditure wholly and exclusively accordingly claimed as revenue expenditure wholly and e accordingly claimed as revenue expenditure wholly and e laid out for the purpose of its business. laid out for the purpose of its business.
4.3 During the financial year ended 31.03.2013, the assessee During the financial year ended 31.03.2013, the assessee During the financial year ended 31.03.2013, the assessee debited an amount of Rs.564,429,191/ debited an amount of Rs.564,429,191/– (inclusive of mark (inclusive of mark–to– market fluctuation of Rs.135,125,414/ market fluctuation of Rs.135,125,414/–) as ESOP cost in its Profit ) as ESOP cost in its Profit and Loss Account and claimed deduction thereof in computation of t and claimed deduction thereof in computation of t and claimed deduction thereof in computation of its taxable income. Out of this amount, Rs.153,747,734/– its taxable income. Out of this amount, Rs.153,747,734/ its taxable income. Out of this amount, Rs.153,747,734/ represented bonus paid to employees during the year, which had represented bonus paid to employees during the year, which had represented bonus paid to employees during the year, which had inadvertently been clubbed under the head ‘ESOP cost’. It is inadvertently been clubbed under the head ‘ESOP cost’. It is inadvertently been clubbed under the head ‘ESOP cost’. It is claimed by the assessee t claimed by the assessee that vide submission dated 21.12.2016, the hat vide submission dated 21.12.2016, the assessee requested that such bonus amount be excluded from the assessee requested that such bonus amount be excluded from the assessee requested that such bonus amount be excluded from the ESOP disallowance, if any, since the same was independently ESOP disallowance, if any, since the same was independently ESOP disallowance, if any, since the same was independently allowable under section 43B of the Act, however, the Ld. Assessing allowable under section 43B of the Act, however, the Ld. Assessing allowable under section 43B of the Act, however, the Ld. Assessing Officer, in his assessme Officer, in his assessment order, did not separately adjudicate this nt order, did not separately adjudicate this plea and proceeded to disallow the entire ESOP cost plea and proceeded to disallow the entire ESOP cost. .
4.2 Before us, the Ld. Counsel for the assessee submitted that the Before us, the Ld. Counsel for the assessee submitted that the Before us, the Ld. Counsel for the assessee submitted that the issue is no longer res integra, as it stands covered in favour of the issue is no longer res integra, as it stands covered in favour of the issue is no longer res integra, as it stands covered in favour of the assessee by the order assessee by the orders of the Tribunal in its own cases for several s of the Tribunal in its own cases for several assessment years, namely AYs 2009 assessment years, namely AYs 2009–10 (ITA No.222/Mum/2014), 10 (ITA No.222/Mum/2014), 2010–11 11 11 (ITA (ITA (ITA No.1546/Mum/2015), No.1546/Mum/2015), No.1546/Mum/2015), 2011–12 2011 2011 (ITA No.927/Mum/2016), 2012 No.927/Mum/2016), 2012–13 (ITA No.1428/Mum/2017), 2014 13 (ITA No.1428/Mum/2017), 2014–15 (ITA No.6475/Mum/2018), 2015 (ITA No.6475/Mum/2018), 2015–16 (ITA No.7207/M 16 (ITA No.7207/Mum/2019), and more recently for AY 2017 and more recently for AY 2017–18 (ITA No.763/Mum/2022, order 18 (ITA No.763/Mum/2022, order dated 09.12.2024) as well as AY 2018 dated 09.12.2024) as well as AY 2018–19 (ITA No.2436/Mum/2022, 19 (ITA No.2436/Mum/2022, order dated 03.06.2025). order dated 03.06.2025).
We have heard rival submissions and perused the material on We have heard rival submissions and perused the material on We have heard rival submissions and perused the material on record. The Ld. CIT(A), having exa record. The Ld. CIT(A), having examined the assessee’s submissions mined the assessee’s submissions and relying upon the binding precedent of the Tribunal in and relying upon the binding precedent of the Tribunal in and relying upon the binding precedent of the Tribunal in assessee’s own case for AY 2017 assessee’s own case for AY 2017–18, deleted the disallowance by 18, deleted the disallowance by observing as under:— —
“6.4. Decision: The issue has been decided by the Hon'ble ITAT, 6.4. Decision: The issue has been decided by the Hon'ble ITAT, 6.4. Decision: The issue has been decided by the Hon'ble ITAT, Mumbai in the as Mumbai in the assessee's own case for A.Y 2017 sessee's own case for A.Y 2017-18 on 09.12.2024 relying on the earlier assessment year ie. AΥ 2009 09.12.2024 relying on the earlier assessment year ie. AΥ 2009 09.12.2024 relying on the earlier assessment year ie. AΥ 2009-10. The relevant extract of the Hon'ble ITAT's order for A.Y.2009 The relevant extract of the Hon'ble ITAT's order for A.Y.2009 The relevant extract of the Hon'ble ITAT's order for A.Y.2009-10 is reproduced as under reproduced as under: “.... 12.3. Before us, the Ld. Senior Counsel drew our attention 12.3. Before us, the Ld. Senior Counsel drew our attention 12.3. Before us, the Ld. Senior Counsel drew our attention to the decision of the Special Bench of the Bangalore Tribunal in the case decision of the Special Bench of the Bangalore Tribunal in the case decision of the Special Bench of the Bangalore Tribunal in the case of Blocon Ltd 144 ITD 21 (Bang) wherein on similar facts the of Blocon Ltd 144 ITD 21 (Bang) wherein on similar facts the of Blocon Ltd 144 ITD 21 (Bang) wherein on similar facts the discount on issue of ESOP was allowed as deduction. discount on issue of ESOP was allowed as deduction. 12.4. The Ld. DR could not bring any distinguishing decision in 12.4. The Ld. DR could not bring any distinguishing decision in 12.4. The Ld. DR could not bring any distinguishing decision in favour of the Revenue. Respectfully following the decision of the our of the Revenue. Respectfully following the decision of the our of the Revenue. Respectfully following the decision of the Special Bench (supra), we hold that discount on issue of Special Bench (supra), we hold that discount on issue of Special Bench (supra), we hold that discount on issue of employees stock options is allowable as deduction in computing employees stock options is allowable as deduction in computing employees stock options is allowable as deduction in computing the income under the head profits and gains of business of the income under the head profits and gains of business of the income under the head profits and gains of business of profession. Gr profession. Ground No. 5 & 6 are accordingly allowed" allowed" 5.1 Before us, the Ld. Counsel has also placed reliance upon the Before us, the Ld. Counsel has also placed reliance upon the Before us, the Ld. Counsel has also placed reliance upon the decision of the Co–ordinate Bench in assessee’s own case for AY ordinate Bench in assessee’s own case for AY ordinate Bench in assessee’s own case for AY 2018–19 (ITA No.2436/Mum/2020), wherein following the findings 19 (ITA No.2436/Mum/2020), wherein following the findings 19 (ITA No.2436/Mum/2020), wherein following the findings of earlier years includ of earlier years including AY 2010–11, the Tribunal deleted the 11, the Tribunal deleted the disallowance. Having considered the totality of facts, we are of the disallowance. Having considered the totality of facts, we are of the disallowance. Having considered the totality of facts, we are of the considered view that the Ld. CIT(A) has passed a reasoned order, considered view that the Ld. CIT(A) has passed a reasoned order, considered view that the Ld. CIT(A) has passed a reasoned order, duly supported by binding precedent. However, it is noted that the duly supported by binding precedent. However, it is noted that the assessee has brought to our notice, for the first time, that the rought to our notice, for the first time, that the rought to our notice, for the first time, that the disallowance disallowance of of Rs.564,429,191/– Rs.564,429,191/ includes includes an an amount amount of of Rs.153,747,734/– towards bonus paid to employees, which was towards bonus paid to employees, which was towards bonus paid to employees, which was inadvertently included in the ESOP cost. Since this factual aspect inadvertently included in the ESOP cost. Since this factual aspect inadvertently included in the ESOP cost. Since this factual aspect requires verification a requires verification at the end of the Assessing Officer, we deem it t the end of the Assessing Officer, we deem it appropriate to restore this limited issue to his file for necessary appropriate to restore this limited issue to his file for necessary appropriate to restore this limited issue to his file for necessary verification. Subject to such verification, the ESOP cost is to be verification. Subject to such verification, the ESOP cost is to be verification. Subject to such verification, the ESOP cost is to be allowed as deduction, in terms of the consistent view already taken allowed as deduction, in terms of the consistent view already taken allowed as deduction, in terms of the consistent view already taken by the Tribunal in assessee’s own case. Tribunal in assessee’s own case. The ground The ground Nos. 1 to 3 of the appeal are accordingly allowed for statistical purposes. the appeal are accordingly allowed for statistical purposes. the appeal are accordingly allowed for statistical purposes.
Ground No. 4 of the Revenue’s appeal pertains to the 4 of the Revenue’s appeal pertains to the 4 of the Revenue’s appeal pertains to the disallowance of Rs.37,11,074/ disallowance of Rs.37,11,074/–, being charges paid by the assessee , being charges paid by the assessee to the Stock Exchange, which were treated by the Assessing Officer to the Stock Exchange, which were treated by the Assessing Officer to the Stock Exchange, which were treated by the Assessing Officer as penal in nature. The details of such charges, as placed in the as penal in nature. The details of such charges, as placed in the as penal in nature. The details of such charges, as placed in the Paper Book at pages 390 to 433, reveal that these pertain to non pages 390 to 433, reveal that these pertain to non– pages 390 to 433, reveal that these pertain to non allocation/non–confirmation of CP/OTR trades and to client code confirmation of CP/OTR trades and to client code confirmation of CP/OTR trades and to client code modifications. The Assessing Officer, taking note of Clause 17(e) of modifications. The Assessing Officer, taking note of Clause 17(e) of modifications. The Assessing Officer, taking note of Clause 17(e) of Form No. 3CD wherein the said amount had been reflected as Form No. 3CD wherein the said amount had been reflected as Form No. 3CD wherein the said amount had been reflected as fine/penalty for non for non–compliance in confirmation of house trades compliance in confirmation of house trades and client code modification, held the same to be in the nature of and client code modification, held the same to be in the nature of and client code modification, held the same to be in the nature of penalty and consequently disallowed the claim by making addition penalty and consequently disallowed the claim by making addition penalty and consequently disallowed the claim by making addition to the total income of the assessee. to the total income of the assessee.
6.1 We have heard rival submissions We have heard rival submissions and carefully perused the and carefully perused the record. The Learned CIT(A), upon appreciation of facts and following record. The Learned CIT(A), upon appreciation of facts and following record. The Learned CIT(A), upon appreciation of facts and following the decision of the Co the decision of the Co–ordinate Bench of the Tribunal in assessee’s ordinate Bench of the Tribunal in assessee’s own case for A.Y. 2009 own case for A.Y. 2009–10, deleted the disallowance with the 10, deleted the disallowance with the following finding:—
“7.4. Decision: This issue has been decided by the Hon'ble ITAT in Decision: This issue has been decided by the Hon'ble ITAT in Decision: This issue has been decided by the Hon'ble ITAT in favour of the appellant in appellant's own case for A.Y 2009 favour of the appellant in appellant's own case for A.Y 2009 favour of the appellant in appellant's own case for A.Y 2009-10. Following the aforesaid decision, the disallowance in respect of Following the aforesaid decision, the disallowance in respect of Following the aforesaid decision, the disallowance in respect of amount paid to the stock exchanges for non amount paid to the stock exchanges for non-confirmation of confirmation of clearing house trades, client code modification, etc. by the ng house trades, client code modification, etc. by the ng house trades, client code modification, etc. by the Appellant, is directed to be deleted. Accordingly, this Ground of Appellant, is directed to be deleted. Accordingly, this Ground of Appellant, is directed to be deleted. Accordingly, this Ground of Appeal is allowed. allowed.” 6.2 Before us, Learned Counsel for the assessee has further drawn Before us, Learned Counsel for the assessee has further drawn Before us, Learned Counsel for the assessee has further drawn attention to the judgment of the Hon’ble Bombay High Court in attention to the judgment of the Hon’ble Bombay H attention to the judgment of the Hon’ble Bombay H Income Tax Appeal No. 30 of 2017, wherein identical charges paid Income Tax Appeal No. 30 of 2017, wherein identical charges paid Income Tax Appeal No. 30 of 2017, wherein identical charges paid to the Stock Exchange were categorically held not to partake the to the Stock Exchange were categorically held not to partake the to the Stock Exchange were categorically held not to partake the character of penalty. The Hon’ble High Court, while so holding, character of penalty. The Hon’ble High Court, while so holding, character of penalty. The Hon’ble High Court, while so holding, followed its earlier ruling in followed its earlier ruling in CIT v. Angel Capital & Debit Market Ltd. al & Debit Market Ltd.. The relevant observations of the High Court in paragraphs 11 and The relevant observations of the High Court in paragraphs 11 and The relevant observations of the High Court in paragraphs 11 and 12 of its order make it abundantly clear that such payments are 12 of its order make it abundantly clear that such payments are 12 of its order make it abundantly clear that such payments are compensatory in nature, arising out of the exigencies of business compensatory in nature, arising out of the exigencies of business compensatory in nature, arising out of the exigencies of business operations, and not penal so as to at operations, and not penal so as to attract disallowance under tract disallowance under section 37(1) of the Act. section 37(1) of the Act. The relevant finding of the Hon’ble High he relevant finding of the Hon’ble High Court is reproduced as under: Court is reproduced as under:
11. The question No.vii pertains to disallowing an expenditure which the 11. The question No.vii pertains to disallowing an expenditure which the 11. The question No.vii pertains to disallowing an expenditure which the revenue argues was in the nature of penalty. We notice that s revenue argues was in the nature of penalty. We notice that s revenue argues was in the nature of penalty. We notice that similar issue was considered by this Court in case of The Income Tax Commissioner was considered by this Court in case of The Income Tax Commissioner was considered by this Court in case of The Income Tax Commissioner Mumbai City-4 Vs. Angel Capital & Debit Market Ltd. (Income Tax Appeal (L) 4 Vs. Angel Capital & Debit Market Ltd. (Income Tax Appeal (L) 4 Vs. Angel Capital & Debit Market Ltd. (Income Tax Appeal (L) No.475 of 2011) in the order dated 28th July, 2011, following question was No.475 of 2011) in the order dated 28th July, 2011, following question was No.475 of 2011) in the order dated 28th July, 2011, following question was examined:- "Whether on th "Whether on the facts and in the circumstances of the case and in e facts and in the circumstances of the case and in law the Tribunal was justified in deleting the disallowance made by law the Tribunal was justified in deleting the disallowance made by law the Tribunal was justified in deleting the disallowance made by the Assessing Officer of claim of the Assessing Company for a the Assessing Officer of claim of the Assessing Company for a the Assessing Officer of claim of the Assessing Company for a deduction of payment of Rs.6,51,240/ deduction of payment of Rs.6,51,240/- towards penalty paid to towards penalty paid to Stock Exchan Stock Exchange even though the penalty payment disallowable ge even though the penalty payment disallowable under Explanation to Section 37(1) of the Income Tax Act? was under Explanation to Section 37(1) of the Income Tax Act? was under Explanation to Section 37(1) of the Income Tax Act? was clearly 12. The question raised by the revenue was rejected making following 12. The question raised by the revenue was rejected making following 12. The question raised by the revenue was rejected making following observations:- "3. As regards question (C) is concerned the finding "3. As regards question (C) is concerned the finding "3. As regards question (C) is concerned the finding of fact recorded by the ITAT is that the amount paid as penalty was on account of by the ITAT is that the amount paid as penalty was on account of by the ITAT is that the amount paid as penalty was on account of irregularities committed by the assessee's clients. Such payments irregularities committed by the assessee's clients. Such payments irregularities committed by the assessee's clients. Such payments were not on account of any infraction of law and hence allowable as were not on account of any infraction of law and hence allowable as were not on account of any infraction of law and hence allowable as business expenditure. In such a case the business expenditure. In such a case the explanation to section 37 explanation to section 37 would not apply. Accordingly question (C) raised by Revenue cannot would not apply. Accordingly question (C) raised by Revenue cannot would not apply. Accordingly question (C) raised by Revenue cannot be entertained." the be entertained." the In that view of the matter, this question is also not In that view of the matter, this question is also not entertained.” entertained.” 6.3 In view of the pronouncement of the jurisdictional High Court In view of the pronouncement of the jurisdictional High Court In view of the pronouncement of the jurisdictional High Court and respectfully following the same, we find no infirmity in the pectfully following the same, we find no infirmity in the pectfully following the same, we find no infirmity in the order of the Learned CIT(A) in deleting the disallowance. The issue order of the Learned CIT(A) in deleting the disallowance. The issue order of the Learned CIT(A) in deleting the disallowance. The issue being squarely covered in favour of the assessee, we see no reason being squarely covered in favour of the assessee, we see no reason being squarely covered in favour of the assessee, we see no reason to interfere. The ground No. 4 of the appeal of the Revenue is he ground No. 4 of the appeal of the Revenue is he ground No. 4 of the appeal of the Revenue is accordingly dismissed. accordingly dismissed.
Order pronounced in the open Court on nounced in the open Court on 09/0 /09/2025.