SWASTIKA COMMODITIES PVT. LIMITED,INDORE vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-5(1), INDORE, INDORE

Brief facts of the case as culled out from the records are that the assessee is a Private Limited Company engaged in the business of commodities, broking and trading. The Income of Rs. 26,88,080/- declared in the e-return filing on 29.09.2012. The case was selected for scrutiny through CASS. Notices u/s 143(2) and 142(1) of the Act served upon the assessee. Assessment was completed after making addition at Rs.23,000/- on account of penalty 2 imposed by NCDEX & MCX and disallowance of various expenses at Rs.1,15,700/-. Income assessed at Rs.28,26,780/-. 5. Aggrieved the preferred an appeal before the Ld. CIT(A) and partly succeeded. 6. Now the assessee is in appeal before the Tribunal raising sole grievance against finding of Ld. CIT(A) confirming the addition for disallowance of penalty imposed at Rs. 23,000/- by NCDEX & MCX. 7. The Ld. DR supported the order of the lower authorities. 8. We have heard the rival contentions and perused the material available on record placed before us. The assessee during the course of business of commodities broking and trading paid penalty of Rs.23,000/- levied by the NCDEX & MCX. Both the lower authorities were of the view that alleged expenditure being penalty in nature is not allowable as business expenditure u/s 37 of the Act. 9. We find that Hon'ble Apex Court in the case of CIT vs. AHMEDEABAD COTTON MFG.CO. LTD. [1994] 205 ITR 163 (SC) held that “what needs to be done by an assessing authority under the I.T. Act, 1961, in examining the claim of an assessee that the payment made by such assessee was a deductible expenditure under Section 37 of the I.T. Act 3 although called penalty is, to see whether the law or scheme under which the amount was paid required such payment to be made, as penalty or as something akin to penalty, that is imposed by way of punishment for breach or infraction of the law or the statutory scheme. If the amount so paid is found to be not a penalty or something akin to penalty due to the fact that the amount paid by the assessee was in exercise of the option conferred upon him under the very law or scheme concerned, the assessing authority has to regard such payment as business expenditure of the assessee, allowable under Section 37 of the I.T. Act, as an incident of business laid out and expended wholly and exclusively for the purposes of the business.” 10. We also find that the Hon'ble Bombay High Court in the case of M/s. The Stock and Bond Trading Company, in ITANo.4117 of 2010) while adjudicating similar issue held that, “As regards the second question is concerned, the finding of fact recorded by the CIT(A) and upheld by the ITAT is that payment made by the assessee to the Stock Exchange for violation of their regulation are not an account of an offence which is prohibited by law. Hence, the invocation of explanation to section 37 of the Income Tax Act, 1961 is not justified.” 4

In the light of the above judgments and examining the facts of the instant appeal, we find that the impugned penalty has been paid to NCDEX & MCX which are recognized commodity exchanges and various type of charges in the name of penalty are levied on the members so as to smoothly conduct the business on commodity exchanges and also to make sure that the assessee adheres to the rules and regulations formed for carrying on the transactions on the exchange. Respectfully, following the above judgments, we are of the considered view that the alleged amount cannot be categorized as a penalty levied for committing any offence which is prohibited by law, and therefore, the same should be allowed as business expenditure u/s 37 of the I.T. Act. Thus, ground raised by the assessee is allowed. 12. In the result, the appeal of the assessee is allowed. Order was pronounced in the open court on 23 .10.2018.