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Facts
The Revenue appealed against the order of the NFAC deleting an addition of Rs. 10,00,000/- made by the AO on account of penalty paid to SEBI, and an addition of Rs. 5,16,00,000/- on account of unexplained cash credit. The assessee, a trading company, had incurred a penalty under SEBI Act for unfair trade practices and had also received cash credits from another company.
Held
The Tribunal held that the penalty paid to SEBI was for the purpose of business to save litigation costs and protect reputation, and thus allowable as an expense under Section 37(1) of the Income Tax Act. Regarding the cash credit, the Tribunal found that the assessee had provided sufficient evidence to establish the identity and creditworthiness of the lender, and the AO failed to establish any nexus between the lender and an entry operator.
Key Issues
Whether the penalty paid to SEBI is an allowable business expenditure, and whether the cash credit received by the assessee was unexplained.
Sections Cited
Section 143(3), Section 68, Section 37(1), Section 15HA of SEBI Act, 1992
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Income Tax Appellate Tribunal, “C” BENCH, DELHI
Before: SHRI ANUBHAV SHARMA & SHRI NAVEENC CHANDRA
This appeal is preferred by the Revenue against the order dated 16.07.2024 of the Ld. National Faceless Appeal Centre (NFAC) (hereinafter
P a g e | Jalco Financial Services Pvt. Ltd.(AY: 2017-18) referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in DIN & Order No : ITBA/NFAC/S/250/2024-25/1066772909(1)arising out of the order dated 27.12.2019 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the DCIT, Circle-13(1) for AY: 2017- 18.
The assessee is a domestic company engaged in the business activity of trading shares, stocks, securities and other instruments. Return was filed at a total loss of Rs.30,20,889/- which was processed under Section 143(1) of the Act by CPC and later on case was selected for complete scrutiny and to verify expenses debited to profit and loss account for earning exempt income and to verify low income in comparison to high loans/advances/investment in shares appearing in balance sheet. The submissions of the assessee did not appeal to the AO and addition of Rs.5,16,00,000/- was made on account of unexplained cash credit under Section 68 of the Act and by disallowing the amount of Rs.10,00,000/- on account of expenditure claimed by the assessee under Section 37(1) of the Act for which assessee approached Ld. First Appellate Authority and had succeeded for which revenue is in appeal raising following grounds:
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“1. Whether on the facts and circumstances of the case and in law, the ld. CIT(A)/NFAC has erred in deleting the addition of Rs.10,00,000/- under Section 37 of the Income Tax Act, 1961 without appreciating the facts that the addition was made by the AO on the fact that penalty levied by SEBI is not an allowable expense u/s 37(1) of the IT Act, 1961.
Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A)/NFAC has erred in deleting the addition of Rs.5,16,00,000/- on account of unexplained cash credit u/s 68 of the Act. The appellant craves to add, alter or amend any/ all of the grounds of appeal before or during the course of the hearing of the appeal.
3. On hearing both sides and perusalof the material in regard to ground No. 1, we find that assessee incurred expenses of Rs.10,00,000/- by way of penalty levied to by SEBI under Section 15HA of the SEBI Act 1992 alleging unfair trade practices. The AO had disallowed such expenditure by applying Explanation 1 to Section 37(1) of the Act. Ld. CIT(A) has deleted the same and relevant findings are as follows:
“4.3.1 Undisputedly, the appellant is engaged in the business of trading in stocks, securities and other instruments. During the course of assessment proceeding, the AO found that the appellant had claimed expenses of Rs.10 lakhs, which was a payment of penalty levied by SEBI under section 15HA of the SEBI Act 1992. The AO disallowed such expenses by referring to Explanation 1 to Section 37(1) of the Act by treating such payment as an expenditure incurred for an offence which is prohibited by law.
4.3.2 On the other hand, the appellant submits that such expenditure had been incurred for the purpose of the business carried on by it, to save the time, cost and hassle of long- winded litigation and to protect the reputation of the appellant. Appellant further submits
P a g e | Jalco Financial Services Pvt. Ltd.(AY: 2017-18) that the Judicial Forums have held that the penalty imposed upon the assessee by the authorities during the course of hisbusiness activity made in exercise of the option given to such assessee by the law, are allowable u/s 37(1) of the Act.
4.3.3 In this regard, the appellant has placed heavy reliance on the decision of the Hon’ble Mumbai ITAT where the issue has been duly dealt with in the case of Dy. Commissioner of Income Tax, Circle 3(3)(1), Mumbai vs. Anil DhirajlalAmbani [2018] 66 ITR(T) 606 (Mumbai). Hon’ble ITAT Mumbai has held that “the payments which were intended to be covered within the scope of explanation were payments, which by themselves amounted to committing an offence, payments in the nature of protection money, hafta, bribe, etc. Furthermore, the term 'etc.' used after bribe would refer to similar payments by applying the principle of ejusdem generis which meant that general term describing a list of specific terms denotes other things that are like the specific elements. The Explanation does not apply to payments arising as a consequence of an offence. Such payments may be disallowable under general principles - on the principle that payment of penalties is not for the purpose of business. The payment made by the Respondent was not in the nature of payment sought to be covered within the ambit of Explanation 1 to section 37(1) of the Act and the same was also not by way of penalty ”.
“46. The payment so made by assessee was a payment for the purpose of the profession carried on by the assessee - to save the time, cost and hassle of a long- winded litigation as also to protect the reputation of the assessee. Hence, the payment has to be allowed as an expenditure under section 37(1) of the Act.”
In this regard, the submission of the appellant, judgements of the various Courts/Tribunals as cited by the appellant in the written submission dt.14.03.2024 and assessment order of the A.O was carefully perused and considered. The appellant has paid penalty u/s 15HA of SEBI Act, 1992 amounting to Rs. 10 lakhs during the conduct of regular business operation allegedly on account of unfair trade practices as per SEBI laws.
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The section 15HA of SEBI Act, 1992 is reproduced as under:
“[53] 15HA Penalty for fraudulent and unfair trade practices. If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher.”
Further, the Finance(No.2) Act, 1988 has elaborately explained the ambit/meaning of explanation 1 of section 37(1) of I.T Act, 1961 in circular No. 772 dated 23.12.1988,the relevant portion of the same is being reproduced as under: “Finance (No. 2) Act, 1998 Disallowance of illegal expenses 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 the claims made by certain assessees in respect of payments on account of protection money, extortion, hafta, bribes etc. as business expenditure. It is well decided that unlawful expenditure is not an allowable deduction in computation of income 20.2 This amendment will take effect retrospectively from 1st April, 1962 and will, accordingly, apply in relation to the assessment year 1962-63 and subsequent years. [Section 15]”
The careful perusal of various judgements relied upon by the appellant and ratios /Judicial principle emanating from the same was analysed in the backdrop of facts and circumstances of instant case of the appellant. The appellant in his written submission has contended that the appellant company was unaware of the counter parties who were involved in trading and the entire trading is done at market price and there has been influence on the market price of the scrip. The contention of the appellant established the fact that alleged default has been occurred in the regular course of business since the appellant company is engaged in business of trading of shares, stocks, securities etc. and the penalty has been imposed during the course of business activity, hence the amount
P a g e | Jalco Financial Services Pvt. Ltd.(AY: 2017-18) was paid by the appellant without challenging it in further appeal with the objective of expediting the business interest of appellant company on account of getting piece of mind toward unnecessary disruption caused by long drawn litigations processes, to save time and resources, reputation of appellant etc.
Further, from the bare perusal of provision of section 15HA of SEBI Act it transpires that impugned penalty has been imposed upon the appellant during the course of his business activity and more importantly payment/expenditure has been made in exercise of the option provided/ permissible to such appellant company by provision of law under which such penalty is being levied. Further, the careful perusal of provision of section 15HA of SEBI act, 1992 also reveals that penalty levied shall be of an amount proportionate to the amount of profit made out of such practices, which may be Rs. 25 Crores or three times the amount of profits made out of such practices, whichever is higher, meaning thereby the imposition/ levy of penalty is compensatory in nature.
Furthermore, the Finance(No.2), Act, 1988 vide circular No. 772 dated 23.12.1998 has explained the nature of disallowance which is not to be allowed/permissible asexpenses will be the payment on account of protection money, extortion, hafta,s bribes etc. which is not legally permissible payment under any law of the land. The mere reading of the name/nature of above expenditure/ payment reveals that the said expenditure/ payment are neither find any mention in the any provisions of law nor it may be considered that the same has been incurred or laid out in the regular course of business, hence certainly such expenditure are illegal expenditure and therefore doesn’t qualify for deduction. However, the payment incurred as levy of penalty in the instant case u/s 15HA of SEBI Act, 1992 has been levied under the specific provision provided by law in SEBI Act,1992 and has been paid in the regular course of business to further promote/expedite the business interest of appellant by not disrupting its business on account of protracted litigations, to save resources and to buy peace of mind. Hence the payment of penalty has been made wholly and exclusively for the purpose of business, therefore the same is allowable expense as held by the various judgements/ratio of the Hon’ble High Court and ITAT.
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Therefore, after the careful consideration of the assessment order, above narrated facts and circumstances of the case, the submissions of the Appellant and respectfully following the ratio/judicial precedent of the judgements(supra) of the Hon’ble High Courts and Tribunals the penalty of Rs.10,00,000/- paid to SEBI and claimed by assessee as expense and the addition was made by AO after disallowing the same under explanation 1 of section 37(1) of the Income Tax Act, 1961 is hereby deleted.
Ground no. 3 is hereby allowed.”
In regard to this ground we are conscious of the fact that CBDT Notification No. 38/2025 dated 23 April 2025 has now provided that certain laws in respect of which any expenditure incurredtowards settlement of initiated proceedings for contraventions, would bedisallowable for tax purposes. The laws as notified are: (i.) the Securities andExchange Board of India (SEBI) Act, 1992. (ii.) the Securities Contracts(Regulation) Act (SCRA), 1956. (iii.) the Depositories Act, 1996. (iv.) theCompetition Act, 2002.The Notification has come into force from the date of its publication in the officialgazette i.e., 23 April 2025. Thus any expenditure incurred by an assessee for settlement of proceedings initiated in relation to contravention or defaults under the abovementioned laws cannot be claimed as a deduction or allowance under the Income tax Act from AY 2025-26 onwards while we are P a g e | Jalco Financial Services Pvt. Ltd.(AY: 2017-18)
dealing with AY2017-18. Thus the proposition of law relied by the ld. DR needs no interference. The ground has no substance.
In regard to ground 2 the findings of Ld. CIT(A) are as under:
“4.2.1 I have carefully considered the submissions filed by the appellant and assessment order. The assessment proceedings of the appellant has been opened for complete scrutiny to verify the expenses claimed and the loans and advances appearing in the balance sheet.
4.2.2 During the course of assessment proceedings, on perusal of the bank account no. 02712500000243 statement maintained with HDFC bank, the AO found that the assessee company had received an amount of Rs.2,00,00,000/- and 3,00,00,000/- on 16.12.2016 and Rs. 16,00,000/- on 27.12.2016 from M/s FairlinkCommotrade Pvt Ltd.(‘FCPL’) The assessee company was asked to file complete details of transaction alongwith name and address, copy of bank account and ITR of the said party for the period 01.04.2016 to 31.03.2017. In response to above, the assessee company vide letter dated 13.11.2019 submitted the name and address and financials of the M/s FCPL and vide letter dated 23.11.2019 submitted the copy of bank statement of FCPL.
4.2.3 On examination of copy of bank account of FCPL, the AO observed that just before transferring the amount to assessee’s account huge amount was credited in the bank account of FCPL.
4.2.4 Then AO further referred to an information which was received from DDIT (Inv.)- Unit 4 (1), Kolkata dated 28th June 2017 informing that a search and seizure operation was carried out in the case of Shri Vikas Kumar Agarwal, who was an entry provider. It is further stated by the AO that the appellant was also found to be one of the beneficiaries of accommodation entries as per the list provided by the Investigation Wing. The AO acknowledges the response filed by M/s FairlinkCommotradePvt. Ltd.(‘FCPL”) towards
P a g e | Jalco Financial Services Pvt. Ltd.(AY: 2017-18) notice issued under Section 133(6) of the Act. However, the AO did not accept the credits as explained for want of ITR and by relying on the information so provided by the investigation wing. 4.2.5 The appellant, on the other hand, submitted that it had received the impugned amount from FCPL on behalf of M/s Pioneer Deal Trade Pvt Ltd. The financial statements and bank account statements of FCPL were also filed during the assessment proceeding. Adverting to the want of ITR of FCPL by the AO, the appellant has also furnished the return of income of the FCPL which is said to have been erroneously omitted to being attached with the response to notice u/s 133(6) of the Act. The appellant also submitted that FCPL is not a paper entity for providing accommodation entries and is not connected to Sh. Vikas Kumar Aggarwal.
4.2.6 Further, from the careful perusal of the documents furnished alongwith written submission, it is seen that various documents pertaining to the impugned transactions were filed during the assessment proceedings, such as bank statement, financial statements including director's report and annual return of the said company and copy of ledger account of M/s Pioneer Deal Trade Pvt. Ltd. As far as the question of filing of ITR of the said company goes, the appellant had duly filed the same before the AO, as can be seen from the records. Further, from the financials of FCPL,the lender company, it is seen that its revenue from operations stand substantively at Rs.6.93 crores, which shows that the said company is indeed in the business of trading in shares and stocks. It is evident from the records that the appellant has been able to duly discharged its onus with regard to the identity and creditworthiness of the said company.
4.2.7 However, in order to verify the genuineness of the transaction, the material information received from the investigation wing, Kolkata and relied upon by the AO was submitted by the appellant alongwith written submission, the same was carefully perused and analysed as under :-
4.2.8 It is the case of the AO that the appellant is a beneficiary of accommodation entries provided by lender company, M/s FairlinkCommotradePvt. Ltd. (FCPL)
P a g e | Jalco Financial Services Pvt. Ltd.(AY: 2017-18) through the entry operator Shri Vikas Kumar Agarwal. In other words, the said lender company, M/s FairlinkCommotradePvt. Ltd. (FCPL) is allegedly operated, controlled and managed by Shri Vikas Kumar Agarwal. It has been brought on record by the appellant that Shri Vikas Kumar Agarwal in his statements recorded on 15th December 2016 and 18th May 2017 has stated that he had given ‘list’ of all the bogus companies which were controlled and managed by him for the sole purpose of providing accommodation entries. The said list was duly signed by witness on the date of deposition and was made the annexure to the statement, which has been relied upon by the AO during the course of assessment. 4.2.9 On perusal of the relevant portion of the statement of Vikas Kumar Agarwal as reproduced by the appellant in his written submission, it is seen that he had listed 118 companies which were under his control for providing accommodation entries. Further, he also provided the list of 71 companies where he was a director/additional director or a designated partner and were controlled by him.”
The Ld. CIT(A) has deleted addition with following conclusions:
“4.2.17 Hence, after the careful perusal and consideration of facts and submissions filed during the appellate proceedings, I am of the considered opinion that the impugned transactions have been duly explained as genuine by the appellant in view of provision contained in section 68 of the Act for following reasons:- (i) Appellant submitted the Bank account statement, financial statements including director's report and annual return of M/s FCPL and copy of ledger account of M/s Pioneer Deal Trade Pvt. Ltd. (ii) No adverse inference has been drawn by AO w.r.t. the transactions undertaken with M/s Pioneer Dealtrade Pvt Ltd. (iii) FCPL filed response to notice u/s 133(6) of the Act issued by the AO alongwith its bank statement, ITR, Audited Financial Statements, MGT-9 and Directors’ Report. (iv) The Revenue from Operations of FCPL in the year under consideration stood at Rs. 6.93 Crores establishing the substantive creditworthiness of company.
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(v) The exhaustive list of entities controlled by Sh. Vikas Kumar Aggarwal shared by the Investigation Wing and relied upon by the AO does not include the name of FCPL. (vi) The AO in the entire assessment order could not establish the fact, by bringing out any piece of evidence, that the lender company M/S FCPL was in any way connected, controlled and managed by entry operator Vikas Kumar Aggarwal as it was incumbent upon the AO to do so, because it was found that the sole basis of holding the appellant company as beneficiary of accommodation entry was questioning the credentials and genuineness of transaction with lender company M/s FCPL, despite the fact that name of the lender company M/s FCPL does not find any mention in the list provided by Mr. Vikas Kumar Aggarwal. (vii) The AO has failed to establish any nexus by bringing any material evidence between FCPL and Sh. Vikas Kumar Aggarwal. (viii) The onus to prove source of source under section 68 of the Act in cases involving credits other than share application money is not perceived under law during the year under consideration. Even otherwise, from the bare perusal of the bank statement of M/s FCPL filed during the assessment proceeding the source of the source as appearing in the bank statement of M/s FCPL is M/s India Nivesh Capitals Ltd, which has a significant net worth, as can be seen from information available in the public domain itself. Moreover, it is also relevant to mention here that it is not the case of the AO that M/s India Nivesh Capitals Ltd i.e. source of the source credit entries from where the pay out has been made to the appellant company, is in any way connected, controlled and managed by entry operator Vikas Kumar Aggarwal. Therefore, after the careful consideration of the assessment order, above narrated facts and circumstances of the case, the submissions of the Appellant and after respectfully following the ratios/judicial precedent of the judgement(supra) of the various courts including Jurisdictional Hon’ble Delhi High Courts and Delhi Tribunal the addition of Rs.5,16,00,000/- on account of unexplained cash credit u/s 68 of the Income Tax Act, 1961 is hereby deleted. Hence the Ground nos. 2, 4 and 6 are hereby allow.”
6.1 Ld. DR has merely relied the order of ld. AO but was unable to bring on record any fact or evidence countering the aforesaid conclusion of ld.
P a g e | Jalco Financial Services Pvt. Ltd.(AY: 2017-18) CIT(A), specially that from the financials of FCPL, the lender company, it is seen that its revenue from operations stand substantively at Rs.6.93 crores, which shows that the said company is indeed in the business of trading in shares and stocks and that M/s FCPL or M/s India Nivesh Capitals Ltd, i.e. source of the source credit entries from where the pay out has been made to the appellant company, is in any way connected, controlled and managed by entry operator Vikas Kumar Aggarwal so as to drawn inference for invoking deeming income provisions. The ground has no substance.
The grounds are thus rejected and the appeal is dismissed.
Order pronounced in the open court on 16.01.2026.
Sd/- Sd/- (Anubhav Sharma) (Naveen Chandra) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated 16.01.2026 Rohit, Sr. PS