DCIT, NEW DELHI vs. M/S. VLS FINANCE LTD., NEW DELHI

This appeal by the Revenue is preferred against the order of the Commissioner of Income Tax(A)-XXXII, dated 24.03.2014 pertaining to A.Y 2010-11.

The grievance of the Revenue is two-fold. First grievance relates to deletion of addition of Rs. 10,97,280/- made by the AO on account of expenditure u/s 37(1) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act'.

During the course of scrutiny proceedings, the AO noticed that the assessee has claimed an amount of Rs. 10,97,280/- as expenditure on account of consent fee charged by the Security Exchange Board of India [SDEBI]. The AO was of the firm belief that the said payment has been made in violation of the statutory provisions of the SEBI Act and, therefore, cannot be allowed as revenue expenditure u/s 37(1) of the Act. Accordingly, Rs. 10,97,280/- was disallowed.

The matter was agitated before the CIT(A) and it was explained that the consent fee paid to SEBI was in settlement of on-going dispute and, therefore, it was incurred during the course of carrying on of the business and is, therefore, allowable as legitimate revenue expenditure. The CIT(A), convinced with the claim of the assessee, deleted the addition of Rs. 10,97,280/-.

Before us, the ld. DR strongly supported the findings of the AO and reiterated that the said payment was in violation of law.

Per contra, the ld. AR relied upon the findings of the CIT(A) and further relied upon the judgment of the Mumbai Bench of the ITAT in the case of ITO Vs. Reliance Share and Stock Brokers [P] Ltd ITA No. 274/MUM/2013.

We have carefully considered the orders of the authorities below. We find that the consent fee paid by the assessee was for non compliance of certain bye-laws/guidelines of SEBI. The fact of payment of consent fee cannot be treated as violation of statutory law. The charges levied by SEBI were in the ordinary course of business of the assessee and it cannot be construed that the payments were made in violation or infringement of any central or state laws. The consent fee paid cannot 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 paid for the purpose of business to settle a dispute with the regulator SEBI and to be able to conduct its business without interruption. We, therefore, do not find any infirmity in the findings of the CIT(A). Ground No. 1 is dismissed.

Second grievance relates to allowance of long term capital loss of Rs. 2,39,92,582/-.

While scrutinising the return of income, the AO noticed that the assessee has claimed in its return of income long term capital loss of Rs. 2,63,96,983/-. The assessee was asked to justify its claim of loss. The assessee, vide letter dated 16.05.2012, has stated as under:

A loss of Rs. 2,12,16,371/- was worked out and accounted for in the books of account during the A. Y. 2005-06 on of liquidation of VLS International SA but the same had not been claimed return of income as the actual realizable amount form investments held by VLS International SA could not be determined at that point of time. The claim of capital loss was allowed to be claimed in the year only

The AO was not satisfied with the reply of the assessee and observed that long term capital loss of Rs. 2,39,92,582/- pertains to A.Y 2006-07 and only 23,53,451/- pertains to the year under consideration. The AO, accordingly, allowed the claim of loss only to the extent of Rs. 23,53,451 and disallowed the claim of loss to the tune of Rs. 2,39,92,582/-.

The assessee agitated the matter before the CIT(A) and reiterated its claim of loss. After considering the facts and submissions, the CIT(A) was convinced that the assessee was entitled to the claim of long term capital loss of Rs. 2,63,46,033/- as against Rs. 23,53,451/- allowed by the AO. Accordingly, the CIT(A) directed the AO to allow the claim of the assessee. Aggrieved by this the Revenue is before us.

The ld. DR strongly supported the findings of the AO. It was the say of the ld. DR that since the assessee is following mercantile system of accounting, the loss incurred in A.Y 2006-07 cannot be allowed in the year under consideration.

Per contra, the ld. AR reiterated what has been stated before the lower authorities.

We have given thoughtful consideration to the orders of the authorities below. The case history of the assessee shows that the assessee accounted for a loss of Rs. 2,12,16,371/- in its books of account for the A.Y 2005-06. Loss was on account of liquidation of its foreign subsidiary company namely, VLS International SA. This fact comes out from the assessment order dated 14.12.2007 framed u/s 143(3) of the Act for A.Y 2005-06 and the relevant findings of the AO read as under:

A perusal of the aforesaid findings of the AO given in A.Y 2005-06 clearly shows that it was during the year under consideration the assessee could make final realisation and, therefore, the difference of actual investments made in the foreign subsidiary company and actual amount realised materialised during the year under consideration and, therefore, the claim of long term capital loss is definitely allowable during the year under consideration. We, therefore, do not find any reason to interfere with the findings of the CIT(A). Ground No. 2 is dismissed.

In the result, the appeal of the Revenue in is dismissed.