DCIT CIR 3(3)(1), MUMBAI vs. ANIL DHIRAJLAL AMBANI, MUMBAI

आदेश / O R D E R PER R.C.SHARMA (A.M):

This is an appeal filed by the Revenue against the order of CIT(A)- 8, Mumbai dated 25/02/2016 for A.Y.2011-12 in the matter of order passed u/s.143(3) of the IT Act. 2. Following grounds have been taken by the Revenue:- 1. "whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) 'is right in deleting the disallowance of Rs. 50,00,00,000/- made by the assessing officer by treating the settlement charges paid by the assessee to Securities & Exchange Board of India (SEBI) as a penalty paid for infraction of law not allowable u/s 37(1) of the Income Tax Act, 1961 ?" 2. "on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in allowing the settlement charges of Rs. 50,00,00,000/- as business expenditure without considering the fact

2 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani that the assessee has opted for settlement in order to avoid final extreme consequence of the proceedings initiated by SEBI for the violation of provisions of SEBI Act, 1992 and thus charges paid under settlement are akin to penalty which is resulting from violation of rule." 3) "The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored." 4) "The appellant craves leave to amend or alter any ground or add a new ground which may be necessary."

3 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani submissions of the assessee and the consent order of SEBI and found that the assessee and his group entities have violated the provisions of SEBI Act, 1992 for which the said agency initiated enforcement action under various Rules for which the assessee submitted a consent application on certain terms and after consideration of the application, SEBI levied certain charges in violation of SEBI provisions which were paid by the assessee. Thus, the assessee paid Rs. 50,00,00,000/- for the violation which was duly paid by the assessee. AO was of the view that this payment is in the nature of penalty. The assessee argued that the 'settlement charges' are not a penalty for violation of SEBI or any other regulations and that the said expenditure is allowable u/s. 37(1) as it is not penal in nature. The Assessing Officer did not accept the argument of the assessee and concluded that the assessee has not admitted nor denied the charges and accordingly has made the payment. This establishes the fact that the assessee has admitted that he has violated the SEBI Regulations and paid the charges. No prudent businessman will pay such huge charges in absence of any violation. Thus, the payment made by the assessee of Rs. 50,00,00,000/- to SEBI for violating the SEBI Regulations was held by AO as penal in nature, not allowable as 'Business Expenditure' u/s. 37(1) of the Act. Therefore, the Assessing Officer considering the provisions of section 37(1) of the Act that the expenditure claimed under the head 'settlement charges' of Rs. 50,00,00,000/- is penal in nature in respect of violation of SEBI Regulation, disallowed the

4 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani amount u/s, 37(1) and added the same to the total income of the assessee. 4. By the impugned order, CIT(A) deleted the addition after observing as under:-

5.1.6 I have given full consideration to the observations of the AO and submissions made by the appellant. Since the AO has not elaborated detailed reasoning for disallowance made under section 37(1), it is to be decided whether any aspect of that section applies to the facts and circumstances of the case. 5.1.7 Section 37(1) is a residuary section. In order to claim deduction under this section, the following condition should be satisfied: • The expenditure should not be of the nature described under section 30 to 36. • It should not be the nature of capital expenditure. • It should not be personal expenditure of the taxpayer. • It should have been incurred in the previous year. • It should be in respect of business carried on by the taxpayer. • It should have been expended wholly and exclusively for the 'purpose of such business. • It should not have been incurred for any purpose which is an offence or is prohibited by any law 5.1.8 The explanation to the section is reproduced below in entirety: "For the removal of doubts, it is hereby declared 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 purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure." 5.1.9 In absence of very specific observation, it is understood that the AO had disallowed the expenditure in context of 1st explanation to section 37(1) of the Act. To ascertain the applicability of this explanation it needs to be decided whether the payment of "consent settlement" to SEBI by the appellant constitutes expenditure incurred for any purpose which is an offence or which is prohibited by law. If yes, the explanation would apply and if no the disallowance cannot be made. 5.1.10 A perusal of "Application for Consent" dated 09/09/2010 filed before SEBl by parties concerned including the appellant and the

5 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani notarised undertaking filed their with the wheels that at item 10 of the undertaking the applicant has stated, "/ neither admit not deny the findings of fact and conclusions of law to be part of the consent order, and consent to enter into the consent order as may be passed by SEBI/AO as settlement of the issues contained in this application, in alliance with the consent terms agreed by me." 5.1.11 The exact nature of "Consent Orders" is given Circular number EFD/ED/Cir-1/2007 dated 20 April 2007 issued by SEBl. The same being a public document is not reproduced here. A perusal of the circular reveals that the idea of consent orders was borrowed from US Securities and Exchange Commission to achieve twin goals of appropriate sanction and deterrence without resorting to a long drawn litigation. In this sense it is a conciliatory proceeding that precedes imposition of full legal proceedings under the SEBl Act, 1992. Clearly, in the instant case, it has resulted from prima facie allegation made by SEBl, which was followed by pre-emptive action taken to avoid further legal action that may result in penalty or any other legal sanction by SEBl. Thus, the consent settlement paid by the appellant lies between the point of prime facie the indication of an offence and final culmination in levy of penalty or any other legal sanction/punishment. This intermediate status of "Application for Consent" between prima facie allegation and final verdict and the acceptance thereof by SEBl needs to be determined as an expenditure for an offence or for an act prohibited by law or otherwise. 5.1.12. Clearly, payment of any kind of settlement/ consent charge under any law in itself is not expenditure made for the purpose of an offence. It has now to be seen whether it is a payment made for an act which is prohibited by law. In the instant case, it is noted that the appellant, in his Application for Consent has clearly iterated denial of exceptions of findings of fact and conclusions of law to be part of the consent order. In its consent order dated 14 January 2011, SEBl, at Parra 5 has stated that the application for Consent filed by the applicants was considered by High-Powered Advisory Committee of SEBI which, "considered the facts and circumstance of the case, material brought before the committee". Thus, the denial of the appellant was also clearly considered by the Committee of SEBI. 5.1.13 In reaching a conclusion on this issue, I find that interpretation of whether "consent settlement" before SEBI is an expenditure incurred for an offence or an act prohibited by law, has been decided by Hon'ble ITAT Mumbai in M/s Reliance Share and Stock Brokers (P) Ltd. , I.T.A. No.274/Mum/2013. The relevant part of the order is extracted below:

6 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani (from Para 16) 6.7 The Appellant submitted that in case of C!T v. Sales Magnesite (P.) Ltd. [1199-51214 ITR 1/81 Taxman 334 (Born.) it was held that, "Commercial expediency must be decided from businessman's point of view. Even expenditure incurred voluntarily on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business would be deductible under this section. The question whether it was necessary or commercial expediency or not is a question that has to be decided from the point of view of the businessman and not by the subjective standard of reasonableness of the revenue." 6.8 In view of the above facts and judicial decisions, the Appellant submitted that fees paid to SEBI is allowable as business expense and not a penalty for infraction of law. 6.9.I have gone through the A. O. 's order as well as the appellant's submissions. It is very apparent from the Circular of SEBI as mentioned above that in cases of administrative/civil actions which includes, interalia, orders of suspension from trading are different from criminal actions. From the order of SEBI it is quite apparent that the appellant had been suspended from doing trading activity for a period of four months and had not been awarded any monetary fines- It has been mentioned in the said order that the consent application of the appellant was without admitting or denying the guilt. SEBI has also accepted the application on this basis. Thus, SEBI has accepted the position that guilt may or may not be established at the end of the appellate proceedings. The fee paid cannot therefore, 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 claimed to have been paid for the purposes of business, to settle a dispute with the regulator SEBI and to be able to conduct its business without interruption. It is also worth noting that various decisions have held that an examination of the nature of expenses, reveals that if the concerned impost is purely compensatory in nature, the same is an allowable expense u/s. 37 of the Act. In the circumstances, the fee cannot be equated with a penalty and is a payment to enable the assessee to carry on its business in the normal course. Hence, the disallowance made by the AO of Rs. 50,00,000/- be deleted. Accordingly, this ground is allowed."

7 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani 17. In view of the foregoing discussions, we are of the view that the Ld CIT(A) was justified in deleting the disallowance of Rs. 50.00 lakhs made by the assessing officer, 18. In the result, the appeal filed by the revenue is dismissed. 5.1.14 In view of a direct decision on similar issue by the jurisdictional ITAT Bench and the facts and circumstances of the instant case being similar to those considered by Hon'ble ITAT, the disallowance of Rs. 50 Crores made by the assessing officer on this issue cannot be sustained. This ground of appeal is therefore allowed.

8 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani of the SEBI, prima facie, revealed that the assessee and his group companies had made serious misrepresentations and mis-statements regarding the nature of investment in, YIELD MANAGEMENT CERTIFICATES/DEPOSITS' and also made misrepresentation regarding the profit & loss in their Annual Reports for the year ended 31.03.2007, 31.03.2008 8s 31.03.2009." 7. As per learned DR, it is clear from the consent order of the SEBI that the various entities had violated many provisions of the SEBI Act, 1992, the SEBI (PFUTP) Regulations, 2003 and SEBI (FII) Regulations, 1995. The exact violations have been reproduced above, which is a part of the A.O's order. SEBI initiated enquiry/ investigation proceedings under the appropriate provisions of SEBI Act, 1992, the SEBI (PFUTP) Regulations, 2003. In the above background, the assessee and its group companies proposed settlement, which were agreed to by the High Powered Action Committee (HPAC) of the SEBI and the said HPAC recommended the terms of 'Settlement' subject to fulfilment of certain conditions which were accepted by the SEBI, which in turn passed the consent order dated l4.01.2011. AS per the terms of the consent order of the SEBI, the assessee paid the impugned amount of Rs.50,00,00,000/-( 25,00,00,000/- each in his two companies as directed in the consent order). After such payment, SEBI disposed off the pending proceedings. The assessee claimed this amount of Rs.50,00,00,000/- as a deduction u/s.37(l) of I.T. Act, 1961 claiming it to be a regular expenditure wholly and exclusively incurred for the purpose of the business of the assessee.

9 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani 8. As per learned AR the A.O. after detailed discussion held that the above amount is nothing but a penalty for grave statutory violations of various provisions of the SEBI Act and various regulations under the SEBI Act. The A.O further held that the said payments were made for escaping the legal consequences of the defaults committed and also to prevent further penal action. Thus, the A.O. consequently disallowed the impugned amount of Rs.50,00,00,000/-. 9. In view of the above, it was argued by learned DR that the impugned deduction was rightfully disallowed by the A.O. and the Ld.CIT(A)-8 fell in error in allowing the disallowance made by the A.O. 10. Further following arguments were placed on record by learned DR:-

a. The sequence of events beginning from the grave violations by the assessee and its group companies regarding the placement of ECBs/FCCBs into the Stock Market and related companies in violation of SEBI Act, 1992, [SEBI (PFUTP), Regulations, 2003], SEBI (Foreign Institutional Investors) Regulations, 1995, the factum of mis- representation in Yield Management Certificates and the P&L A/c misstatements for three years, up to the event \, of passage of the settlement/consent order passed by the SEBI and the payment of the impugned amount by the assessee have been discussed at length in paras 2 and 3 of this submission. b. The Revenue further contends that The Hon'ble ITAT may appreciate that the settlement, which was proposed by the assessee and its group companies was NOT AT ALL VOLUNTARY IN NATURE, rather, the assessee was forced to come in for settlement because there was a prima facie finding of the SEBI after its investigation into the alleged irregularities that the assessee was guilty of violating various provisions of SEBI Act, 1992, the [SEBI (PFUTP), Regulations, 2003 ], SEBI (Foreign Institutional Investors) Regulations, 1995. c. It is further pertinent to note that the violations/infractions of various provisions as quoted above were neither procedural nor trivial but rather were violations of substantive and grave nature in as much as that they were in the nature of serious acts of misrepresentation and misstatements to the shareholders and irregularities in reporting the

10 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani correct profits as per P&L A/cs of the group companies to the investors for three consecutive years. d. It may kindly be appreciated that the violations, inter-alia comprised fundamental violations of Sec.l2A(b) & Sec.l2A(c) of the SEBI Act, 1992 read with the [SEBI (PFUTP), Regulations, 2003], SEBI (Foreign Institutional Investors) Regulations, 1995. It will be relevant to quote the Sec.l2A(b) & Sec.l2A(c), which reads as under : "Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control __ No person shall directly or indirectly (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange, (c) engage in any act, practice, course or business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed in a recognised stock exchange, in contravention of the provisions of this Act or the rules of the regulations made thereunder, * From the above, the Hon'ble ITAT may well appreciate that the above violations are in no manner small violations, but are in the nature of manipulative deceptive devices and schemes or artifices to DEFRAUD in relation to dealing in securities listed or proposed to be listed on a recognised stock exchange. Further, the violations also are of the nature of any act or practise that would operate as FRAUD OR DECEIT upon any person in connection with the issue of shares listed or proposed to be listed on a recognised stock exchange. e. It is thus clear that the only when the assessee was faced with such charges wherein the acts were of the nature of deceit, defraud upon the investors in relation to securities in question that the assessee was out of force required to come to the negotiating table and therefore, he applied for the settlement, which was granted in the form of consent order of the SEBI. It is therefore, the case that the settlement/consent charges were paid for the above grave violations of Law, which were of a serious nature bordering on acts of fraud, deceit and untruths to misguide and manipulate the investors and shareholders. Thus, the payment of the consent/settlement fee is forwarding of and to get rid of the serious legal consequences that would have followed, had the assessee not proposed settlement. It is therefore, the case that these charges are in essence nothing but payments not for any venial or technical breaches of Law, but indeed are payments in the nature of serious and gross violations of Law and hence are more serious than any stray penalty imposed. f. Therefore, the payment is nothing but a payment of compounding charges for violation of Law. It is well settled that the payments made

11 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani for compounding of an offense for infraction of Law is not a legitimate business expenditure and hence not allowable in any manner as a deduction. As already stated the payments are made due to fear of legal and penal consequence that would have followed had settlement not been proposed. Therefore, the settlement/consent charges are nothing but in the nature of penalty. g. It is further submitted that the Ld.CIT(A) has given much credence to the assessee's argument that the assessee has neither accepted nor denied the prima facie findings of the SEBI about the serious infractions of law but had paid the settlement / consent charges in order to avoid further legal complication in the matter. This argument of the assessee is rather self defeating, given the clear fact that only when the assessee realised that he is facing serious legal action due to his grave defaults, only then did he propose settlement. The conduct of the assessee shows his real appreciation of the proceedings of SEBI though formally the assessee maintained the line that there was neither denial or acceptance of guilt. Time and again the courts have held that due importance is to he given TO THE SUBSTANCE OF THE TRANSACTION OR EVENT AND NOT TO IT'S FORM. The CIT(A)-8 has failed to appreciate this aspect which the Hon'ble Tribunal may kindly look into.

12 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani 12. As per learned DR, without prejudice to the above submissions, the Revenue also contends that the said payments are also not wholly and exclusively for purpose of business. For this proposition, reliance is placed on the decision of the Hon'ble Apex Court in the case of Indian Aluminium Company Ltd., 79 ITR 514 (SC), wherein it was held that a payment made under the statutory obligation because the assessee was in default could not constitute expenditure laid out for the purpose of assessee's business. The ratio of this case is squarely applicable to the case at hand, wherein the payment has been made for serious breach of Law and hence cannot constitute business expenditure wholly and exclusively for the purpose of business. 13. On the other hand, it was contended by learned AR that the Ld. CIT(A) considered the exact nature of consent orders which is given in Circular No.EFD/ED/Cir. 1/2007 dated 20.4.2007 issued by SEBI. [Page 5 - 10 of the Factual Paper Book (FPB) filed on December 27, 2017]. As per Ld. C1T(A) the idea of consent orders was borrowed from US Securities and Exchange Commission to achieve twin goals of appropriate sanction and deterrence without resorting to a long drawn litigation. The Ld. CIT(A) held that the process is a conciliatory proceedings which precedes full legal proceedings under the SEBI Act. The Ld. CIT(A) therefore held that the consent settlement paid by the respondent lies between the point of prima facie indication of an offence and final culmination of levy of penalty or other legal sanction / punishment. The Ld. CIT(A) held that this intermediate status of "application for consent" between prima facie

13 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani allegation and final verdict and acceptance thereof by SEBI is not an expenditure made for the purpose of an offence. The Ld. CIT(A) also came to conclusion that it is not a payment made which is prohibited by law. The Ld. CIT(A) relied upon consent order dated 14.1.2011 in para 5 where it was stated that the application for consent filed was considered by High Powered Advisory Committee by SEBI which considered the facts and circumstances of the case, material bought before the committee and therefore the denial by the respondent was clearly considered by committee of SEBI. The Ld. CIT(A) further held that the issue was squarely covered in favour of the respondent by the decision of the Hon'ble Jurisdictional Tribunal in the case of ITO v. Reliance Shares and Stock Brokers (P.) Ltd. (2015) (67 SOT 73) (Mum.-Trib.). Tribunal held that SEBI has accepted the position that the guilt may or may not be establish at the end of appellate proceedings. The Tribunal therefore held that the 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. Tribunal has held that the fee is claimed to have been paid for the purpose of business, to settle a dispute with a regulator SEBI and to be able to conduct its business without interruption. 14. Learned AR further invited our attention to Para 7 of the Consent Order (Page 3 of the FPB) wherein the order passing authority has stated that the payment is made without admitting or denying the charges. Likewise, the payment made in Reliance Shares and Stock Broker's case

14 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani was also without admitting or denying the guilt. Relevant Para 13 from the decision of the Hon'ble Mumbai Tribunal is reproduced as under:

15 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani settlement of civil actions for damages 'for alleged, but not proved' fraudulent statements in a prospectus were allowable expenses. 17. Reliance was also placed on the decision of Jurisdictional Tribunal in case of Kaira Can Company Ltd. Vs. DCIT [2010] 127 TTJ 514 (Mum.- Trib.) Wherein, the Hon'ble Jurisdiction Tribunal has held that:

" Where assessee had made payment ofRs. 1,40,000 under a scheme namely SEBI Regulation Scheme, 2002 (Scheme of 2002) for non- compliance with disclosure norms under regulations 6 and 8 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, such payment could not be disallowed under Explanation to section 37(1) by treating it as penalty, "

16 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani all or have complied with the said requirements after the expiry of the time specified in the said Regulations. In terms of s. 1 5A of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as 'the SEBI Act'), such persons are liable to a penalty not exceeding five thousand rupees payable for ever day during which such failure to furnish information, return, report or document, etc. continues. Besides, such persons are also liable for prosecution under s. 24 of the SEBI Act. It has also been brought to the notice of the SEBI that, the disclosures were not made either on account of oversight or lack of knowledge. The monetary penalty under s. 15A of the SEBI Act may be imposed after adjudication and enquiry under Chapter VI-A of the SEBI Act. Further, the prosecution proceedings involve considerable time and even if concluded in conviction, the penalty, monetary or otherwise, may be very nominal. In view of the above, SEBI has decided to introduce a scheme, namely, 'SEBI Regularization Scheme, 2002' (hereinafter referred to as 'the Scheme') to enable such persons and companies to comply with these requirements. Under the Scheme, the persons and companies who have not made disclosures or who have made disclosures after expiry of the period as specified in the Takeover Regulations, 1997, are permitted to make disclosures to the company and the stock exchange as the case may be, and pay the lump sum amount specified herein. This is to provide one time opportunity to enable the companies and the specified persons to comply with the law of land By implementation of the Scheme, the listed companies as well as the stock exchanges shall have the required information. Besides, the public will also have access to the necessary information about the shareholding etc. of such persons in the company. The Scheme will be in operation for a limited period as specified hereinafter. The persons and the companies may, therefore, take full advantage of this Scheme. It is also clarified that after the expiry of the Scheme, SEBI may have to initiate appropriate action against defaulting persons and the companies, which may result in heavy penalties against such persons and companies, as per the provisions of the SEBI Act. Therefore, in exercise of the powers under s. 11 of the SEBI Act read with regns. 6 and 8 of the Takeover Regulations, 1997, SEBI hereby introduces the said Scheme. The salient features of the Scheme are as under :

17 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani Regularization of the defaults 1. Under the Scheme, the eligible persons and companies may make disclosures and pay the lump sum amount within the period specified under the Scheme. Eligibility 2. Following are eligible for availing benefit under this Scheme— "(a) Persons who have failed to comply with or who have complied with the requirements of regulations 6(1), 6(3), 8(1) and 8(2) of the Takeover Regulations, 1997, after expiry of the period specified in the said regulations. (b) The listed companies which had failed to comply with or complied with the requirements of regulations 6(2), 6(4) and 8(3) of the Takeover Regulations, 1997, after expiry of the period specified in the said regulations. (c) In respect of the listed companies where there was no change in the shareholding of persons specified under regulation 8(1) and 8(2) of the Takeover Regulations, 1997, in a particular year, the disclosure under regulation 8(3) for that year if not made, earlier, can be made under this Scheme specifying that there was no change in shareholding of the said persons. Such companies will not be required to pay any amount. This benefit will not be available to persons covered under regulations 8(1) and 8(2)." Scheme not to apply in certain cases 3. The benefit of this Scheme will not be available in cases where penalty under the SEBI Act read with Takeover Regulations, 1997 has already been imposed. However, where such proceedings under the SEBI Act read with Takeover Regulations are in progress, per sons/companies may avail the benefit of the Scheme." The other provisions are not of much significance and it would be suffice if their contents are noted briefly. Rule 4 prescribes the procedure for making disclosure. Rule 5 prescribes the lump sum amount which is to be paid. Rule 6 provides the mode of payment and r. 7 prescribes the period during which such disclosure could be made. 23. The perusal of the scheme clearly shows that the object was to regularize the default which could have been because of oversight or lack of knowledge which is apparent from para 3 of the recital of the scheme. Para 4 provides in clear terms that the scheme was being introduced to enable the defaulters to comply with legal requirements under the Regulations of 1997. Once the payment prescribed under the scheme was made, the requirements under the 1997 Regulations are treated to be complied with and consequently, the provisions ofss. 15A and 24 of the SEBI Act could not be enforced against such persons. Therefore, in our humble opinion, such payments cannot be said to be

18 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani payment for violation of law and consequently, the same cannot be said to be a penalty under s. 15A of the SEBI Act. Therefore, neither the decision of the Hon'ble Supreme Court in the case of Haji Aziz & Abdul Shakoor Brothers (supra) nor the provisions of Explanation to s. 37 can be applied to the present case. " 19. Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of Asst. CIT Vs. A. K. Menon [1995] 215 ITR 364 (SC), wherein the Hon'ble Supreme Court had an occasion to decide the powers of Special Court to adjudicate appeals to overrule tax authorities. The relevant extract of the decision is reproduced as under: "3. It is clear that the Special Court has no power to sit in appeal over or overrule the orders of the tax authorities, the Tribunal or the Courts in regard to the tax liabilities of notified persons. The only power of the Special Court is to determine the priorities in which claims upon the property under attachment shall be paid. The claims relating to the tax liabilities of a notified person are, along with revenues, cesses and rates entitled to be paid first in the order of priority and in full, as far as may be. In relation to a claim for payment of the tax liability of a notified person, the Special Court has, therefore, only the limited power to determine what, having regard to the funds available, can be paid; that is to say, whether (he claim can be satisfied in full or only in part. If a particular tax claim cannot at any time be paid in full, provision would have to be made for the balance, so far as may be, so that it is not jeopardised. …… 5. The Special Court has no jurisdiction to sit in appeal over the assessment of the tax liability of a notified person by the authority or Tribunal or Court authorised to perform that function by the statute under which the tax is levied. The Special Court has, therefore, no jurisdiction to determine whether or not any assessment of the tax liability of a notified person by the appropriate authority is bonafide or reasonable or justified or enforceable. S.V. Kondaskar, Official Liquidator and Liquidator of the Colaba Land and Mills Co. Ltd. v. KM ' Deshpande, ITO [1972] 83ITR685; 42 Comp Cas 168 (SC) distinguished." 20. It was also argued by learned AR that tax authorities cannot arrive at determination under other laws and must accept the finding of the

19 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani authorities under those laws is also established by the decision of Vadilal Chemicals Ltd. Vs. State of Andhra Pradesh [2005] 192 ELT 33 (SC) wherein the Hon'ble Supreme Court observed that: "...... ...The Department of Industries & Commerce having exercised its mind, and having granted the final eligibility certificate (which was valid at all material times), the Commercial Taxes Department could not go beyond the same... " 21. To the same effect are the observations of the Hon'ble Bombay High Court in the case of Bombay Chemicals Pvt. Ltd. Vs. Union of India and Others(1982] 10 ELT 171 (Bom.) observes that: "16...............In my judgment, the certificates produced by the petitioners beforethe revisional authority support the claim that the goods imported were chemicals. In these circumstances, it was not open for the Customs authorities to ignore the certificates by holding that the same were issued under an error or the D.G.T.D. cannot issue a certificate which has an effect of overriding the substantive part of the Notification in question. The view taken by the authorities below that the quasi-judicial authority is competent to interpret and apply the notification and can ignore the certificates issued by the D.G.T.D. is clearly erroneous. The conclusion recorded by the authorities by ignoring this certificate cannot be accepted

"... The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than of a trader. The assessee incurred the impugned expenditure to avoid any adverse effect

20 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani on its reputation, to protect the managing agency which was an income earning apparatus and for retaining it with the reconstituted firm in which the interest of the assessee was the same as before. It was likely that but for the expenditure, the fair name of the assessee would have been tarnished or rendered suspicious and the managing agency would have been terminated. The expenditure incurred on the preservation of a profit earning asset of a business has always been held to be a deductible expenditure by the courts. In the circumstances, it was difficult to hold that the expenditure incurred by the assessee was either gratuitous or one incurred outside the trading activities of the assessee. The expenditure was, therefore, deductible under section 37(1)...."

21 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani Infrastructure Ltd. ('RIL'), Ms. Reliance Natural Resources Ltd. (RNRL), Reliance Infratel Ltd. (RINL), M/s. Reliance Capital Ltd. (RCap) and Reliance Power Limited (RPL). 26. As per Assessing Officer, companies namely RIL and RNRL alongwith the respondent and 4 other directors of these companies were directly or indirectly involved in dealing in the shares of RCL by utilizing the External Commercial Borrowings (ECBs) and Foreign Currency Convertible Bonds (FCCBs). In connection with this, SEBI conducted certain preliminary investigations against RIL, a company of which the Respondent was Chairman and Managing Director and against RNRL, a company of which the Respondent was Chairman; in relation to the amounts raised by these companies towards ECBs/ FCCBs and the alleged misuse of these funds. In order to establish whether there had, in fact, been a violation of various provisions of SEBI Act and Regulations, SEBI issued a show cause notice (SCN) to the two companies and also to various individuals connected with the two companies as Chairman, Managing Director, Vice Chairman, whole time Director and Director i.e. persons who at the time of alleged offence was committed were in charge of/ were responsible to, these companies for the conduct of the business of the companies. 27. Based on the basis of investigations carried out, it was alleged in the SCN that the aforesaid entities, i.e. RIL and RNRL were 'prima-facie' responsible for misrepresenting the nature of investments in 'Yield Management Certificates/Deposits (YMCs)' and profit and loss thereof in their annual accounts for the year ended March 2007, March 2008 and

22 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani March 2009 and thereby misusing the SEBI (Foreign Institutional Investors) Regulations, 1995. 28. From the record we found that in order to avoid long drawn litigation and the consequential expenditure of time and effort as also the likely damage to the reputation by continuing adverse publicity over a long drawn period, the parties to whom the show cause notice had been issued decided to avail of SEBFs Guidelines relating to "consent terms" and consequently, made an application for consent dated September 9, 2010. The High Powered Advisory Committee (HPAC) of SEBI considered the case to be a fit case for a Consent Order after taking into account the factors specified in Para 11 of the Guidelines having due regard to the interests of investors and securities market and recommended that the consent terms voluntarily proposed by the applicants be accepted. SEBI in turn accepted the recommendations of the HP AC and on the applicants (including the Respondent) confirming / voluntarily proposing the said consent terms SEBI passed a consent order on January 14, 2011. 29. Pursuant to the Consent Order, the applicants were required to pay a sum of Rs. 25 crores in the matter of RIL and a further sum of Rs. 25 crores in the matter of RNRL. The liability for the same was joint and several. Taking into account all the facts and circumstances the Respondent paid the settlement charge of Rs. 50 crores. The settlement charges so paid was disallowed by the Assessing Officer for the reasons that the respondent and his group companies 'have violated' the

23 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani provisions of SEBI Act, 1992 for which SEBI initiated enforcement action under various rules; The AO concluded that the payment of settlement charges was for violation of the provisions of the Securities Exchange Board of India Act, 1992 ('SEBI Act') i.e. a payment made for an offence in the eyes of SEBI Regulations and therefore disallowed the same by invoking the Explanation to section 37(1) of the Income-tax Act, 1961 ('the Act').

24 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani appropriate sanction and deterrence without resorting to a long drawn litigation. The Ld. CIT(A) held that the process is a conciliatory proceedings which precedes full legal proceedings under the SEBI Act. The Ld. CIT(A) therefore held that the consent settlement paid by the respondent lies between the point of prima facie indication of an offence and final culmination of levy of penalty or other legal sanction / punishment. The Ld. CIT(A) held that this intermediate status of "application for consent" between prima facie allegation and final verdict and acceptance thereof by SEBI is not an expenditure made for the purpose of an offence. The Ld. CIT(A) also came to conclusion that it is not a payment made which is prohibited by law. The Ld. CIT(A) relied upon consent order dated 14.1.2011 in para 5 where it was stated that the application for consent filed was considered by High Powered Advisory Committee by SEBI which considered the facts and circumstances of the case, material bought before the committee and therefore the denial by the respondent was clearly considered by committee of SEBI. The Ld. CIT(A) further held that the issue was squarely covered in favour of the respondent by the decision of the Hon'ble Jurisdictional Tribunal in the case of ITO v. Reliance Shares and Stock Brokers (P.) Ltd. (2015) (67 SOT 73) (Mum.-Trib.). Tribunal held that SEBI has accepted the position that the guilt may or may not be establish at the end of appellate proceedings. The Tribunal therefore held that the 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. Tribunal has held

25 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani that the fee is claimed to have been paid for the purpose of business, to settle a dispute with a regulator SEBI and to be able to conduct its business without interruption. 32. We also found that issue is squarely covered by the decision of the Hon'ble Jurisdictional Tribunal in the case of Reliance shares and Stock Brokers (supra) [Page 63-75 of the Legal Paper Book (LPB) filed by assessee during the course of hearing. On the similar issue, the respondent also relied on decision of the Hon'ble Jurisdictional Tribunal in the case of DCIT v. Pravav Securities Pvt. Ltd. (ITA No. 1144/Mum/2015) (order dated December 20, 2016). 33. It was also contended by learned DR that the decision of Mumbai Tribunal relied by the assessee was a case of company in which the company had claimed the payment of settlement charges against the business income and the present case was that of Individual and therefore the same could not be applied in the present case. In this regard, we observe that at Page 7 of the assessment order, whereby it was pointed out that the AO himself had assessed the income of the Respondent as Business Income and the AO has disallowed the said settlement charges in the head 'Income from Business or Profession' treating the same as not allowable under the provisions of section 37(1) of the Act. Hence now question whether the same is incurred for the purpose of business/profession does not arise as the same was accepted by the AO. However, the Revenue cannot and has not challenged the correctness of this finding by the AO.

26 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani 34. It was also contention of learned DR that there was a distinction between technical violation vis a vis grave violation. While payments made for technical violations would be allowed, the payments made in case of grave violations could not be allowed. He further submitted that in Reliance Shares and Stock Brokers's (supra) case, the violations were technical violations and in the present appeal, the violations made by the Respondent were grave and more serious in nature and therefore factually different from the decision relied by the Respondent. In this respect we observe that the violations were similar in both the cases. We found that the SEBI had in both the cases initiated action under section 11 of the SEBI Act. It was pointed from Para 4 and 8 of the Consent Order at Page No. 2 and 4of the FPB, respectively, where under it is mentioned that SEBI initiated proceedings under section 11, 11(4) and 11B of the SEBI Act read with Regulations 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations,2003. 35. However, as per para 9 of the order of the Tribunal in case of Reliance Share and Stock Borkers Pvt. Ltd., we found that SEBI has initiated action u/s.11 of the SEBI Act. However, the issue for consideration is not the nature of the alleged offence but, whether there has, in fact, been an offence or a determination by a concerned authority of an offence having been committed. In the facts of the case as accepted by the Revenue in their written arguments [Para 4(b)] there was, at most, a "prima facie finding of the SEBI". SEBI has not held or found that an

27 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani offence (alleged by the AO to be grave) had actually, occurred. The question of the finding becoming by virtue of appellate decisions final so that it is conclusively held that the concerned companies were guilty of an offence does not and cannot, therefore, arise. Consequently, there being no offence, the alleged nature of offence is not and cannot be a relevant factor. In the absence of any finding of an offence having been committed, the allegation of the payment by itself being for an offence and / or by way of penalty cannot apply and there can be no disallowance. 36. It was also contention of learned DR that there was no voluntary consent application made by the assessee and that the action was initiated by the SEBI. Since SEBI initiated action against the violation, it was a payment for violations under the provisions of the SEBI Act and hence not allowable in view of Explanation 1 to section 37 of the Act. Thus he submitted that it was only after initiation of action on the part of SEBI, the consent application was made and the Consent Order was passed by the SEBI. As per our considered view, Consent Order cannot be made without there being initiation of action by the SEBI. The application for consent was voluntary and the same can be demonstrated from the Consent Order [Page No. 2 of the FPB] which reads as under: 5. While the above proceedings were in progress, applicants vide a combined letter dated September 09, 2010 proposed settlement of the aforementioned proceedings through a consent order in terms of SEBI Circular No. EFD/ED/Cir-1/2007 dated April 20, 2007. The Applicants, vide letter dated December 03, 2010, proposed revised consent terms in the matter. The High Powered Advisory Committee (HPAC) constituted by SEBI, considered the facts and circumstances

28 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani of the case, material brought before the committee, SEBI's regulatory remit in the matter, consent terms voluntarily proposed by the applicants and recommended the case for settlement as follows:

29 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani committed certain irregularities and hence the officials recommended for suspension of the assessee for nine months^ which was ultimately reduced to four months.”

30 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani iii) In the assessee's case, suspended trading activity was not a consequence of violation made by the Respondent. The suspension was a part of the voluntary consent terms offered by the assessees. It was not a punishment imposed by SEBI as wrongly alleged by the AO (Para 6.3, Page No. 3-4 of the assessment order). On the other hand in Reliance Shares and Stock Broker's case, the consequence of violation held by SEBI to have been made by the respondent was suspended trading activity. This is evident from Para 4 of Reliance Shares and Stock Broker's case (Page No. 66 of the LPB). Further, in Para 16 of Reliance Shares and Stock Broker's case (Page No. 75 of the LPB), the Hon'ble Tribunal has reproduced the order of the CIT(A) and it is brought out that the consequence of violation made by the respondent in the said case was suspended trading activity. It was further pointed out that in the facts of the present case, in fact, the SEBI had granted an exception in case of Mutual Funds (Para (a) at Page 3 of the FPB) which was not the case in Reliance Shares and Stock Broker's case. 42. Learned AR further invited our attention to Para 7 of the Consent Order (Page 3 of the FPB) wherein the order passing authority has stated that the payment is made without admitting or denying the charges. Likewise, the payment made in Reliance Shares and Stock Broker's case was also without admitting or denying the guilt. Relevant Para 13 from the decision of the Hon'ble Mumbai Tribunal is reproduced as under:

31 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani paper book, more particularly Paragraph 19 of the application which specifies "Terms of Consent Proposal". The Ld Counsel submitted that the assessee has clearly stated that the consent application shall not be construed, in any manner, as admission of the findings or the acceptance of the penalty stated in the order. The Ld Counsel submitted that the assessee has never admitted the irregularities alleged to have been committed by it. Accordingly, the Ld A.R submitted that the sole motive of the assessee in filing the Consent letter is to enable it to carry on its business activities without interruption, which decision has been taken on commercial expediency in the best interest of its business and clients. The Ld A.R, then, invited our attention to page 10 of the paper book, wherein the order passed by the SEBI against the Consent Application. The Ld A.R invited our attention to paragraph 2 of the Consent order which reads as under:— "2. You had vide consent application and letter dated 15th November, 2007 proposed, without admitting or denyins the guilt, to offer Rs.50,00,000/- {Rupees Fifty lakhs only) as an aggregate amount towards settlement charges, legal expenses and administrative expenses in the matter." The Ld A.R further submitted that the SEBI has accepted that the assessee has filed consent application without admitting or denying the guilt. Further it is clearly stated in the Consent Order that the amount of Rs.50.00 lakhs paid by the assessee was towards settlement charges, legal expenses and administrative expenses. Accordingly, the Id A.R contended that the assessing officer was not correct in presuming that the amount of Rs. 50.00 lakhs paid by the assessee was a penalty for infraction of law as specified in the proviso to section 37(1) of the Act. (Page No. 71 of the LPB1 43. Thus, even in this case, the payment was made without admitting or denying the guilt and the payment made by the Respondent was similar to that of the payment in Reliance Shares and Stock Brokers's case. 44. Learned DR also argued that in the present case the payment is nothing but a payment for compounding charges for violation of law. He therefore submitted that the payment made by the assessee was a payment made for violation of provisions of the SEBI Act was a payment for an offence and hence not allowable under section 37(1) of the Act. The Ld.

32 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani DR further contended that provisions of the Act do not permit such payments to be claimed and hence the payment made by assessee is not as per the scheme and intent of the provisions of the Act. In this regard, CBDT Circular No. 772 dated December 23, 1998 is very relevant, wherein the scope of 'provision has been explained as under: 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. 45. Relying on the aforesaid CBDT Circular, we observe that the payment of settlement charges made by the Respondent was neither in the nature of protection money, nor extortion, nor hafta nor bribe. It was also not a payment for a purpose namely, settlement, which can be said to be "an offence" or which can be said to be "prohibited by law". Therefore, 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

33 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani 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 aassessee - 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. 47. Now, we deal with the contention of learned DR with regard to the reliance placed on the decision of Indian Aluminum Co. Ltd. [1971] 79 ITR 514(SC). In the case of Indian Aluminum Co. Ltd. (supra), the assessee has not deducted TDS on certain payment and the ITO has treated as 'assessee in default'. The assessee has claimed the said amount from party and subsequently the said party refused to give. The assessee has written off the said liability and claimed as expenses under the provisions of the Act. The Hon'ble Supreme Court has held that a payment made under statutory obligation, because the assessee was in default, could not constitute expenditure laid out for purposes of its business within meaning of section 10(2)(xv) and hence, same was not allowable under that section. In this regard we observe that under the provisions of the Act, income-tax is not allowable expenditure and therefore question of written off income tax liability is also not allowable expenditure. However, in the

34 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani present case, the expenditure claimed by the Respondent is not in nature of penalty for any default as in the case before the Hon'ble Supreme Court in the case of Indian Aluminum Co. Ltd. (supra). Hence, the facts of the above decision is not applicable in the present case. Now coming to the argument of learned DR, that the reason for filing the consent application and paying the settlement fee / consent charges is the alleged fact that the assessee was apprehensive of the serious consequences of the offence committed by it is without any basis. There is nothing whatsoever to support this contention except the ipsi dixit of the Revenue. The assessee has always submitted that there was no offence. Even the consent application was filed without admitting guilt. There is no finding or order by any authority. It is logical to hold that the assessee was apprehensive of the toll that a long winded litigation - both, in terms of time, cost and hassle as also in terms of reputation -would take. The fact that the consent application proposed by the Respondent was accepted by SEBI also on the footing that the Respondent has paid the settlement "without admitting or denying the charges" indicates that the SEBI was not unaware of the outcome of its case against the Respondent. There is no reason to believe or infer that consent application without admitting guilt amounts to evidence of an offence having been committed. 48. In view of the above discussion, we can safely observe that the detailed findings recorded by CIT(A) are as per material on record an require no interference on our part. Accordingly, there is no infirmity in the order of the CIT(A) for deleting disallowance made by invoking explanation to 37(1) of the IT Act.

35 ITA No.3676/Mum/2016 Shri Anil Dhirajlal Ambani 49. In the result, appeal of the Revenue is dismissed.

Order pronounced in the open court on this 23/03/2018 Sd/- Sd/- (AMARJIT SINGH) (R.C.SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 23/03/2018 Karuna Sr.PS Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. BY ORDER, 6. Guard file. सत्यापित प्रतत //True Copy// (Asstt. Registrar) ITAT, Mumbai