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

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.

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 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 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.

As per learned DR, reliance placed by the Ld.CIT(A)-8 in the case of Reliance Share 85 Stock Brokers (P.) Ltd. is misplaced. This is because in that case there is clear finding by the Securities Appellate Tribunal (SAT) on the basis of which the consent order was passed by the SEBI, that the violations in that case were technical in nature. In this case, as demonstrated in detail, the violations are not only serious and grave, but also are of the nature of deceit and fraud upon the investors/shareholders. Thus, the ITAT decision in the case of Reliance Share & Stock Brokers (P.) Ltd., is indeed well distinguishable since the very nature of the infraction of Law are extremely different from the case at hand. In that case, the breach of Law is technical whereas here it is serious and fundamental violation.

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 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:

While concluding the appeal, the Hon'ble Tribunal has noted various aspects which are reproduced as under: "22. However, the contention of the learned counsel for the assessee is that the payment has not been made by the assessee under s. 15A of SEBI Act. According to him, the payment was under an option given under the Scheme of 2002 and therefore, such payment cannot be said to be either as a penalty or akin to penalty. Hence, no disallowance could be made as per the decision of the apex Court in the case of Ahmedabad Cotton Mfg. Co. Ltd & Ors. (supra). After going through the scheme, we find force in the contention of the learned counsel for the assessee for the reasons given hereafter. In order to appreciate the controversy, it would be appropriate to reproduce the relevant provisions of the scheme as under: "SEBl Regularization Scheme, 2002 for non compliance with regulations 6 and 8 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 In terms of Chapter II of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as 'the Takeover Regulations, 1997'), certain categories of persons are required to disclose their shareholding and/or control in a listed company to that company. Such companies, in turn, are required to disclose such details to the stock exchanges where shares of the company are listed. It has been observed that many listed companies and/or their promoters/shareholders have either not complied with at 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 :

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."

It was also argued by learned AR that tax authorities cannot arrive at determination under other laws and must accept the finding of the 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... "

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

Reliance was also placed on the ruling in the case of CIT v. Delhi Safe Deposit Co. Ltd. (133 ITR 756) (SC) (Page No. 39 to 45 of the LPB) wherein it was held that expenditure incurred to save business reputation is an admissible expenditure. The relevant extract of the decision is reproduced as under:

We have considered rival contentions and carefully gone through the orders of the authorities below. We have also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us, in the context of factual matrix of the case.

From the record we found that the respondent is an individual having proprietorship concerns namely M/s. Indian Renewable Energy Foundation engaged in generation of wind energy and M/s. Shri. Anil Dhirajlal Ambani engaged in the profession of promoting and controlling companies and acting as a company director. During the previous year 2010-11, the respondent claimed an expenditure of Rs. 50 Crores being the settlement charges paid to the Securities Exchange Board of India (SEBI) pursuant to Consent Order dated January 14, 2011 passed by the SEBI. 25. The said expenditure was claimed against the Professional Income by way of 'commission' and 'sitting fees' received by the Respondent from 'Reliance Communications Ltd.' (RCL), M/s. Reliance 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 Shri Anil Dhirajlal Ambani March 2009 and thereby misusing the SEBI (Foreign Institutional Investors) Regulations, 1995.

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.

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 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').

By the impugned order, the Commissioner of Income-tax (Appeals) allowed the respondent's appeal. The Ld. CIT(A) considered whether the payment of consent settlement to SEBI by the respondent constitutes expenditure incurred for any purpose which is an offence or which is prohibited by law. The Ld. CIT(A) considered the application for consent dated 9.9.2010 filed before SEBI. Item 10 of the Undertaking has stated that: "I neither admit nor 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 IAO as settlement of the issues contained in this application, in alliance with the consent terms agreed by me ".

From the record we found that 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 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 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.

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).

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.

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 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.

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 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:

It is clear from the above extract of the Consent Order that the application for consent terms was voluntarily made by the assessee and the contention of the Ld. DR that there was no voluntary application made by the assessee is factually incorrect.

It was also argument of learned DR that in Reliance Shares and Stock Broker's case (supra) no such action was initiated by the SEBI against the respondent. In this regard Para 9 of the order passed in Reliance Shares and Stock Brokers is very much relevant and reads as under: “9. The next issue relates to the disallowance of Consent fee of Rs. 50.00 lakhs paid by the assessee. The Ld D.R submitted that the assessee has penalty for violation of the provisions of SEBI Act, i.e., the assessee has not followed the various Rules prescribed under the Act. He further submitted that the Consent order passed by the SEBI shall not change the character of violation or penalty initially levied by the Board. On the contrary, the Ld Counsel appearing for the assessee submitted that the SEBI had initiated the action against the assessee in connection with certain technical violations. Such action has been initiated by virtue of powers given to SEBI to take certain administrative or civil action. The Ld A.R invited our attention to paragraph 61 of the order dated 11-12-2006 passed by the Securities Appellate Tribunal (SAT) , wherein the SAT had observed that the violations are technical in nature. In this regard, the Ld A.R carried us through the Securities and Exchange Board of India Act, 1992, more particularly to section 11 of the Act, which elaborates the Powers and Functions of the Board. The Ld Counsel submitted that the Board has the power to regulate the working of stock brokers etc., levy fees or other charges from them and take the measures specified in sec. 11(4) of the above said Act in the interests of investors or securities market. The actions specified in sec. 11(4), inter alia, are that the Board may restrain persons from accessing the securities market; direct any intermediary or any person associated with the securities market in any manner not to dispose of or alineate an asset forming part of any transaction which is under investigation etc. The Ld Counsel submitted that the assessee herein was alleged to have 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.”

Thus, it is clear from the above that in Reliance Shares and Stock Broker's case, SEBI did initiate action on the assessee, and, in fact, passed an order levying a punishment. The assessee had appealed against the said Order and filed for consent during the pendency of appeal. The pendency of appeal was the basis for the ITAT to hold that there was no offence, and the settlement charges were not by way of penalty.

Thus, we observe that facts of the issue in the present appeal are exactly similar to the facts in the case of Reliance Shares and Stock Brokers (supra) decided by the Tribunal. 41. After carefully gone through the decision of the ITAT in the case of Reliance Shares and Stock Brokers (supra), we observe following similarities. i) There was a consent order passed by the SEBI in both the cases; ii) In Respondent's case, action was initiated by the SEBI under section 11 of the SEBI Act (Para 8, Page No. 4 of the FPB). Attention was invited to Para 9 & 12 of Reliance Shares and Stock Broker's case (Page 69-71 of the LPB) wherein the AR of the respondent submitted that even in Reliance's case (supra), SEBI initiated action against under section 11 of the SEBI Act.

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:

The Ld Counsel then invited our attention to the Consent application filed by the assessee, which is placed at pages 13-32 of 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.

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 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.

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.

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 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.

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.