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Income Tax Appellate Tribunal, KOLKATA BENCH ‘SMC’, KOLKATA
Before: Shri P.M. Jagtap, AM]
order : May 24, 2018 ORDER This appeal filed by the assessee is directed against the order of Ld. CIT (Appeals) – 18, Kolkata dated 15.04.2016 and the solitary issue involved therein relates to the disallowance of Rs. 5,00,000/- made by the A.O. and confirmed by the Ld. CIT(A) on account of penalty charges paid to Insurance Regularly and Development Authority “(IRDA)”.
The assessee in the present case is a company which is carrying on the business of insurance broker. The return of income for the year under consideration was filed by it on 13.10.2010 declaring a total income of Rs. 23,43,280/-. In the profit and loss filed along with the said return, a sum of Rs. 5,00,000/- was debited by the assessee on account of penalty charges. In the assessment completed under section 143(3) vide an order dated 23.01.2013, the Assessing Officer
2 Assessment Year: 2010-11 Microsec Insurance Brokers Ltd. disallowed the penalty charges observing that penal expenses are not allowable as deduction as per the Income Tax Act, 1961.
Against the order passed by the A.O. u/s 143(3), an appeal was preferred by the assessee before the Ld. CIT(A) disputing the disallowance of Rs. 5,00,000/- made by the A.O. on account of penalty charges. During the course of appellate proceedings before the Ld. CIT(A), it was submitted by the assessee that the amount of Rs. 5,00,000/- in question was charged by IRDA for the violation of their rules and the same not being for any offence prohibited by law, the disallowance made by the A.O. was not justified. In support of this contention reliance was placed on behalf of the assessee on certain judicial pronouncements.
The submission made by the assesssee did not find favour that the Ld. CIT(A) who proceeded to confirm the disallowance of Rs. 5,00,000/- made by the A.O. on account of penalty charges for the following reasons given in his impugned order: “I have carefully considered the facts of the case and the submission of the assessee and the case laws relied upon. In the case of Prakash Cotton Mills Pvt. Ltd. vs CIT 201 ITR 684, Hon’ble Supreme Court has held that whenever a statutory levy paid by assessee by way of damages or penalty or interest is claimed as an allowable expenditure, the A.O. is required to examine whether it is compensatory or penal in nature. If the levy is compensatory in nature then this may be allowed as expenditure. Keeping this in mind now let us see the nature of payment made by the assessee. During renewal of license IRDA notice that assessee had diverted fixed deposit of 55,00,000/- and bonds of Rs. 15,00,000/- to its sister concern for allowing its sister concern to avail credit facilities from banks. These FDs and Bonds were pledged to IRDA. Hence show cause notice was issued and after considering the reply of the assessee penalty of Rs. 5,00,000/- was levied by IRDA. IRDA has been created by an Act of Parliament and Rules and Regulations framed by IRDA are statutory in nature. The facts
3 Assessment Year: 2010-11 Microsec Insurance Brokers Ltd. of the case also make it clear that penalty of Rs. 5,00,000/- was not compensatory in nature and rather it has been levied for infringement of statutory regulations framed by IRDA. In the case of CIT vs Syndicate Bank 261 ITR 528, Hon’ble Karnataka High Court has held that payments made for infringement of Banking Regulations Act are not allowable. In view of the judgment of the Hon’ble Supreme Court in the case of Prakash Cotton Mills Pvt. Ltd. and the judgment of Karnataka High Court in the case of Syndicate Bank, penalty of Rs. 5,00,000/- paid by the assessee for violations of the rules framed by IRDA are not allowable. Hence addition of Rs. 5,00,000/- is confirmed.”
Aggrieved by the order of the Ld. CIT(a), the assessee has preferred this appeal before the Tribunal.
The learned counsel for the assessee submitted that the amount of penalty of Rs. 5,00,000/- in question was levied by IRDA for non- compliance of Regulation 34(2) of IRDA (insurance brokers) Regulation, 2002. He invited the attention of the bench to Regulation 34(1) and 34(2) and pointed out that there are certain requirements and restrictions which the broker is required to observe and follow. He contended that the non-compliance of this regulation results in levy of penalty and if the non-compliance continues, the license of the broker is liable to be cancelled or suspended. He contended that such non-compliance of the regulations of IRDA by the broker cannot be treated as infraction of any statute or law warranting disallowance. In support of this contention, he relied on the decision of the Division Bench of this Tribunal in the case of M/s. Dayco Securities Pvt. Ltd. Vs DCIT vide its order dated 15.04.2016 in wherein it was held that members of National Stock Exchange are bound to abide by the regulations and bye laws of the National Stock Exchange and violation of the same cannot be treated as violation of a 4 Assessment Year: 2010-11 Microsec Insurance Brokers Ltd. statutory law or rule. He contended that the ratio of the said decision of the Tribunal in the case of M/s. Dayco Securities Pvt. Ltd. is squarely applicable in the present case. As regards the decision of Hon’ble Karnataka High Court in the case of CIT vs Syndicate Bank 261 ITR 528 relied upon by the Ld. CIT(A), he contended that there was violation of statutory provision of Bombay Regulation Act by the assessee and penalty imposed for the same, therefore, was held to be not an allowable expenditure.
The learned DR, on the other hand, contended that the penalty in question levied by IRDA is not compensatory in nature and the same being for violation of certain regulations, it is not an allowable expenditure under the Income Tax Act. He, therefore, strongly supported the impugned order of the Ld. CIT(A) confirming the disallowance made by the A.O. on account of penalty charges.
I have considered the rival submissions and also perused the relevant material available on record. It is observed that the penalty of Rs. 5,00,000/- in question was levied by IRDA for non-compliance of Regulation 34(2) of IRDA (insurance brokers) Regulations, 2002. As pointed out by the learned counsel for the assessee, the assessee company as a broker was required to observe certain restrictions and follow certain procedures as prescribed in regulation 34.There was however a non-compliance on the part of the assessee of the said regulation which resulted in imposition of penalty by IRDA. In the case of M/s. Dayco Securities Pvt. Ltd. (supra) cited by the learned counsel for the assessee, the assessee as a member of National Stock Exchange was bound to abide by rules and regulations and by-laws of 5 Assessment Year: 2010-11 Microsec Insurance Brokers Ltd. the National Stock Exchange. There was however violation of such rules and regulations by the assessee and when the question of allowability of fine imposed by the National Stock Exchange for such violation arose, the Division Bench of this Tribunal held that violation of such rules and regulations could not be treated as violation of statutory law or rule. It was also held by the Tribunal that the fine paid by the assessee for such violation was only for non observation of internal regulation of Stock Exchange and the same could not be equated with violation of statutory rule or law warranting disallowance of fine. In my opinion, the ratio of the decision of Division Bench of this Tribunal in the case of M/s. Dayco Securities Pvt. Ltd. (supra) is squarely applicable to the issue involved in the present case and respectfully following the same, I delete the disallowance made by the A.O. and confirmed by the Ld. CIT(A) on account of penalty charges levied by the IRDA on the assessee.
In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 24th May, 2018.