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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: HON’BLE S/SHRI JOGINDER SINGH (JM), & RAJESH KUMAR,(AM)
Per RAJESH KUMAR, Accountant Member:
This is an appeal filed by the revenue. It is directed against order passed by Ld. CIT(A)-9, Mumbai dated 18.12.2014 for assessment year 2011-12.
Brief facts of the case are that the assessee filed its return of income on 15.9.2011 declaring total income of Rs.3,23,97,806/- which was processed under section 143(1) of the Act and thereafter the case of the assessee was selected for scrutiny and accordingly notices u/s 143(2) and 142(1) were issued and served upon the assessee. Thereafter the assessment was completed under section 143(3) vide order dated 28.1.2014 by assessing the income of the assessee at Rs.3,93,89,870/- by making various additions as stated in para 7 of the assessment order. Aggrieved by the order of the AO, the assessee filed an appeal before the ld.CIT(A) who allowed the appeal of the assessee and now the revenue is in appeal before us aggrieved by the order of ld.CIT(A) on the following grounds: “
1. "On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the disallowance made by the A.O. u/s 37(1) on account of payment made to SEBI for infringement of law, which is a fee for compounding an offence as per clause 19 of SEBI circular No.EPD/ED/Cir-1/2007 dated 20.04.2007" 2. "On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to allow indexation benefit from AY 1998-99 and not from AY 2005-06 in spite of the fact that the shares of BSE were acquired by the assessee in the year 2005-06 only”
3. The first ground of appeal is against the deletion of disallowance made by the A.O. u/s 37(1) on account of payment made to SEBI for infringement of law, which is a fee for compounding an offence.
Brief facts of the case are that during the course of assessment proceedings the AO observed that the assessee had debited Rs.5 lakhs under the head SEBI consent fees and Rs.16,31,704/- towards penalty levied by the NSE for wrong reporting of margin to NSE. The AO was of the view that these were the payments which are made for compounding an offence and therefore issued show cause notice vide ordersheet entry dated 27.12.2013 to show cause as to why these payment should not be disallowed under section 37 of the Act. The assessee replied the same vide letter dated 8.1.2014 which the AO did not find to be satisfactory and convincing and accordingly disallowed an amount of Rs.21,31,704/- on account of consent fees paid and penalty for wrong reporting of margin to NSE.
On appeal before the First Appellate Authority, the ld. CIT(A) has decided the issue in favour of the assessee by observing and holding as under : “2.3 Similar issue was involved in the case of Reliance Share and Stock Brokers (P) in A.Y. 2008-09. The issue before the Hon'ble ITAT was disallowance of consent fees paid to SEBI. The Hon'ble ITAT in dated 22nd October, 2014, has decided the issue in favour of the appellant by holding that consent fees paid was an allowable deduction. 2.4 In view of the above facts and decisions, the disallowance made by the AO amounting to Rs.5,00,000/- and Rs.16,31,704/- is directed to be deleted. The grounds of appeal
are thus treated as allowed.”
6. We have heard both the parties on the issue and perused the material placed before us including the impugned order. We find that the ld. CIT(A) has deleted the above addition by following the decision of Co-ordinate Bench of the Tribunal in the case of Reliance Share and Stock Brokers (P) in ITA No. 274/Mum/2013 (AY-2008-09) dated 22nd October, 2014, in which the similar issue has been decided in favour of the assessee. The relevant part of the above judgement is reproduced below : “14. On consideration of rival submissions, we notice that the case of the Ld A.R was that the amount of Rs.50.00 lakhs was paid by the assessee by taking into consideration the business interest in order to settle the ongoing dispute and according to Ld A.R, the assessee never admitted or accepted the alleged irregularities. Thus, according to Ld A.R, the assessee has not committed any of the allegation made by the SEBI. Hence the amount of Rs.50.00 lakhs paid by the assessee cannot be equated to penalty levied for infraction of law. In the alternative, the contention of the Ld A.R is that the penalties prescribed in sections 15E to 15H are related to technical violations and they cannot be considered as “infraction of law”. On the other hand, we notice that the revenue was mainly carried away by the expression “penalty” used in sections 15E to 15H of the SEBI Act.
15. However, we find force in the contentions of the assessee. The Circular issued by SEBI for “Consent application” clearly specifies that the action taken under section 11 of the Act fall in the category of “administrative or civil action”. Further, order passed by SAT also clearly states that the irregularities alleged against the assessee are “technical violations”. Most of all, the amount of Rs.50.00 lakhs paid by the assessee are not related to the penalty, if any, imposed by the SEBI, rather it was a “Consent Fee” paid by the assessee for settlement of dispute, legal expenses and other administrative charges of SEBI. The said amount was paid clearly specifying that it was paid without admitting or denying the guilt. Hence, in our view, it cannot be said that the assessee has paid the amount of Rs.50.00 lakhs by duly accepting or upon proving the irregularities alleged against it. On the contrary, it is the case of the assessee that it has taken the decision to settle the dispute on commercial expediency and upon business interests.
16. We notice that the Ld CIT(A) has adjudicated this issue in favour of the assessee in another angle. For the sake of convenience, we extract below therelevant observations made by the Ld CIT(A). “6.3 The Appellant further submitted that it may be worthwhile to reproduce the relevant guidelines for Consent Order: "Under the SEBI Act, 1992, Securities Contracts (Regulation) Act, 1956 (SCRA) and the Depositories Act, 1996, SEBI pursues two streams of enforcement actions i.e. Administrative/ Civil or Criminal. Administrative/civil actions include issuing directions such as remedial orders, cease and desist orders, suspension or cancellation of certificate of registration and imposition of monetary penalty under the respective statutes and action pursued or defended in a court of law/tribunal..................” It further provides that, "Consent Order may be passed at any stage after probable cause of violation has been found. However, in the event of a serious and intentional violation, the process should not be completed till
the fact finding process is completed whether by way of investigation or otherwise." 6.4 The Appellant further submitted that most of the irregularities referred to in the Order are procedural or administrative non- compliances of the various provisions of SEBI Act. The SEBI has been given the power by the Parliament of India to pass consent orders under the SEBI Act and the Depositories Act. It has also been specified that in the event of a serious and intentional violation the process should not be completed till the fact finding process is completed. The Appellant's case was decided without waiting for the final fact findings, suggesting that the case was one of routine abnormality. 6.5 The appellant also submitted that the SEBI while accepting the consent proposal of the Appellant has inter alia stated as under: "You had vide consent application and letter dated 15th November, 2007 proposed, without admitting or denying the guilt, to offer 50,00,000/-(Rupees Fifty Lakhs only) as an aggregate amount towards settlement charges, legal expenses and administrative expenses a in the matter. In this regards, we inform you, that the terms proposed by you were examined by the Independent High Powered Advisory Committee (HPAC) and having considered the facts and circumstances of the case, HPAC has recommended that the case may be settled on payment of Rs. 50,00,000,/- (Rupees Fifty Lakhs only). In view of the recommendation of HPAC, SEBI has in principle agreed to the clause' Undertakings(Waivers vide your afore-mentioned consent application." 6.6 The Appellant further relied upon the following judgements to substantiate the same: • Fine and penalties are collected by a stock exchange from its members for various reasons. Where such payments were collected for alleged unfair trading practice or non- business like conduct, it is not a payment for violation of the regulations of- the stock exchange. It -was held, that such amounts cannot be disallowed in Gold Crest Capital Markets Limited v ITO (2010) 2 ITR (Trib) 355 (Mumbai). In coming to the conclusion, the Tribunal discussed the provisions of the Constitution of National Stock Exchange and the regulations applicable to brokers and sub-brokers stipulated by the Securities and Exchange Board of India with reference to which penalties are levied by Disciplinary Action Bench of National Stock Exchange.
The Hon'ble Murnbai Tribunal in the case of VRM Share Broking (P) Ltd, 27 SOT 469 it was held that: "From the perusal of various notifications issued by SEBI, it was apparent that they were issued mainly in the context of the risk management, rather than as a penal provision for punishing the defaulters or deeming the transactions illegal. In view of the same, it was opined that with or without the provisions of margin money the loss could not be held as illegal loss denying the benefit of set off of same against the income or allowing the same to carry forward to the later years. The order of the Commissioner(Appeals') therefore did not call for any interference. [Pare 6] "The amount paid was a penalty levied for violation of the margins imposed by the SEBI on the share brokers. Front the notifications issued by the SEBI, it was found that such margins were imposed in order to reduce the risk components and, therefore, those were basically risk management oriented penalties, which were routine in nature. It was also found that those violations were offered by payment of penalty as in the instant case. Therefore, impugned order of the Commissioner (Appeals) did not call for any interference. [Para 10] CASES REEFERED TO CIT v. Gwalior Rayon Silk Manufacturing (Wvg.) Co.Ltd [1999] 237 ITR 253/102 Taxman 433 (Born.) (para 5) and consolidated Coffee Ltd. v. Agricultural Income-tax Officer [2001] 248 ITR 417 (SC)" - The Hon'bie ITAT in the case of Kaira Can Company Ltd. (32 DTR 485) has held that Payment, made under SEBI Regulation scheme, 2002 for failure to make disclosure as required under SEBI (Substantial Acquisition of shares and Takeovers) Regulations 1997 could not be treated as penalty as it is a payment for regularizing the default committed hence such payment can not be disallowed by invoking explanation to s. 37(1)., The Hon'ble Apex Court in the case of CIT Ahmedabad Cotton Mfg. Co. Ltd. [1993] 205 ITR 163 has held that, “Penalty paid under option conferred on assessee under the concerned law or scheme itself is deductible – What needs to be done by an assessing authority under the Income-tax Act in examining the claim of an assessee that the payment made by such 'assessee was a deductible expenditure under section 37, although called penalty, is to see whether the law or scheme under which the amount was paid requires such payment to be made, as penalty or as something akin to penalty, that is imposed by way of punishment for breach or infraction of the law or the statutory scheme. If the amount so paid is found to be not a penalty or something akin to penalty due to the fact that the amount paid by the assessee was in exercise of the option conferred upon him under the very law or scheme concerned, then one has to regard such payment as business expenditure of the assessee, allowable under section 37, as an incident of business laid out and expended wholly and exclusively for the purposes of the business. If such payment by the assessee is that which is made in exercise of the option given to such assessee by the law or the statutory scheme, there arises no need for assessing authority to go into the question whether the payment could be regarded as that made as a measure of business expediency, for it cannot ignore the fact that the law or the statutory scheme enables incurring of such expenditure in the course of assessee's business - CIT v. Ahmedabad Cotton Mfg. Co. Ltd. 71 Taxman 56/[1994] 205 [ER 163 (SC). The Hon’ble Apex Court in the case of Prakash Cotton Mills (P) Ltd V/s CIT (1993) 201 ITR 684 has been held that, “whenever any statutory impost paid by an Assessee by way of damages or penalty or interest is claimed as a allowable expenditure under section 37(1) of the Act, the assessing authority is required to examine the scheme of the provisions of the relevant stature providing for payment of such impost notwithstanding the nomenclature of impost as given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) wherever such examination reveals the concerned impost to be purely compensatory in nature." The Hon'ble Bombay High Court (ITA NO.4117 OF 2010) in the case of M/s. The Stock and Bond Trading Company, has held that, "As regards the second question is concerned, the finding of fact recorded by the CIT (A) and upheld by the ITAT is that payment made by the Assessee to the Stock Exchange for violation of their regulation are not an account of an offence or which is prohibited by law. Hence, the invocation of explanation to section 37 of the Income Tax Act, 1961 is not justified. In our opinion, in the facts and circumstances of the present case, no fault can be found with the decision of the [TAT. Accordingly, the second question cannot be entertained." 6.7 The Appellant submitted that in case of CIT 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, inter- alia, 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.” 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.
We find from the above decision of the Co-ordinate Bench of the Tribunal that the issue decided by the Tribunal and issue in hand are same. Therefore, respectfully following the ratio laid down in the said decision we uphold the order of the ld.CIT(A) by dismissing the ground of the revenue.
The issue raised in the second ground of the appeal is against the direction of the ld.CIT(A) in direction to AO to allow indexation benefit from AY 1998-99 and not from AY 2005-06 in spite of the fact that the shares of BSE were acquired by the assessee in the year 2005-06 only. 9. Facts of the case are that the assessee during the year has earned long term capital gains of Rs.51,59,561/- on the sale of 70694 shares of BSE Ltd for a total consideration of Rs.2,26,92,774/- and after claiming deduction of indexation cost of acquisition of Rs.1,75,33,213/- by taking cost of shares at Rs.81,62,438/- in the year 1997-98 which was the cost of acquisition of BSE card. In the month of August 2005, the BSE were underwent demutualization and corporatization under which the BSE card holders were allotted shares at Rs.1 each wherein the assessee was also allotted shares. While computing the long term capital gain, the assessee has taken the cost of acquisition at Rs.81,62,438/- as the cost of acquisition of 70694 shares and indexed the same. During the course of assessment proceedings, the AO vide order sheet entry dated 17.1.2014 asked the assessee as to why the period of holding of these shares should not be taken from the assessment year 2005-06 instead of assessment year 1997-98 which was responded by the assessee by stating that the period of holding of the card of BSE which was taken by the AO from 2005-06 has also to be taken into account as per the provision Clause (xiii) of section 47. The AO considered the reply of the assessee and rejected the same on the ground that the assessee became the owner of the shares in the assessment yea 2005-06 and allowed indexation of cost of acquisition from the assessment year 2005-06. Aggrieved by the order of the AO, the assessee preferred an appeal before the ld.CIT(A) who allowed the appeal of the assessee vide para 3.2 and 3.3 of the appellate order as under : “3.2 I have considered the facts of the case, assessment order passed by he AO and the submission made by the appellant. It is seen that the issue of benefit of indexation was also involved in the case of M/ s. G. Das Capital Markets Pvt. Ltd. in A.Y. 2008 -09 decided by me in Appeal No. CIT (A)-8/Cir.4/374/2010-11, dated 20.02.2013. While deciding the issue, I have made the following observation :- "The Finance Act, 2003 also bring in the statute new sections such as 47(xiiia) and 55 (2)(ab). On the basis of the provisions of the Act as discussed in the foregoing paras, I am of the considered view that there is a no merit in the argument of the AO that the sale of the BSE shares be treated as short term capital gain, the law is very clear that since the holding is more than a year the sale of shares be treated as long term capital gain and the AO is directed to treat the receipts on sale of shares as long term capital gain. There is a considerable force in the arguments of the AR of the appellant that that the cost of indexation should be given from the date it acquired the membership card and not from the date of the scheme of demutualization/ corporatization which has come into being in FY 2005-06. The scheme of the Act is very clear and the same has been specifically clarified by the Explanation 1 to Sec 2(42A) of the Act. In view of the foregoing discussion even though the new asset came into being through a governmental scheme, the cost of indexation has to be allowed with effect from date of original holding and the prior period has to be taken into consideration while computing the capital gain. The object of giving relief to an assessee by allowing indexation is with a view to offset the effect of inflation. As per the CBDT Circular No. 636 dt. 31st Aug., 1992 (1992) 198 ITR (St) 1, a fair method of allowing relief I71J way of indexation is to link it to the period of holding the asset. The said circular further provides that the cost of acquisition and the cost of improvement have to be inflated to arrive at the indexed cost of acquisition and the indexed cost of improvement and then deduct the same from the sale consideration to arrive at the long-term capital gains. If indexation is linked to the period of holding and the law specifically allowed the inclusion of the prior period of holding despite the assets undergoing a change, the same is thus required to be included. In view of the forgoing the appellant's appeal is allowed." 3.3 Against the order passed by me in the case of G. Das Capital Markets Pvt. Ltd. in A.Y-2008-09, the department preferred an appeal before the Hon'ble IT AT, Mumbai and Hon'ble ITAT, Mumbai G Bench Mumbai in dated 28-08.2014 has upheld the order passed by me. As the issue in the present appeal is identical to the one decided by the Hon’ble ITAT “G” Bench in the case of G Das Capital Markets pvt ltd in AY 2008-09, the AO is accordingly directed to allow indexation benefit in line with the decision of the Hon’ble ITAT in the case of G Das Capital Markets Pvt Ltd in AY 2008-09. The ground of appeal
is thus allowed”
10. We have heard the rival contentions and perused the material placed before us including the orders of authorities below and the case law relied upon by the assessee. We find from the order of ld. CIT(A) that the appeal of the assessee has been allowed by the First Appellate Authority on the basis of ratio laid down in the case of G Das Capital Markets Pvt.Ltd in ITA No.3187/Mum/2013 (AY-2008-09) dated 28.8.2014. The relevant part of the Tribunal order, for the sake of brevity, we reproduce below : “12. We have considered rival contentions and found that share allotted to the assessee by BSE in lieu of its membership card was sold by the assessee during the year under consideration. The long term capital gain arose thereon was computed by the AO by taking the WDV of membership 15 card so allotted. The CIT(A) deleted the addition so made by observing that u/s.55(2)(ab) was introduced by Finance Act, 2001, according to which in case of sale of capital asset being equity share allotted to the shareholder of a recognized stock exchange in India under scheme of demutualization, shall be the cost of acquisition of its original membership of the exchange. The CIT(A) found that the original cost of acquisition of membership card at Rs.91,23,000/-. Accordingly, the CIT(A) directed the AO to recomputed the capital gain on sale of shares of BSE by taking the cost of acquisition at Rs.91,23,000/- and allowing indexation thereon as per provisions of law. Hence, we do not find any infirmity in the order of CIT(A) for directing the AO to recompute capital gain by taking cost of acquisition at Rs.91,23,000/-.”
11. From the perusal of the above decision, we find that an identical issue has been decided by the Co-ordinate bench of the Tribunal. The facts being the same in both the cases, we find that the ld.CIT(A) has rightly allowed the appeal of the assessee in view of the said decision. We, therefore, respectfully following the same uphold the order of the ld. CIT(A) on this issue.
Resultantly, the appeal of the revenue stands dismissed.
The above order was pronounced in the open court on 20th Dec,2016. Sd sd (JOGINDER SINGH) (RAJESH KUMAR) न्याययक दस्य/Judicial Member ऱेखा दस्य/Accountant Member Mumbai: 20th Dec,2016. SRL, Sr. PS