Naresh Gupta Vs ACIT (ITAT Jaipur)
The Income Tax Appellate Tribunal (ITAT), Jaipur, considered an appeal filed by the assessee against the order of the Commissioner of Income Tax (Appeals) dated 26.09.2025 arising from the assessment order passed under Section 143(3) of the Income-tax Act, 1961 for the relevant assessment year. The appeal involved three issues relating to disallowance of LIC commission expenses, disallowance of NCDEX margin shortfall charges under Section 37, and disallowance of interest expenditure under Section 36(1)(iii).
The first ground related to the disallowance of ₹10,730 out of total expenses of ₹53,651 claimed against LIC commission income of ₹1,28,651. The assessee admitted that no separate books of account were maintained for the insurance commission business and sought deletion of the estimated disallowance sustained by the CIT(A). The Revenue relied upon the LIC (Agents) Regulations, 2017 and submitted that, in the absence of separate details of first-year and renewal commissions, the estimated disallowance was justified. The Tribunal referred to CBDT Circular No. 648 dated 30.03.1993, which permitted specified deductions where separate books were not maintained. Taking the circular as a guiding principle, the Tribunal observed that the deduction already allowed by the CIT(A) exceeded the amount justified on that basis and held that no further deduction was allowable. Accordingly, this ground was dismissed.
The second ground concerned disallowance of ₹5,37,471 under Section 37 in respect of charges paid to the National Commodity and Derivatives Exchange (NCDEX) for margin shortfall. The assessee contended that the payment was compensatory in nature, arising from contractual obligations with the exchange, and was not a payment for any offence or act prohibited by law. Reliance was placed on several judicial precedents. The Revenue submitted that the assessee had failed to establish that the expenditure was wholly and exclusively incurred for business purposes and was not for infraction of law.
The Tribunal held that margin shortfall charges were compensatory in nature and did not fall within Explanation 1 to Section 37(1). It observed that the charges arose from breach of contractual obligations to maintain margin requirements, did not constitute violation of any statutory law or criminal offence, and were incurred for maintaining NCDEX clearing and settlement lines and conducting commodity derivatives trading. Holding that the expenditure was incurred wholly and exclusively for business purposes, the Tribunal deleted the disallowance.
The third ground related to disallowance of interest expenditure of ₹28,74,727 under Section 36(1)(iii). The Assessing Officer had disallowed 10% of the net interest debited on an estimated basis, observing that the assessee had failed to establish that interest-free funds alone had been used for making interest-free advances. Before the Tribunal, the assessee submitted that unsecured borrowings were utilised entirely for business purposes. It pointed out that interest had been charged on advances made to related parties and that no interest-free advances had been given to unrelated parties. The assessee also relied upon its audited financial statements, showing substantial inventories and sundry debtors, to demonstrate business utilisation of the borrowed funds. It was further submitted that the Assessing Officer had neither identified any specific non-business advance nor rejected the books of account under Section 145.
The Revenue argued that the assessee had not produced date-wise fund flow, cash flow or source-wise utilisation statements to establish exclusive use of interest-free funds.
After examining the audited financial statements, the Tribunal observed that the unsecured loans stood explained by business assets, including inventories and sundry debtors. It found no specific finding that any advance had been made for non-business purposes. The Tribunal further noted that the genuineness of the expenditure had not been doubted, no defects had been found in the books of account, and regular cash books were maintained. It held that requiring a separate cash flow or fund flow statement in such circumstances was unnecessary. Since the disallowance had been made merely on an estimated basis without identifying any diversion of borrowed funds, the Tribunal deleted the addition of ₹28,74,727.
Accordingly, the Tribunal dismissed the first ground relating to LIC commission expenses, allowed the second ground by deleting the disallowance under Section 37, allowed the third ground by deleting the disallowance under Section 36(1)(iii), and partly allowed the appeal. The order was pronounced on 06.07.2026.
Cases Discussed
- Indiabulls Securities Limited vs DCIT (ITAT Delhi), ITA No. 718/DEL/2025 dated 24.10.2025
- DJS Stock and Shares Ltd. vs DCIT (ITAT Mumbai), ITA No. 648/Mum/2022 dated 22.07.2022
- DCIT vs. Edelweiss Financial Advisors Ltd. (ITAT Ahmedabad), (2021) 188 ITD 834
- ITO Vs. M/s. The Stock & Bond Trading Co. (ITAT Mumbai), ITA No. 6459/Mum/08 dated 02.02.2010
- ITO vs. V.R.M. Share Broking Pvt. Ltd., 27 SOT 469
- Master Capital Services Ltd. Vs. DCIT (ITAT Chandigarh), 108 TTJ 389
- ITO vs. GDB Share & Stock Broking Services Ltd. (ITAT Kolkata), 88 TTJ 352
FULL TEXT OF THE ORDER OF ITAT JAIPUR
This appeal is filed by the assessee against the order of the ld. Commissioner of Income Tax, Appeal (in short `CIT(A)’), passed u/s 250 of the Income Tax Act,1961 dated 26.09.2025which has emanated from the order of the ITO, Ward 3, Sriganganagar passed u/s 143(3) of the I. T. Act, 1961 dated 22.03.2016.
2. The grounds of appeal taken by the assessee in the memorandum of appeal in form 36 are as follows:
“1. The Ld. CIT(A) has erred on facts and in law in confirming the disallowance of expenditure of Rs. 10,730/- incurred on earning LIC commission income.
2. The Ld. CIT(A) has erred on facts and in law in confirming the disallowance of Rs.5,37,471/- made by AO u/s 37 of the Act by not accepting the contention of the assessee that penalty levied by NCDEX for margin shortfall is not a payment for an offence OR prohibited by law and thus the same is an allowable business expenditure.
3. The Ld. CIT(A) has erred on facts and in law in confirming the disallowance of interest expenses of Rs.28,74,727/- made by AO u/s 36(1)(iii) of the Act by not appreciating that borrowed funds has been used for business purpose and by incorrectly holding that assessee has not brought any evidence to indicate that only interest free funds have been utilized for giving interest free advances.
4. The appellant craves to alter, amend and modem any ground of appeal.
5. Necessary cost to be awarded to the assessee.
3. The first ground of appeal relates to disallowance of Rs. 10,730/- out of total expenses of Rs. 53,651/- ,being expenses claimed by the assessee in respect of gross LIC commission of Rs.1,28,651/-, received during the year which includes commission earned against new policy as well as on renewal of old ones.
In course of hearing the Ld AR of the assessee admitted the fact that no separate books of accounts are maintained in respect of the insurance commission business, and the ld CIT ( A ) has sustained an addition of Rs.10,730/- ( being 20% of the total expenses Rs.53,651/- claimed by the assessee )on estimate and he prayed for deleting the said addition.
4. The Ld DR pointed out the LIC ( Agents ) Regulations, 2017, and submitted that commissions are paid at prescribed rates on first year commission and on renewal commission and expenses incurred by the agents for earning the same are also variable and in this case since no separate figures are available the estimated disallowance by the Ld CIT(A) is justified and may be sustained.
5. We find that as per the old CBDT circular No 648 dated 30/03/1993, in case of small agents claiming expenses on LIC commission without separate books, are entitled to deduction of 50% on first year commission and 15% on renewal, and where separate figures are not available, adhoc claim of 33% of gross commission are justified. Though the circular being an old one (where the applicability is restricted to gross commission receipts at Rs.60,000/),taking the same as a guiding principle ,in this case where separate figures are not available, we find that 33% of gross is Rs.42,454/- and the Ld CIT(A) has already allowed a deduction of 42,921/-out of the total claim of Rs.53,651/-, which is perfectly in order, and no further deduction is allowable.
6. This ground of appeal of the assessee is dismissed being devoid of merits.
7. The second ground relates to the disallowance of Rs.5,37,471/- made by AO u/s 37 of the Act on the ground that penalty levied by NCDEX for margin shortfall is a penal offence and is not an allowable expenditure.
8. During the course of hearing, the ld. AR of the assessee has submitted as under:-
4. The assessee in the present case paid the amount to NCDEX for margin shortfall. It is a compensatory payment. NCDEX is a public limited company and an online commodity exchange that is regulated by the Securities and Exchange Board of India (SEBI). It was incorporated under the Companies Act and operates as a recognized exchange for trading agricultural and other commodities, serving as an independent marketplace. The payment by way of penalty for margin money shortfall is thus a compensatory payment and is not for any purpose which is an offence or is prohibited by law. Hence, the same cannot be disallowed under explanation 1 to section 37 of the Act. In this connection, reliance is placed on the following cases: –
DJS Stock and Shares Ltd. vs DCIT (Mumbai): ITA No. 648/Mum/2022 dt. 22.07.2022.: Para 4 to 6 of this order is reproduced as under: –
“4. The Learned AR submitted that the assessee is required to maintain margin money with the Stock Exchange. Whenever margin money falls short, the assessee has to make good the same immediately, failing which, the Stock Exchange would levy a penalty upon the assessee. The Learned AR submitted that the said penalty is levied as per the terms and conditions entered with the Stock exchange with its members. It is only a practice of disciplining the members of stock exchange, i.e., it is only a deterrent under the usual business of carrying on the business by the members of stock exchange. The Ld A.R submitted that the said penalty cannot be equated with the penalty levied for infraction of any law and hence proviso to section 37(1) of the Act would not apply to the above said payment. Accordingly he submitted that learned CIT(A) was not justified in confirming the disallowance made by the Assessing Officer. The Learned AR submitted that an identical issue has been considered by the Coordinate Bench of the Tribunal in the case of ITO Vs. Ws. The Stock & Bond Trading Co. (ITA No. 6459/Mum/08 dated 2.2.2010) and the Tribunal has deleted the disallowance by holding that the penalty charges levied by the Stock Exchange cannot be treated to penalty falling within the ambit of proviso to section 37(1) of the Act. The Learned AR submitted that the above said decision of the Tribunal has since been uphold by Hon’ble High Court of Bombay in ITA No. 4117 of 2010 dated 14.10.2011.
5. I have heard learned DR on this issue and perused the record. I noticed that an identical issue has been examined by the Division Bench of the Tribunal and it has been decided in favour of the assessee with following observations:-
“5. Ground No. 8 to 12 raised by the Revenue in this appeal involve a common issue relating to disallowance of Rs. 2,73,693/- made by the A.O. on account of penalty imposed by the stock exchange which stands deleted by the Id. CIT(A).
6. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that a similar issue had come up for consideration before the coordinate Bench of this Tribunal in the case of ITO vs. V.R.M. Share Broking Pvt. Ltd.. 27 SOT 469 wherein it was held that the penalty for failure of margins imposed by SEBI on share brokers by various notifications being risk management oriented, payment towards such penalty does not attract proviso to section 37(1) which is aimed at providing deterrence for infraction of laws of the country. To the similar effect in the decision of Chandigarh Bench of the ITAT in the case of Master Capital Services Ltd. Vs. DCIT, 108 TTJ 389 wherein it was held that fines and penalties paid by the assessee to NSE for trading beyond exposer limit, late submissions of margin certificates and delay in making deliveries of shares due to deficiencies are payments made in regular course of business and not for infraction of law as envisaged in proviso to section 37(1). In our opinion, these decisions of the Tribunal are squarely applicable to the issue under consideration and respectfully following the same, we uphold the impugned order of the ld. CIT(A) deleting the disallowance made by the A.O. on account of penalty paid by the assessee to BSE on violation of the bye laws of the stock exchange. Ground No. 8 to 12 of Revenue’s appeal are accordingly dismissed.”
6. 1 also noticed that the above decision rendered by the Tribunal has since been upheld by Hon’ble High Court of Bombay. In the instant case also penalty charged levied by the SEBI are related to shortfall in the margin money and is not for infraction of any law. Accordingly the said payment cannot be considered as penalty for violation of any law falling within the ambit of proviso to section 37(1) of the Act. Accordingly, following the decision rendered by the Division Bench in the case of M/s. The Stock & Bond Trading Co. (supra), 1 hold that the said amount is allowable as deduction. Accordingly I set aside the order passed by learned CIT(A) on this issue and direct the Assessing Officer to delete the disallowance.”
9. Further, the ld. AR of the assessee has relied on following decisions
- Indiabulls securities limited vs DCIT (Delhi): ITA No. 718/DEL/2025 dt. 24.10.2025;
- DCIT vs. Edelweiss Financial Advisors Ltd. (2021) 188 ITD 834 (ITAT Ahmedabad)
- ITO vs. GDB Share & Stock Broking Services Ltd. 88 TTJ 352 (ITAT-Kol.)
10. The Ld DR relied on the order of the Ld first appellate authority and submitted that the burden lies on the assessee to prove that the expenses was wholly and exclusively incurred for business and the same is not for any infraction of law.
11. We have heard the rival submissions and we are of the opinion that margin penalties are compensatory in nature and they do not violate the explanation 1 of provisions of section 37(1) and are neither an illegal act nor is it a statutory offence. Margin shortfalls are imposed by exchanges for breach of contractual obligations to maintain sufficient funds and does not violate any statutory law and is not a criminal offence. It is required to maintain NCDEX clearing and settlement lines and conduct commodity derivatives trading and as such the same is an expense wholly and exclusively for business purpose, and as such the disallowance made on this ground is hereby deleted.
12. This ground of appeal of the assessee is allowed.
13. The third ground of appeal is against the disallowance of interest of Rs.28,74,727/- claimed u/s 36(1)(iii) of the Act.
14. The Ld AR of the assessee submitted that the above disallowance has been made on an estimate basis by disallowing 10% of the net interest debited in accounts. Referring to the audited financials placed in the paper book the Ld AR argued that the total of unsecured loans as on year end was Rs. 18.70 crores plus secured bank loans was Rs. 5 lakhs) total being Rs.18.75 crores (wrongly mentioned as Rs.20.26 crores in CIT(A) order). The interest paid / payable on unsecured loans was Rs. 6.88 crores ( as per schedule — P of audited financials ) and the interest received / receivable by the assessee from unsecured loans advanced to various parties was Rs. 4.01 crores ( as per Schedule —M of A/F), leaving a net interest balance of Rs. 2.87 crores, claimed as business expenses.
15. He further submitted that out of the said claim the AO has made an estimated disallowance of 10% ( ten percentage ) of the net of interest amounting to 28.74 lakhs, in absence of any evidence furnished by the assessee to indicate that only interest free funds have been utilised for giving interest free advances.
16. The Ld AR further explained that the assessee has given advances to four related parties ( as per schedule contained in page — 29 of CIT ( A ) order) against which interest has been charged / received amounting to Rs.3.06 crores, as reflected and there are no advances given to any unrelated parties without charging interest.
17. He further submitted that the unsecured loans are wholly and fully utilised for the purpose of business, in as much, the closing stock ( inventories) as on year end is 52.09 crores and the outstanding sundry debtors as on year end was Rs.30401 crores, which is indication enough that the entire unsecured borrowings being only Rs.18.70 crores ,are utilised in the business itself including interest charged on late payment for purchase , which also is directly related to business .
18. Moreover, the AO has examined the books of accounts and has not specifically pointed out any party from whom interest has not been charged and has not taken recourse to section 145 of the Act either.
19. As such the Ld AR prayed for deletion of the said addition , which according to him is just an ad hoc disallowance onestimate ,without any basis .
20. Per contra the Ld DR submitted that the assessee has not produced any date wise fund flow or cash flow statement and source wise utilisation statement to establish that the investments were made exclusively from own interest free funds and as such the same remains unsupported for lack of evidence.
21. We have considered the rival submissions and the audited financials, and we find that the total unsecured loans of the assesseeis Rs. 70 crones ( schedule — C of 24/F )and the explanation of the assessee is that the said amount is fully and wholly utilised for business purpose and as evidence thereof he refers to the closing inventories of Rs.5209 crores(as reflected in schedule — F) of audited financials, and also the outstanding sundry debtors ,which together is more than adequate to absorb the entire loan sand there is no specific finding that any advance has been given to any party for non business purpose. Moreover, we also find that genuineness of the expenses are not doubted and no specific defects are found in regular books of accounts in course of assessment proceedings and when regular cash book is available, requirement of separate cash / fund flow is superfluous.
22. As such we are of the opinion that disallowance of Rs. 28.74 lakhs ,on estimate @ 10% of net interest debited in accounts, is not legally justified when it is evident from record that the loan funds are utilised in the business itself, and as such we are not able to sustain the same and the addition is deleted.
23. This ground of appeal is allowed.
24. In the result the appeal of the assessee is partly allowed as indicated above.
Order pronounced on 06.07.2026 under Rule 34(4) of the Income Tax Appellate Tribunal Rules 1963.
