DCIT Vs Shri Anil Dhirajlal Ambani (ITAT Mumbai)
Facts in brief are that the assessee is an individual having proprietorship concerns namely M/s. Indian Renewable Energy Foundation and M/s. Shri. Anil Dhirajlal Ambani. The assessee has filed his return of income for the year under consideration on 28/9/2011 declaring total loss at Rs. 43,22,11,483/-. The Return of Income was processed under section 143(1) and notice under section 143(2) of the Act was issued and duly served on the assessee. Thereafter, case was selected for scrutiny. During the course of assessment proceedings, the Assessing Officer observed from the accounts that the assessee had claimed an expenditure of Rs. 50,00,00,000/-being settlement charges against the income by way of ‘commission1and ‘sitting fees’ received from M/s. Reliance Communication Ltd. (RCL) and from M/s. Reliance I Infrastructure ltd (RIL), M/s. Reliance Natural Resources Ltd (RNSL) etc. During the course of assessment proceedings, the assessee was asked to file complete details of such ‘settlement charges’ along with necessary supporting documents. In response, the assessee made written submissions and also submitted a copy of ‘consent order1passed by ‘Securities & Exchange Board of India’ . Assessing Officer perused the 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 amount u/s, 37(1) and added the same to the total income of the assessee.
Relying on the aforesaid CBDT Circular No. 772 dated December 23, 1998, 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 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 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 1 0(2)(xv) and hence, same was not allowable under that 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 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.
FULL TEXT OF THE ITAT JUDGMENT
This is an appeal filed by the Revenue against the order of CIT(A)- 8, Mumbai dated 25/02/2016 for A.Y.201 1-12 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 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. Rival contentions have been hard and record perused. Facts in brief are that the assessee is an individual having proprietorship concerns namely M/s. Indian Renewable Energy Foundation and M/s. Shri. Anil Dhirajlal Ambani. The assessee has filed his return of income for the year under consideration on 28/9/2011 declaring total loss at Rs. 43,22,11,483/-. The Return of Income was processed under section 143(1) and notice under section 143(2) of the Act was issued and duly served on the assessee. Thereafter, case was selected for scrutiny. During the course of assessment proceedings, the Assessing Officer observed from the accounts that the assessee had claimed an expenditure of Rs. 50,00,00,000/-being settlement charges against the income by way of ‘commission1and ‘sitting fees’ received from M/s. Reliance Communication Ltd. (RCL) and from M/s. Reliance I Infrastructure ltd (RIL), M/s. Reliance Natural Resources Ltd (RNSL) etc. During the course of assessment proceedings, the assessee was asked to file complete details of such ‘settlement charges’ along with necessary supporting documents. In response, the assessee made written submissions and also submitted a copy of ‘consent order1passed by ‘Securities & Exchange Board of India’ . Assessing Officer perused the 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 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 3 7(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:
