Case Law Details
Brief of the Case
ITAT Mumbai held in the case of Mangal Keshav Securities Limited vs. ACIT that as per the nature of business of the assessee, certain procedural non-compliance are not unusual, for which assessee is required to pay some fines or penalties. In our considered view, these routine fines or penalties are “compensatory” in nature; these are not punitive. Their levy depends upon facts and circumstances of the case, and peculiarities or complexities of the situations involved. On the other hand, being an ‘offence’ would be the one which will arise as a result to commission of an action which is prohibited by law, and, in all the given situations, no element of any consent of the parties involved can bring any change in its legal consequences. Thus, only those payments, which have been made by the assessee for any purpose which is an ‘offence’ or which is ‘prohibited by law’, shall alone would be hit by the explanation to section 37. In the present case, penalties/fines paid only for procedural non-compliance, hence allowed.
Facts of the Case
The assesses is a closely held company engaged in the business of share/stock brooking and is a member of BSE, NSE, is a DP for CDSL & NSDL and Mutual Fund Distribution. During the course of assessment proceedings, it was noted by the AO from the Tax Audit Report in Form No. 3CA, that the assesses has paid penalty/fine, levied by the Stock Exchange amounting to Rs.9,08,193/-. The AO informed the assesses that in view of Explanation 1 to section 37, the aforesaid amount was not allowable as business expenditure. The assesses, in reply, submitted that it has neither undertaken any activities which were in ‘violation’ or ‘offence’ of any law, nor has conducted any activities which were prohibited by law. It was submitted by the assesses that fines, penalty etc. have been paid for some procedural non-compliance, inadvertently done by the assesses company and therefore, the same could not be strictly construed as an ‘offence’ or something ‘which is prohibited by law’. But the AO was not satisfied and aforesaid amount was disallowed by invoking explanation to section 37.
Contention of the Assesses
The ld counsel of the assesses made detailed arguments and reiterated most of the submissions made by the assessee company before the authorities below. In addition to that, he has relied upon the judgment of Hon’ble Tribunal in assessee’s own case, wherein similar dis allowance has been deleted by the Tribunal in assessment year 2007-08 vide order dated 04.11.2010 in ITA No.121/Mum/2010.
Contention of the Revenue
The ld counsel of the revenue relied on the order of lower authorities.
Held by CIT (A)
CIT (a) confirmed the dis allowance.
Held by ITAT
ITAT held that the assesses company is engaged into stock brooking activities and also in financial services which involves substantial compliance requirements with various regulatory authorities e.g. BSE, NSE, CDSL, NSDL, & SEBI etc. In the regular course of the business of the assesses company, certain procedural non-compliance are not unusual, for which assesses is required to pay some fines or penalties. In our considered view, these routine fines or penalties are “compensatory” in nature; these are not punitive. These fines are generally levied to ensure procedural compliance by the concerned persons. Their levy depend upon facts and circumstances of the case, and peculiarities or complexities of the situations involved. Sometimes elements of discretion of levying authorities are also involved therein.
Further an ‘offence’ would be the one which will arise as a result to commission of an action which is prohibited by law, and, in all the given situations, no element of any consent of the parties involved can bring any change in its legal consequences. In other words, under the income tax law, one is required to go into the real nature of the transactions and not to the nomenclature that may have been assigned by the parties. Thus, to decide such issues, we are required to see real substance under the Income Tax Law, and not merely its form. Thus, only those payments, which have been made by the assesses for any purpose which is an ‘offence’ or which is ‘prohibited by law’, shall alone would be hit by the explanation to section 37.
Also we take support from the orders of Hon’ble Tribunal in assess own case for A.Y. 2007-08 in ITA No.121/Mum/2010 dated 04.11.2010. The facts in this year are same. Nature of expenses incurred in the name of fines or penalties are same as have been incurred in assessment year 2007-08. These facts could not be controverted by the Ld DR during the course of hearing. Therefore, relying upon the judgment of Hon’ble Tribunal in assess own case, we find that dis allowance is contrary to law and the same is directed to be deleted.
Accordingly appeal disposed of.
