Case Law Details
CA Suraj R. Agrawal
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
Brief of the Case:-
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. Similarly, any amount paid by the assessee, in the form of compensation, as a consequence of breach of contract between the two parties, cannot be said to be amount paid for any purpose which is an ‘offence’, prohibited by the law. 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 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
Case Summary:-
Facts of the case:
- The assessee is a closely held company engaged in the business of share/stock broking 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 assessee has paid penalty/fine, levied by the Stock Exchange amounting to Rs.9,08,193/-.
- The AO informed the assessee that in view of Explanation 1 to section 37 of the Act, the aforesaid amount was not allowable as business expenditure.
- It was submitted by the assessee that fines, penalty etc. have been paid for some procedural non-compliances, inadvertently done by the assessee company and therefore, the same could not be strictly construed as an ‘offence’ or something ‘which is prohibited by law’.
- Being aggrieved, the assessee carried the matter to the Learned Commissioner of Income Tax (hereinafter called as “Ld CIT (A)”}, wherein detailed submissions were made by the assessee company. But the Ld CIT (A) was not satisfied and disallowance made by the AO was confirmed. Being aggrieved again, the assessee has filed the present appeal before the tribunal.
Ruling of Honorable ITAT/Court:
- Counsel has taken ITAT through various pages of the paper book to show that the impugned payments have been made on account of routine fines for minor procedural irregularities, in day- to- day working of the assessee company.
- The assessee company is engaged into stock broking 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 assessee company, certain procedural non-compliances are not unusual, for which assessee is required to pay some fines or penalties.
- In ITAT considered view, these routine fines or penalties are “compensatory” in nature; these are not punitive. These fines are generally levied to ensure procedural compliances by the concerned persons. Their levy depends upon facts and circumstances of the case, and peculiarities or complexities of the situations involved. Sometimes elements of discretions of levying authorities are also involved therein.
- On the other hand, 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. Similarly, any amount paid by the assessee, in the form of compensation, as a consequence of breach of contract between the two parties, cannot be said to be amount paid for any purpose which is an ‘offence’, prohibited by the law. 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 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.
- 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 Assessee’s own case, ITAT find that disallowance is contrary to law and the same is directed to be deleted. Thus, Ground is allowed.