Stock Exchange Penalties for Procedural Lapses Allowable as Business Expenditure: ITAT Mumbai

ICICI Securities Ltd Vs DCIT (ITAT Mumbai)

Summary: ITAT Mumbai allowed both appeals of ICICI Securities Ltd concerning Assessment Years 2020-21 and 2021-22. For A.Y. 2021-22, the Assessing Officer had disallowed Rs. 2,80,87,838 paid to stock exchanges for bad/short delivery, late reporting, security deposit shortages, fund shortages, client code modification and similar lapses, treating them as penalties hit by Explanation 1 to Section 37(1). The Tribunal held that substantially identical payments had already been considered in the assessee’s earlier cases and were non-statutory compensatory charges for operational and procedural lapses under stock-exchange bye-laws and regulations rather than expenditure incurred for an offence or purpose prohibited by law. Mere description of the payments as “penalties” in the tax audit report could not alter their true character. The Rs. 2.80 crore disallowance was therefore deleted. For A.Y. 2020-21, the Tribunal also deleted penalty under Section 270A arising from disallowance of the assessee’s health and education cess deduction. The deduction had been claimed before the Finance Act, 2022 retrospectively inserted Explanation 3 to Section 40(a)(ii), and the claim was supported at the relevant time by the Bombay High Court ruling in Sesa Goa Ltd. The Tribunal followed its decision in Wellknown Polysters Limited Vs DCIT, holding that a bona fide claim based on prevailing judicial precedent could not attract penalty merely because it subsequently became inadmissible through retrospective legislation. Both appeals were allowed.