INTEREST ON PENALTIES PAYABLE FROM THE DEADLINE UNDER SECTION 28A OF SEBI ACT, NOT FROM THE DEMAND NOTICE

Objects of SEBI Act

The Securities and Exchange Board of India Act, 1992 (‘SEBI Act’ for short) was primarily enacted-

• to protect the interests of investors in securities;
• to promote the development and regulation of the securities market; and
• to address matters incidental thereto.

The above objects also include, but are not limited to,-

• preventing fraudulent activities and malpractices in trading;
• guiding investors through the mobilisation and allocation of resources;
• ensuring safety in investments by prohibiting insider trading;
• curtailing price rigging, promoting fair practices in the trading of securities and stocks; and
• regulating financial intermediaries through the creation of codes of conduct for take overs, as well as conducting inquiries and audits of the stock market.

To achieve the above objects, the Securities and Exchange Board of India (‘Board’ for short) takes cognizance of offences committed by companies and their directors and initiates action by way of levying penalties, suspending trading privileges, or recommending imprisonment. A company, though a juristic person, capable of suing and being sued in its own name, can be inflicted with punishments of penalty or suspension from trading, but cannot be punished by imprisonment.

Penalties

Chapter VI A of the SEBI Act provides for the imposition of penalties for contravention of the provisions of the SEBI Act and Rules made thereunder and for adjudication of the same.  Sections 15A to 15HB of the Act provide for the imposition of penalties.   The Adjudicating Officer sends notices to the persons on whom penalties are imposed, directing them to pay the penalties within the date mentioned in the demand.  If the penalty is not paid within the time stipulated in the demand notice, the Recovery Officer, under Section 28A will initiate recovery proceedings. 

The provisions of sections 220 to 227, 228A, 229, 232, the Second and Third Schedules to the Income-tax Act, 1961 and the Income-tax (Certificate Proceedings) Rules, 1962, as in force from time to time, in so far as may be, apply with necessary modifications as if the said provisions and the rules made thereunder were the provisions of this Act and referred to the amount due under this Act instead of to income-tax under the Income-tax Act, 1961.

Payment of interest on penalties not paid

If the penalty is not paid within the time stipulated in the demand notice, interest will be paid along with the penalty.  Explanation 4 to Section 28A of the Income Tax Act, 1961 provides that the interest shall commence from the date the amount became payable by the person.

The above said provision for charging interest has been confirmed by the Supreme Court in ‘JAYKISHOR CHATURVEDI & ETC. Versus SECURITIES AND EXCHANGE BOARD OF INDIA - 2025 (7) TMI 1011 - Supreme Court.

In the above said case, the appellants are the promoter-directors Brijlaxmi Leasing and Finance Limited, a company limited by shares, listed on the Bombay Stock Exchange.  The appellants are engaged in providing various financial services, including lending, loan syndication, advisory, and portfolio management, among others. The appellant came up with an Initial Public Offer for fully paid-up share capital of 56,48,500 shares of face value of Rs.10/- each. The fully paid up 5,64,85,000 shares of the company were split from Rs.10/- to Re.1 each from 30.06.2005.

The Board conducted examination of scrips of the company.  SEBI found that the promoters and directors of the company purchased shares of the company on various dates between October 2012 and July 2013 in violation of the provisions of Regulation Nos.13(4) and 13(4A) read with 13(5) of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (‘Regulations’ for short).   The Adjudicating Officer, after issuing notice to the company and personally heard, passed adjudication orders on 28.08.2014 under section 15-I of the SEBI Act read with Rule 5 of the SEBI Rules, 1995, imposing penalty on the appellants.

The appellants, in this case, filed appeal before Securities Appellate Tribunal (‘SAT’ for short) challenging the order of Adjudicating Officer.  SAT dismissed these appeals.  The appellants filed an appeal before Supreme Court, challenging the order of SAT.  The Supreme Court upheld the quantum of penalties imposed on the appellants.  Thus, the order of Adjudicating Officer attained finality.

Thereafter, the Recovery Officer issued demand notices on 13.05.2022 directing the appellants to pay penalties along with interest @ 12% per annum from 28.08.2014 to 13.05.2022.  The appellants failed to pay the same amount. Therefore, the Recovery Officer issued notice to attach the bank accounts etc., of the appellants either singly or jointly with any other persons held with the bank.  The Recovery Officer also attached the demat accounts of the appellants.

Being aggrieved against the said order, the appellants filed an appeal before SAT.  The SAT dismissed all the three appeals.  Therefore, the appellants filed the present appeals before the Supreme Court.   The appellants contended the following before the Supreme Court-

• The Recovery Officer of SEBI exceeded the powers vested under section 28A of the SEBI Act by imposing retrospective interest computed from the date of the original adjudication orders dated 28.08.2014 under section 15-I of the SEBI Act, despite the absence of any provision for the imposition of interest in the said order.
• The scheme of recovery proceedings under the SEBI Act is governed by Section 28A read with Sections 220 to 227, 228A,229, 232, along with the Second and Third Schedules to the Income Tax Act, 1961, and the Income Tax (Certificate Proceedings) Rules, 1962.
• Section 220(2) of the Income Tax Act, 1961, in unambiguous terms, stipulates that interest would be imposable at the rate of 1% per month after the 30^th day from the date of the demand notice as it stood prior to insertion of Explanation– 4 to Section 28A, which came into force on 21.02.2019.
• Prior to the insertion of Explanation – 4 to Section 28A of the SEBI Act, interest was to be levied in accordance with Section 220 of the Income Tax Act, 1961 – that is, after 30 days from the issuance of the notice of demand, and not from the date the amount became payable by the person.
• The notice of demand dated 13.05.2022 issued under section 28A of the SEBI Act by the respondent comprised the penalty amount imposed along with interest at 12% p.a. computed from the date of the adjudication orders.
• The original adjudication orders dated 28.08.2014 imposed only a penalty and did not award any interest. Therefore, the Recovery Officer of SEBI exceeded his jurisdiction by computing interest on the penalty amount at 12% per annum from the date of the adjudication orders, when such order did not direct the payment of any interest.
• The demand notices, in essence, amount to a rewriting of the original adjudication orders, which had already attained finality.
• Hence, interest on the penalty would be leviable only at the rate of 1% per month from 13.05.2022, i.e., 30 days after the date of the demand notices issued by the respondent, and not from 28.08.2014, the date of the adjudication orders.
• The insertion of Explanation - 4 to Section 28A of the SEBI Act, which came into effect from 21.02.2019, cannot be applied retrospectively, as it alters the legal position as it stood earlier by introducing provisions relating to the levy of interest.
• The imposition of interest is a matter of substantive law, and therefore, cannot have retrospective application.
• The levy of interest shall be computed in accordance with the plain language of Section 220(2) of the Income Tax Act, 1961 i.e., after 30 days from the date of notice of demand.
• The Supreme Court in Dushyant N. Dalal And Another Versus Securities And Exchange Board of India - 2017 (10) TMI 149 - Supreme Court, upheld the levy of interest in equity as a principle of law, in the absence of express statutory provisions for interest.
• It is trite law that the exercise of equity cannot override or violate express statutory provisions; and the equity jurisdiction may be invoked only where the law is silent or does not operate in the field.

In view of the above, the appellants prayed that these appeals be allowed by setting aside the levy of interest at 12% p.a. charged from 28.08.2014, as well as the recovery certificates issued by the respondent and the notices of attachment issued in pursuance thereof.

SEBI contended the following before the Supreme Court-

• The Supreme Court in ‘Dushyant N. Dalal’ (supra), affirmed the authority of SEBI to levy interest, including on penalty amounts, pursuant to Section 28A of the SEBI Act read with Section 220 of the Income Tax Act, 1961.
• The Supreme Court further clarified that the provision for levying interest embodies both substantive and procedural elements of law, thereby enabling SEBI to recover interest from the date on which the liability originally arose, in consonance with principles of equity and the Interest Act, 1978.
•  The cause of action arose on 28.08.2014, i.e., upon the imposition of penalties by the Adjudicating Officer of SEBI, on each of the appellants, accompanied by a direction to effect payment within 45 days from the date of receipt of the adjudication orders.
• Section 220(1) of the Income Tax Act, 1961 does not contemplate the issuance of any independent notice of demand and the amount specified in such notice shall be paid within 30 days, failing which interest at the rate of 12% per annum becomes payable under Section 220(2) on the amounts specified therein, calculated from the expiry of the period prescribed under Section 220(1).
• Since Section 156 of the Income Tax Act is not incorporated into Section 28A of the SEBI Act, the expression ‘notice of demand’ referred to in Section 220(1), for the purposes of recovery under the SEBI Act would be referrable to the demand raised by SEBI.
• In the instant case, the direction issued by the Adjudicating Officer of SEBI in the adjudication orders dated 28.08.2014, requiring payment of penalties by the appellants within 45 days from the receipt of the said orders, would constitute the ‘notice of demand’ contemplated under section 156 of the Income Tax Act.
• Since the appellants failed to pay the penalty the levy of interest from 28.08.2014 until the date of payment is fully warranted and justified as per the applicable statutes and the settled legal position.
• Section 28A of the SEBI Act makes the provisions of Sections 220 to 227, 228A,229, 232 and the Second and Third Schedules to the Income Tax Act, 1961 and the Income Tax (Certificate Proceedings) Rules, 1962 apply “with necessary modifications” as if the said provisions and Rules made thereunder were the provisions of the SEBI Act.
• The appellants had unsuccessfully challenged the imposition of the penalty before both SAT and Supreme Court. Therefore, they cannot now contend that the cause of action for payment of the penalty arose only on 13.05.2022, when notice was issued by the Recovery Officer of SEBI.
• There is no merit in the present appeals and the same are liable to be dismissed.

The Supreme Court considered the submissions of the parties to the present appeal.  The Supreme Court framed the following questions to decide the case-

• Whether interest on penalties imposed by the Adjudicating Officer is payable by the appellants? if so,
• from which date – whether from the date of the adjudication orders passed by the Adjudicating Officer or the demand notices issued by the respondent?

The Supreme Court analysed the provisions of SEBI Act in regard to the penalties (from Section 15A to 15HB) and adjudication and Section 28A, which was inserted by Securities Laws (Amendment) Act, 2014, dated 22.08.2014 came into effect from 18.07.20123.  Section 28A of the SEBI Act prescribes the procedure for the recovery of penalties.  The Supreme Court also analysed the provisions of Income Tax Act, 1961 that are incorporated into SEBI Act, viz. Section 220, Section 156

The Supreme Court observed that the Recovery Officer, for the purpose of recovering the penalties, in compliance with the provisions of Income Tax Act, 1961, that are incorporated into SEBI Act, shall serve a notice of demand upon the person from whom the penalty is recoverable.  Section 220 of the Income Tax Act deals with the period within which the demand made under Section 156 is to be paid. Section 156, by itself, does not specify any period within which the payment is to be made.   Section 28A is a substantive law insofar as the levy of interest. The adjudication is conducted as per the mechanism outlined under SEBI Act and the rules framed thereunder. Notably, the provisions of the SEBI Act or its rules do not mandate the issuance of a separate demand notice before recovery. Adjudication amounts to a crystallization of liability, and the demand is a natural sequitur. Therefore, there is no corresponding requirement for issuance a separate notice of demand seeking payment of the amount determined under the adjudication order. The adjudication authority is well within his powers to fix a period for payment of the amount specified in the adjudication order, and upon default, the liability to pay interest becomes inevitable.

The Supreme Court observed that in the present case although the original adjudication orders dated 28.08.2014 did not expressly mention interest, the liability to pay interest arises as a matter of law by operation of section 28A read with section 220 of the Income Tax Act.   The appellants did not pay the penalty within 45 days from the date of notice as stipulated in the demand notice.  The appellants paid the penalty after 9 years.  It is a settled principle that statutory dues not paid within the prescribed time attract statutory interest, irrespective of whether such interest was specifically mentioned in the original order or not.   The enabling provision to recover interest was already in vogue when the adjudication order was passed. Accordingly, the appellants are liable to pay interest at 12% per annum on the unpaid penalty amounts for the period of delay.  Therefore, the Supreme Court held that the contentions of the appellants that interest cannot be levied retrospectively is misplaced. 

The Supreme Court, then, considered the second question - whether interest on the unpaid penalty should accrue from the expiry of the 45-day period stipulated in the Adjudicating Officer’s orders dated 28.08.2014, or from the expiry of 30 days following the SEBI’s notices dated 13.05.2022.  Section 220(1) of the Income Tax Act, 1961 does not independently envisage the issuance of a demand notice. Instead, it refers to the notice served under section 156, requiring payment within 30 days. Failure to comply attracts interest at 12% per annum under section 220(2), calculated from the expiry of the 30-days period. However, since section 156 is not incorporated into section 28A of the SEBI Act, the expression ‘notice of demand’ for recovery under the SEBI Act must be understood to include adjudication orders issued under Chapter VIA of the SEBI Act.

The Supreme Court observed that the Adjudicating Officer can fix the date for making the payment of penalty in the demand.  In the present case, the Adjudicating Authority fixed 45 days the period in which the penalty was payable by the appellants.  The order of the Adjudicating Officer attained finality following the appellants’ unsuccessful challenges before the SAT and Supreme Court, thereby crystallizing the liability. Once the adjudication order has attained finality, the obligation to pay the penalty stands revived from the date of adjudication. The pendency of any challenge after the period specified for payment only postpones or reduces the liability to pay interest; and the interim order granted if any, would also not absolve the appellants from the obligation to pay interest.   The appellants’ failure to comply within the specified time rendered them ‘defaulters’ under Section 220(4) of the Income Tax Act, justifying the accrual of interest from the expiry of the 45-day compliance period.   The demand notice dated 13.05.2022 merely reiterated the earlier demand and did not create a fresh liability.

The Supreme Court affirmed in ‘Dushyant Dalal case (supra) that the Interest Act, 1978 empowers tribunals, including SAT, to award interest from the date the cause of action arose until the initiation of recovery proceedings based on equitable considerations.  Explanation 4 to section 28A inserted on 21.02.2019, explicitly states that interest under section 220 shall accrue from the date the amount became payable.  as the adjudication order itself specified the time for payment of the penalty, the liability to pay interest would commence upon the expiry of the period mentioned in the assessment notice.

The Supreme Court further observed that the Explanation introduced in 2019 did not bring about any substantive change but merely clarified the existing legal position.   Interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. The interest is levied on the actual amount of tax withheld and the extent of delay in paying the tax on the due date. Essentially, it is compensatory and different from penalty which is penal in character (see Pratibha Processors v. Union of India.

The Supreme Court held that interest must accrue from the expiry of the 45-day compliance period following the adjudication orders dated 28.08.2014. The subsequent demand notices are nothing but reminders and are not the first demand notices before the accrual of liability for interest. The Supreme Court found no infirmity in the impugned order. 

The Supreme Court dismissed the appeals.  The Supreme Court directed the appellants to pay interest calculated by the respondent, within a period of 15 days from the date of receipt of a copy of this judgment.