2009 (1) TMI 553 - AT - Income Tax

Tribunal Rules in Favor of Assessee: Fines Not Penalties, Remits Disallowance & Software Expenses for Reassessment.

The Tribunal allowed the assessee's grounds and dismissed the Revenue's appeals for the assessment years 2002-03 and 2003-04. It deleted the disallowance ... Disallowances on fines paid to NSE - Whether violations of the Rules and Regulations of NSE Ltd. by its members could be treated as an offence or as an act prohibited by law - claim for Business expenditure - HELD THAT:- Fines and penalties levied for violation on account of ‘unfair trading practice’ as specified in regn. 4.6 of the NSE Regulations and ‘un-business like conduct’ as specified in r. IV(4)(e) of the NSE Rules cannot be equated with violation of a statutory rule or law. Though, the ld CIT(A) has referred r. 4C in Appendix 222 to SEBI Rules, 1992, this rule only specifies the condition to be satisfied for the SEBI Board to grant a certificate to a stock broker. It is true that working of stock exchanges can be regulated by SEBI under the SEBI enactment but violation of rules and regulations framed by such stock exchanges cannot be per se considered as violation of any provision of SEBI enactment. The fine imposed on the assessee by the disciplinary bench of the NSE was admittedly for violation of the regulation of NSE Ltd., and neither the AO nor the CIT(A) has been able to point out how such violation or breach of regulations could be treated on par with the breach of a rule under the SEBI enactment. Therefore, we are of the considered opinion that there was no violation of law by the assessee and the fine paid were only for non-observation of internal regulations of stock exchange. We find no reason to interfere in the order of CIT. In the result, grounds 1 and 2 of the assessee are allowed whereas the sole effective ground raised by the Revenue is dismissed. Disallowance of salary - HELD THAT:- Assessee has furnished full information regarding salary payments. The comparative year-wise cost furnished by the assessee before CIT(A) clearly show that the increase in salary was due to higher payments paid to individual employees and also on account of the reason that such payments were made for full year in majority of the cases. Payments of salaries and employment of staff are the prerogative of a businessman and if he feels that employees should be paid well so as to get optimum productivity it could only be considered as a commercially prudent decision. In any case, no defect was pointed out in the accounts of the assessee, but the disallowance was only made for the reason that share trading and other income of the assessee had come down in the relevant previous year. In our opinion, this is not a criteria to judge the commercial expediency of salary payment and assessee’s contention that hire and fire policy would not be conducive for its business, was correctly appreciated by the CIT(A). Therefore, we find no necessity to interfere with the orders of the CIT(A) in this regard. In the result, ground of the Revenue stands dismissed. Issues Involved:1. Disallowance of fines paid to NSE.2. Disallowance of expenditure and interest under Section 14A of the IT Act.3. Treatment of software expenses.4. Disallowance of SEBI turnover charges.5. Disallowance of salary expenses.Detailed Analysis:1. Disallowance of Fines Paid to NSE:The assessee, a member of NSE, had debited Rs. 3,85,511 in its P&L account for fines related to bad delivery and other charges. The AO disallowed Rs. 3,56,093, considering these fines as penal in nature under Explanation to Section 37(1) of the IT Act. The CIT(A) sustained the disallowance except for Rs. 6,093. The Tribunal examined whether violations of NSE rules could be treated as an offence or act prohibited by law. It concluded that NSE, being a company under the Companies Act, and its rules being internal regulations, did not equate to statutory laws. Thus, fines for violations of NSE regulations were not considered penalties for infractions of law. The Tribunal referenced a similar decision in the case of Asstt. CIT vs. CFL Ltd. and deleted the disallowance of Rs. 2,50,000 and Rs. 1,00,000. The deletion of Rs. 6,093 by CIT(A) was also upheld. Consequently, the assessee's grounds were allowed, and the Revenue's appeal was dismissed.2. Disallowance of Expenditure and Interest Under Section 14A:The AO disallowed Rs. 2,989 and Rs. 56,809 under Section 14A, attributing these expenses to earning exempt dividend income. The CIT(A) confirmed the disallowance. The Tribunal noted the Special Bench decision in ITO vs. Daga Capital Management (P) Ltd., which held that Section 14A and Rule 8D were retrospective. Therefore, the matter was remitted back to the AO for reconsideration in light of the Special Bench decision.3. Treatment of Software Expenses:The AO treated software expenses of Rs. 96,900 as capital in nature and allowed depreciation at 25%. The CIT(A) confirmed this treatment. The Tribunal referred to the Special Bench decision in Amway India Enterprises vs. Dy. CIT, which provided guidelines for treating software expenses. The matter was remitted back to the AO for reconsideration in line with these guidelines.4. Disallowance of SEBI Turnover Charges:The assessee did not press this ground. Consequently, the Tribunal dismissed this ground as not pressed.5. Disallowance of Salary Expenses:The AO disallowed 20% of the total employee cost, amounting to Rs. 5,49,125, citing a disproportionate increase in employee costs despite a drop in income. The CIT(A) deleted the disallowance, noting that the increase was due to full-year salary payments to some employees. The Tribunal upheld the CIT(A)'s decision, emphasizing that salary payments are a business prerogative and no specific defects were pointed out by the AO. The Tribunal found no necessity to interfere with the CIT(A)'s order.Conclusion:The appeals for the assessment years 2002-03 and 2003-04 resulted in the assessee's grounds being largely allowed and the Revenue's appeals being dismissed. The Tribunal provided detailed reasoning for each issue, referencing relevant legal precedents and guidelines.