Business expenditure for regulatory settlements and unexplained cash credits: future disallowance rule not retrospective; deletion of additions affirmed

CBDT has prescribed that expenditure for settlement of proceedings under specified laws will be disallowable for tax from AY 202526; that rule does not apply to earlier years, so the reliance on the notification does not assist the assessee for AY 201718 and the Revenue's proposition requires no interference. Separately, additions under unexplained cash credits were deleted after the lender's accounts showed substantive trading revenue, demonstrating genuine business activity and no link to the entry operator that would trigger deeming income; accordingly the Revenue appeal was dismissed.

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Issues: (i) Whether the penalty of Rs.10,00,000 paid under section 15HA of the SEBI Act is an allowable business expenditure under section 37(1) of the Income-tax Act, 1961 despite Explanation 1 to section 37(1); (ii) Whether the addition of Rs.5,16,00,000 made as unexplained cash credit under section 68 of the Income-tax Act, 1961 was justified.

Issue (i): Whether the SEBI penalty paid during the course of business qualifies as a deductible business expense under section 37(1) despite Explanation 1.

Analysis: The payment was imposed under section 15HA of the SEBI Act during trading activities and was paid in the regular course of business to avoid protracted litigation and to protect business interests. The appellate authority examined judicial precedents and statutory context, distinguished payments that are inherently illegal (protection money, bribes, extortion) from penalties levied under a statutory scheme which may be compensatory in nature, and considered the nature and purpose of the payment as made in exercise of a lawfully available option.

Conclusion: In favour of Assessee - the addition of Rs.10,00,000 under section 37(1) is deleted and the penalty is held allowable as a business expenditure for the relevant assessment year.

Issue (ii): Whether amounts credited to the assessee (total Rs.5,16,00,000) are to be treated as unexplained cash credits under section 68.

Analysis: The appellant furnished bank statements, financial statements, ITR, audited financials and other records of the remitter; the remitter's revenue from operations established substantive business activity and creditworthiness; no material was produced by the assessing officer to establish a nexus between the remitter and an alleged entry operator; the investigation list did not include the remitter; source-of-source was evidenced in bank records. The appellate authority applied the legal standard on proof of identity, genuineness and creditworthiness and found the onus discharged.

Conclusion: In favour of Assessee - the addition of Rs.5,16,00,000 under section 68 is deleted.

Final Conclusion: Both contested additions under section 37(1) and section 68 were held not sustainable and the appeal by the Revenue is dismissed.

Ratio Decidendi: Where a statutory penalty is imposed and paid in the regular course of business under a specific provision of law and is not of the kind expressly contemplated by Explanation 1 to section 37(1) (such as protection money, bribes or extortion), it may be allowable as a business expense; and where a taxpayer produces credible documents establishing identity, creditworthiness and source (including source of source), section 68 additions cannot be sustained absent positive material connecting the creditor to disallowed entry operators.

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