AI Drafter 
TaxTMI 
TaxTMI 
2016 (7) TMI 948
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....ing the disallowance of] the expenditure of Rs. 45,00,000/- paid to the Reserve Bank of India towards compounding fee in relation to ECBs on the ground that the said expenditure is incurred for a purpose which is an offence or which is prohibited by law disregarding the facts that the expenditure is not towards any offence nor is prohibited by law. 3. The only issue arising in the present appeal is against disallowance of Rs. 45 lakhs paid by the assessee to the Reserve Bank of India towards compounding fees. 4. Briefly, in the facts of the present case, the assessee was engaged in the business of development and selling of real estate. Search and seizure operations on the premises of assessee were carried out on 11.09.2009. In response to the notice issued under section 153A of the Act, the assessee furnished return of income declaring total loss of Rs. 8,82,07,947/-. During the course of search at the office premises of assessee, inventory of certain loose papers / documents were found and seized. One such paper found from the possession of assessee was page 20 of Bundle 2 of Annexure-A, where some calculations had been done. The scanned copy of said page is available in th....
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....e. 6. The assessee is in appeal against the order of CIT(A). 7. The learned Authorized Representative for the assessee drew our attention to the copy of compounding order passed by the Reserve Bank of India which is placed at pages 1 to 6 of the Paper Book, under which the assessee had entered into three loan agreements with M/s. Porto Limited, Porto Louis, Mauritius. With regard to ECB loans, our attention was drawn to the page 3 of Paper Book, wherein it was referred that the lender company was wholly owned company of the directors of assessee company and the Reserve Bank of India had show caused the assessee that the lender was not a recognized lender in terms of guidelines for ECB under FEMA Act, 1999. Further, the Reserve Bank of India approved the pre-payment of all these three ECB loans for Inward Remittance without prejudice to an action being taken under the Rules, Regulations, Directions of FEMA. The learned Authorized Representative for the assessee stressed that the said loans were sanctioned after the approval was given by Reserve Bank of India and in view of the said LR number being issued to the assessee, the amount was disbursed under the ECB loan agreements. ....
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...., 1998. The learned Authorized Representative for the assessee pointed out that the proposal to insert Explanation under section 37(1) of the Act was that no allowance shall be made in respect of any expenditure incurred for any purpose which was an offence or which was prohibited by law. He stressed that the compounding fees paid by the assessee did not fall within either of conditions and hence, the Explanation to section 37(1) of the Act was not attracted. The learned Authorized Representative for the assessee further placed reliance on the ratio laid down by the Hon'ble Supreme Court in Prakash Cotton Mills Pvt. Ltd. Vs. CIT (1993) 201 ITR 684 (SC), wherein it was held that deduction under section 37(1) of the Act is available where it is of compensatory nature notwithstanding the nomenclature of impost as given by the Statute. However, where it constituted of two components, then the same had to be bifurcated and deduction in respect of component which was penal, was not to be allowed to the assessee. 8. The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below and pointed out that during the course of search, the said inform....
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....sessee for non-compliance with the Rules / Regulations / Directions under FEMA Act, 1999. Under the Reserve Bank of India guidelines, a Circular is issued by Reserve Bank of India on compounding of contraventions under FEMA Act, 1999. The said Master Circular on compounding of contraventions under FEMA Act, 1999 is placed at pages 7 to 11 of the Paper Book. Under clause 3.5, it recognizes three types of contraventions, which are as under:- "a. whether the contravention is technical and / or minor in nature and needs only an administrative cautionary advise; b. whether the contravention is serious in nature and warrants compounding of the contravention; and c. whether the contravention, prima facie, involves money-laundering, national and security concerns involving serious infringement of the regulatory framework." 10. The contravention as per sub-clauses (a) and (b) of clause 3.5 are to be referred to the Reserve Bank of India and the contravention, if any, under subclause (c) are to be decided by the Enforcement Directorate. As per clause 4, the scope and manner of compounding is provided and as per clause 4.3, the application for compounding is to be disposed of on m....
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.... measure to be taken by the authorities by charging compounding fees in respect of contravention, if any. Such a compounding fees charged to the assessee being compensatory in nature as is evident from the fact that though the amount to be charged could be up to Rs. 30.25 crores, the assessee was asked to pay sum of Rs. 45 lakhs in order to meet the ends of justice, established the case of assessee that the same was not in the form of penalty. Where the amount paid by the assessee is compensatory payment and was not by way of any penalty levied under the provisions of FEMA, then such amount is to be allowed as deduction in the hands of assessee. 12. Now, coming to the stand of authorities below that such payment is covered by Explanation to section 37(1) of the Act. We find no merit in the said stand of CIT(A). The Explanation to section 37(1) of the Act was inserted in respect of any expenditure incurred for any purpose which was an offence or which was prohibited by law. The Circular of Reserve Bank of India itself provided that where the assessee had committed an irregularity while dealing in foreign earnings or expenditure outgoes, then such an action of applicant could be c....