TaxTMI 
TaxTMI 
TaxTMI 
2018 (6) TMI 469
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....ssee has opted for settlement in order to avoid final extreme consequence of the proceedings initiated by SEBI for the violation of provisions of SEBI Act, 1992 and thus charges paid under settlement are akin to penalty which is resulting from violation of rule." 3) "The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored." 4) "The appellant craves leave to amend or alter any ground or add a new ground which may be necessary." 3. Rival contentions have been hard and record perused. Facts in brief are that the assessee is an individual having proprietorship concerns namely M/s. Indian Renewable Energy Foundation and M/s. Shri. Anil Dhirajlal Ambani. The assessee has filed his return of income for the year under consideration on 28/9/2011 declaring total loss at Rs. 43,22,11,483/-. The Return of Income was processed under section 143(1) and notice under section 143(2) of the Act was issued and duly served on the assessee. Thereafter, case was selected for scrutiny. During the course of assessment proceedings, the Assessing Officer observed from the accounts that the assessee had claimed an expenditure of Rs. 50....
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....e addition after observing as under:- 5.1.6 I have given full consideration to the observations of the AO and submissions made by the appellant. Since the AO has not elaborated detailed reasoning for disallowance made under section 37(1), it is to be decided whether any aspect of that section applies to the facts and circumstances of the case. 5.1.7 Section 37(1) is a residuary section. In order to claim deduction under this section, the following condition should be satisfied: * The expenditure should not be of the nature described under section 30 to 36. * It should not be the nature of capital expenditure. * It should not be personal expenditure of the taxpayer. * It should have been incurred in the previous year. * It should be in respect of business carried on by the taxpayer. * It should have been expended wholly and exclusively for the 'purpose of such business. * It should not have been incurred for any purpose which is an offence or is prohibited by any law 5.1.8 The explanation to the section is reproduced below in entirety: "For the removal of doubts, it is hereby declared that any expenditure . incurred by an assessee for any purpose whi....
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....t prohibited by law or otherwise. 5.1.12. Clearly, payment of any kind of settlement/ consent charge under any law in itself is not expenditure made for the purpose of an offence. It has now to be seen whether it is a payment made for an act which is prohibited by law. In the instant case, it is noted that the appellant, in his Application for Consent has clearly iterated denial of exceptions of findings of fact and conclusions of law to be part of the consent order. In its consent order dated 14 January 2011, SEBl, at Parra 5 has stated that the application for Consent filed by the applicants was considered by High-Powered Advisory Committee of SEBI which, "considered the facts and circumstance of the case, material brought before the committee". Thus, the denial of the appellant was also clearly considered by the Committee of SEBI. 5.1.13 In reaching a conclusion on this issue, I find that interpretation of whether "consent settlement" before SEBI is an expenditure incurred for an offence or an act prohibited by law, has been decided by Hon'ble ITAT Mumbai in M/s Reliance Share and Stock Brokers (P) Ltd. , I.T.A. No.274/Mum/2013. The relevant part of the order is extrac....
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....dingly, this ground is allowed." 17. In view of the foregoing discussions, we are of the view that the Ld CIT(A) was justified in deleting the disallowance of Rs. 50.00 lakhs made by the assessing officer, 18. In the result, the appeal filed by the revenue is dismissed. 5.1.14 In view of a direct decision on similar issue by the jurisdictional ITAT Bench and the facts and circumstances of the instant case being similar to those considered by Hon'ble ITAT, the disallowance of Rs. 50 Crores made by the assessing officer on this issue cannot be sustained. This ground of appeal is therefore allowed. 5. Against the above order of CIT(A), Revenue is in further appeal before us. 6. It was argued by learned DR that it is clear from the order of the AO that the Anil D. Ambani, Group of companies (ADAG for short) were directly or indirectly, involved in dealing in the shares of M/s. Reliance Communications Ltd. by wrongfully utilising the Proceeds of the External Commercial Borrowings (ECBs) and Foreign Convertible Currency Bonds (FCCBs) in the Stock Market and specifically investing the same in the flagship group company in clear violation of provisions of the SEBI Act and R....
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.... SEBI Act. The A.O further held that the said payments were made for escaping the legal consequences of the defaults committed and also to prevent further penal action. Thus, the A.O. consequently disallowed the impugned amount of Rs. 50,00,00,000/-. 9. In view of the above, it was argued by learned DR that the impugned deduction was rightfully disallowed by the A.O. and the Ld.CIT(A)-8 fell in error in allowing the disallowance made by the A.O. 10. Further following arguments were placed on record by learned DR:- a. The sequence of events beginning from the grave violations by the assessee and its group companies regarding the placement of ECBs/FCCBs into the Stock Market and related companies in violation of SEBI Act, 1992, [SEBI (PFUTP), Regulations, 2003], SEBI (Foreign Institutional Investors) Regulations, 1995, the factum of mis-representation in Yield Management Certificates and the P&L A/c misstatements for three years, up to the event \, of passage of the settlement/consent order passed by the SEBI and the payment of the impugned amount by the assessee have been discussed at length in paras 2 and 3 of this submission. b. The Revenue further contends that The Hon'....
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....person in connection with the issue of shares listed or proposed to be listed on a recognised stock exchange. e. It is thus clear that the only when the assessee was faced with such charges wherein the acts were of the nature of deceit, defraud upon the investors in relation to securities in question that the assessee was out of force required to come to the negotiating table and therefore, he applied for the settlement, which was granted in the form of consent order of the SEBI. It is therefore, the case that the settlement/consent charges were paid for the above grave violations of Law, which were of a serious nature bordering on acts of fraud, deceit and untruths to misguide and manipulate the investors and shareholders. Thus, the payment of the consent/settlement fee is forwarding of and to get rid of the serious legal consequences that would have followed, had the assessee not proposed settlement. It is therefore, the case that these charges are in essence nothing but payments not for any venial or technical breaches of Law, but indeed are payments in the nature of serious and gross violations of Law and hence are more serious than any stray penalty imposed. f. Therefore....
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....t the said payments are also not wholly and exclusively for purpose of business. For this proposition, reliance is placed on the decision of the Hon'ble Apex Court in the case of Indian Aluminium Company Ltd., 79 ITR 514 (SC), wherein it was held that a payment made under the statutory obligation because the assessee was in default could not constitute expenditure laid out for the purpose of assessee's business. The ratio of this case is squarely applicable to the case at hand, wherein the payment has been made for serious breach of Law and hence cannot constitute business expenditure wholly and exclusively for the purpose of business. 13. On the other hand, it was contended by learned AR that the Ld. CIT(A) considered the exact nature of consent orders which is given in Circular No.EFD/ED/Cir. 1/2007 dated 20.4.2007 issued by SEBI. [Page 5 - 10 of the Factual Paper Book (FPB) filed on December 27, 2017]. As per Ld. C1T(A) the idea of consent orders was borrowed from US Securities and Exchange Commission to achieve twin goals of appropriate sanction and deterrence without resorting to a long drawn litigation. The Ld. CIT(A) held that the process is a conciliatory proceedin....
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....ubmitted that the assessee has clearly stated that the consent application shall not be construed, in any manner, as admission of the findings or the acceptance of the penalty stated in the order. The Ld Counsel submitted that the assessee has never admitted the irregularities alleged to have been committed by it. Accordingly, the Ld A.R submitted that the sole motive of the assessee in filing the Consent letter is to enable it to carry on its business activities without interruption, which decision has been taken on commercial expediency in the best interest of its business and clients. The Ld A.R, then, invited our attention to page 10 of the paper book, wherein the order passed by the SEBI against the Consent Application. The Ld A.R invited our attention to paragraph 2 of the Consent order which reads as under:- "2. You had vide consent application and letter dated 15th November, 2007 proposed, without admitting or denyins the guilt, to offer Rs. 50,00,000/- {Rupees Fifty lakhs only) as an aggregate amount towards settlement charges, legal expenses and administrative expenses in the matter." The Ld A.R further submitted that the SEBI has accepted that the assessee has file....
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....me as under: "SEBl Regularization Scheme, 2002 for non compliance with regulations 6 and 8 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 In terms of Chapter II of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as 'the Takeover Regulations, 1997'), certain categories of persons are required to disclose their shareholding and/or control in a listed company to that company. Such companies, in turn, are required to disclose such details to the stock exchanges where shares of the company are listed. It has been observed that many listed companies and/or their promoters/shareholders have either not complied with at all or have complied with the said requirements after the expiry of the time specified in the said Regulations. In terms of s. 1 5A of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as 'the SEBI Act'), such persons are liable to a penalty not exceeding five thousand rupees payable for ever day during which such failure to furnish information, return, report or document, etc. continues. Besides, such persons are also liable for prosecu....
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.... of regulations 6(1), 6(3), 8(1) and 8(2) of the Takeover Regulations, 1997, after expiry of the period specified in the said regulations. (b) The listed companies which had failed to comply with or complied with the requirements of regulations 6(2), 6(4) and 8(3) of the Takeover Regulations, 1997, after expiry of the period specified in the said regulations. (c) In respect of the listed companies where there was no change in the shareholding of persons specified under regulation 8(1) and 8(2) of the Takeover Regulations, 1997, in a particular year, the disclosure under regulation 8(3) for that year if not made, earlier, can be made under this Scheme specifying that there was no change in shareholding of the said persons. Such companies will not be required to pay any amount. This benefit will not be available to persons covered under regulations 8(1) and 8(2)." Scheme not to apply in certain cases 3. The benefit of this Scheme will not be available in cases where penalty under the SEBI Act read with Takeover Regulations, 1997 has already been imposed. However, where such proceedings under the SEBI Act read with Takeover Regulations are in progress, per sons/companie....
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....etermine what, having regard to the funds available, can be paid; that is to say, whether (he claim can be satisfied in full or only in part. If a particular tax claim cannot at any time be paid in full, provision would have to be made for the balance, so far as may be, so that it is not jeopardised. ...... 5. The Special Court has no jurisdiction to sit in appeal over the assessment of the tax liability of a notified person by the authority or Tribunal or Court authorised to perform that function by the statute under which the tax is levied. The Special Court has, therefore, no jurisdiction to determine whether or not any assessment of the tax liability of a notified person by the appropriate authority is bonafide or reasonable or justified or enforceable. S.V. Kondaskar, Official Liquidator and Liquidator of the Colaba Land and Mills Co. Ltd. v. KM ' Deshpande, ITO [1972] 83ITR685; 42 Comp Cas 168 (SC) distinguished." 20. It was also argued by learned AR that tax authorities cannot arrive at determination under other laws and must accept the finding of the authorities under those laws is also established by the decision of Vadilal Chemicals Ltd. Vs. State of Andhra....
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....ays been held to be a deductible expenditure by the courts. In the circumstances, it was difficult to hold that the expenditure incurred by the assessee was either gratuitous or one incurred outside the trading activities of the assessee. The expenditure was, therefore, deductible under section 37(1)...." 23. We have considered rival contentions and carefully gone through the orders of the authorities below. We have also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us, in the context of factual matrix of the case. 24. From the record we found that the respondent is an individual having proprietorship concerns namely M/s. Indian Renewable Energy Foundation engaged in generation of wind energy and M/s. Shri. Anil Dhirajlal Ambani engaged in the profession of promoting and controlling companies and acting as a company director. During the previous year 2010-11, the respondent claimed an expenditure of Rs. 50 Crores being the settlement charges paid to the Securities Exchange Board of India (SEBI) pursuant to Consent Order dated January 14, 2011 passed by ....
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....t dated September 9, 2010. The High Powered Advisory Committee (HPAC) of SEBI considered the case to be a fit case for a Consent Order after taking into account the factors specified in Para 11 of the Guidelines having due regard to the interests of investors and securities market and recommended that the consent terms voluntarily proposed by the applicants be accepted. SEBI in turn accepted the recommendations of the HP AC and on the applicants (including the Respondent) confirming / voluntarily proposing the said consent terms SEBI passed a consent order on January 14, 2011. 29. Pursuant to the Consent Order, the applicants were required to pay a sum of Rs. 25 crores in the matter of RIL and a further sum of Rs. 25 crores in the matter of RNRL. The liability for the same was joint and several. Taking into account all the facts and circumstances the Respondent paid the settlement charge of Rs. 50 crores. The settlement charges so paid was disallowed by the Assessing Officer for the reasons that the respondent and his group companies 'have violated' the provisions of SEBI Act, 1992 for which SEBI initiated enforcement action under various rules; The AO concluded that the p....
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....ht before the committee and therefore the denial by the respondent was clearly considered by committee of SEBI. The Ld. CIT(A) further held that the issue was squarely covered in favour of the respondent by the decision of the Hon'ble Jurisdictional Tribunal in the case of ITO v. Reliance Shares and Stock Brokers (P.) Ltd. (2015) (67 SOT 73) (Mum.-Trib.). Tribunal held that SEBI has accepted the position that the guilt may or may not be establish at the end of appellate proceedings. The Tribunal therefore held that the fee paid cannot be equated to a penalty which must necessarily be a punishment for infraction of a law or a regulation having statutory force. Tribunal has held that the fee is claimed to have been paid for the purpose of business, to settle a dispute with a regulator SEBI and to be able to conduct its business without interruption. 32. We also found that issue is squarely covered by the decision of the Hon'ble Jurisdictional Tribunal in the case of Reliance shares and Stock Brokers (supra) [Page 63-75 of the Legal Paper Book (LPB) filed by assessee during the course of hearing. On the similar issue, the respondent also relied on decision of the Hon'ble ....
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....but, whether there has, in fact, been an offence or a determination by a concerned authority of an offence having been committed. In the facts of the case as accepted by the Revenue in their written arguments [Para 4(b)] there was, at most, a "prima facie finding of the SEBI". SEBI has not held or found that an offence (alleged by the AO to be grave) had actually, occurred. The question of the finding becoming by virtue of appellate decisions final so that it is conclusively held that the concerned companies were guilty of an offence does not and cannot, therefore, arise. Consequently, there being no offence, the alleged nature of offence is not and cannot be a relevant factor. In the absence of any finding of an offence having been committed, the allegation of the payment by itself being for an offence and / or by way of penalty cannot apply and there can be no disallowance. 36. It was also contention of learned DR that there was no voluntary consent application made by the assessee and that the action was initiated by the SEBI. Since SEBI initiated action against the violation, it was a payment for violations under the provisions of the SEBI Act and hence not allowable in view o....
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....our attention to paragraph 61 of the order dated 11-12-2006 passed by the Securities Appellate Tribunal (SAT) , wherein the SAT had observed that the violations are technical in nature. In this regard, the Ld A.R carried us through the Securities and Exchange Board of India Act, 1992, more particularly to section 11 of the Act, which elaborates the Powers and Functions of the Board. The Ld Counsel submitted that the Board has the power to regulate the working of stock brokers etc., levy fees or other charges from them and take the measures specified in sec. 11(4) of the above said Act in the interests of investors or securities market. The actions specified in sec. 11(4), inter alia, are that the Board may restrain persons from accessing the securities market; direct any intermediary or any person associated with the securities market in any manner not to dispose of or alineate an asset forming part of any transaction which is under investigation etc. The Ld Counsel submitted that the assessee herein was alleged to have committed certain irregularities and hence the officials recommended for suspension of the assessee for nine months^ which was ultimately reduced to four months." ....
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....he Consent Order (Page 3 of the FPB) wherein the order passing authority has stated that the payment is made without admitting or denying the charges. Likewise, the payment made in Reliance Shares and Stock Broker's case was also without admitting or denying the guilt. Relevant Para 13 from the decision of the Hon'ble Mumbai Tribunal is reproduced as under: 13. The Ld Counsel then invited our attention to the Consent application filed by the assessee, which is placed at pages 13-32 of paper book, more particularly Paragraph 19 of the application which specifies "Terms of Consent Proposal". The Ld Counsel submitted that the assessee has clearly stated that the consent application shall not be construed, in any manner, as admission of the findings or the acceptance of the penalty stated in the order. The Ld Counsel submitted that the assessee has never admitted the irregularities alleged to have been committed by it. Accordingly, the Ld A.R submitted that the sole motive of the assessee in filing the Consent letter is to enable it to carry on its business activities without interruption, which decision has been taken on commercial expediency in the best interest of its busi....
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.... disallowance of the claims made by certain assessees in respect of payments on account of protection money, extortion, hafta, bribes etc, as business expenditure. It is well decided that unlawful expenditure is not an allowable deduction in computation of income. 45. Relying on the aforesaid CBDT Circular, we observe that the payment of settlement charges made by the Respondent was neither in the nature of protection money, nor extortion, nor hafta nor bribe. It was also not a payment for a purpose namely, settlement, which can be said to be "an offence" or which can be said to be "prohibited by law". Therefore, the payments which were intended to be covered within the scope of explanation were payments, which by themselves amounted to committing an offence, payments in the nature of protection money, hafta, bribe, etc. Furthermore, the term 'etc.' used after bribe would refer to similar payments by applying the principle of ejusdem generis which meant that general term describing a list of specific terms denotes other things that are like the specific elements. The Explanation does not apply to payments arising as a consequence of an offence. Such payments may be disall....