AI Drafter 
TaxTMI 
TaxTMI 
2018 (6) TMI 469
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.... expenditure without considering the fact that the assessee 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....
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....me of the assessee. 4. By the impugned order, CIT(A) deleted the 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....
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.... prima facie allegation and final verdict and the acceptance thereof by SEBl needs to be determined as an expenditure for an offence or for an act 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, ha....
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....th a penalty and is a payment to enable the assessee to carry on its business in the normal course. Hence, the disallowance made by the AO of Rs. 50,00,000/- be deleted. Accordingly, 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 Borrowing....
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....learned AR the A.O. after detailed discussion held that the above amount is nothing but a penalty for grave statutory violations of various provisions of the SEBI Act and various regulations under the 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 settlemen....
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....es or artifices to DEFRAUD in relation to dealing in securities listed or proposed to be listed on a recognised stock exchange. Further, the violations also are of the nature of any act or practise that would operate as FRAUD OR DECEIT upon any 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....
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....he infraction of Law are extremely different from the case at hand. In that case, the breach of Law is technical whereas here it is serious and fundamental violation. 12. As per learned DR, without prejudice to the above submissions, the Revenue also contends that 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 p....
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....uced 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 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, wit....
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....n the case of Ahmedabad Cotton Mfg. Co. Ltd & Ors. (supra). After going through the scheme, we find force in the contention of the learned counsel for the assessee for the reasons given hereafter. In order to appreciate the controversy, it would be appropriate to reproduce the relevant provisions of the scheme 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 ....
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.... Regularization of the defaults 1. Under the Scheme, the eligible persons and companies may make disclosures and pay the lump sum amount within the period specified under the Scheme. Eligibility 2. Following are eligible for availing benefit under this Scheme- "(a) Persons who have failed to comply with or who have complied with the requirements 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 ben....
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....ecial Court is to determine the priorities in which claims upon the property under attachment shall be paid. The claims relating to the tax liabilities of a notified person are, along with revenues, cesses and rates entitled to be paid first in the order of priority and in full, as far as may be. In relation to a claim for payment of the tax liability of a notified person, the Special Court has, therefore, only the limited power to determine 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 jus....
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....verse effect on its reputation, to protect the managing agency which was an income earning apparatus and for retaining it with the reconstituted firm in which the interest of the assessee was the same as before. It was likely that but for the expenditure, the fair name of the assessee would have been tarnished or rendered suspicious and the managing agency would have been terminated. The expenditure incurred on the preservation of a profit earning asset of a business has always 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 ....
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....009 and thereby misusing the SEBI (Foreign Institutional Investors) Regulations, 1995. 28. From the record we found that in order to avoid long drawn litigation and the consequential expenditure of time and effort as also the likely damage to the reputation by continuing adverse publicity over a long drawn period, the parties to whom the show cause notice had been issued decided to avail of SEBFs Guidelines relating to "consent terms" and consequently, made an application for consent 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 fu....
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....or consent" between prima facie allegation and final verdict and acceptance thereof by SEBI is not an expenditure made for the purpose of an offence. The Ld. CIT(A) also came to conclusion that it is not a payment made which is prohibited by law. The Ld. CIT(A) relied upon consent order dated 14.1.2011 in para 5 where it was stated that the application for consent filed was considered by High Powered Advisory Committee by SEBI which considered the facts and circumstances of the case, material bought 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....
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....vely, where under it is mentioned that SEBI initiated proceedings under section 11, 11(4) and 11B of the SEBI Act read with Regulations 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations,2003. 35. However, as per para 9 of the order of the Tribunal in case of Reliance Share and Stock Borkers Pvt. Ltd., we found that SEBI has initiated action u/s.11 of the SEBI Act. However, the issue for consideration is not the nature of the alleged offence 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 ....
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....sessee has not followed the various Rules prescribed under the Act. He further submitted that the Consent order passed by the SEBI shall not change the character of violation or penalty initially levied by the Board. On the contrary, the Ld Counsel appearing for the assessee submitted that the SEBI had initiated the action against the assessee in connection with certain technical violations. Such action has been initiated by virtue of powers given to SEBI to take certain administrative or civil action. The Ld A.R invited 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.....
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....nce Shares and Stock Broker's case (Page No. 75 of the LPB), the Hon'ble Tribunal has reproduced the order of the CIT(A) and it is brought out that the consequence of violation made by the respondent in the said case was suspended trading activity. It was further pointed out that in the facts of the present case, in fact, the SEBI had granted an exception in case of Mutual Funds (Para (a) at Page 3 of the FPB) which was not the case in Reliance Shares and Stock Broker's case. 42. Learned AR further invited our attention to Para 7 of the 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 t....
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....see is not as per the scheme and intent of the provisions of the Act. In this regard, CBDT Circular No. 772 dated December 23, 1998 is very relevant, wherein the scope of 'provision has been explained as under: 20.1 Section 37 of the Income-tax Act is amended to provide that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purposes of business or profession and no deduction or allowance shall be made in respect of such expenditure. This amendment will result in 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". Th....