TaxTMI 
TaxTMI 
2026 (9) TMI 1244
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....the assessment proceedings, the AO, on perusal of the tax audit report, noticed that the tax auditor had reported penalties amounting to Rs. 2,80,87,838/- as expenditure by way of penalty or fine for violation of any law for the time being in force. The penalties were under the following heads: - Bad Delivery / short Delivery - Late reporting - Security Deposit Charges - Fund Shortages - Client Code Modification 4. The AO, therefore, issued a show-cause notice to the Assessee, who contended that Explanation 1 to Sec. 37(1) of the Act covers only expenditure incurred for a purpose, which is an offence or prohibited by law. The penalties were paid in the normal course of business and not for any infraction of law or offence and, therefore, were allowable as business expenditure. In support thereof, the Assessee also relied upon the judgment of the Hon'ble Tribunal in its own case for the A.Y. 2007-08. 5. The AO, however, not being convinced, found that the expenditure of Rs. 2,80,87,838/- towards penalties paid to the stock exchanges for violation of any law for the time being in force was covered by Sec. 37(1) r.w. Explanation 1 and....
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....fence and therefore, the same shall be allowed as business expenses. The Assesssee craves leave to submit additional evidence in order to substantiate its claim that the expenses are incurred in the normal course of business. 2.4. Further, the Assessee invites Your Goodself's attention to the Assessee's own case for AY 2007-08 wherein the facts of the case is similar to the facts of AY 2007-08. The Assessce reproduces the relevant extract as under: (attached as Annexure 4) "8... The penalties were levied by the Stock Exchange on account of bad delivery/short delivery, wrong claim of corporate benefits, late reporting, security deposit shortages, fund shortage and client code modification... 8.4... The Hon'ble High Court in the above case agreed with the order of the Tribunal that the amount paid were not on account of any infraction of law and hence allowable as business expenditure. Facts being similar, we follow the above decision and uphold the order of the Ld. CIT(A)...' (Underlined for emphasis) 2.5. The Assessee also relies on the decision of the Hon'ble Jurisdictional High Court in case of CIT vs. M/s The Stock and Bond....
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....xchanges for violation of their laid down rules and regulations and hence such penalties are due to lapses on the part of the assessee. Therefore, these penalties cannot be considered to be regular expenses or normal business expenses as claimed by the assessee. Hence, these expenses by way of penalties which have been incurred due to lapses on the part of the assessee, would be liable to be disallowed as per the provisions of section 37(1) r.w. explanation 1. Further, assessee has referred to the decision of the Hon'ble ITAT Mumbai in its case for assessment year 2007-08. However, it is to be mentioned that it has not been established that the facts of the case involved in the AY 2007-08 is same as the current assessment year. It is a fact that this year the tax auditor has categorically reported the issue in the tax audit report and also the penalties have been imposed for lapses and violation of stock exchanges rules & laws such as Bad Delivery, Short Delivery etc. as mentioned above. So, it can not be said that the facts in the instant case is similar to the facts involved in respect of which the decision of the Hon'ble ITAT Mumbai has been referred to or the fact as to....
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....on'ble Tribunal decided the issue in its favour, holding that the penalties in question were not statutory penalties imposed for violation of law, but compensatory charges levied for operational and procedural lapses under the bye-laws and regulations of the stock exchange. The Ld. Counsel further submitted that, though the Ld. Commissioner observed in the impugned order that the exact nature of the penalties was not clear from the narration in the assessment order, the AO, in para 5.1.6 thereof, referred to the facts involved in the decision of the Hon'ble ITAT, Mumbai. The Ld. Counsel also relied upon the judgment of the Hon'ble Jurisdictional High Court in CIT Vs. M/s. The Stock and Bond Trading Company (ITA No. 4117 of 2020, decided on 14.10.2011). 9. On the contrary, the Ld. DR refuted the claim of the Assessee by relying upon the orders passed by the authorities below. 10. We have heard the parties, perused the material available on record and given thoughtful consideration to the rival claims of the parties. The facts involved in the instant case are pari materia with those in the Assessee's own case for the A.Y. 2007-08, decided vide order dated 15.09.2017 in ITA No. ....
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.... "(C) Whether on the facts and in the circumstances of the case and in law the Hon'ble Tribunal was justified in deleting the disallowance made by the Assessing Officer of claim of the Assessing Company for a deduction of payment of Rs. 6,51,240/- towards penalty paid to Stock Exchange even though such penalty payment was clearly disallowance under Explanation to Section 37(1) of the Income Tax Act?" The Hon'ble High Court in the above case agreed with the order of the Tribunal that the amount paid were not on account of any infraction of law and hence allowable as business expenditure. Facts being similar, we follow the above decision and uphold the order of the Ld. CIT(A). The 2nd ground of appeal is thus dismissed." 13. We further observe that, in the Assessee's case for the A.Y. 2020-21 concerning the challenge to the order u/s. 263 of the Act, the Hon'ble Tribunal also considered identical penalties levied by the stock exchanges and held that they were not statutory penalties imposed for violation of law, but compensatory charges levied for operational and procedural lapses under the bye-laws and regulations of the stock exchange. Such payments do not fall....
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....ited by law. 37. The relevant extract of the stock exchange circular, explaining the nature of such penalties and disciplinary actions, has been reproduced in the original draft and demonstrates that the charges levied depend upon the frequency and gravity of the violation and are designed to ensure adherence to compliance requirements. 38. Upon a careful consideration of the material on record, it is evident that the penalties in question are not statutory penalties imposed for violation of law, but are in the nature of compensatory charges levied for operational and procedural lapses under the bye-laws and regulations of the stock exchange. Such payments do not fall within the mischief of Explanation 1 to section 37(1). 39. The distinction between expenditure incurred for an offence or for a purpose prohibited by law, and expenditure incurred in the ordinary course of business for regulatory non-compliances of a technical or procedural nature, is well recognised in law. The latter category of expenditure has consistently been held to be allowable. 40. In this context, reliance placed by the assessee on judicial precedents, including the decisio....
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....tion 194J of the Income Tax Act, 1961? B Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in deleting the additions made by the Assessing Officer under proviso to section 37(1) of the Income Tax Act, 1961 being penalty imposed by the National Stock Exchange on the Assessee? 2 As regards the first question is concerned, counsel for the Revenue states that the said question is answered against the Revenue in case of The Income Tax Commissioner Mumbai City-4 vs. Angel Capital & Debit Market Ltd. in Income Tax Appeal (L) No.475 of 2011 dated 28th July, 2011. Hence, the first question cannot be entertained. 3 As regards the second question is concerned, the finding of fact recorded by the CIT (A) and upheld by the ITAT is that the payments made by the Assessee to the Stock Exchange for violation of their regulation are not an account of an offence or which is prohibited by law. Hence, the invocation of explanation to section 37 of the Income Tax Act, 1961 is not justified. In our opinion, in the facts and circumstances of the present case, no fault can be found with the decision of the ITAT. Accordingly, the secon....
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....High Court in Sesa Goa Ltd. Vs. JCIT [423 ITR 426 (Bombay HC)], wherein cess was held to be an allowable deduction, while computing income chargeable to tax. It was further claimed that Explanation 3 to Sec. 40(a)(ii) of the Act was inserted by the Finance Act, 2022, with retrospective effect from 01.04.2005 and, therefore, no penalty could be levied, as the claim was based upon the aforesaid judgment and the Explanation was introduced subsequently. 23. The AO considered the Assessee's reply dated 16.05.2024 and its claim concerning the retrospective insertion of Explanation 3 to Sec. 40(a)(ii) of the Act. However, vide penalty order dated 27.02.2025 passed u/s. 270A of the Act, the AO ultimately held the Assessee to be in default for under-reporting income of Rs. 9,82,65,295/- on account of education cess disallowed in the assessment and levied a penalty of Rs. 1,23,65,704/-, being 50% of the tax payable on the income of Rs. 9,82,65,295/- computed in the hands of the Assessee. 24. The Assessee, being aggrieved, challenged the said penalty before the Ld. Commissioner, who, though sustained the penalty levied, however, changed its basis by holding that it is not a case of levy....
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....ance of education cess, pursuant to the retrospective amendment made by the Finance Act, 2022. After considering the judgment of the Hon'ble Jurisdictional High Court in Sesa Goa Ltd. Vs. JCIT [2020] 423 ITR 426, the Tribunal deleted the identical penalty levied, by observing as under: "2. Brief facts of the case are as under: 29.1. The assessee is a company and filed its return of income for the year under consideration on 15.02.2021 declaring total income at Rs. 2,37,16,74,630/-. The case was selected for scrutiny and notice under section 143(2) of the Act was issued. In response to the statutory notices, the assessee furnished various details and explanations. Thereafter, assessment under section 143(3) of the Act came to be completed on 24.10.2022 determining the total income at Rs. 2,40,35,49,937/- after disallowing the claim of deduction towards education cess amounting to Rs. 3,18,75,307/-. 29.2. Subsequently, penalty proceedings under section 270A of the Act were initiated separately for under-reporting of income. In response to the notice issued, the assessee filed a reply dated 11.11.2022 contending that the disallowance of education cess arose ....
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....referred an appeal before the Ld.CIT(A). 3. The Ld.CIT(A) while confirming the penalty observed as under: "I have considered the submission of the assessee as filed above, case records and gone through the AO's observation & decision in penalty vis- à-vis assessment order. It is observed from the penalty order that the AO has imposed penalty of Rs. Rs. 68,12,391/- after being satisfied on completion of scrutiny assessment as per the acceptance of the appellant regarding proposed disallowance of deduction of education cess of Rs. 3,18,75,307/-. I find from the case records vis-à-vis assessment order that despite getting multiple opportunity of hearing the appellant miserably failed to file satisfactory compliance/explanation with supporting documents before the assessing officer (AO) in favour of its claim being the penalty levied under section 270A of the Income-tax Act deserves to be deleted. It is observed that the appellant had claimed deduction of education cess in its return of income filed for the relevant assessment year on the bona fide belief, supported by judicial precedents. At the same time it is also observed that the appellant has r....
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....lf recognized the bona fide nature of such claims made in the preceding assessment years and consciously incorporated a saving provision in section 155(18), providing that no penalty shall be leviable subject to fulfilment of certain conditions. For the sake of convenience, the relevant provision and proviso are reproduced herein below: "Section 155 [(18) Where any deduction in respect of any surcharge or cess, which is not allowable as deduction under section 40, has been claimed and allowed in the case of an assessee in any previous year, such claim shall be deemed to be under-reported income of the assessee for such previous year for the purposes of sub-section (3) of section 270A, notwithstanding anything contained in sub-section (6) of section 270A, and the Assessing Officer shall recompute the total income of the assessee for such previous year and make necessary amendment; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of section 154 being reckoned from the end of the previous year commencing on the 1st day of April, 2021: Provided that in a case where the assessee mak....