By TIOL News Service

MUMBAI, JUNE 08, 2018: THE ISSUE IS - Whether an amount paid towards a consent order of the SEBI for compromising a dispute to carry on a business without interruption, can be covered within the scope of Explanation 1 to Sec. 37(1). AND THE ANSWER IS YES.

Facts of the case:

The assessee, an individual, having proprietorship concerns namely M/s. Indian Renewable Energy Foundation and M/s. Shri. Anil Dhirajlal Ambani, had returned loss for the relevant AY. The return was processed u/s 143(1) and notice u/s 143(2) was issued and was duly served on the assessee. During the scrutiny assessment, the AO noted that the assessee had claimed an expenditure being settlement charges against the income by way of 'commission' and 'sitting fees' received from M/s. Reliance Communication Ltd. (RCL), Reliance Infrastructure ltd (RIL) and M/s. Reliance Natural Resources Ltd (RNSL). Accordingly, the assessee was asked to file complete details of such 'settlement charges'. In reply, written submissions were made alongwith the consent order passed by SEBI. Pursuant to the assessee's submissions, the AO found that the assessee and his group entities had violated the provisions of SEBI Act, 1992 for which the said agency initiated enforcement action under various Rules for which the assessee had submitted a consent application on certain terms. After considering the application, SEBI levied certain charges in violation of SEBI provisions which were paid by the assessee. The AO was of the view that this payment was in the nature of penalty. However, the assessee contended that expenditure towards 'settlement charges' was allowable u/s 37(1) as it was not penal in nature. The AO believed that the assessee had admitted that he had violated the SEBI Regulations and paid the charges and hence, were not allowable as 'Business Expenditure' u/s 37(1). Therefore, the AO disallowed the amount u/s 37(1) and added the same to the assessee's total income. On appeal, the CIT(A) deleted the additions made by the AO.

ITAT held that,

++ in the case of Reliance Shares and Stock Brokers, there was a consent order passed by the SEBI in both the cases. In assessee's case, action was initiated by the SEBI u/s 11 of the SEBI Act. 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. 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. In Reliance Shares and Stock Broker's case, SEBI did initiate action on the assessee, and, in fact, passed an order levying a punishment. The assessee had appealed against the said Order and filed for consent during the pendency of appeal. The pendency of appeal was the basis for the ITAT to hold that there was no offence, and the settlement charges were not by way of penalty. Therefore, the payment was made without admitting or denying the guilt and the payment made by the assessee was similar to that of the payment in Reliance Shares and Stock Brokers's case;

++ relying on the CBDT Circular, we observe that the payment of settlement charges made by the assessee 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. The Explanation does not apply to payments arising as a consequence of an offence. Such payments may be disallowable under general principles - on the principle that payment of penalties is not for the purpose of business. The payment made by the assessee was not in the nature of payment sought to be covered within the ambit of Explanation 1 to Sec. 37(1) and the same was also not by way of penalty. The payment so made by assessee was a payment for the purpose of the profession carried on by the aassessee to save the time, cost and hassle of a long winded litigation as also to protect the reputation of the assessee. Hence, the payment has to be allowed as an expenditure u/s 37(1);

++ in the case of Indian Aluminum Co. Ltd., the assessee has not deducted TDS on certain payment and the ITO has treated as 'assessee in default'. The Apex Court has held that a payment made under statutory obligation, because the assessee was in default, could not constitute expenditure laid out for purposes of its business within meaning of Sec. 10(2)(xv) and hence, same was not allowable under that section. In this regard we observe that under the provisions of the Act, income-tax is not allowable expenditure and therefore, question of written off income tax liability is also not allowable expenditure. However, in the present case, the expenditure claimed by the assessee is not in nature of penalty for any default as in the case before the Supreme Court in the case of Indian Aluminum Co. Ltd. Hence, the facts of the said decision is not applicable in the present case;

++ coming to the argument of the Counsel for the Revenue, that the reason for filing the consent application and paying the settlement fee/consent charges is the alleged fact that the assessee was apprehensive of the serious consequences of the offence committed by it is without any basis. There is nothing whatsoever to support this contention except the ipsi dixit of the Revenue. The assessee has always submitted that there was no offence. Even the consent application was filed without admitting guilt. There is no finding or order by any authority. It is logical to hold that the assessee was apprehensive of the toll that a long winded litigation - both, in terms of time, cost and hassle as also in terms of reputation would take. The fact that the consent application proposed by the assessee was accepted by SEBI also on the footing that the assessee has paid the settlement "without admitting or denying the charges" indicates that the SEBI was not unaware of the outcome of its case against the assessee. There is no reason to believe or infer that consent application without admitting guilt amounts to evidence of an offence having been committed. Therefore, we can safely observe that the detailed findings recorded by CIT(A) are as per material on record, does not require any interference on our part. Accordingly, there is no infirmity in the order of the CIT(A) for deleting disallowance made by invoking explanation to 37(1).

(See 2018-TIOL-824-ITAT-MUM)