24 August 2010
Whether penalty amount paid by a stock broker to the stock exchange, be allowed as a deduction under section 37(1) of the Income-tax Act, 1961?
IN THE ITAT MUMBAI BENCH ‘F’ Income-tax Officer-4(2)(2) v. VRM Share Broking (P.) Ltd. R.K. GUPTA, JUDICIAL MEMBER AND D. KARUNAKARA RAO, ACCOUNTANT MEMBER IT APPEAL NO. 6536 (MUM.) OF 2006 [ASSESSMENT YEAR 2004-05] NOVEMBER 3, 2008 I. I. Section 28(i) of the Income-tax Act, 1961 - Business loss/deductions - Allowable as - Assessment year 2004-05 - Assessee, a share broker and a trader in shares, claimed deduction of a sum not recovered from its client as business loss - Assessing Officer held that loss had resulted to assessee as it failed to maintain margin money to extent of 20 per cent of price of securities proposed to be purchased by its client as per terms of notifications issued by SEBI - Accordingly, Assessing Officer having formed an opinion that loss in question was not legitimate loss, disallowed assessee’s claim - Commissioner (Appeals), however, allowed assessee’s claim - On instant appeal, it was seen that various notifications issued by SEBI were mainly in context of risk management, rather than as a penal provision for punishing defaulters or deeming transactions illegal - Whether, in view of aforesaid, with or without provisions of margin money, loss could not be held as illegal loss denying benefit of set off of same against income - Held, yes - Whether, therefore, Commissioner (Appeals) rightly allowed assessee’s claim - Held, yes II. II. II. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 2004-05 - Whether penalty paid by assessee, a share broker, for ‘excess utilisation limits’ comparable to it for doing trade of its clients at a particular time, was allowable under section 37(1) - Held, yes FACTS-I The assessee, a share broker and a trader in shares, claimed deduction of a sum not recovered from its client as business loss. The Assessing Officer held that loss had resulted to assessee as it failed to maintain margin money to the extent of 20 per cent of the price of the securities proposed to be purchased by its client as prescribed by the notifications issued by SEBI. Accordingly, the Assessing Officer having formed an opinion that loss in question was not legitimate loss, disallowed the assessee’s claim. On appeal, the Commissioner (Appeals) allowed the assessee’s claim. On revenue’s appeal : HELD-I From the perusal of various notifications issued by SEBI, it was apparent that they were issued mainly in the context of the risk management, rather than as a penal provision for punishing the defaulters or deeming the transactions illegal. In view of the same, it was opined that with or without the provisions of the margin money the loss could not be held as illegal loss denying the benefit of set off of same against the income or allowing the same to carry forward to the later years. The order of the Commissioner (Appeals) therefore did not call for any interference. [Para 6] FACTS-II The assessee had paid certain amount to the stock exchange. The Assessing Officer taking view that the payment was incurred for infringement of rules and regulations of SEBI Act, 1992, disallowed assessee’s claim under section 37(1). On appeal, the Commissioner (Appeals) found that the amount was levied for “excess utilization limits” comparable to it for doing the trade of its clients at a particular time. Accordingly, the Commissioner (Appeals) agreed with the assessee’s submission that payment to NSE was not for violation of any provision of SEBI Act and deleted the addition. On revenue’s appeal HELD-II The amount paid was a penalty levied for violation of the margins imposed by the SEBI on the share brokers. From the notifications issued by the SEBI, it was found that such margins were imposed in order to reduce the risk components and, therefore, those were basically risk management oriented penalties, which were routine in nature. It was also found that those violations were offered by payment of penalty as in the instant case.Therefore, impugned order of the Commissioner (Appeals) did not call for any interference. [Para 10] CASES REFERRED TO CIT v. Gwalior Rayon Silk Manufacturing (Wvg.) Co. Ltd. [1999] 237 ITR 253/102 Taxman 433 (Bom.) (para 5) and Consolidated Coffee Ltd. v. Agricultural Income-tax Officer [2001] 248 ITR 417 (SC) (para 9). JVD Lengaste for the Appellant. Vijay Mehta for the Respondent.
24 August 2010
that case law was for penalty under Central excise rules and not for violation of exchange norms.
Also it is just a levy by the exchange. Only government can levy a penalty which ensues criminal prosecution and such payment is not allowable under Income Tax. However BSE & NSE is not government and the said exchange cannot be able to levy a penalty.
The point that need to be considered for a levy to be regarded as a penal are:
1. It should not be of compensatory nature. 2. The non compliance of which enforces criminal liability or prosecution.
Hence the said penalties is merely compensatory in nature and also the said non compliance does not ensue any criminal liability or prosecution
Thus one can evidently state the above amount of penalty charges is merely a compensatory in nature and therefore it should be allowed.
24 August 2010
I AGREE WITH UR VIEWS. BUT MY DOUBT IS THAT IF PENALTY PAID FOR VIOLATING THE CASE LAW IN THE COURSE OF THE CONDUCT OF BUSINESS THEN IT CANNOT REGARDED AS DEDUTIBLE EXPENDITURE(AS SAME CASE BROKER VIOLATING THE LAWS OF STOCK EXCHANGE AND HE PAID THE PENALTY)SO BROKER IS EXPECTED TO CARRY ON BUSINESS IN ACCORDANCE WITH LAW NOT IN VIOLATION OF LAW.PLS CLEARIFY MY POINTS.
24 August 2010
The penalties levied by the exchanges are basically risk management oriented penalties which were routine in nature and not for an infraction of any law.
Whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1), it is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find out whether it is compensatory or penal in nature. Wherever such examination reveals the concerned impost to be purely compensatory in nature deduction for same is allowed and in the instant case the penalties as levied by the exchange are compensatory in nature. So deduction will be allowable.
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