THE issue before the Bench is - Whether the provisions of Sec 14A come into play only after the AO first examines the disallowance made by the assessee itself and then the AO is not satisfied with the same. YES is the answer.
Facts of the case
The assessee is engaged in Share broking business. Upon scrutiny, the AO noticed that the assessee had claimed dividend income as exempt u/s 14A, however, no disallowance under the said section was made by the assessee. The assessee offered workings for disallowance of interest paid and expenses; The AO accepted the expenses computation but rejected the working of interest income and computed the same invoking Rule 8D and accordingly made additions. On appeal, the CIT(A) held that since the assessee had established direct nexus between the borrowings and investments and accordingly allocated interest expenditure proportionately, the interest disallowance was directed to be restricted to Rs.29,91,393/-, i.e., at the amount worked
out by the assessee.
Aggrieved, the revenue has filed this appeal.
Payment of consent fees to SEBI
The AO noticed that the assessee's broking license was cancelled for 9 months by the SEBI for violation of various regulations which was challenged before the Security Appellate Tribunal (SAT) . However, the SEBI issued a circular to settle the dispute in consideration of ‘Consent Application' furnished by the assessee on payment of consent fee . Accordingly, the assessee filed a Consent Application before SEBI, wherein it agreed to pay a sum of Rs.50.00 lakhs without admitting or denying the guilt alleged by SEBI. On its approval, the Security Appellate Tribunal also disposed of the appeal filed by the assessee in terms of Consent terms. The AO took the view that the above said amount of Rs.50.00 lakhs is a compounding fee paid by the assessee for offences committed under SEBI (Stock Brokers and sub-brokers) Regulations, 1992. Accordingly, the AO took the view that this was a penalty paid for infraction of law and hence, disallowed by virtue of the Explanation to Section 37(1) of the Act. On appeal, the CIT(A) held that the consent fee was paid by the assessee without accepting or denying the guilt. Further the CIT(A) held that the fact of acceptance of said consent application by SEBI would only show that the SEBI has also accepted that the charge or guilt may or may not be established. Accordingly, the CIT(A) held that the consent fee paid by the assessee cannot be equated with “Penalty” for infraction of law and therefore, allowed the same as business expenditure.
The DR submitted that the Consent order passed by the SEBI shall not change the character of violation or penalty initially levied by the Board.
The counsel of the assessee referred to various sections of the SEBI Act especially sections from 15E to 15H and submitted that the penalties under these sections are technical in nature and is distinguished from section 24 or 24A of the Act which provides for offences. Therefore, it was submitted that violation by the assessee which is of technical nature cannot be regarded as infraction of law. The Counsel submitted that the action was taken against the assessee under section 11 of the Act and the same is made clear that it was an “administrative or civil action”. Further the consent order is permissible only if there was a prima facie case, meaning thereby there was only a prima facie case against the assessee also. The Counsel submitted that the assessee has never admitted the irregularities alleged to have been committed by it. Accordingly, it was 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.
Having heard the parties, the Tribunal held that,
Deduction u/s 14A
++ as rightly pointed out by CIT(A), the requirement of making disallowance under Rule 8D(2)(ii) would arise only if the nexus between the borrowings and investments could not be clearly established. In the instant case, the CIT(A) has noticed that the assessee was able to prove the nexus between the borrowings and investments and accordingly it has computed the interest disallowance. The following table furnished by the assessee shows the purpose and utilization of borrowings made by the assessee, i.e., the nexus between the borrowings and its utilisation ;
++ it is now settled principle that the assessing officer has to examine the disallowance made by the assessee by having regard to the accounts of the assessee and only thereafter the AO, if he is not satisfied with the correctness of the claim, shall determine the disallowance to be made u/s 14A of the Act in accordance Rule 8D. In this regard, a gainful reference may be made to the decision rendered by the jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd . It is also pertinent to note the decision rendered by Delhi High Court in the case of Maxopp Investment Ltd Vs. CIT, wherein the Delhi High Court has expressed the view that the assessing officer has to first reject the claim of the assessee with regard to the extent of expenditure by having regard to the accounts of the assessee and such rejection must be for disclosed cogent reasons. It is only then that the question of determination of expenditure u/s 14A by the assessing officer would arise. In the instant case, we notice that the workings furnished by the assessee for interest disallowance was not examined at all by the AO, whereas he is required to reject the workings furnished by the assessee after having regard to the accounts of the assessee. Further we notice that the revenue could not controvert the finding given by the CIT(A) that the assessee was able to establish the nexus between the borrowings and the investments. We have also noticed that the finding so given by the first appellate authority was correct as per the workings furnished by the assessee in the table extracted above. It is also pertinent to note that the revenue did not find fault with the said workings. Under these circumstances, we are of the view that the CIT(A) was justified in holding that the interest disallowance was required to be made under Rule 8D(2)(i) of the I.T Rules and also in confirming the disallowance of interest to the extent of Rs.29,91,393/-, as worked out by the assessee. Accordingly, we uphold his order on this issue;
Payment of consent fees to SEBI
++ we find force in the contentions of the assessee. The Circular issued by SEBI for “Consent appliation” clearly specifies that the action taken under section 11 of the Act fall in the category of “administrative or civil action”. Further, order passed by SAT also clearly states that the irregularities alleged against the assessee are “technical violations”. Most of all, the amount of Rs.50.00 lakhs paid by the assessee are not related to the penalty, if any, imposed by the SEBI, rather it was a “Consent Fee” paid by the assessee for settlement of dispute, legal expenses and other administrative charges of SEBI. The said amount was paid clearly specifying that it was paid without admitting or denying the guilt. Hence, in our view, it cannot be said that the assessee has paid the amount of Rs.50.00 lakhs by duly accepting or upon proving the irregularities alleged against it. On the contrary, it is the case of the assessee that it has taken the decision to settle the dispute on commercial expediency and upon business interests;
++ we notice that the CIT(A) has adjudicated this issue in favour of the assessee in another angle. For the sake of convenience, we extract below the relevant observations made by the CIT(A).
[".....I have gone through the A.O.'s order as well as the appellant's submissions. It is very apparent from the Circular of SEBI as mentioned above that in cases of administrative/civil actions which includes, interalia, orders of suspension from trading are different from criminal actions. From the order of SEBI it is quite apparent that the appellant had been suspended from doing trading activity for a period of four months and had not been awarded any monetary fines. It has been mentioned in the said order that the consent application of the appellant was without admitting or denying the guilt. SEBI has also accepted the application on this basis. Thus, SEBI has accepted the position that guilt may or may not be established at the end of the appellate proceedings. The fee paid cannot therefore, be equated to a “penalty” which must necessarily be a punishment for infraction of a law or a regulation having statutory force. The fee is claimed to have been paid for the purposes of business, to settle a dispute with the regulator SEBI and to be able to conduct its business without interruption. It is also worth noting that various decisions have held that an examination of the nature of expenses, reveals that if the concerned impost is purely compensatory in nature, the same is an allowable expense u/s. 37 of the Act. In the circumstances, the fee cannot be equated with 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.”];
++ in view of the foregoing discussions, we are of the view that the CIT(A) was justified in deleting the disallowance of Rs.50.00 lakhs made by the assesing officer. In the result, the appeal filed by the revenue is dismissed.
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