Thursday, November 13, 2014

Consent fee paid to SEBI without admitting alleged violation by broker couldn’t be held as penalty; deduction allowed

IT: When SEBI accepted consent application (settlement application) without admitting or denying guilt by assessee-stock-broker, resultant consent fee paid to SEBI could not be equated with a “penalty” - The fee was paid for purpose of business, to settle a dispute with SEBI and to be able to conduct business without interruption - Thus, consent fee was allowable as business expenditure under Section 37.


a)The assessee-company was engaged in share broking business. It filed its return of income. on examination of the said return, the Assessing Officer (‘AO’) noticed that assessee had paid a sum of Rs. 50 lakhs to SEBI as consent fee.

b)On further examination, he noticed that the SEBI had recommended suspension of Certificate of Registration of assessee as stock broker for a period of nine months for violating the various regulations framed by SEBI. After hearing the assessee, period of suspension was reduced to four months.

c)The assessee challenged said order by filing an appeal before the Securities Appellate Tribunal. While the said appeal was pending, the SEBI issued a circular whereby it agreed to settle the disputes in consideration of ‘Consent Application’ furnished by the assessee on payment of consent fee.

d)Thus, the AO took the view that the said amount of Rs.50 lakhs was a compounding fee paid for offences committed under SEBI (Stock Brokers and sub-brokers)Regulations, 1992. Accordingly, he held that it was a penalty paid for infraction of law and, hence, disallowed the said claim by invoking the Explanation to Sec. 37(1) of the Income-tax Act (‘I-T Act’). On appeal, the CIT(A) deleted the disallowance made by AO. The aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

The Tribunal upheld the order of the CIT(A) which provided as under:

a)It was apparent from the Circular issued by the SEBI that instances of administrative/civil actions which included, inter-alia, orders of suspension from trading, etc., were different from criminal actions.

b)Further, it was apparent from the order of SEBI 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 had been mentioned in the said order that the consent application of the appellant was without admitting or denying the guilt. SEBI had also accepted the application on this basis.

c)Thus, SEBI had accepted that guilt might or might not be established at the end of the appellate proceedings. Therefore, the fee paid could not be equated with a “penalty” which had necessarily to be a punishment for infraction of a law or a regulation having statutory force.

d)The fee was claimed to have been paid for the purposes of business to settle a dispute with SEBI and to be able to conduct its business without interruption. Thus, if the concerned impost was purely compensatory in nature, the same was an allowable expense under section 37 of the I-T Act. – ITO V. RELIANCE SHARE & STOCK BROKERS (P.) LTD. [2014] 51 215 (Mumbai - Trib.)