|CORAM:||Ashwani Taneja (AM), Joginder Singh (JM)|
|SECTION(S):||Explanation to s. 37|
|CATCH WORDS:||business expenditure, deductibility|
|DATE:||September 29, 2015 (Date of pronouncement)|
|DATE:||February 15, 2016 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Expl to s. 37(1): Penalties & fines paid to SEBI, BSE etc for breach of regulatory/ procedural requirements are "compensatory" in nature and not for any purpose which is an ‘offense’ prohibited by the law|
(i) The payments have been made on account of routine fines for minor procedural irregularities, in day- to- day working of the assessee company. The assessee company is engaged into stock broking activities and also in financial services which involves substantial compliance requirements with various regulatory authorities e.g. BSE, NSE, CDSL, NSDL, & SEBI etc. In the regular course of the business of the assessee company, certain procedural non-compliances are not unusual, for which assessee is required to pay some fines or penalties. In our considered view, these routine fines or penalties are “compensatory” in nature; these are not punitive. These fines are generally levied to ensure procedural compliances by the concerned persons. Their levy depend upon facts and circumstances of the case, and peculiarities or complexities of the situations involved. Sometimes elements of discretions of levying authorities are also involved therein.
(ii) On the other hand, an ‘offence’ would be the one which will arise as a result to commission of an action which is prohibited by law, and, in all the given situations, no element of any consent of the parties involved can bring any change in its legal consequences. Similarly, any amount paid by the assessee, in the form of compensation, as a consequence of breach of contract between the two parties, cannot be said to be amount paid for any purpose which is an ‘offence’, prohibited by the law. In other words, under the income tax law, one is required to go into the real nature of the transactions and not to the nomenclature that may have been assigned by the parties. Thus, to decide such issues, we are required to see real substance under the Income Tax Law, and not merely its form. Thus, only those payments, which have been made by the assessee for any purpose which is an ‘offence’ or which is ‘prohibited by law’, shall alone would be hit by the explanation to section 37.