Decided on October 22,2014

Income Tax Appellant
Reliance Share And Stock Brokers (P) Ltd. Respondents


B.R.Baskaran, Member (A) - (1.) THE appeal filed by the revenue is directed against the order dated 02.11.2012 passed by Ld CIT(A) -8, Mumbai and it relates to the assessment year 2008 -09.
(2.) THE revenue is in appeal before us in respect of the following issues: - (a) Disallowance made u/s. 14A r.w. rule 8D (b) Disallowance of consent fee paid to SEBI. The facts relating to the above said issues are stated in brief. The assessee company is engaged in Share broking business. It filed its return of income for the year under consideration declaring loss of Rs. 1,55,950/ -. The said return of income came to be scrutinized by the assessing officer. On examination of the same, the AO noticed that the assessee has disclosed dividend income of Rs. 2,13,016/ - and claimed the same as exempt from taxation. It appears that the assessee did not make any disallowance u/s. 14A of the Act. Hence, the assessing officer asked the assessee to compute the disallowance to be made in terms of sec. 14A of the Income Tax Act, 1961 (the Act). The assessee furnished workings, wherein the interest disallowance was worked out at Rs. 29,91,393/ - and the expenses to be disallowed was worked out at Rs. 15,58,023/ -. The assessing officer accepted the working given for disallowing expenses, but did not agree with the assessee with regard to the interest disallowance. The AO took the view that the provisions of Rule 8D of the Income Tax Rules, 1962 (the Rules) have to be adopted in letter and spirit and accordingly took the view that the interest disallowance needs to be computed in terms of Rule 8D(2)(ii) of the Rules. Accordingly, the AO worked out the interest disallowance at Rs. 2,50,84,476/ -. Accordingly, the assessing officer disallowed a sum of Rs. 2,66,42,967/ - (Rs. 2,50,84,476/ - + Rs. 15,58,203/ -) u/s. 14A of the Act. (There is a casting error, the addition should have been Rs. 2,66,42,679/ -).
(3.) THE AO further noticed that the assessee has paid a sum of Rs. 50.00 lakhs to SEBI as consent fee. On further examination, it was noticed that the SEBI has recommended for suspension of the Certificate of Registration as Stock broker for a period of nine months for violating the various regulations framed by SEBI. After hearing the assessee, the period of suspension was reduced to four months. The assessee had challenged the said order by filing 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. 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 the said claim by invoking the Explanation to Sec. 37(1) of the Act.;

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