Allowability of expenditure incurred for compliance of law
If the payment is incidental to the carrying on the business then the same has to be allowed; the compliance of law is incident of every business carried on by a person; therefore, any payment made for the purpose of compliance of the provisions of law would tantamount to payment incidental to the carrying on the business.
ITAT, ‘A’ BENCH, MUMBAI
Kaira Can Company Ltd.
v.
DCIT
ITA No. 820/Mum./05 & 3452/Mum/2006
January 9, 2009
RELEVANT EXTRACTS:
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21. In the present case, admittedly, the assessee is governed by the provisions of SEBI Act. Certain regulations were made under this Act which are called as SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 1997. Under these regulations, the assessee was admittedly required to make certain disclosures and noncompliance of the same was liable to penalty not exceeding Rs.5,000/- for every day during which such non-compliance continued. In addition, such persons are also liable for prosecution u/s. 24 of the SEBI Act. In view of the above provisions, it is clear beyond doubt that non-disclosure under the Regulations of 1997 would amount to violation of law or the Rule which, in turn, would amount to an offence. Therefore, if any payment is to be made by way of penalty under the provisions of section 15A of SEBI Act. than such payment cannot be allowed as deduction u/s. 37 read with Explanation.
22. However, the contention of the learned counsel for the assessee is that the payment has not been made by the assessee u/s. 15A of SEBI Act. According to him, the payment was under an option given under the scheme of 2002 and therefore such payment cannot be said to be either as a penalty or akin to penalty. Hence, no disallowance could be made as per the decision of the apex court in the case of Ahmedabad Cotton Manufacturing Company Ltd. (supra). After going through the scheme, we find force in the contention of the learned Counsel for the assessee for the reasons given hereafter. In order to appreciate the controversy, it would be appropriate to reproduce the relevant provisions of the scheme as under:
SEBIREGULARIZA TION SCHEME, 2002 FOR NON-COMPLIANCE
WITH REGULA TIONS 6 AND 8 OF THE SEBI (SUBSTANTIAL
ACQUISITION OF SHARES AND TAKEOVERS)
REGULATIONS, 1997
In terms of Chapter II of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as 'the Takeover Regulations, 1997') certain categories of persons are required to disclose their shareholding and/or control in a listed company to that company. Such companies, in turn, are required to disclose such details to the stock exchanges where shares of the company are listed. If has been observed that many listed companies and/or their promoters/shareholders have either not complied at all or have complied with the said requirements after the expiry of the time specified in the said regulations.
In terms of section ISA of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as 'the SEBI Act'), such persons are liable to a penalty not exceeding five thousand rupees payable for ever day during which such failure to furnish information, return, report, or document etc. continues. Besides, such persons are also liable for prosecution under section 24 of the SEBI Act.
It has also been brought to the notice of the Securities and Exchange Board of India (SEBI) that the disclosures were not made either on account of oversight or lack of knowledge. The monetary penalty under Section 15A of the SEBI Act may be imposed after adjudication and enquiry under Chapter VIA of the SEBI Act. Further, the prosecution proceedings involve considerable time and even if concluded in conviction, the penalty, monetary or otherwise, may be very nominal.
In view of the above, SEBI has decided to introduce a scheme, namely, SEBI Regularization Scheme, 2002' (hereinafter referred to as the Scheme') to enable such persons and companies to comply with these requirements. Under the Scheme, the persons and companies who have not made disclosures or who have made disclosures after expiry of the period as specified in the Takeover Regulations, 1997 are permitted to make disclosures to the company and the stock exchange as the case may. be, and pay the lump-sum amount specified herein.
This is to provide one time opportunity to enable the companies and the specified persons to comply with the law of land. By implementation of the Scheme, the listed companies as well as the stock exchanges shall have the required information. Besides, the public will also have access to the necessary information about the shareholding etc. of such persons in the company.
The Scheme will be in operation for a limited period as specified hereinafter. The persons and the companies may, therefore, take fidl advantage of this Scheme. It is also clarified that after the expiry of the Scheme, SEBI may have to initiate appropriate action against defaulting persons and the companies, which may result in heavy penalties against such persons and companies, as per the provisions of the SEBI A ct.
Therefore, in exercise of the powers under section 11 of the SEBI Act read with regulations 6 and 8 of the Takeover Regulations, 1997, SEBI hereby introduces the said Scheme. The salient features of the Scheme are as under:-
Regularization of the Defaults
L Under the Scheme, the eligible persons and companies may make
disclosures and pay the lump-sum amount within the period specified under the Scheme.
Eligibility
2. Following are eligible for availing benefit under this scheme -
a) Persons who have failed to comply with or who have complied with the requirements of regulations 6(1), 6(3), 8(1) and 8(2) of the Takeover Regulations, 1997. after expiry of the period specified in the said regulations.
b) The listed companies which had failed to comply with or complied with the requirements of regulations 6(2), 6(4) and 8(3) of the Takeover Regulations, 1997, after expiry of the period specified in the said regulations.
c) In respect of the listed companies where there was no change in the shareholding of persons specified under regulations 8(1) and 8(2) of the Takeover Regulations, 1997. in a particular year, the disclosure under regulation 8(3) for that year if not made earlier, can be made under this scheme specifying that there was no change in shareholding of the said persons. Such companies will not be required to pay any amount. This benefit will not be available to persons covered under regulations 8(1) and 8(2)."
d)
Scheme not to apply in certain cases
3. The benefit of this Scheme will not be available I cases where penalty under the SEBI Act read with Takeover Regulations, 1997 has already been imposed.
However, where such proceedings under the SEBI Act read with Takeover Regulations arc in progress, persons/companies may avail the benefit of the Scheme.
The other provisions are not of much significance and it would be suffice if their contents are noted briefly. Rule 4 prescribes the procedure for making disclosure. Rule 5 prescribes the lump sum amount which is to be paid. Rule 6 provides the mode of payment and Rule 7 prescribes the period during which such disclosure could be made.
25. The perusal of the above clearly shows that if the amount paid is in the nature of penalty or akin to penalty then the amount paid can be disallowed. Otherwise, such payment has to be allowed if the payment is incidental to the carrying on the business. The word 'penalty' has been defined by various dictionaries including Black's law dictionary as punishment imposed on a wrongdoer for violation of law. In the present case, the payment has not been made u/s. 15A of the SEBI Act but under a scheme for regularizing the default. The object of the scheme was lo provide a one time opportunity to defaulters for regularizing the default which might have been committed by oversight or lack of knowledge. The purpose was, therefore, not to punish the person but to enable him to comply with the provisions of Regulations of 1997. Thus, in our humble opinion, the payments made by the assessee under the scheme of 2002 could not be treated as penalty or akin to penalty..
26. The only question which remain for our consideration is whether such payment is incidental to the carrying on the business. As already observed, the payment was made under the scheme to regularize the default. The object of the scheme was to enable the companies one time opportunity to comply with the law of land. The compliance of law is incident of every business carried on by a person. Therefore, in our opinion, any payment made for the purpose of compliance of the provisions of law would tantamount to payment incidental to the carrying on the business.
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Posted at www.taxmannindia.blogspot.com
Get Free Quality SMS updates from my blog on your MOBILE:http://labs.google.co.in/smschannels/subscribe/ca_taxmannindiaIf the payment is incidental to the carrying on the business then the same has to be allowed; the compliance of law is incident of every business carried on by a person; therefore, any payment made for the purpose of compliance of the provisions of law would tantamount to payment incidental to the carrying on the business.
ITAT, ‘A’ BENCH, MUMBAI
Kaira Can Company Ltd.
v.
DCIT
ITA No. 820/Mum./05 & 3452/Mum/2006
January 9, 2009
RELEVANT EXTRACTS:
** ** ** ** ** ** ** ** ** ** ** **
21. In the present case, admittedly, the assessee is governed by the provisions of SEBI Act. Certain regulations were made under this Act which are called as SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 1997. Under these regulations, the assessee was admittedly required to make certain disclosures and noncompliance of the same was liable to penalty not exceeding Rs.5,000/- for every day during which such non-compliance continued. In addition, such persons are also liable for prosecution u/s. 24 of the SEBI Act. In view of the above provisions, it is clear beyond doubt that non-disclosure under the Regulations of 1997 would amount to violation of law or the Rule which, in turn, would amount to an offence. Therefore, if any payment is to be made by way of penalty under the provisions of section 15A of SEBI Act. than such payment cannot be allowed as deduction u/s. 37 read with Explanation.
22. However, the contention of the learned counsel for the assessee is that the payment has not been made by the assessee u/s. 15A of SEBI Act. According to him, the payment was under an option given under the scheme of 2002 and therefore such payment cannot be said to be either as a penalty or akin to penalty. Hence, no disallowance could be made as per the decision of the apex court in the case of Ahmedabad Cotton Manufacturing Company Ltd. (supra). After going through the scheme, we find force in the contention of the learned Counsel for the assessee for the reasons given hereafter. In order to appreciate the controversy, it would be appropriate to reproduce the relevant provisions of the scheme as under:
SEBIREGULARIZA TION SCHEME, 2002 FOR NON-COMPLIANCE
WITH REGULA TIONS 6 AND 8 OF THE SEBI (SUBSTANTIAL
ACQUISITION OF SHARES AND TAKEOVERS)
REGULATIONS, 1997
In terms of Chapter II of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as 'the Takeover Regulations, 1997') certain categories of persons are required to disclose their shareholding and/or control in a listed company to that company. Such companies, in turn, are required to disclose such details to the stock exchanges where shares of the company are listed. If has been observed that many listed companies and/or their promoters/shareholders have either not complied at all or have complied with the said requirements after the expiry of the time specified in the said regulations.
In terms of section ISA of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as 'the SEBI Act'), such persons are liable to a penalty not exceeding five thousand rupees payable for ever day during which such failure to furnish information, return, report, or document etc. continues. Besides, such persons are also liable for prosecution under section 24 of the SEBI Act.
It has also been brought to the notice of the Securities and Exchange Board of India (SEBI) that the disclosures were not made either on account of oversight or lack of knowledge. The monetary penalty under Section 15A of the SEBI Act may be imposed after adjudication and enquiry under Chapter VIA of the SEBI Act. Further, the prosecution proceedings involve considerable time and even if concluded in conviction, the penalty, monetary or otherwise, may be very nominal.
In view of the above, SEBI has decided to introduce a scheme, namely, SEBI Regularization Scheme, 2002' (hereinafter referred to as the Scheme') to enable such persons and companies to comply with these requirements. Under the Scheme, the persons and companies who have not made disclosures or who have made disclosures after expiry of the period as specified in the Takeover Regulations, 1997 are permitted to make disclosures to the company and the stock exchange as the case may. be, and pay the lump-sum amount specified herein.
This is to provide one time opportunity to enable the companies and the specified persons to comply with the law of land. By implementation of the Scheme, the listed companies as well as the stock exchanges shall have the required information. Besides, the public will also have access to the necessary information about the shareholding etc. of such persons in the company.
The Scheme will be in operation for a limited period as specified hereinafter. The persons and the companies may, therefore, take fidl advantage of this Scheme. It is also clarified that after the expiry of the Scheme, SEBI may have to initiate appropriate action against defaulting persons and the companies, which may result in heavy penalties against such persons and companies, as per the provisions of the SEBI A ct.
Therefore, in exercise of the powers under section 11 of the SEBI Act read with regulations 6 and 8 of the Takeover Regulations, 1997, SEBI hereby introduces the said Scheme. The salient features of the Scheme are as under:-
Regularization of the Defaults
L Under the Scheme, the eligible persons and companies may make
disclosures and pay the lump-sum amount within the period specified under the Scheme.
Eligibility
2. Following are eligible for availing benefit under this scheme -
a) Persons who have failed to comply with or who have complied with the requirements of regulations 6(1), 6(3), 8(1) and 8(2) of the Takeover Regulations, 1997. after expiry of the period specified in the said regulations.
b) The listed companies which had failed to comply with or complied with the requirements of regulations 6(2), 6(4) and 8(3) of the Takeover Regulations, 1997, after expiry of the period specified in the said regulations.
c) In respect of the listed companies where there was no change in the shareholding of persons specified under regulations 8(1) and 8(2) of the Takeover Regulations, 1997. in a particular year, the disclosure under regulation 8(3) for that year if not made earlier, can be made under this scheme specifying that there was no change in shareholding of the said persons. Such companies will not be required to pay any amount. This benefit will not be available to persons covered under regulations 8(1) and 8(2)."
d)
Scheme not to apply in certain cases
3. The benefit of this Scheme will not be available I cases where penalty under the SEBI Act read with Takeover Regulations, 1997 has already been imposed.
However, where such proceedings under the SEBI Act read with Takeover Regulations arc in progress, persons/companies may avail the benefit of the Scheme.
The other provisions are not of much significance and it would be suffice if their contents are noted briefly. Rule 4 prescribes the procedure for making disclosure. Rule 5 prescribes the lump sum amount which is to be paid. Rule 6 provides the mode of payment and Rule 7 prescribes the period during which such disclosure could be made.
25. The perusal of the above clearly shows that if the amount paid is in the nature of penalty or akin to penalty then the amount paid can be disallowed. Otherwise, such payment has to be allowed if the payment is incidental to the carrying on the business. The word 'penalty' has been defined by various dictionaries including Black's law dictionary as punishment imposed on a wrongdoer for violation of law. In the present case, the payment has not been made u/s. 15A of the SEBI Act but under a scheme for regularizing the default. The object of the scheme was lo provide a one time opportunity to defaulters for regularizing the default which might have been committed by oversight or lack of knowledge. The purpose was, therefore, not to punish the person but to enable him to comply with the provisions of Regulations of 1997. Thus, in our humble opinion, the payments made by the assessee under the scheme of 2002 could not be treated as penalty or akin to penalty..
26. The only question which remain for our consideration is whether such payment is incidental to the carrying on the business. As already observed, the payment was made under the scheme to regularize the default. The object of the scheme was to enable the companies one time opportunity to comply with the law of land. The compliance of law is incident of every business carried on by a person. Therefore, in our opinion, any payment made for the purpose of compliance of the provisions of law would tantamount to payment incidental to the carrying on the business.
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Posted at www.taxmannindia.blogspot.com
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