Whether violations of Rules & Regulations of NSE by members could be offence or act prohibited by law — Held, No. Whether fine paid by member to NSE can be disallowed under Explanation to S. 37(1) — Held, No.

30 Goldcrest Capital Markets Ltd. v. ITO

ITAT ‘B’ Bench, Mumbai

A.Y. : 2003-04. Decided on : 21-1-2009

Counsel for assessee/revenue : Ajay Gosalia/

Pitamber Das

The assessee, a member of the National Stock Exchange (NSE),
debited its profit & loss account with a sum of Rs.3,85,511 on account of bad
delivery and other charges. In the course of assessment proceedings the assessee
explained that this amount represents payments to NSE (a) Rs.2,50,000 for
violation of Capital Market Segment Trading, (b) Rs.1,00,000 for change in
shareholding pattern, and (c) Rs.35,511 — for miscellaneous. According to the
AO, Stock Exchanges were regulated by SEBI which was a statutory body
constituted by an Act of the Parliament and such Rules & Regulations of SEBI
having been framed in public interest, fine for violation could be considered as
penalty. He disallowed Rs.3,85,511 on the ground that these fines were penal in
nature and could not be allowed as deduction in view of the Explanation to S.
37(1).

The CIT(A) upheld the disallowance of Rs.3,50,000 on the
ground that the fine of Rs.2,50,000 imposed for violation of Rules fell under
the heading ‘unfair trade practice’ and such violations being for breach of
public policy, fine imposed was in the nature of penalty and as regards the fine
of Rs.1,00,000 he was of the view that violation of clause 30 of Membership
undertaking for capital market segment of the Exchange was also a violation of
Rule 4(c) of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992.

Aggrieved, the assessee preferred an appeal to the Tribunal.

The Tribunal held that NSE is not a statutory body on par
with SEBI. Fines & penalties levied for violation on account of ‘unfair trading
practice’ as specified in 4.6 of NSE regulations and ‘un-business like conduct’
as specified in IV(4)(e) of the NSE Rules cannot be equated with violation of
statutory rule or law. Since there was no violation of law, the fine paid for
non-observance of internal regulations of Stock Exchange was held to be
allowable. The Tribunal stated that its reasoning gets support from the decision
of the co-ordinate Bench in the case of CFL Ltd.