Section 28(i) — Penalty paid on account of failure to maintain margin money and not recovered from client, was an allowable loss.

ITO vs. VRM Share Broking (P.) Ltd.

A.Y. : 2004-05. Dated 03.11.2008

1. Section 28(i) — Penalty paid on account of failure to
maintain margin money and not recovered from client, was an allowable loss.
2. Section 37(1) of the Income-tax Act, 1961 —Penalty paid to SEBI for ‘excess
utilisation limits’ was an allowable business expense.

 

For the relevant assessment year, the Assessing Officer
disallowed the following amounts claimed by the assessee as expenses :

a. Amount not recovered from client on account of failure
to maintain margin money of 20% of the price of the securities proposed to
be purchased by the client.

b. Amount paid to the NSE for violation of the margins
imposed by SEBI on the share brokers.

Both the disallowances were deleted by the CIT(A).

The Tribunal, following the decision of the Bombay High
Court in the case of CIT vs. Gwalior Rayon Silk Manufacturing (Wvg.)
Co. Ltd. [1999] 237 ITR 23/102 Taxman 433, also held in favour of the
assessee. The Tribunal noted as under :

1. From the perusal of various Notifications issued by
SEBI, it was apparent that they were issued mainly in the context of risk
management rather than as penal provisions for punishing the defaulters or
deeming the transactions as illegal. In view of the same, it was held that
irrespective of whether the margin money was available or not, the loss
could not be held as illegal loss. The benefit of set-off of the same
against the income or allowing the same to be carried forward to the later
years cannot be denied to the assessee.

2. The amount paid was a penalty levied for violation of
the margins imposed by SEBI on the sharebrokers. From the Notification
issued by SEBI, it was found that such margins were imposed in order to
reduce the risk components and, therefore, those were basically risk
management oriented penalties, which were routine in nature. Having regard
to the purpose of the provisions of Section 37(1) which is aimed at
providing deterrence for infraction of laws of the country, the violation in
the instant case was not such that it would attract the provisions of
Section 37(1).