Judgment:
1. This appeal by the assessee is directed against the order of learned CIT(A)-II, Ludhiana, dt. 7th Dec, 2005.
That the order under Section 250(6) passed by the learned CIT(A), Ludhiana, is against law and facts on the file inasmuch as the learned CIT(A) was not justified to uphold the disallowance of Rs. 68,330 by holding the same in the nature of fees and penalty. The expenditure was incurred for running day-today business of the appellant company and could not be termed as any fine or penalty for infraction of any law.
3. The relevant facts of the case under consideration in brief are that the AO during the course of assessment proceedings noticed that the assessee had paid following amounts on account of NSE violations and on account of fine and penalty: The AO asked the assessee to show-cause why those amounts should not be disallowed. The assessee submitted that the expenses were incidental to the business of the assessee and were compensatory in nature as such the expenses were rightly being claimed and were allowable. The AO did not accept the contention of the assessee and disallowed the expenses amounting to Rs. 68,330.
4. The assessee carried the matter to the learned CIT(A) and submitted that expenditure was incurred for running day-to-day business of the assessee and not for infraction of any law. It was further contended that the assessee was a member of NSE and was dealing in purchase and sale of shares as share broker mainly on behalf of its clients and its own account also. Regarding disallowance amounting to Rs. 68,330, it was stated that NSE has prescribed various procedures to check and control the operations of all trading members, non-compliance of which attracts fines which is in the normal course of trading operations. It was contended that NSE fixed the limit of every trading member for the total exposures according to the margin (FDRs, bank balance transfer, bank guarantees, securities, etc.) deposited by the member whenever due to increase in trading volume of member exposure reaches/crosses that fixed exposure limit, the trading terminal of a member is automatically closed/switched off and the NSE charged Rs. 5,000 per instance to allow to start the trading terminal of the member which was in the normal course. It was explained that out of total the amount of Rs. 30,000 was charges debited by the NSE for violation of that exposure limit six times which was in the normal course of business and not infraction of any law. It was further stated that every member of stock exchange was required to submit a margin certificate (for total deposits taken from the clients against their exposures) on quarterly basis to the NSE. NSE has charged Rs. 9,300 (Rs. 6,200 + Rs. 3,100) due to the late submission of margin certificates. It was stated that NSE charged per day penalty for delay in submission of that margin certificate which is in normal course of business and not due to infraction of any law and that the late submission was due to unavoidable circumstances/computer software problem. It was further stated that NSE had prescribed the time-limit for delivery of shares to the NSE against sale of shares made by the member and Rs. 29,030 were charged on NSE accounts for non-delivery of shares or deficiencies in the documents in the deliveries of shares (bad delivery) which was in the normal course of business and not due to infraction of any law. It was accordingly submitted that the expenditure incurred was very much in the nature of revenue expenditure and had been incurred for running of day-to-day business of the assessee and not for infraction of any law, thus be allowed as business expenditure.
5. Learned CIT(A) after considering the submissions of the assessee and comments of the AO, wherein he mainly relied on the assessment order, observed that the payments were made on account of NSE violations as well as fine and penalty which were penal in nature. He, therefore, confirmed the action of the AO. Now, the assessee is in appeal.
6. Learned Counsel for the assessee vehemently argued that there was no instance of infraction of any law and the fines had been paid in the normal course of business operations. It was further stated that delay occurred in making the deliveries of the shares for various reasons like signatures were not matching, shares were not received from the clients, etc. and similarly late submission of margin certificate was due to unavoidable circumstances like the computer software problems, etc. which were beyond the control of the assessee. It was further submitted that in the normal course of business exposure limit was crossed due to increase in trading volume but that was not intentional, so, it was also in regular course of business and there was no infraction of any law.
7. In his rival submissions, learned Departmental Representative for the Revenue strongly supported the orders of authorities below and further submitted that the SEBI had fixed certain norms for the working of different stock exchanges which in turn had framed rules and regulations to conduct the business smoothly, those rules and regulations are applicable to the members of respective stock exchange and if any violation is there that violation is in the nature of infraction of law, so, the penalties and fines levied in violation of guidelines were not allowable as business expenses, therefore, the AO was justified in making the disallowance and the learned CIT(A) rightly confirmed the disallowance.
8. We have considered the rival contentions and carefully gone through the material available on record. In the instant case, it is noticed that the assessee incurred the expenses in the shape of fines during normal course of business and there was no infraction of any statutory law. In such type of business it is beyond the control of share broker to know in advance that the trading volume will increase beyond the fixed exposure limit because trading depends upon the market trend and on certain dates there can be extraordinary increase in trading volume.
On that increased trading volume, the concerned member also earns income in the shape of commission, etc. which is taxable so, the fine paid which was co-related with the increase in trading volume which crossed the fixed exposure limit, cannot be considered as infraction of law although irregularities are there, and for those irregularities, the assessee suffered and paid the fine but this payment cannot be termed as penal in nature. Similarly, late submission of margin certificate due to computer software problem, cannot be considered as infraction of law and if any fine is paid for such late submission, due to unavoidable circumstances in the regular course of business that cannot also be termed as penal in nature. Similarly, fine paid for delay in making the deliveries of shares due to deficiencies in the documents like non-matching of signatures, etc. cannot be considered penal in nature; irregularities of this type cannot be ruled out in such type of business and any fine paid for those irregularities cannot be considered as infraction of any law. So, the payments made by the assessee in the regular course of business, cannot be termed as penal in nature, particularly when the assessee did not commit those irregularities intentionally and regularly. The AO disallowed the fine levied for the transactions where the trading volume reached or crossed the fixed exposure limit. Similarly, as regards to the deliveries or bad deliveries of the shares, it is not the case of the Department that the assessee was committing those mistakes intentionally and regularly.
On the other hand, the contention of the learned Counsel for the assessee that those deficiencies were unintentional and occurred in the regular course of business, cannot be brushed aside. We, therefore, considering the totality of the facts of the present case, are of the opinion that in the instant case although some violations of the conditions prescribed by the NSE was there but that violations occurred in the regular course of business and cannot be considered as infraction of any statutory law. So, the expenses incurred by the assessee in regular course of business were allowable. In that view of the matter, we set aside the order of learned CIT(A) and direct the AO the allow the expenses claimed by the assessee.