In an assessee-favor ruling, the Indore Bench of Income Tax Appellate Tribunal (ITAT) has held that penalty paid to stock exchange is a regular business expenditure.
The issue before the division bench comprising Shri Kul Bharat as the Judicial Member and Shri Manish Board as the Accountant Member was with respect to the disallowance made by the Assessing Officer (AO) u/s 14A of the Income Tax Act r/s Rule 8D of the Income Tax Rules to 0.05%.
Laying down the facts of the present case, the AO observed that the assessee has made investments in shares and also incurred expenditure on interest. However, no expenditure was disallowed u/s 14A of the Act. Hence, the AO made a disallowance of the same which included interest disallowance and administrative expenses.
The assessee contended that no expenditure was incurred in relation to earning exempt income. The investments were made out of own capital and reserves and the assessee has no effective borrowing. Further, major investments were brought forward from earlier years and they majorly included unlisted shares of subsidiary companies which never yielded any income. The assessee relying upon a case held that if both funds are available with the assessee i.e. interest bearing funds and interest-free funds then the presumption would arise that investment made would be out of interest-free funds available with the company if the interest-free funds are sufficient to meet the investments.
After considering the arguments of both the parties, the Tribunal considered that it was nowhere mentioned that the penalty paid by the assessee levied by the Stock Exchange was paid for infringement of any law. Hence, the assessee made no offence prohibited by law which can be contemplated to be covered under Explanation to Section 37 of the Act and therefore, the payment of penalty made by the assessee to the Stock Exchange is regular business expenditure and the impugned disallowance has rightly been deleted by the learned Commission of Income Tax (CIT).
