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Money paid under consent settlement can be treated as business expense: IT Appellate Tribunal

The Income Tax Appellate Tribunal (ITAT) has clarified that money paid under the consent decree mechanism to settle disputes is permissible as business expenditure and cannot be equated to penalty levied for breaching law. The clarification will set precedence as many companies are currently negotiating with the market regulator to settle disputes under the consent mechanism by paying a fee but without admitting or denying guilt.

They can record such costs as normal business expenditure and claim tax exemption. No such tax benefit can be taken on penalties levied for breaching law.

The ruling of the ITAT bench of BR Baskaran and Sanjay Garg came on a case related to Reliance Shares & Stock Broker, a unit of Anil Ambani's Reliance Group. For the assessment year 2008-09, the company had declared a loss of Rs 1.55 lakh in its Income Tax return. The assessing officer observed that it had paid Rs 50 lakh to the Securities and Exchange Board of India to settle a dispute, and disallowed it as business expenses.

The regulator had recommended for suspension of the company's certificate of registration as a stock broker for nine months for allegedly violating various regulations. Reliance Shares & Stock Broker challenged Sebi's decision at the Securities Appellate Tribunal, but before the tribunal made a decision, agreed to settle the issue with Sebi by paying Rs 50 lakh under the consent mechanism.

The tax department argued the company had paid a penalty for not following rules under the Sebi Act. The consent order passed by the regulator shall not change the character of violation or penalty initially levied by the board, it said.

The company's counsel submitted that Sebi had initiated the action in connection with certain technical violations based on powers given to the regulator to take administrative or civil action. According to the counsel, the Sebi Act makes clear demarcation of penalties levied under administrative or civil action for technical defaults and the penalties levied for offences committed.

The commissioner of income tax had not accepted the assessing officer's decision disallowing to record the fee as business expense, but that was challenged at the tribunal.

Article referred: http://articles.economictimes.indiatimes.com/2014-11-12/news/56025526_1_securities-appellate-tribunal-consent-mechanism-sebi-act

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