Delhi H.C : Whether the provisions of section 43B are applicable to the SEBI registration fee ?

High Court Of Delhi

CIT vs. BLB Ltd.

Assessment Year : 2001-02

Section : 43B

A.K. Sikri And Suresh Kait, JJ.

IT Appeal No. 1878 Of 2010

December 3, 2010

JUDGMENT

Suresh Kait, J. – The Revenue has preferred the instant appeal challenging the order dated January 29, 2010, passed by the Income-tax Appellate Tribunal (“the ITAT”) proposing the following questions of law that under section 88E of the Act, the assessee is entitled for payment of income-tax of profits and gains of business or profession arising from taxable securities transaction computed in the manner provided in sub-section (2) of an amount equal to the security transaction tax paid in respect of the taxable securities transaction.

“(a) Whether the Income-tax Appellate Tribunal was correct in law in allowing deduction of Rs. 3,84,01,630 to the assessee being the SEBI registration fee holding that the same was statutory fee, allowable as deduction under section 43B of the Act ?

(b) Whether the provisions of section 43B are applicable to the SEBI registration fee ?

(c) Whether the SEBI registration fee is statutory liability in the nature of ‘fee’ within the meaning of section 43B(a) of the Act ?

(d) Whether the Income-tax Appellate Tribunal was correct in law in holding that the payment was made by the assessee during the year and, therefore, deduction was allowable in the year under consideration applying the provisions of section 43B of the Act ?

(e) Whether the order passed by Income-tax Appellate Tribunal is perverse in law and on facts ?”

2. The facts in brief of this case are that the assessee filed the return declaring income at Rs. 8,92,070, which was revised on March 30, 2007, declaring income at Rs. 7,45,34,674. During the assessment proceedings, the Assessing Officer noticed that the assessee had claimed a sum of Rs. 3,94,16,470 being the SEBI registration fee as expense in the profits and loss account. The Assessing Officer required the assessee to justify as to why the same be not disallowed as it was in the nature of prior period expense.

3. The assessee replied that the said payment was made as one-time settlement fees to the SEBI under the Securities and Exchange Board of India (Interest Liability Regularisation) Scheme, 2004. As per the Scheme all the brokers of the Bombay Stock Exchange and the National Stock Exchange were required to pay turnover fees at a prescribed rate for an initial period of five years. For non-payments, the SEBI had charged interest on the amount payable. The brokers were representing to the Board that the fee was arbitrary and excessive. In this process of confrontation, brokers went to the court to get relief and the matter went to the apex court which, vide its judgment in the case of B.S.E. Brokers Forum v. SEBI [2001] 30 SCL 1 (SC), upheld the regulations of the SEBI, holding the fees as reasonable and valid.

4. Even after the verdict in the aforesaid judgment by the apex court in 2001, the non-compliance from the brokers continued for non payment. As a result thereof, the SEBI came out with a scheme of “one-time settlement” for the brokers which they could avail of only if they paid the registration fee on the annual turnover fees along with 20 per cent of the total interest before a specified date, i.e., November 15, 2004. The assessee also opted for one-time settlement and paid the amount. It was claimed as deduction on the ground that since the liability was quantified in that year and, therefore, the expense was allowable during the year under consideration. Further, he contended that since the amount was paid during the year the same was allowed even as per the provisions of section 43B of the Act.

5. The aforesaid contentions could not convince the Assessing Officer. He observed that :

(i) the assessee was legally bound to pay annual regulatory fees based on turnover to the SEBI,

(ii) the liability was contested before the court and, therefore, the same was unascertained till the appeal was pending,

(iii) with the final verdict by the hon’ble Supreme Court in the year 2001, the whole of the liability (principal + interest) became ascertained liability,

(iv) since the liability became final and got crystallized in February, 2001, the same was to be claimed by the assessee in the assessment year 2001-02,

(v) since the liability got finalized and crystallized even on payment basis as it belonged to prior period,

(vi) by making the payment in 2004, the assessee-company discharged its liability in the year 2004 though it accrued in the year 2001.

6. The Assessing Officer relied on the judgment of this court in Delhi Tourism and T.D.C. Ltd. v. CIT [2006] 285 ITR 114/155 Taxman 10 (Delhi) wherein it was held that the assessee was not entitled to claim the deduction in the year under consideration for prior period expenses. On this basis, the Assessing Officer disallowed the deduction of Rs. 3,84,01,623 as claimed by the assessee.

7. The assessee being aggrieved by the aforesaid disallowance, preferred an appeal before the Commissioner of Income-tax (Appeals) on the contentions as under :

(a) The disallowance of the expenditure incurred was neither justified on facts nor could have been disallowed in law since the said sum was to be allowed as a deduction under section 43B of the Act.

(b) The Assessing Officer had erred in restricting the claim of rebate under section 88E of the Act, at Rs. 2,76,81,059 (as against the claim which should have been allowed on Rs. 8,35,86,315).

(c) There was no dispute that the assessee had paid a sum of Rs. 8,35,86,315, i.e., securities transaction tax which was the sum levied on each transaction purchase and sale made by the assessee-broker or any other intermediary on the stock exchange with effect from October 1, 2004. It may be clarified that in so far as the sum of Rs. 3,84,01,623 is a distinct “fee” and represents turnover “fee”.

8. The Commissioner of Income-tax (Appeals), for the reasons stated in its order, held that the Assessing Officer was not justified in disallowing the claim of expenditure incurred. He was of the opinion that the payment of Rs. 3,84,16,023 to the SEBI as registration “fee” was nothing but “a fee” under regulation 10 of the SEBI (Stock Brokers and Sub-Brokers) Regulations Act, 1992, and since it is the “fee”, it had to be allowed as a deduction in terms of section 43B of the Income-tax Act. Even if it is held that it pertained to prior period and not falling in the assessment year or even is the liability and accrued in the years when the transactions were entered and could be held as non-contingent.

9. The Commissioner of Income-tax (Appeals) has also held that the calculations made by the Assessing Officer was not correct and the assessee ought to have been allowed the deduction of Rs. 3,95,27,704, and not only of Rs. 2,76,81,059 as calculated by the Assessing Officer.

10. Aggrieved by this order, the Revenue/Department filed an appeal before the Income-tax Appellate Tribunal who relied on the order passed by the Income-tax Appellate Tribunal, Mumbai Bench, in the case of ITO v. Sureshchand Jain [2006] 100 ITD 435 (Mum.) and another in the case of I. Kay Holding Co. (P.) Ltd. v. Dy. CIT [2009] 32 SOT 586 (Delhi) wherein it had been held that the SEBI turnover fee, being a statutory liability was allowable under section 43B of the Act. Accordingly, in the present case, the Income-tax Appellate Tribunal held that the same as “fee” is falling under section 43B in the year under consideration as the payment was made during the year.

11. The Income-tax Appellate Tribunal has come to the conclusion on the following basis :

(i) The SEBI is a nodal agency for regulating the stock market, brokers, sub-brokers, and other brokers and intermediaries who have registered themselves with the SEBI.

(ii) The SEBI Act, 1992, empowers the SEBI to levy “fee” for registration for registering brokers/sub-brokers called as the SEBI registration “fee”.

(iii) The SEBI Regulations also prescribe the basis for charging of the SEBI registration “fee” which is relatable to the turnover of the assessee.

(iv) The brokers, however, were representing to the Board that the “fee” was arbitrary and excessive.

(v) The brokers forum went to the Supreme Court who, vide its judgment dated February 7, 2011, upheld the regulations of the SEBI and held that the “fee” levied by the SEBI was reasonable and valid.

(vi) In the meantime, the SEBI came out with one-time settlement “fee” along with interest for non-late payment of the SEBI registration “fee”. There was a case of Lalit Kumar Marodia v. Union of India [2005] 59 SCL 474 (Cal.) wherein an interim order was passed by the High Court on May 20, 2004, where after the payment was made by the appellant.

12. The Revenue/Department has taken a ground that the order passed by the Income-tax Appellate Tribunal is not sustainable in law, inter alia, for the following reasons :

(a) Because the order passed by the Income-tax Appellate Tribunal is not in accordance with law.

(b) Because the Income-tax Appellate Tribunal has erred in deleting the addition of Rs. 3,84,01,623 made by the Assessing Officer by disallowing the deduction of the SEBI registration fees claimed by the assessee.

(c) Because the Income-tax Appellate Tribunal erred in holding that the SEBI registration fee was a statutory liability and it was a fee within the meaning of section 43B and, therefore, was allowable on payment basis.

(d) Because the Income-tax Appellate Tribunal did not appreciate that the assessee was bound to pay annual regulatory fees based on turnover to the SEBI as per its regulations. The liability became ascertained in the year 2001 when the Supreme Court gave the final verdict holding the fee reasonable and valid. Accordingly, the assessee had to claim it in the assessment year 2001-02 since the liability accrued in the year 2001, it could not have been allowed in the year under consideration even on payment basis being a prior period expense.

(e) Because the judgment of this High Court in the case of Delhi Tourism &T.D.C. Ltd. (supra) is clearly applicable to the present case wherein it is held that the electricity charges for electricity consumed were a non-liability to the assessee and the assessee could make a provision for every year of assessment, on the basis of average, even if no bill was received in a particular year ; if the assessee failed to provide for a known expenditure, the same could not be claimed in a subsequent year.

(f) Because, in the present case, the assessee has failed to provide for a known liability and, therefore, it could not have been allowed in the year of payment.

(g) Lastly, because the SEBI registration fee was not a statutory liability or statutory fee within the meaning of section 43B(a) of the Act, rather it was a contractual liability as whosoever wanted to become member of stock exchange, he was under an obligation to pay registration fee to the SEBI.

13. On the other hand, the learned counsel Mr. C.S. Aggarwal, senior advocate appeared on behalf of the assessee, who submits as under :

(i) The assessee is a public limited company, mainly dealing in buying and selling of shares on its own account. The company also acts as a share broker, and is a member of the National Stock Exchange and the Bombay Stock Exchange.

(ii) On October 29, 2005, the assessee furnished its return of income declaring at Rs. 8,92,070. The assessee revised its return of income on March 30, 2007, and declared therein was at Rs. 7,43,34,674 as per the original profit and loss account.

(iii) The Assessing Officer issued questionnaire directing the assessee to furnish certain details in compliance thereto, necessary details, as were directed were duly furnished by the assessee on August 6, 2007.

14. The assessee further filed additional reply dated October 15, 2007. In his submission made before the Assessing Officer, an amount claimed as an expenditure of Rs. 3,95,27,704 since represents “fee” is to be allowed as a deduction as provided under section 43B of the Income-tax Act. It was further stated that the amount paid aggregating to Rs. 3,94,16,470 was settlement “fee” payable to the SEBI and was the sum allowable as a deduction under section 43B of the Act. The Assessing Officer, however, disallowed a sum of Rs. 3,84,01,623 out of the amount incurred and paid and allowed only Rs. 10,14,847.

15. Further, the assessee stated the nature of payment was “fee”. In this context, the assessee-company referred to the provisions of regulation 10 of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, the assessee-company had also furnished the details of its income for the assessment years 2002-03 to 2004-05 which is detailed below :

Assessment year Returned income Assessed income Remarks
2002-03 1,52,33,614 1,52,33,610 143(1)
2003-04 2,24,47,176 2,24,47,176 143(3) 115JB
2004-05 14,27,77,827 14,27,77,830 143(3) 115JB

16. Counsel for the assessee further argued that the aforesaid sum of Rs.3,84,01,623 was not really one-time payment which is an incorrect expression used since such turnover “fee” had to be paid on yearly basis, and is being regularly paid thereafter. He further pointed out that the BSE Brokers Forum, Bombay, and others had challenged the levy of “fee” and the Supreme Court held, by its judgment dated February 11, 2001, that under the SEBI Regulations, the SEBI has the power to levy such a “fee”.

17. Counsel for the assessee pointed out that the Revenue Department has also placed on record Schedule III to the Securities and Exchange Board of India, which provides the liability to pay “fee” by every broker in respect of its annual turnover. Further, he submits that in the instant case, the petitioner company made the payment of Rs. 3,94,16,407 in the instant year. As submitted by him that the aforesaid sum was paid on the basis of the notified scheme duly gazetted in Part II, Schedule III published by the Securities and Exchange Board of India dated July 15, 2004 and was designated as the SEBI (Interest Liability Regularisation) Scheme, 2004. In fact, the Assessing Officer allowed Rs. 10,14,847 which represented the payment made out of current year’s liability. The Assessing Officer, however, framed an assessment on December 19, 2007, whereby allowing the claim of expenditure incurred by way of “fee” as an allowable deduction. In fact, while making the disallowance the Assessing Officer did not consider the provisions of section 43B of the Act. In other words, the assessment had been framed at an income of Rs. 11,29,36,297 by disallowing the claim of expenditure aggregated at Rs. 3,84,01,623 out of the SEBI registration “fee” and otherwise accepting the income returned as per its revised computation of income. The Assessing Officer further did not correctly compute the rebate allowable under section 88E of the Act.

18. Counsel for the assessee has pointed out that the aforesaid sum of fee has been paid by the assessee-company before the due date, i.e., November 15, 2004, as per details. The said sum of expenditure incurred was paid on the basis of “quantification”, made by the SEBI, in accordance with the scheme formulated on July 15, 2004, requiring the share brokers to make a payment on or before November 15, 2004.

19. The learned counsel for the assessee further submitted that it cannot be disputed that the said sum of expenditure had been incurred in the course of business and represents “fee” levied by the SEBI, which regulates the mechanism of stock market and protects the investors, stock brokers and other intermediaries for which registration “fee” is charged by it, in accordance with the Central enactment. As submitted that the said sum paid by the assessee was a “fee” under the law, formulated by the SEBI and it is a Central enactment and has legal force. On the basis of the above argument, he concluded his arguments and submitted that there can be no justification on the part of the Revenue to have disallowed the said sum of expenditure which has been found to be allowed by the Commissioner of Income-tax (Appeals) which falls strictly, within the provisions of section 43B of the Income-tax Act. It is further submitted that merely because the expenditure pertains to the preceding years can be no ground to disallow the claim since under section 43B of the Income-tax Act, where expenditure has been incurred by way of tax “fee”, etc. The sum of liability is to be allowed only when the payment is actually made and is not allowed in the year to which it pertains.

20. Learned counsel further points out that section 43B(a) of the Act was substituted by the Finance Act, 1988, with effect from April 1, 1989. Prior to the substitution, “cess” and “fees” were not included in the definition. However, according to the perception of the Income-tax Department as contained in Circular No. 528, dated December 16, 1988 (See [1989] 176 ITR (St.) 154), was that, the disallowance to be made was to cover any amount payable, to any statutory authority including local authority and could be allowed only in the year in which such an amount is paid. In view, therefore, the amendment was made and it was clarified that such an amount would also be allowed only on actual payment irrespective of the previous year in which liability to pay such sum was incurred.

21. Counsel for the respondent has further drawn our attention that on the identical issue which arose before the Income-tax Appellate Tribunal where in the similar deduction was allowed. It was held in the case of ITO v. Sureshchand Jain (supra) by the Tribunal that the registration “fee” paid to the SEBI is a “fee” and falls under section 43B of the Income-tax Act.

22. After hearing both the parties, we are of the view that the assessee on a query replied to the Assessing Officer that the said payment in question was made as one-time settlement fees to the SEBI under the Securities and Exchange Board of India (Interest Liability Regularisation) Scheme, 2004. As per the Scheme, all the brokers of the Bombay Stock Exchange and the National Stock Exchange were required to pay turnover fees at a prescribed rate for an initial period of five years. For non-payments, the SEBI has charged interest on the above payment. Against the said charges the brokers approached the Board that the fee was arbitrary and excessive. In this process of confrontation brokers went to the court to get relief and matter went to the apex court who, vide its judgment dated February 1, 2001, in the case of B.S.E. Brokers Forum (supra) has upheld the regulations of the SEBI, holding the fees as reasonable and valid. As a result thereof, the SEBI came out with a scheme for one-time settlement by the brokers which they would be able to avail of only if they pay the registration fee on the annual turnover fees along with 20 per cent of the total interest before a specified date, i.e., November 15, 2004. The assessee, in this case, also opted for one-time settlement, owned the contention that since the liability was quantified during the year and, therefore, the expense was allowable during the year under consideration. Further, since the amount was paid during the year, the same was allowed even as per the provisions of section 43B of the Act. The Assessing Officer also did not appreciate that the assessee was bound to pay the annual regulatory fees based on turnover to the SEBI as per its regulations.

23. The aforesaid sum in question was paid on the basis of the notified scheme duly gazetted in Part II, Schedule III published by the Securities and Exchange Board of India dated July 15, 2004, and was designated as the SEBI (Interest Liability Regularisation) Scheme, 2004. In fact, the Assessing Officer has allowed Rs. 10,14,847 which represented the payment made out of current year’s liability. Having observed that the Assessing Officer has, however, framed an assessment on December 19, 2007, where he has allowed as stated above, the claim of expenditure incurred by way of “fee” as an allowable deduction.

24. According to the perception of the Income-tax Department as contained in Circular No. 528, dated December 16, 1988, the disallowance was to cover any amount payable to any statutory authority including local authority and could be allowed only in the year in which such an amount is paid. In that view, therefore, the amendment was made and it was clarified that such an amount would also be allowable only on actual payment irrespective of the previous year in which liability to pay such sum was incurred. In view thereof, the amendment was made and it was clarified that such an amount would also be allowable only on actual payment irrespective of the previous year in which liability to pay such sum was incurred.

25. Keeping in view the above discussion, we find that no question of law has arisen in the instant appeal. We are not inclined to interfere with the order/judgment passed by the Income-tax Appellate Tribunal. The instant appeal filed by the Revenue accordingly dismissed with no order as to costs.

[Citation : 347 ITR 139]

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