There have been instances wherein individuals – most recently Anil Ambani – and companies have actually managed to get tax benefits from the income tax department on the money paid to the Securities and Exchange Board of India (SEBI) to settle matters under the consent mechanism.
Entities have shown the settlement amount paid to SEBI as a deductible business expense to lower their taxable income and thereby the tax liability.
Now, a panel set up by SEBI under the chairmanship of Supreme Court former justice A R Dave to review the consent mechanism has highlighted this regulatory loophole and has recommended the capital market watchdog to take up the matter with the government.
“It may be appropriate for the (SEBI) Board to write to the Central Government to request appropriate changes in the Income Tax Act, 1961 on the lines of the US IRC (Internal Revenue Code) and explore seeking an undertaking, to be reproduced in settlement orders, in respect of non-tax reimbursements,” stated the report submitted by the panel.
Settlement amounts are non-deductible under US laws where the Securities Exchange Commission (SEC) has clearly laid down that applicants cannot seek any kind of indemnification, insurance coverage or reimbursement including tax deduction or tax credit on such amount paid to the regulator.
Interestingly, even the income tax authorities have accepted the reasoning given by the entities and have allowed them to treat the settlement amount as an expense while calculating their taxable income. The premise put forth by the tax authorities is that the settlement amount is not a penalty and the money is paid without an admission of guilt.
In February 2016, the Commissioner of Income Tax (Appeals) allowed Anil Ambani to treat Rs.50 crore paid as settlement charges to SEBI as an expenditure that led to the industrialist declaring a net loss of Rs.43.22 crore for the fiscal.
The Income Tax Appellate Tribunal upheld the observation while stating that the settlement money was paid “without admitting or denying the charges” and hence there was no reason to believe that consent application without admitting guilt amounts to evidence of an offence having been committed.
There have been two other instances as well wherein Pranav Securities and Reliance Share & Stock Brokers claimed tax benefits on account of the settlement money paid to SEBI.
“It is important to determine the crux of the settlement before any conclusion around allowance or disallowance under tax is drawn,” said Ravi Mehta, Partner, Grant Thornton India LLP.
“If the intent of settlement is merely to avoid any undue hardships and buy peace, without the taxpayer being convicted for any offence/wrong-doing or criminal/civil violation, then such payment may not classify as a penalty. Deeming such payment as a penalty will deter the taxpayer from taking benefit of the settlement procedures prescribed by SEBI,” added Mr Mehta.
Between 2014-15 and 2017-18, SEBI disposed 378 matters under the consent mechanism, which was introduced in 2007.