Can we claim short margin penalty charged by exchanges as business expenditure and set off against income?
As per a Quicko article, penalties cannot be claimed as a business expense -
Expenses which a Trader cannot claim in Income Tax Return
- Personal Expenses – An expense incurred for personal purposes is not deductible.
They also mentioned about it in another thread -
@Quicko is the article referencing tax penalties and interest or any interest/penalty by private parties like Zerodha?
Margin penalty can be claimed as a business expense.
As per Explanation 1 of Section 37 of the Income Tax Act, any expense incurred by a taxpayer which is an offence or is prohibited by law cannot be claimed as a business expense. Eg: Interest paid on late filing of ITR cannot be claimed as a business expense.
Based on the nature of fine or penalty, if the penalty is for breach of a contract, it is deductible as an expense. However, if the penalty is for breach of provision of law, it is not deductible as an expense.
Margin Penalty is a penalty levied on trades performed without sufficient margin. Penalty paid to a stock exchange/broker is not an infringement of law. Thus, it does not violate Explanation 1 of Sec 37 and is deductible as a business expense. A similar judgement was taken by the IT Department in the case of ACIT Vs M/s Arihant Capital Markets Ltd. (ITAT Indore).
P.S: We have updated the quicko article to clarify the same.