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Income Tax Appellate Tribunal, ‘’D’’BENCH, AHMEDABAD
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)-XVI, Ahmedabad [Ld.CIT in short], dated 18/09/2013 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here- in-after referred to as "the Act") dated 30/12/2011 relevant to Assessment Year (AY) 2009-10. 2. The assessee has raised the following grounds of appeal:
On facts and in the circumstances of the case, the learned CIT (A) has grossly erred in confirming the order passed u/s 143(3) of the Act by the Asstt. Year 2009-10 2
Learned Assessing Officer ('Ld. AO'), which is bad in law, against natural justice and need to quashed.
In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in confirming the disallowance of the expenditure of Rs. 50 lacs incurred by the appellant (Selling Shareholder), claimed as for cost of transferring shares of 20 Microns Ltd ('20ML') in 'offer for sale'.
In law and in the facts and circumstances of the appellant's case, the learned CIT(A) ought to have considered that the aforementioned expense not only had a direct nexus with the transfer of shares but it was wholly and exclusively in connection with the transfer as encompassed by the provisions of section 48(i) of the Act.
In law and in the facts and circumstances of the appellant's case, the learned CIT(A) ought to have considered that reimbursement of IPO expenses in contemplation to sale of shares is an allowable expense u/s48(1) in view of the decision of ITAT Chennai in the case of UsharaniRaqhunathan 2012 vide citation (8) TMI 668. 5. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) ought to have considered that the reason behind reimbursement of IPO expenses of Rs. 50,00,0007- is the adverse market conditions at the time of IPO as against the budget. Further, it was only due to the extra efforts put by 20 ML that its IPO was successful and the aforesaid reimbursement was merely consequential to the same and therefore the appellant could receive Rs. 14.71 crores as consideration in offer for sale. Thus the reimbursement of IPO expenses had a direct nexus with the IPO proceeds.
In law and in the facts and circumstances of the appellant's case, the learned CIT(A)'s contention that 'the issue of sharing of expenses came l• much later' (page 6 of the impugned appellate order) is untenable in view of the provisions of section 45(1) r.w. s. 48(i) of the Act, wherein the chargeability of capital gains to income tax arises on transfer of capital asset effected in the previous year.
In law and in the facts and circumstances of the appellant's case, the learned CIT(A) erred in observing that the payments made by the appellant to 20ML qualifies as 'personal in nature' (page 10 of the impugned appellate order) and not wholly and exclusively in connection with transfer of shares. Asstt. Year 2009-10 3
The Ld. CIT(A) has erred in facts and in law in upholding the charge of interest u/s 234A, 234B and 234C when no such interest is leviable. The appellant denies its liability to pay interest.
The appellant craves leave to add to, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing
The only issue raised by the assessee is that the Ld.CIT (A) erred in confirming the disallowance of Rs. 50,00,000/- representing the cost of transfer of the asset.
Briefly stated facts are that the assessee is an AOP and engaged in the activity of providing Venture Finance Assistance to Information Technology/Software units located in the state of Gujarat. The assessee holds 53,51,264/- shares of M/s 20 Microns Ltd (in short ‘’20 ML’’) which is equivalent to 43% of the total shares of 20 ML. The assessee during the year agreed to sell its 50% shareholdings of ‘’20 ML’’ through IPO to be issued by ‘’20 ML’’. As such ‘’20 ML’’ issued 43,50,632 shares through IPO consisting of 16,75,000 fresh equity shares and 50% shares held by the assessee, i.e., 26,75,632 shares. The ‘’20 ML’’ fixed the price of the share at Rs. 55 including the share premium of Rs. 45 per share.
1 The IPO was opened on 08/09/2008 and closed on 11/09/2008. The ‘’20 ML’’ budgeted its IPO expenses at Rs. 2.65 crores but incurred an expense of Rs. 3.91 crore which was more than budgeted expenses.
2 The assessee received sale proceeds of the shares sold by it of ‘’20 ML’’ dated 25/09/2008. Asstt. Year 2009-10 4
3 However, the ‘’20 ML’’ requested the assessee vide letter dated 05/12/2008 to share the expenses incurred by it for the IPO on the ground that its actual expenses have exceeded the budgeted expenses. As such the ‘’20 ML’’ requested the assessee to reimburse the IPO expenses for an amount of Rs. 1 crore.
4 The assessee accordingly in its Board Meeting dated 23/12/2008 agreed to reimburse the cost of IPO expenses to the tune of Rs. 50,00,000/- subject to the opinion by the C.A. regarding the sharing of IPO expenses. Subsequently, the C.A. in its report dated 08/01/2009 submitted that the IPO expenses incurred by ‘’20 ML’’ can be shared with the mutual understanding. As such, there is no bar if the assessee shares the expenses with the ‘’20 ML’’ incurred in the process of IPO.
5 The assessee subsequently made the payment of Rs. 50,00,000/- to ‘’20 ML’’ vide cheque no. 19386 dated 27/02/2009 drawn on Union Bank of India.
6 Thus, the assessee declared long term capital gain income of Rs. 5,11,640/- after claiming the deduction of Rs. 50,00,000/- as the cost of transfer against the sale of shares of ‘’20 ML’’.
7 However, the AO observed certain facts as detailed under:
The reimbursement of IPO expenses was paid after the close of the IPO issue, and sale proceeds received by the assessee. As such there was no need for the assessee to reimburse any expense incurred by 20 ML in Asstt. Year 2009-10 5
connection with the transfer of shares sold by it through the process of IPO.
The expenses which are incurred only and exclusively for transfer of shares are eligible for deduction u/s 48 of the Act.
There is no nexus between the reimbursement of the cost of IPO expense vis-à-vis the share held by the assessee in ‘’20 ML’’.
Therefore the same cannot be classified as cost of improvement of shares.
The expenses u/s 48 of the Act can be claimed if these were necessary for the transfer of shares otherwise the same cannot be allowed as deduction.
As per the agreement between the assessee and the ‘’20 ML,’’ it was the obligation of ‘’20 ML’’ to provide the exit route to the assessee for the shares held by it.
Because of the above, AO concluded that assessee is not eligible for the deduction of Rs. 50,00,000/- against the long term capital gain earned by the assessee on the transfer of shares. Accordingly the AO disallowed the same and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the Ld.CIT (A). The assessee before the Ld.CIT (A) submitted that the cost of Rs.50,00,000/- is incidental to the transfer of shares. Therefore the same should be included in the cost of acquisition for calculating the long term capital gain. Asstt. Year 2009-10 6
1 The phrase used u/s 48 of the Act, ‘’in connection with’’ does not require that the expenditure should necessarily be incurred before transferring the title in the property. As such the provision of section 48 of the Act requires that expenditure incurred in connection with the transfer should be allowed as deduction u/s 48 of the Act.
2 The expression ‘’for the transfer’’ refers to the expenses necessary for the transfer of the property. But such term was not used u/s 48 of the Act.
The Ld.CIT(A) after considering the submission of the assessee held that the reimbursement of IPO expenses cannot be equated as the cost of the improvement. Thus, the question remains to be answered whether these expenses were necessary to incur for the transfer of the shares held by the assessee in ‘’20 ML’’. In this regard the Ld.CIT (A) was of the view that ‘’20 ML’’ was under the obligation to provide the exit route to the assessee.
Therefore under no circumstances, it can be construed that the expenses were incurred for transfer of the shares.
1 The reasons given by ‘’20 ML’’ that the actual expenses in relation to the IPO had exceeded the budget expenses has no relevance as such.
Therefore that cannot be the basis of claiming that the expenses were incurred for the transfer of shares. Accordingly the Ld.CIT(A) held that the expenses increased due to the adverse market condition is not acceptable.
2 There was no prior agreement between assessee and ‘’20ML’’ for the sharing of the expenses before the date of IPO.
3 The request given by ‘’20 ML’’ was much after the close of IPO. Asstt. Year 2009-10 7
4 In view of above the Ld.CIT (A) held that the expenses by way of reimbursement to ‘’ 20 ML’’ cannot be allowed as deduction u/s 48 of the Act. Accordingly the Ld.CIT (A) confirmed the order of the AO.
Being aggrieved by the order of the Ld.CIT (A) assessee is in appeal before us.
The Ld.AR, before us, filed a paper book running from pages 1 to 53 and submitted that the decision for the reimbursement of the expenses was approved in the Board of Directors meeting dated 23/12/2008. There was also a report from the C.A. for sharing of the expenses.
1 The reimbursement of the expenses were directly linked with the transfer of shares. Therefore it is concluded that the expenses were incurred wholly and exclusively for transfer of the shares. There is no mentioned u/s 48 of the Act that the expenses will be allowed as deduction if these were necessary for the transfer of an asset.
2 There is also no mention under the provision of section 48 of the Act that the expenses need to be incurred before the date of transfer of the shares. Thus, the expenses incurred after transfer of the shares are also eligible for deduction u/s 48 of the Act.
3 The Ld.AR also submitted that the assessee is a Government Organization and the C&AG will verify the necessity of expenses. As such the duty of AO is to ensure whether there is any contravention of the Asstt. Year 2009-10 8
provision as specified under the Act concerning to the deduction for the transfer of shares.
On the other hand the Ld . DR, submitted that there was no obligation on the assessee to incur the cost concerning the IPO as it was the duty of ‘’20 ML’’. Therefore, the amount given by the assessee represents as if it was given as a token of gratitude which is not allowable under the provision of the Act.
1 The Ld. DR, vehemently supported the order of the authorities below.
We have heard the rival contentions and perused the materials available on record. In the instant case, the assessee has transferred its 26,75,632 shares of 20 Microns Ltd through the process of IPO. The assessee against such transfer of shares has claimed an expense of Rs. 50 lacs under the provisions of section 48 of the Act. However such expense claimed by the assessee was disallowed by the AO on the ground that same was not incurred in connection with such transfer of the shares. The Ld. CIT-A subsequently confirmed the view taken by the AO.
1 Now the controversy before us arises whether the assessee is eligible for the deduction of Rs. 50 lacs against the transfer of 26,75,632 shares of 20 ML. In this regard we note that the provisions for the deduction of the expenses for the transfer of capital assets are contained under section 48 of the Act which reads as under: “81[Mode of computation. 8248. The income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration 83received or accruing as a result of the transfer of the capital asset the following amounts, namely :— Asstt. Year 2009-10 9
(i) expenditure incurred wholly and exclusively in connection with such transfer 83a; (ii) the cost of acquisition of the asset and the cost of any improvement 83a thereto:”
From the above provisions, it is clear that the expenses incurred wholly and exclusively in connection with the transfer of assets is eligible for deduction under section 48 of the Act. The phrase ‘wholly and exclusively’ means that it should be directly linked with the subject matter. One needs to be quite clear on whether a deduction has both a commercial and private element. If yes, then how that element is divided. To give a simple example, if a sole trader deducts the expense of running a car, the proportion of their personal use of that vehicle has to be worked out accurately and excluded from the amount submitted for deduction.
2 In the case on hand, the expenses incurred by the assessee were having direct nexus/ connection with the transfer of the shares though it can be said that these expenses were not necessary to incur for such transfer of shares. But the language of the provision is unambiguous that it does not talk about the expenses which are necessary for such transfer shall be allowed. Had this been the intention of the legislation then there would have been a provision for the expenses which were necessary for such transfer. But there is no such provision under section 48 of the Act. The section requires that the expenses should be directly connected with the transfer of the assets. In this regard, we find support and guidance from the judgment of Hon’ble Supreme Court in the case of Sasson J. David & co. Pvt Ltd Vs. CIT reported in 1 taxman 485 wherein it was held as under: “It has to be observed here that the expression "wholly and exclusively" used in section 10(2)(xv) of the Act does not mean "necessarily". Ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the Asstt. Year 2009-10 10
business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of section 37 of the Income-tax Act, 1961 which corresponds to section 10(2)(xv) of the Act. An attempt was made in the Income-tax Bill of 1961 to lay down the "necessity" of the expenditure as a condition for claiming deduction under section 37. Section 37(1) in the Bill read "any expenditure. . . . laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed" The introduction of the word "necessarily" in the above section resulted in public protest. Consequently when section 37 was finally enacted into law, the word "necessarily" came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. This view is in accord with the following observations made by this Court in CIT v. ChandulalKeshavlal& Co. [1960] 3 SCR 38 at page 48”
3 We further place our reliance on the judgment of Bombay High Court in case CIT Vs. Smt. Shakuntalakantilal reported in 58 taxman 106 wherein it was held as under: “The Legislature while using the expression 'full value of consideration', in our view, has contemplated both additions to as well as deductions from the apparent value. What it means is the real and effective consideration. That apart so far as (i) of section 48 is concerned, we find that the expression used by the Legislature in its wi om is wider than the expression 'for the transfer'. The expression used is 'the expenditure incurred wholly and exclusively in connection with such transfer'. The expression 'in connection with such transfer' is, in our view,, certainly wider than the expression 'for the transfer'. Here again, we are of the view that any amount the payment of which is absolutely necessary to effect the transfer will be an expenditure covered by this clause. In other words, if without removing any encumbrance including the encumbrance of the type involved in this case, sale or transfer could not be effected, the amount paid for removing that encumbrance will fall under clause (i). Accordingly, we agree with the Tribunal that the sale consideration requires to be reduced by the amount of compensation. The first question is, therefore, answered in the affirmative and in favour of the assessee.” Asstt. Year 2009-10 11
4 We also place reliance on the judgment of Bombay High Court in case of CIT Vs. AbrarAlvi reported in 117 taxman 95 wherein it was held as under:
“Before concluding, one more point needs to be mentioned. The assessee has paid an amount of Rs. 8 lakhs to his son, AbrarAlvi. Much prior to the sale of the property in 1992, AbrarAlvi has instituted a suit in the city civil court being Suit No. 4763 of 1986, seeking an injunction restraining the assessee from selling 'JankiKutir'. Hence, the said amount of Rs. 8 lakhs was paid. On the facts, the Tribunal found that the amount was paid to remove the encumbrance. The Tribunal also applied the ratio of the judgment of this Court in the case of CIT v. ShakuntalaKantilal [1991] 190 ITR 561, wherein it has been held that expenditure incurred in removing the encumbrances is deductible. The Tribunal found that there was an acrimonious dispute between the father and the son and the said amount was paid to effect the transfer. Hence, the Tribunal ordered Rs. 8 lakhs to be deductible. We see no reason to interfere with this finding of fact.”
5 The allegation of the AO that the expenses by way of reimbursement of the IPO expenses to 20 ML were incurred after receiving the consideration for the sale of shares has no relevance. It is because the provision of section 48 of the Act does not require the assessee to incur the expenses before the transfer of the assets. The requirement of section 48 is only that it should be in connection with the transfer of the assets. Thus we disagree with the finding of the lower authorities. In this regard, we find support and guidance from the judgment of Hon’ble Kerala High Court in the case of CIT Vs. Dr.P.Rajendran reported in 127 ITR 810 wherein it was held as under:
“The words "in connection with" used in section 48(i) were very wide in their ambit. There was, thus, no warrant for importing a restriction that to qualify for deduction the expenditure must necessarily have been incurred prior to the passing of title. The crucial test was whether the expenditure was incurred wholly and exclusively in connection with the transfer and it was immaterial whether it was incurred prior or subsequent to the passing of title. Further, by virtue of the definition contained in section 2(47), the expression "transfer" would include the compulsory acquisition of a capital Asstt. Year 2009-10 12
asset under any law. Hence, the compulsory acquisition of property under the Land Acquisition Act, 1964, had to be treated as a "transfer" for computing capital gains. The fixation of the quantum of consideration for the transfer was finally effected only by the decision rendered by the civil court. Such fixation formed an integral part of the process of transfer by way of compulsory acquisition provided by the Land Acquisition Act. The Tribunal was, therefore, right in holding that the expenses incurred by the assessee in his litigation before the civil courts to claim enhanced compensation for the compulsory acquisition of his property was an expenditure incurred wholly and exclusively in connection with its transfer”
6 We also note that the assessee claimed such expenses not as the cost of improvement but as incurred in connection with the transfer of the shares. This fact can also be established from the order of the AO wherein it was disallowed by observing as under:
Profit & Gains From Business Or Profession Income-As per statement of income Rs. NIL
CAPITAL GAINS LTCG-As per statement of income Rs. 1,93,43,404 Add: Cost of transfer disallowed – as discussed at Para. 4 to Rs. 50,00,000 4.5.3 Long term Capital Gains Rs. 2,43,43,404
7 As per the agreement between the assessee and “20 ML”, there was no obligation on the assessee to incur any cost in connection with the transfer of the shares. As such it was the responsibility of “20 ML” to provide an exit route to the assessee for the disinvestment of the shares held by it. In this regard, we note that reimbursement of the expenses was decided in the board meeting of the assessee and after taking the report/opinion from the chartered accountant. Asstt. Year 2009-10 13
8 As per the report of the chartered accountant there was no prohibition for the assessee to share the cost in the IPO expenses. Therefore even the assessee was not under the obligation to incur such cost, but that cannot be the basis of disallowance of the expenses under section 48 of the Act.
9 Moreover we also find that the obligation of “20ML” was to provide the exit route to the assessee, but there was no clause or condition that the assessee shall not share the expenses in connection with the transfer.
10 It is settled law that the AO cannot sit on the armchair of the assessee to decide/direct the business affairs of the assessee. It is the assessee who knows the best of its business affairs. The role of the AO is to establish whether the expenses were incurred wholly and exclusively in connection with the transfer of assets. There is no ambiguity that the expenses were incurred wholly and exclusively in connection with the transfer of the shares as held by us in the preceding paragraph. Thus, the allegation of the AO that the assessee was not under the obligation to incur the cost for the transfer of shares has no relevance in the given facts and circumstances.
11 In this regard we also find support and guidance from the judgment of Hon’ble High Court of Delhi in case of CIT Vs. Oracale India Pvt. Ltd. reported in 11 taxmann.com 139 wherein it was held as under:
“19. It is, thus, clear that what is to be seen is that the expenditure was incurred by the assessee in the course of business and had nexus with the business of the assessee. It could not be disputed that the payment of royalty is a business expenditure, which was expended wholly and exclusively for the purpose of business of the assessee. The nature of the expenses is also not such which would fall in any of the exceptions carved out under sections 30 and 36 of the Act. Asstt. Year 2009-10 14
Once these conditions are satisfied, the expense is to be allowed in toto as business expenditure, and the Revenue cannot sit in the arm's chair of the assessee and decide as to how affairs of the business are to be run and wasteful or excessive expenditure is to be curtailed. The question of commercial expediency is to be judged by the assessee and not by the AO. Following test was laid down in the case of Atherton v. British Insulated &Helsby Cables Ltd. 10 TC 155, 191 (HL) in the following terms:
"A sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order indirectly to facilitate the carrying on the business, may yet be expended wholly and exclusively for the purposes of the trade." The above test was quoted with approval and applied by the Supreme Court in the case of Eastern Investments Ltd. v. CIT [1951] 20 ITR 1.”
12 In view of the above we conclude that the assessee is entitled to a deduction under section 48 of the Act, for the expenses incurred wholly and exclusively in connection with the transfer of the shares. Accordingly, we reverse the order of the authorities below. Accordingly, we set aside the order of the Ld.CIT (A) and direct the AO to delete the addition made by him.
Hence the ground of appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed
Order pronounced in the Court on 21/01/2019 at Ahmedabad.
- - (JUSTICE P.P. BHATT) ACCOUNTANT MEMBER () Ahmedabad; Dated 21/01/2019 Manish Asstt. Year 2009-10 15
आदेश क" ""त"ल"प "े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant
""यथ" / The Respondent. 3. संबं"धत आयकर आयु"त / Concerned CIT 4. आयकर आयु"त(अपील) / The CIT
"वभागीय ""त"न"ध, आयकर अपील"य अ"धकरण / DR, ITAT, 6. गाड" फाईल / Guard file. आदेशानुसार/BY ORDER, उप/सहायक पंजीकार (Dy./Asstt.