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Income Tax Appellate Tribunal, .
I.T.A No.695/2019 C/W I.T.A No.696/2019
1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 16TH DAY OF DECEMBER 2022 PRESENT THE HON’BLE MR. JUSTICE P.S.DINESH KUMAR AND THE HON’BLE MR. JUSTICE T.G.SHIVASHANKARE GOWDA I.T.A NO.695 OF 2019 C/W I.T.A NO.696 OF 2019
IN I.T.A NO.695 OF 2019
BETWEEN:
CHINCHOLI GURURAJACHAR VENKATESH NO.1449, 3RD CROSS 1ST STAGE, 2ND PHASE CHANDRA LAYOUT BANGALORE-560 040.
.…APPELLANT
(BY SHRI. B.R. SUDHEENDRA, ADVOCATE)
AND:
ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-4(1)(2), BANGALORE BMTC BUILDING, 80TH FT ROAD KORAMANGALA 6TH BLOCK BANGALORE - 560 095 …RESPONDENT
(BY SHRI. M. DILIP, ADVOCATE FOR SHRI. K.V. ARAVIND, STANDING COUNSEL)
THIS ITA IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED: 30/06/2016 PASSED IN ITA No.283/BANG/2019, FOR THE ASSESSMENT YEAR 2016-2017, PRAYING TO FORMULATE AND ADMIT THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ETC.
I.T.A No.695/2019 C/W I.T.A No.696/2019
2 IN I.T.A NO.696 OF 2019
BETWEEN:
SATISH KUMAR PANDEY NO.1101, RAJ LAKEVIEW APARTMENTS, 29TH MAIN N.S.PALYA BENGALURU-560 078 PAN - ADBPP0235A …APPELLANT
(BY SHRI. B.R. SUDHEENDRA, ADVOCATE)
AND:
ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-4(1)(2), BANGALORE. BMTC BUILDING 80TH FT ROAD KORAMANGALA 6TH BLOCK BANGALORE-560 095. …RESPONDENT
(BY SHRI. M. DILIP, ADVOCATE FOR SHRI. K.V. ARAVIND, STANDING COUNSEL)
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED: 04/04/2019 PASSED IN ITA No.284/BANG/2019, FOR THE ASSESSMENT YEAR 2016-2017, PRAYING TO FORMULATE AND ADMIT THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ETC.
THESE ITAs, HAVING BEEN HEARD AND RESERVED FOR JUDGMENT ON 04-11-2022 COMING ON FOR PRONOUNCEMENT OF JUDGMENT, THIS DAY, P.S. DINESH KUMAR J., PRONOUNCED THE FOLLOWING:-
I.T.A No.695/2019 C/W I.T.A No.696/2019
3 JUDGMENT These two appeals by the assessees, directed against the common order by the ITAT1 dated April 4, 2019 in ITA No. 283 & 284/Bang/2019 have been admitted to consider the questions of law raised in the appeals. After hearing the learned Advocate for the assessees and learned Standing Counsel for the Revenue, in our opinion, only the following question arises for consideration: Whether, on the facts and circumstances of the case and law applicable, the Tribunal is right in law in refusing to allow the expenses incurred towards fees paid to KPMG, Khaitan & Co., Bank Charges and other miscellaneous expenses in relation to the transfer of capital asset under Section 48 of the Income Tax Act, 1961? 2. Heard Shri. B R Sudheendra, learned Advocate for the Assessees and Shri. Dilip, learned Standing Counsel for the Revenue.
1Income Tax Appellate Tribunal.
I.T.A No.695/2019 C/W I.T.A No.696/2019
4 3. Briefly stated the facts of the case are, Appellant/Assessees filed their returns for the Assessment year 2016-2017. They are the shareholders of M/s Maxwatt Turbines Private Limited. Out of total 96,000 shares of the said Company, each assessee owned 34,800 shares. They entered into an Agreement with KPMG2 and Khaitan & Co. Advocates in connection with transfer of the aforesaid shares to M/s MAN Diesel & Turbo SE, a Company incorporated in Germany for a consideration of Rs. 58 Crores. 4. The AO3 noted that the selling expenses was not incurred wholly and exclusively in connection with the transfer of Capital asset and vide order dated June 04, 2018, under Section 143(3) of the IT Act4, AO disallowed the expenses and made an addition of Rs. 1,18,29,300. The
2KPMG India Private Limited. 3 Assessing Officer. 4Income Tax Act, 1961.
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5 CIT(A)5 and ITAT6 have confirmed the addition. Hence, these appeals. 5. Shri. Sudheendra, learned Advocate for the Assessees submitted that: • admittedly, the assessees entered into an agreement with KPMG and Khaitan & Co. Advocates in connection with the transfer of their shares. Any transaction involving sale of shares requires expert advice and hence services from KPMG and Khaitan & Co. were essential; • the transaction is between the shareholders and the company and the finding recorded by the ITAT that the company is the beneficiary is perverse. • As per Section 2(68) of the Companies Act, 2013, the right of transfer of shares in a Private
5Commissioner of Income Tax (Appeals). 6Income Tax Appellate Tribunal.
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6 Limited Company is restricted and in this case, in the manner and to the extent appearing in the para 8 of the Articles of Association; • the expenses incurred have inextricable nexus with the transfer of shares because without the assistance of professionals, the transaction could not have been concluded. 6. Opposing the appeal, Shri. Dilip submitted that the services rendered by KPMG and Khaitan & Co. Advocates are in the nature of consultancy and financial advice. Therefore, it has no nexus with the transfer of shares. The ITAT has rightly recorded a finding in para 07 of its order that vide the engagement letter dated June 20, 2014, the shareholders had structured the transactions, as transfer of shares, whereas the transfer was that of the Company. He contended that the services of KPMG and Khaitan & Co. were utilized by the
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7 Company and not the Shareholders. To support this contention, Shri Dilip adverted to the Letter of Engagement and pointed out that the engagement was with the Company and therefore, there was no obligation upon the shareholders to make the payment. 7. We have carefully considered rival contentions and perused the records. 8. In substance, Revenue’s case is that expenditure incurred towards professional services rendered by KPMG and Khaitan & Co. has no nexus with the transfer of shares. 9. The ITAT’s view is, as per the engagement letter, KPMG had worked for: • preparation of corporate profile; • identification of potential investor; • negotiation on value;
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8 • structure and terms of the transaction and • coordination of the due diligence process and the above work done has no nexus with the transfer of shares. Therefore, the requirement of Section 48 of the IT Act is not fulfilled. 10. Para 8 of the Articles of Association reads as follows: “8. Subject to the provision of Section 108 of the Companies Act, 1956 any member desiring to sell any of his shares must notify to the Directors of the number of shares, the fair value and the name of the proposed transferee and the Board must offer to the other shareholders, the shares offered, at the fair value and if the offer is accepted, the shares shall be transferred to the acceptors and if the shares of any of them are not so accepted within one month from the date of notice to the Board, the members proposing transfer shall, be at liberty; subject to Articles 8 and hereof to sell and transfer the shares to any person at the same or at a higher price...” (Emphasis supplied) 11. The above Article shows that a shareholder desirous of selling his shares must
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9 notify the number of shares, a 'fair value' and proposed transferee. Assessees' specific case is, they have engaged the services of the professionals for the said purpose. The transfer of shares is not disputed by the Revenue. Admittedly, KPMG is a firm providing advisory service and Khaitan & Co. is a law firm. 12. Section 48 of the IT Act reads: " 48. The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:—
(i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) xxx " (Emphasis Supplied)
The expression “in connection” has been interpreted in various judgments.
I.T.A No.695/2019 C/W I.T.A No.696/2019
In Kaushalya Devi Vs. Commissioner of Income Tax7, relied by the assessees, the Delhi High Court has held: “The word "connection" in section 48(1) reflects that there should be a causal connect and the expenditure incurred to be allowed as a deduction must be united or in the state of being united with the transfer of the capital asset resulting in income by way of capital gains on which tax has to be paid. The expenditure, therefore, should have direct connection and should not be remote or have indirect result or connect with the transfer.” 15. In Commissioner of Income Tax Vs. Venkata Rajendran8, this Court has held that: “9. The sale of shares took place on the account of the legal and professional assistance given by MIFL. The agreement entered into between the shareholders and MIFL clearly set out the pro rata of charges chargeable by each of the shareholders depending upon their shareholding. In so far as the assessee is concerned, he is a major shareholder. Prior to the entering into the agreement the assessee had written a letter6 agreeing to pay an additional amount in the event MIFL gets him a good price for his shares. The evidence on record shows the
7(2018) 404 ITR 136 (Del). 8(2015) 373 ITR 424 (Kar).
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11 assessee got 72 cents extra when compared to other shareholders. Under the letter dated March 25, 2004, entered prior to the agreement he had agreed to bear the extra charges. Therefore, he being the major shareholder and a director of the company who is a person who was actively involved and interested in selling the shares. He wanted additional amount to be paid to his shares and, therefore, he has agreed to pay the additional charges also on the basis of such amount which he would get. It is not in dispute that the assessee got a sum of Rs. 2,98,11,303 more than for his shares than what he would not get at the rate of USD 4.93 that the other shareholders were paid. It is out of the said additional amount he received, he paid a sum of Rs. 2,84,898,000 to MIFL as their charges. The payment is not in dispute. Therefore, that is the amount which the assessee incurred as expenditure for sale of shares. That is the amount which is wholly and exclusively incurred by the assessee in connection with such transfer.” (Emphasis Supplied) 16. In the instant case, assessees have engaged the services of professional who have identified the investor, negotiated the value and structured the transaction. Therefore, in our
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12 considered view, the transaction has an inextricable nexus with the transfer of shares. 17. The other ground that was urged on behalf of the Revenue is, KPMG had addressed the letter to the Managing Director of the Company and therefore, assessees had no obligation to make the payment. We have perused the engagement letter dated June 20, 2014. The letter is addressed to the Assessees. Thus, this contention is contrary to records and therefore liable to be rejected. 18. In the light of the above discussion, in our considered view, the assessees, in accordance with the para 8 of the Articles of Association, have taken services of KPMG and Khaitan & Co., and the engagement of the said firms has direct nexus with the transfer of shares. Hence, the expenditure incurred is deductible under Section 48(i) of the IT Act.
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13 19. Hence, the following: ORDER (a) Appeals are allowed. (b) The question of law is answered in favour of the assessees and against the Revenue. No costs.
Sd/- JUDGE
Sd/- JUDGE
SPS