DURGA KUMARI BOBBA,BANGALORE vs. DCIT,

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ITA 172/BANG/2013Status: DisposedITAT Bangalore26 August 2016AY 2009-1010 pages
AI SummaryDismissed

What did the Tribunal hold?

The Tribunal held that the obligation to discharge income-tax liability lies with the company itself. The expenditure was not a condition precedent for the transfer of shares and thus not incurred wholly and exclusively for the transfer. The claim was also considered untenable as the entire tax liability of the companies could not be fastened on a single shareholder.

What were the facts?

The assessee claimed an expenditure of Rs. 90,74,103/- as incurred wholly and exclusively in connection with the transfer of shares. This expenditure represented the income-tax liability of certain companies that the assessee had paid as per a share purchase agreement.

What were the issues?

Whether income-tax liability discharged by the assessee for companies can be claimed as an expenditure incurred wholly and exclusively in connection with the transfer of shares under Section 48 of the Income-tax Act.

Which sections of the Income-tax Act were involved?

Section 48

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Income Tax Appellate Tribunal, ‘C’ BENCH, BANGALORE

Before: SMT. ASHA VIJAYARAGHAVAN & SHRI INTURI RAMA RAOSmt.Durga Kumari Bobba,

For Appellant: Shri V.Srinivasan, Advocate
For Respondent: Shri Sunil Kumar Agarwala, JCIT(DR)
Hearing: 30/06/2016Pronounced: 26/08/2016

This is an appeal filed by the assessee directed against the order of the CIT(A)-I, Bangalore, dated 31/10/2012 for the assessment year 2009-10.

2.

The assessee raised the following grounds:

3. Briefly facts of the case are that the assessee is an individual deriving income under the head ‘salary’, ‘house property’, ‘capital gains’ and ‘other sources’. Return of income for the assessment year 2009-10 was filed on 26/10/2010 declaring income of Rs.1,17,84,059/-. Against said return of income, assessment was completed by the Assessing Officer [AO] u/s 143(3) vide order dated 18/11/2011 at a total income of Rs.2,57,23,321/-. While doing so, the AO disallowed the expenditure of Rs.90,74,103/- claimed an expenditure in connection with transfer of shares while computing capital gains arising out of sale of shares in Bobba Aviation Services Pvt.Ltd, Bobba Aviation Ground Handling Services Pvt. Ltd., Ground and Page 4 of 10 Air Technical Services Pvt. Ltd., and Mount Kailash Power Project Pvt. Ltd. It is the contention of the assessee that as per clause 7(1) of the Share Purchase Agreement entered between the assessee and the purchaser of shares, tax liability of all the companies should be borne by shareholders of the companies. It is stated that the assessee had paid income-tax liability of the companies as follows:

4.

While computing capital gains arising on sale of shares in said companies, assessee had claimed said amount of Rs.90,74,103/- as expenditure incurred wholly and exclusively in connection with transfer of such shares u/s 48 of the Income-tax Act,1961 [‘the Act’ for short]. The said explanation was negative by the AO by holding as under:

5.

Being aggrieved, an appeal was filed before the CIT(A) who, vide impugned order, confirmed the addition as follows:

6.

Being aggrieved, assessee is before us in the present appeal.

6.1 Learned counsel for assessee argued that the assessee has discharged income-tax liability of the companies in which he held shares pursuant to conditions imposed in the sale of shares agreement. He submitted that any expenditure incurred for facilitating transaction i.e. sale of shares is an expenditure incurred wholly and exclusively for transfer and therefore clearly allowable u/s 48(2) of the Act. In this connection, he relied on the decision of the Hon’ble Madras High Court in the case of CIT vs. Bradford Trading Co. P.Ltd.(261 ITR 222)(Mad). He also relied on the decision of the Hon’ble Supreme Court in the case of CIT vs. George Henderson & Co. Ltd.(66 ITR 622) for the proposition that ‘full valuation of consideration’ cannot be construed as a market value but as a price bargained by the parties to the sale.

6.2 On the other hand, learned Departmental Representative vehemently contended that discharge income-tax liability of the company always lies with company. The liability cannot be fastened only to one particular shareholder. He further submitted that income-tax liability of companies of which shares held by the assessee cannot go to reduce value of consideration received by Page 8 of 10 the assessee-company. In support of this he relied on the following decisions: i. Krishnadas G.Parikh vs. DCIT (114 ITD 362)(Ahd.) and ii. Smt.Sita Nanda vs. CIT (119 Taxman 227(Del)

7.

We heard rival submissions and perused material on record. The only issue in this appeal to be adjudicated is whether income-tax liability discharged by the assessee can be claimed as expenditure incurred in connection with transfer of shares as deduction u/s 48 of the Act. Needless to say, obligation to discharge income-tax liability of a private limited company lies with the company alone. If the company is unable to discharge the tax liability, burden to discharge the tax liability shifts to directors of the company in certain specified circumstances. In this case, clause 7(1) of share purchase agreement entered by the company and the shareholders reads as under:

The above clause clearly stipulates that sellers i.e. assessee and others are liable to reimburse company for all the taxes that may be levied on the company in respect of period up to the closing date and in the event of company receiving any refund of any tax in respect of period up to the closing date, the same shall be passed on to the seller by the companies. Thus, it is a future

Page 9 of 10 contingent liability as only future tax that may be levied up to the date of closing date is liable to be reimbursed to companies. Furthermore, there is no stipulation in the agreement that the assessee should alone discharge the tax liabilities of the companies. Furthermore, the said agreement also stipulated certain conditions which are precedent for transfer of shares vide clause 4 of the agreement. This clause does not form part of conditions precedent. Obviously it goes to prove that it is not a condition precedent for transfer of shares and therefore it cannot be held that expenditure is incurred wholly and exclusively in connection with transfer of shares. Further, the entire tax liability of the companies cannot be fastened on a single shareholder. If at all the tax liability of private limited company is to be borne by shareholders, it has to be borne equally in the ratio of shares held. Therefore the claim is not only untenable but also appears to be a device invented to reduce tax liability in the hands of assessee. Therefore, we reject the grounds of appeal of the assessee.

8.

In the result, assessee’s appeal is dismissed.

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