NAVNI9TA H. MELWANI,MUMBAI vs. ITO WD 12(3)(3), MUMBAI

2 & 1757/Mum/2012 (A.Y. 2007-08) आदेश / O R D E R Per Sanjay Arora, A. M.: These Appeals by the Assessee’s are directed against separate Orders by the Commissioner of Income Tax (Appeals)-21, Mumbai (‘CIT(A)’ for short) dated 19.12.2011, partly allowing their appeals contesting their assessment u/s.143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the assessment year (A.Y.) 2007-08 vide orders dated 30.12.2009.

3 & 1757/Mum/2012 (A.Y. 2007-08) CIT(A) found no reason to disallow the assessee’s claim for brokerage expenses in- as-much as the broker had rendered services in relation to the transfer of shares and not sale of land, as presumed by the A.O. However, solicitor fee, being legal expenses, allowed to M/s. Fox Mandal Services Private Ltd., being in relation to services toward transfer of plots of land, were in his view not allowable. Though what was sought to be sold, and correspondingly, purchased, were plots of land, what in law had been sold, and on which capital gain stands earned and returned, were shares. He, accordingly, after show causing the assessee in its respect (vide order sheet entry dated 29.11.2011), disallowed the same, holding as under: ‘I have considered the facts of the case. Though the real intention of the sellers (i.e. appellant and his wife) and purchasers (of shares) was to sell and purchase the two plots of land owned by the said two companies in which the appellant and his wife were holding 100% shareholding. However, the plots of land could not be sold without transferring of shares. In the facts and circumstances, in the eyes of law, the subject matter of transaction was transfer of shareholdings of those two companies. Therefore, the brokerage expenses incurred were allowable against the capital gain earned on sale of those shares. However, the legal expenses, i.e., payment made to solicitor was not at all allowable against the capital gain earned on sale of shares of those two companies. As it appears, the services of solicitor was obtained by the appellant and his wife in connection with the ownership/title deeds and agreements, etc. of the plots of land. Since in the eyes of law the subject matter of transaction on which capital gain has been earned was sale of shares only, therefore, the payment made to solicitors was not incurred wholly and exclusively for the purpose of transfer of shares. Therefore, the deduction of legal expenses i.e. payment made to solicitor fee was incorrectly allowed by A.O. in the assessment order to the appellant. The two issues i.e. legal expense (payment to solicitor) and brokerage expenses were part of same issue discussed in assessment order i.e. appellant’s claim of expenses against the capital gains, therefore, the undersigned being CIT(A) has power to rectify and mistake commited by A.O. in the assessment order. The Supreme Court in the case of Nirbhayram Duleram 224 ITR 610 held that in appeal to the Appellate Commissioner, the Appellate Commissioner is entitled to direct additions in respect of items of income not considered by A.O. On this issue reliance is also placed in the cases of :

4 & 1757/Mum/2012 (A.Y. 2007-08)  Deoria Oxygen Co. Ltd. vs. CIT 210 CTR (All.) 509,  Smt. Ishrawati Devi vs. ITO (2008) 114 TTJ (All.) 541,  CIT vs. K. S. Dattatray (2011) 241 CTR (Kar.) 227  187 ITR 86 (Ker)  280 ITR 318 (All.)  276 ITR 411 (Guj.)  258 ITR 735 (Mad.) Since the A.O. wrongly/incorrectly allowed appellant’s claim of deduction of legal expense i.e. payment of solicitor fees, the mistake committed by A.O. is hereby rectified/corrected and the appellant’s claim of deduction of legal expenses is disallowed. By making this disallowance the undersigned has not tried to find a new source of addition/income in assessment order and therefore, the decisions in the cases of Shapoorji Pallonji 44 ITR 891 (SC) and Sardarlal & Co. 251 ITR 864 (Del.) are not applicable. The A.O. is directed to re-work out the capital gain on sale of shares by disallowing appellant’s claim of legal expenses/solicitor fees. The A.O. is directed to ascertain such legal expenses of solicitor fee from computation of income or obtain from the appellant.’ Aggrieved, the assessee is in second appeal. 3.1 Before us, the ld. counsel for the assessee, Shri Molti B. Totlani, submitted that that what was intended to be sold, and what the buyer, Rukmini Finance Pvt. Ltd. (RFL), was interested to buy, were the plots of land, as noted by the ld. CIT(A), is not denied. However, the same, in the facts and circumstances of the case, is through medium of takeover of the two companies holding the land in question, buying the entire shareholding therein. So much so that even the value at which the shares are transacted was fixed (arrived at) with reference to the price settled for land (Rs.1042 per sq. ft.), adducing a copy of the takeover agreement dated 13.4.2006, entered into by the assessees (of the first part), along with the two companies (parties of the second part), with the buyer RFL (of the third part), adverting our attention to clause 2(c) thereof toward the same. The buyer would thus be interested in having a clear title over both, the shares (in the two companies) as well as land. Referring to para 6 5 & 1757/Mum/2012 (A.Y. 2007-08) of the said Agreement, it was further submitted that as many as 42 items were listed for verification and production, and which had to be furnished, highlighting some of them, viz. sale deed of land (from the previous buyer, Radiant Industries Ltd.); khata extracts; encumbrance certificates; Board resolutions; resignation of the directors; sketch of the property; IT clearance; loans availed, etc. It was toward this that the legal expenses were incurred, which thus relate to both, i.e., shares as well as land. The same are allowable, even as held in Compagnie Financiere Haman, In re, reported at [2009] 177 Taxmann 511 (AAR), New Delhi (copy on record). On being asked if the takeover agreement, being not referred to in the orders of the authorities below, as also not forming part of the paper-book, which requires certification in respect of it being furnished before the Revenue authorities, the ld. counsel was unable to say for sure if the same was submitted before the A.O., while had admittedly not been to the ld. CIT(A).

3.2 The ld. Departmental Representative (DR) would, on the other hand, submit that the legal form of the transaction cannot be ignored, and therefore when what was sold were shares, the expenses in relation to transfer of property could not be allowed. This is not the issue decided in Compagnie Financiere Haman, In re (supra), where the legal expenses held deductible u/s. 48(i) were in relation to the capital asset transferred, i.e., shares.

4.2 We may next consider the issue of deductibility of the solicitor fee, being legal expenses, claimed to be incurred wholly and exclusively in relation to the transfer of the capital asset, i.e., shares, in the two companies afore-said. However, before we may proceed therewith, we shall be required to address the assessee’s preliminary objection of the exercise of the power of enhancement by the first appellate authority being not proper. We have, while narrating the facts, already stated that the assessees were show caused in the matter. In fact, the assessee’s AR attended the proceedings on 19.12.2011 in response thereto and, as recorded by the ld. CIT(A), the case was discussed. This in fact is admitted, with the ld. counsel stating that he attended with all the relevant evidences, which though were not accepted. How could we determine the veracity of the said statement; the ld. CIT(A) stating of no submissions/ arguments/explanation having been filed (at para 3 of his order). Then, again, how is it relevant, i.e., to the exercise of the power of enhancement; the materials being 7 & 1757/Mum/2012 (A.Y. 2007-08) admittedly only qua the merits of the case. Much is made of the ld. CIT(A) stating of the A.O. having committed a ‘mistake’ when he allows legal expenses, which requires ‘rectification’, with reference to the power of rectification u/s.

4.3 Coming to the merits of the case, i.e., the deductibility of the legal expenses u/s. 48(i) of the Act in the facts and circumstances of the case, we examine the relevant bills by the law firm, M/s. Fox Mandal Services Private Ltd. (forming part of the paper-book). The same, similarly worded, read as under:

‘Mr. Haresh Melwani, 27 D.N. Road, Fort, Mumbai 400 001 B ILL Re: Sale of Shares of Hemson Softech Pvt. Ltd. Towards consulting charges for sales of shares held by Mr. Haresh Melwani in Hemson Softech Pvt. Ltd. Attending meeting with the prospective buyers as requested by Mr. Melwani from time to time, attending discussing the matter; attending drafting and vetting necessary agreement for the said transaction, including all incidental attendance and correspondence. Consolidate fee Rs.7,50,000.00 Service Tax @12.24% Rs. 91,800.00 Total Rs.8,41,800.00 (Rupees Eight lakhs forty one thousand eight hundred only)

Bangalore E&O.E Regd. No.: 2035/SM/111 /2006 for Fox Mandal Services Pvt. Ltd Dated: 3rd June 2006 Sd/- Accounts Dept.’ 8 & 1757/Mum/2012 (A.Y. 2007-08) We have already found as a fact that the transaction is, in substance, for the transfer of interest in plot/s of land. Verification of title thereto; payment of taxes; encumbrance certificates; khata extracts/endorsement; sketch, etc. are crucial thereto, and toward which proper documentation is required. We observe that all the documents are required to be submitted to the buyer company in original vide clause 5(a) of the takeover agreement, which also specifies of the delivery of possession of the scheduled property. No doubt, the land being held in two closely held companies, purchase of the entire shareholding thereof, simultaneously from the two persons – the assessees, holding the same, i.e., takeover of the said companies, formed a valid, legal mechanism for acquiring the land, or interest therein. That being the case, the legal services would and did extend to verification of the antecedents of the two companies, and satisfaction with regard to their shareholding. That, however, would not alter the nature of the services, which are primarily and principally in relation to the transfer of land or interest therein – the beneficiary interest therein getting changed from the transferor to the transferee of the shares under reference. In fact, the manner of the acquisition by way of takeover of the companies would have itself emanated from the solicitor firm, forming part of their legal counsel, and thus services rendered, culminating in drafting the takeover agreement. We are, however, not in agreement with the ld. CIT(A) when he states that the plots of land could not be sold without the transfer of shares. The plots could definitely be sold independent of the shares. The moot question, however, is: Is it relevant? Once it is clarified that the shares have been sold with a view to transfer land (or interest therein), all the services rendered, whether relating to transfer of land or shares, become incidental to the transfer of shares, i.e., the capital asset transferred. We, accordingly, though in agreement with his finding of it being essentially a case of transfer of land, are yet unable to persuade ourselves to agree that the services rendered in respect thereof would not be deductible in-as-much as the sale of shares is not an independent transaction; rather, is only to enable transfer of interest in land.

9 & 1757/Mum/2012 (A.Y. 2007-08) Though, in law the titular ownership continues to be with the two companies, the beneficial interest therein is with the buyer-company, which now holds the entire shares therein. We, accordingly, find no dichotomy in the two sets of facts, i.e., of the transaction being, in principle, for the sale of land and the capital asset/s transferred being shares, the two forming part of the one, composite transaction. There is no question of dissecting it into two parts, which together constitute one integrated whole. The impugned expenses are clearly allowable u/s. 48(i) in the facts of the case, for which we also draw support from the decision in Compagnie Financiere Haman, In re (supra), even as in that case the legal expenses were directly in relation to the sale of the capital asset transferred. The issue, we may clarify, is primarily factual, so that any expenditure incurred in connection with the transfer of a capital asset is allowable u/s. 48(i) in computing capital gains on such transfer u/s.

4.4 We, in view of the foregoing, find no infirmity in the assessee’s claim for legal expenses u/s.48(i), and uphold the same, in principle. However, it is not clear if the takeover agreement dated 13.4.2006, evidencing the transaction, and which constitutes the prime evidence, was before the Revenue authorities, whose finding as to the sale of land being the prime motive and the driver of the transaction has been affirmed by us. The said agreement would however have to be examined, if only to verify if the transaction as executed is in agreement therewith. The same states the total consideration (in the hands of both the assessee-transferors) at Rs.890 lacs, while we observe the stated price, which is with reference to and in terms of unit of land, works to Rs.925.75 lacs (88,843 sq. ft. x Rs.1042 per sq. ft.). Subject to the A.O.’s verification, returning positive findings, we confirm the deductibility of the impugned expenses. We may however clarify that any apparent mistake/s, if any, could be rectified following the due process of law. We decide accordingly.