2019 (1) TMI 1065 - AT - Income Tax

Disallowance of deduction u/s 48(i) - computation of capital gain - Whether the expenditure incurred of U.S. 13,27,609, is wholly and exclusively in relation to the transfer of shares of the Indian subsidiary, hence, allowable as deduction under section 48(i) - Held that - There cannot be any room for doubt that the expenditures were in relation to the transfer of shares of the India Subsidiary termed as Project Genesis . As could be seen from the scope of work for which the services were rendered by the legal /professional firm, it is closely and intrinsically related to transfer of shares of the Indian Subsidiary. Therefore, the expenditure incurred is wholly and exclusively in connection with the transfer of shares of the Indian Subsidiary. Hence, qualifies for deduction u/s 48(i). Non disclosure / non mention in the name of the ultimate buyer of the shares in no way militates against the fact that the expenditure incurred by the assessee on account of legal and professional fees paid is in connection with transfer of shares. The decision relied upon by the learned Departmental Representative on the other hand, will not be applicable to the facts of the present case, since, it involves allowability of PMS fee which is not the issue in the present appeal. Thus, in view of the aforesaid, we hold that assessee s claim of deduction of U.S. 13,27,609 is allowable under section 48(i). - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of assessee’s claim of deduction under section 48(i) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of assessee’s claim of deduction under section 48(i) of the Income Tax Act, 1961:

The assessee, a foreign company operating as a Foreign Institutional Investor (FII) in India, sold 23,10,498 shares of its Indian subsidiary, AIG Systems Solutions Pvt. Ltd., during the financial year relevant to the assessment year 2010-11. In its income tax return filed on 15th August 2010, the assessee declared a long-term capital gain of ?5,54,49,453 from the sale of these shares. The return was selected for scrutiny, during which the Assessing Officer (AO) noticed that the assessee claimed a deduction of U.S. $13,27,609 as expenditure incurred towards the transfer of shares. This expenditure was primarily legal and professional fees paid to various entities for assisting in the transfer process.

The AO questioned the allowability of this deduction, arguing that the expenses were not incurred wholly and exclusively for the transfer of shares as required under section 48(i) of the Income Tax Act. The AO issued a show cause notice, to which the assessee responded with detailed submissions and supporting evidence, asserting that the expenses were indeed related to the transfer of shares. However, the AO disallowed the deduction, stating that the expenses were aimed at optimizing the economic value of the business rather than facilitating the transfer of shares. The AO also noted that the documentation provided did not mention the name of the buyer or indicate that the expenses were incurred for the transfer to Mphasis Ltd.

The Commissioner of Income Tax (Appeals) upheld the AO's decision, categorizing the expenses as business expenses rather than expenses incurred for the transfer of shares.

The assessee appealed to the ITAT, arguing that the expenses qualified for deduction under section 48(i) of the Act. The assessee's counsel highlighted that the expenses were paid to entities like Deloitte Corporate Finance LLP, Dua Associates, and Milbank, Tweed, Hadley & Mccloy LLP for services directly related to the transfer of shares. The counsel provided detailed invoices and email correspondences to support this claim.

The Departmental Representative countered that the assessee failed to substantiate the claim, noting that the documents did not disclose the buyer's name. Additionally, one invoice referred to "Project Eagle" instead of "Project Genesis," which was the project name for the share transfer.

Upon review, the ITAT examined the legal provisions and precedents, including decisions from the Bombay High Court and Kerala High Court, which interpreted the phrase "in connection with the transfer of capital asset" to include expenses intrinsically related to the transfer. The ITAT found that the services rendered by the legal and professional firms were closely related to the transfer of shares of the Indian subsidiary. The mention of "Project Eagle" in one invoice was deemed a typographical error, as other documents consistently referred to "Project Genesis."

The ITAT concluded that the expenses were indeed incurred wholly and exclusively in connection with the transfer of shares, thus qualifying for deduction under section 48(i) of the Act. The appeal was allowed, and the assessee's claim for the deduction of U.S. $13,27,609 was upheld.

Conclusion:
The ITAT ruled in favor of the assessee, allowing the deduction of U.S. $13,27,609 under section 48(i) of the Income Tax Act, 1961, as the expenses were found to be wholly and exclusively related to the transfer of shares of the Indian subsidiary.