TMI Blog2009 (2) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicant wanted to expand its air, fin coolers and heat recovery activities in India. For this purpose, Memorandum of Understanding (MOU) dated 25.2.1997 was entered into between the applicant and GEI Engineering/Industry Ltd., a listed public company, having registered office at Bhopal, India (hereinafter referred to as Indian Company). Subsequently, the applicant reportedly entered into a Joint Venture Agreement dated 29.9.1997 with the Indian company and their promoters. Pursuant to the agreement, the applicant decided to invest in the equity shares of the Indian company by way of preferential allotment. In the share holders agreement it was stated that the applicant would hold 30% of the equity share capital of the Indian company and would subscribe 29,95,000 equity shares at a price of Rs.21 per share (face value of Rs.10 plus premium of Rs.11) giving way to total investment of Rs.6.29 crores approximately. The approval of the RBI was also sought by the Indian company to issue requisite shares to the applicant. As per letter bearing No.597/208(G-B)/97-98 dated 28.11.97, RBI granted approval under section 19(1)(d) of the Foreign Exchange Regulation Act, 1973 and accordingly 29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yable on the long-term capital gains arising on the sale of originally purchased shares of the Indian Company will be 10% of the amount of capital gains as per proviso to section 112(1) of the Act? 2. Whether while computing the cost of acquisition of shares while calculating the capital gain in terms of Section 48 of the Income Tax Act the legal expenses incurred in relation to transfer of shares is to be taken into account? 4. In the course of the hearing of the application under section 245R(4) of the Act, we have, for the sake of correct appreciation of the point-at-issue, recast the question No.2 in the following terms:- Que.No.2 Whether in computing the capital gains, deduction is admissible under section 48 of the IT Act on account of legal expenses incurred in relation to transfer of shares? 1st Question 5. The applicant contends that the second proviso to section 112(1) is attracted and therefore, the rate of 10(ten) per cent specified therein would apply. The applicant relies on the ruling of this Authority in the case of Timken France SAS, reported in 294 I.T.R. 513 which has subsequently been followed by the Authority in the cases of (a) McLe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Authority took the view that the benefit of the proviso to section 112(1) of the Act could not be denied to non-residents/foreign companies even if they are entitled to relief in terms of the proviso to section 48 of the Act. The Authority also held that the proviso to section 112(1) of the Act was a special provision in relation to transfer of certain long-term capital assets viz listed securities, units etc. and there was no warrant to limit the 10 per cent effective rate provided therein as against the normal rate of 20 per cent only to the three categories of resident assesses specified in clause (a), (b) and (d). It may not be out of place to give the following extract from the Head Note of the ruling in the case of Timken France(supra) which is in the following terms:- "In plain and peremptory words, the proviso to section 112(1) limits the rate of tax on long-term capital gains from the transfer of listed securities to 10 per cent. but with an important rider that the quantum of capital gains should be arrived at without taking into account the formula laid down in the second proviso to section 48 based on the indexed cost of acquisition. In other words, while computing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Indian Promoters and by the applicant respectively before the Company Law Board (CLB). These Company Petitions were filed under Section 397 and 398 of the Companies Act for relief against oppression of minority shareholders and mismanagement of the company. Ultimately, as stated, the parties settled the disputes and arrived at a settlement. The Memorandum of Settlement was signed on 6.5.2008. According to the terms of the settlement, the Indian Promoters of Indian Company and/or nominees of Promoter No.1 in C.P.133/2007 agreed to purchase 25 lakh shares owned by the applicant @ Rs.65/- each. Besides, the parties agreed to the retention of remaining shares of 4.95 lakhs by the applicant. The CLB, thereafter, passed an order on 9.5.2008 to give effect to the terms of settlement. After narrating these facts, the applicant stated as follows :- "That the applicant till date during the entire process of settlement culminating into proposed transfer of shares of the Indian Company borne legal expenses to the tune of Euros 1,49,445.00 (equivalent to Rs.8,902,063/-)." The applicant has not furnished any break up of the said figure or the details pertaining to the expenses. The applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing section 48(i) of the Act, Delhi High Court in the case of Smt. Sita Nanda 251 I.T.R. 575, 577 observed as under: - "The crucial words in the provisions are "in connection with such transfer". The expression means intrinsically linked with the transfer. Such expenditure has to be wholly and exclusively in connection with the transfer. Even if such expenditure has some nexus with the transfer it does not qualify for deduction unless it is wholly and exclusively in connection with the transfer." Similarly, the following observation of Mysore High Court in the case of B.N.Pinto vs. CIT 96 I.T.R. 306 can be usefully recalled:- "What can be deducted under section 48(i) is expenses incurred wholly and exclusively in connection with the transfer. The damages for mental worry and suffering on account of wrongful withholding and detention of her property cannot, by any stretch of imagination, be said to be expenses incurred wholly land exclusively in connection with the transfer. The claim in respect of lawyer's fees is also indefinite and vague and is not specific that it was in connection with the transfer, like, for example, drafting of the deed or such purposes intimat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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