2014 (11) TMI 1051 - AT - Income Tax

Expenditure incurred wholly and exclusively in connection with transfer as contemplated u/s. 48(i) - Whether the payment is actually made as per the agreement? - Payments to the employees - Voluntary payment - Held that - The assessee established substitution of the conditions mentioned in clause 29 of the share purchase agreement with the manner in which assessee discharged payments to the employees, then the additional evidence with regard to payments could have been examined. Since the assessee has failed to do so, claim of the assessee for having made payments to employees can at best be regarded as a voluntary payment, which cannot be said to be expenditure incurred wholly and exclusively in connection with the transfer of shares. We may also add that the question whether the expenditure is incurred wholly and exclusively in connection with transfer, which is essentially a question of fact, dependent on facts of each case. The judicial precedents cited by the ld. DR before us, can only serve as a guidance. For example in CIT v. Radio Talkies, (1999 (3) TMI 67 - BOMBAY High Court ), there was a sale of business of exhibiting films and property consisting of land and buildings. The agreement provided that seller had to discharge the liabilities of employees gratuity, retrenchment compensation, bonus, etc. Payment was to the former employees and not to the employees who continue after take over of the business by the purchaser. In those circumstances, the Hon ble Bombay High Court held that expenditure was not allowable u/s. 48(i) of the Act. In the present case, however, we are concerned with a case of change of ownership of business, consequent to sale of shares. The entity, Trident, continues to remain in existence. Therefore, the aforesaid decision cannot be applied to the facts of the present case. We have therefore not discussed the case laws cited by the learned DR before us. CIT(A) correctly relied on the decision of the Hon ble High Court of Karnataka in CIT v. R. Ranga Shetty, 1984 (12) TMI 45 - KARNATAKA High Court , wherein it was held that compensation paid to a tenant on transfer by compulsory acquisition of property is not expenditure incurred in connection with transfer and not allowable as a deduction. Following the said decision, he held that expenditure in question claimed by the assessee was a voluntary payment and therefore cannot be allowed as deduction u/s. 48(i) of the Act. - Decided against assessee

Summary

Issues Involved:
1. Whether the payment made by the assessee as per the Share Purchase Agreement qualifies for deduction under section 48(i) of the Income Tax Act.
2. Whether the payment was actually made as per the agreement.

Issue-Wise Detailed Analysis:

1. Whether the payment made by the assessee as per the Share Purchase Agreement qualifies for deduction under section 48(i) of the Income Tax Act:

The assessee sold shares in Trident Power Craft Pvt. Ltd. to EMR Mauritius Ltd. and claimed a deduction of Rs. 20,97,600 as expenditure incurred wholly and exclusively in connection with the transfer under section 48(i) of the Income Tax Act. This sum was part of a total Rs. 3.45 crores to be paid to a trust for the benefit of Trident's employees as per clause 29 of the Share Purchase Agreement. The Assessing Officer (AO) disallowed the claim, stating that no trust was set up as required by the agreement, and the amount was only deposited into a separate bank account, making the purpose and utilization of the contribution doubtful.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, referencing the Karnataka High Court decision in CIT v. R. Ranga Shetty, which held that voluntary payments do not qualify as expenditure incurred in connection with the transfer. The CIT(A) concluded that the payment was voluntary and not allowable as a deduction under section 48(i).

Upon appeal to the Tribunal, the Tribunal examined whether the payment met the conditions of section 48(i). The Tribunal noted that the waiver of clause 29 was not substantiated by the assessee and that the payments made to employees could not be traced back to the Share Purchase Agreement. Thus, the Tribunal concluded that the payments were voluntary and not wholly and exclusively incurred in connection with the transfer of shares, thereby upholding the CIT(A)'s order.

2. Whether the payment was actually made as per the agreement:

The assessee argued that the formation of a trust was deemed unnecessary later, and instead, a bank account named "Trident ex-Promoters Welfare Fund" was opened, into which the Rs. 3.45 crores was deposited. The assessee provided evidence of payments from this account to Trident employees, including a certificate from the Vice President of Trident waiving the trust requirement. However, the CIT(A) found that the actual utilization of funds was unverifiable, citing discrepancies in payment lists and unverified cash payments.

The Tribunal agreed with the CIT(A) that the waiver of clause 29 was not validly substantiated and that the payments made could not be linked to the Share Purchase Agreement. Therefore, the Tribunal did not find it necessary to consider additional evidence provided by the assessee regarding the payments to employees.

Conclusion:

The Tribunal upheld the CIT(A)'s decision, concluding that the payment of Rs. 20,97,600 claimed by the assessee did not qualify for deduction under section 48(i) as it was a voluntary payment and not wholly and exclusively incurred in connection with the transfer of shares. The appeal by the assessee was dismissed.