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2016 (10) TMI 802 - AT - Income TaxComputation of capital gains - Expenditure incurred in connection with transfer - deduction of payment of taxes as per the agreement - expenditure incurred wholly and exclusively in connection with transfer of such shares u/s 48 - Held that - 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 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. 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. Decided against the assessee.
Issues Involved:
1. Disallowance of ?90,74,103/- as expenditure in connection with the transfer of shares under Section 48 of the Income-tax Act, 1961. Detailed Analysis: 1. Disallowance of ?90,74,103/- as Expenditure in Connection with Transfer of Shares: The appeal was filed by the assessee against the order of the CIT(A)-I, Bangalore, dated 31/10/2012 for the assessment year 2009-10. The main issue pertains to the disallowance of ?90,74,103/- claimed as expenditure incurred wholly and exclusively in connection with the transfer of shares under Section 48 of the Income-tax Act, 1961. The assessee contended that the expenditure was related to taxes paid according to a share purchase agreement with Soham Renewable Energy India Pvt. Ltd. The agreement stipulated that the assessee would bear the tax liabilities of the companies involved in the transfer, namely Bobba Aviation Services Pvt. Ltd., Ground and Air Technical Services Pvt. Ltd., Bobba Aviation Ground Handling Services Pvt. Ltd., and Mount Kailash Power Projects Pvt. Ltd. The assessee argued that these payments were intrinsically linked to the transfer of shares and should be deductible under Section 48(i) of the Income-tax Act. The Assessing Officer (AO) disallowed the expenditure, stating several reasons: - The expenditure was not related to the acquisition of the capital asset. - The income tax liability of the company should be borne by the company itself, not by its shareholders. - The allowable expenditures under Section 48 are limited to the cost of acquisition, cost of improvement, and expenditure incurred wholly and exclusively in connection with the transfer. The claimed expenditure did not fit these categories. - The liability of the company should not be borne by individual shareholders. - The expenditure was not wholly and exclusively for the transfer of shares. - The case laws cited by the assessee were found to be distinguishable and not applicable. The CIT(A) upheld the AO's decision, emphasizing that the expenditure did not qualify as being incurred wholly and exclusively in connection with the transfer of shares. The CIT(A) noted that the taxes paid by the assessee lacked an intrinsic connection with the transfer of shares and were not valid under Section 48(i) of the Act. Upon appeal to the ITAT, the Tribunal examined the arguments and materials on record. The Tribunal noted that the obligation to discharge the income-tax liability of a private limited company lies with the company itself. The share purchase agreement's clause 7(1) indicated a future contingent liability, not a condition precedent for the transfer of shares. The Tribunal concluded that the expenditure was not incurred wholly and exclusively in connection with the transfer of shares and that the entire tax liability of the companies could not be fastened on a single shareholder. The Tribunal dismissed the appeal, holding that the claim was untenable and appeared to be a device to reduce the tax liability of the assessee. Conclusion: The ITAT upheld the disallowance of ?90,74,103/- as expenditure in connection with the transfer of shares, concluding that the expenditure did not meet the criteria under Section 48(i) of the Income-tax Act, 1961. The appeal was dismissed, confirming the decisions of the AO and the CIT(A).
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