2022 (8) TMI 205 - HC - Income Tax

Capital gain computation - sale of shares - full value of consideration - deduction of expenses u/s 48 - The appellant had agreed to pay the tax component as per Clause 7(1) of the share purchase agreement. - whether the tax component does not fall within the definition of expenditure - HELD THAT - Section 48 of the Income Tax Act provides for mode of computation in terms of which the income chargeable under the head 'Capital Gains' shall be computed by deducting full value of the consideration received. The expenditure incurred and cost of acquisition are deductible. The Revenue's case is, payment of tax does not fall in these two categories. But in the facts of this case, the total amount realised or in other words, which the appellant got in her hand, is Rs.1.80 Crores. The deduction is claimed based on the agreement between the parties. A careful perusal of the agreement shows that intention of the parties is clear to the effect that the value of the shares shall be the amount agreed between the parties excluding the tax component. However, the contention urged by Shri Aravind that tax component should be distributed among both sellers merits consideration. Therefore, appellant shall be entitled for deduction of only 50% of the tax component proportionate to her share holding. This appeal is allowed in part. The questions are answered partly in favour of the assessee and against the Revenue, holding that assessee shall be entitled for deduction of only 50% of the tax component.

Summary

Issues:
1. Interpretation of Section 48 of the Income Tax Act regarding the full value of consideration in a share purchase agreement.
2. Allowability of deduction under 'capital gains' on the tax component in the sale of shares.

Analysis:

Issue 1: Interpretation of Section 48 of the Income Tax Act
The appellant contended that the full value realized from the sale of shares should exclude the tax component, whereas the Revenue argued that the tax component is part of the consideration. The court examined the share purchase agreement, which indicated that the consideration was Rs.2.70 Crores minus the tax component. The court noted that the tax paid was not an expenditure or cost of acquisition under Section 48 of the Act. However, considering the agreement's terms, the court allowed a deduction of 50% of the tax component proportionate to the appellant's share holding. The court referred to relevant case law and held that the full value of consideration should be computed based on the agreement terms, excluding the tax component.

Issue 2: Allowability of deduction under 'capital gains'
The appellant claimed a deduction under 'capital gains' on the tax component of Rs.90,74,103/- as per Section 48 of the Act. The Revenue argued that the tax component should not be deductible as it was part of the consideration. The court analyzed the payment of taxes clause in the agreement and the tax payments made by the appellant. It was observed that the net amount realized by the appellant was Rs.1,79,58,175/- after deducting the tax component from the consideration. The court relied on relevant legal provisions and held that the appellant was entitled to a deduction of 50% of the tax component based on the agreement terms and the proportionate share holding.

In conclusion, the court partially allowed the appeal, holding that the appellant could claim a deduction of only 50% of the tax component in the sale of shares. The judgment clarified the interpretation of Section 48 of the Income Tax Act and emphasized determining the full value of consideration based on the terms of the agreement, excluding certain components like taxes.