2015 (7) TMI 656 - HC - Income Tax

Disallowance of legal and professional charges paid in calculating the capital gains - Tribunal allowed claim - Whether the Tribunal was justified in allowing the entire consultancy charges paid for transfer of shares by violating the provisions of Section 48 of the Act? - Held that - The sale of shares took place on the account of the legal and professional assistance given by MIFL. The agreement entered into between the shareholders and MIFL clearly setout the pro rata of charges chargelable by each of the shareholders depending upon their shareholding. Insofar as the assessee is concerned, he is a major shareholder. Prior to the entering into the agreement the assessee had written a letter agreeing to pay an additional amount in the event MIFL gets him a good price for his shares. The evidence on record shows the assessee got 72% cents extra when compared to other shareholders. Under the letter dated 25.03.2004 entered prior to the agreement he had agreed to bear the extra charges. Therefore, he being the major shareholder and a director of the company who is a person who was actively involved and interested in selling the shares. He wanted additional amount to be paid to his shares and therefore, he has agreed to pay the additional charges also on the basis of such amount which he would get. It is not in dispute that the assessee got a sum of ₹ 2,98,11,303/- more than for his shares than what he would not get at the rate of USD 4.93 that the other shareholders were paid. It is out of the said additional amount he received, he paid a sum of ₹ 2,84,898,000/- to MIFL as their charges. The payment is not in dispute. Therefore, that is the amount which the assessee incurred as expenditure for sale of shares. That is the amount which is wholly and exclusively incurred by the assessee in connection with such transfer. Under these circumstances the order passed by the Tribunal is in accordance with law and does not suffer from any legal infirmity which calls for interference. - Decided in favour of the assessee.

Issues:
1. Allowance of legal and professional charges in calculating capital gains.
2. Interpretation of Section 48 of the Income Tax Act.
3. Justification of allowing entire consultancy charges for share transfer.

Issue 1: Allowance of Legal and Professional Charges in Calculating Capital Gains

The case involved the appellant appealing against the Tribunal's decision to allow the entire legal and professional charges paid by the assessee to MIFL in calculating the capital gains arising from a share transaction. The assessee, a major shareholder in a company, had entered into agreements regarding the sale of shares, resulting in him receiving more for his shares than other shareholders. The Tribunal held that since there was no dispute regarding the services rendered by MIFL and no objection from the department, the entire charges should be allowed. The revenue contended that the Tribunal erred in allowing 75% of the charges based on a letter written prior to the agreement stipulating 25% charges. However, the court upheld the Tribunal's decision, emphasizing that the expenditure incurred by the assessee for the sale of shares, including the additional charges paid to MIFL, was wholly and exclusively in connection with the transfer, thus justifying the allowance of the entire consultancy charges.

Issue 2: Interpretation of Section 48 of the Income Tax Act

Section 48 of the Income Tax Act was crucial in determining the computation of capital gains. It states that the income chargeable under capital gains shall be computed by deducting certain amounts, including expenditure incurred wholly and exclusively in connection with the transfer of the capital asset. The court noted that the statute does not differentiate between amounts agreed upon in an agreement and those paid outside it. In this case, the expenditure incurred by the assessee for legal and professional assistance in the share transaction was found to be directly related to the transfer, meeting the requirements of Section 48. The court emphasized that the assessee's active involvement in the sale, agreement to bear additional charges, and the resulting higher amount received for shares justified the allowance of the consultancy charges as a deduction.

Issue 3: Justification of Allowing Entire Consultancy Charges for Share Transfer

The court addressed the contention raised by the revenue regarding the justification of allowing the entire consultancy charges for the share transfer. It was emphasized that the agreement between the shareholders and MIFL clearly outlined the charges payable by each shareholder based on their shareholding. The assessee, being a major shareholder, had agreed to pay additional charges if a good price was obtained for his shares. The evidence showed that the assessee received a significantly higher amount for his shares compared to other shareholders, justifying the additional charges paid to MIFL. The court concluded that the Tribunal's decision to allow the entire consultancy charges was in accordance with the law, as the expenditure incurred by the assessee was directly linked to the share transfer and did not warrant any legal interference.

In conclusion, the High Court dismissed the appeal, upholding the Tribunal's decision to allow the entire legal and professional charges paid by the assessee to MIFL in calculating the capital gains. The judgment extensively analyzed the provisions of the Income Tax Act, the specifics of the share transaction, and the justification for considering the consultancy charges as deductible expenses in connection with the transfer of shares.

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