2019 (4) TMI 1015 - AT - Income Tax

Disallowance of cost of transfer of the asset - cost of transferring shares of 20 Microns Ltd ('20ML') in 'offer for sale' - IPO issued - assessee is an AOP and engaged in the activity of providing Venture Finance Assistance to Information Technology/Software units located in the state of Gujarat - no prohibition for the assessee to share the cost in the IPO expenses - HELD THAT - As per the agreement between the assessee and 20 ML , there was no obligation on the assessee to incur any cost in connection with the transfer of the shares. As such it was the responsibility of 20 ML to provide an exit route to the assessee for the disinvestment of the shares held by it. In this regard, we note that reimbursement of the expenses was decided in the board meeting of the assessee and after taking the report/opinion from the chartered accountant. As per the report of the chartered accountant there was no prohibition for the assessee to share the cost in the IPO expenses. Therefore even the assessee was not under the obligation to incur such cost, but that cannot be the basis of disallowance of the expenses under section 48 of the Act. The obligation of 20ML was to provide the exit route to the assessee, but there was no clause or condition that the assessee shall not share the expenses in connection with the transfer. AO cannot sit on the armchair of the assessee to decide/direct the business affairs of the assessee. It is the assessee who knows the best of its business affairs. The role of the AO is to establish whether the expenses were incurred wholly and exclusively in connection with the transfer of assets. There is no ambiguity that the expenses were incurred wholly and exclusively in connection with the transfer of the shares as held by us in the preceding paragraph. Thus, the allegation of the AO that the assessee was not under the obligation to incur the cost for the transfer of shares has no relevance in the given facts and circumstances. We conclude that the assessee is entitled to a deduction under section 48 of the Act, for the expenses incurred wholly and exclusively in connection with the transfer of the shares. Accordingly, we reverse the order of the authorities below. Accordingly, we set aside the order of the Ld.CIT (A) and direct the AO to delete the addition made by him. - Decided in favour of assessee.

Issues Involved:
1. Confirmation of the disallowance of ?50,00,000 incurred for the cost of transferring shares.
2. Determination of whether the expenditure has a direct nexus with the transfer of shares.
3. Applicability of Section 48(i) of the Income Tax Act, 1961 concerning the allowance of expenses.
4. Consideration of the reimbursement of IPO expenses as an allowable expense under Section 48(1).
5. Analysis of the relevance of adverse market conditions on the reimbursement of IPO expenses.
6. Evaluation of the timing and nature of the expenses concerning the transfer of shares.
7. Examination of the personal nature of the payments made by the appellant.
8. Liability of the appellant to pay interest under Sections 234A, 234B, and 234C.

Detailed Analysis:

1. Confirmation of the Disallowance of ?50,00,000:
The primary issue raised by the assessee was the confirmation of the disallowance of ?50,00,000 representing the cost of transfer of shares. The AO disallowed the expense, arguing it was not incurred in connection with the transfer of shares, and the CIT(A) upheld this view.

2. Nexus with Transfer of Shares:
The assessee contended that the ?50,00,000 expense was directly linked to the transfer of shares and should be included in the cost of acquisition for calculating long-term capital gain. The AO and CIT(A) disagreed, stating there was no need for the assessee to reimburse any expense incurred by 20 Microns Ltd (20 ML) in connection with the transfer of shares.

3. Applicability of Section 48(i):
The assessee argued that Section 48(i) of the Act allows for the deduction of expenses incurred wholly and exclusively in connection with the transfer of assets. The provision does not specify that expenses must be incurred before the transfer. The Tribunal agreed, noting that the language of the provision is unambiguous and does not require expenses to be necessary for the transfer, only that they be directly connected.

4. Reimbursement of IPO Expenses:
The assessee claimed the reimbursement of IPO expenses as an allowable expense under Section 48(1), citing the decision of ITAT Chennai in UsharaniRaqhunathan. The Tribunal found that the expenses were directly connected with the transfer of shares, even though they were not necessary for such transfer.

5. Adverse Market Conditions:
The assessee argued that the reimbursement of IPO expenses was due to adverse market conditions at the time of the IPO. The CIT(A) dismissed this argument, stating that the increased expenses due to market conditions were not relevant. The Tribunal, however, found that the expenses were incurred wholly and exclusively in connection with the transfer of shares, regardless of market conditions.

6. Timing and Nature of Expenses:
The AO and CIT(A) argued that the reimbursement was made after the IPO and sale proceeds were received, and thus was not necessary for the transfer. The Tribunal disagreed, stating that Section 48 does not require expenses to be incurred before the transfer, only that they be in connection with it.

7. Personal Nature of Payments:
The CIT(A) observed that the payments made by the appellant were personal in nature and not wholly and exclusively in connection with the transfer of shares. The Tribunal disagreed, finding that the expenses were directly connected with the transfer of shares.

8. Liability to Pay Interest:
The appellant denied liability to pay interest under Sections 234A, 234B, and 234C. The Tribunal did not specifically address this issue in the detailed analysis but focused on the main issue of the disallowance of expenses.

Conclusion:
The Tribunal concluded that the assessee is entitled to a deduction under Section 48 of the Act for the expenses incurred wholly and exclusively in connection with the transfer of shares. The order of the lower authorities was reversed, and the AO was directed to delete the addition made. The appeal of the assessee was allowed.

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