2023 (1) TMI 175 - HC - Income Tax

Capital gain computation - expenses incurred towards fees paid to KPMG, Khaitan Co. Bank Charges and other miscellaneous expenses in relation to the transfer of capital asset u/s 48 - Revenue s case is that expenditure incurred towards professional services rendered by KPMG and Khaitan Co. has no nexus with the transfer of shares - HELD THAT - In the instant case, assessees have engaged the services of professional who have identified the investor, negotiated the value and structured the transaction. Therefore, in our considered view, the transaction has an inextricable nexus with the transfer of shares. The other ground that was urged on behalf of the Revenue is, KPMG had addressed the letter to the Managing Director of the Company and therefore, assessees had no obligation to make the payment. We have perused the engagement letter dated June 20, 2014. The letter is addressed to the Assessees. Thus, this contention is contrary to records and therefore liable to be rejected. In our considered view, the assessees, in accordance with the para 8 of the Articles of Association, have taken services of KPMG and Khaitan Co., and the engagement of the said firms has direct nexus with the transfer of shares. Hence, the expenditure incurred is deductible u/s 48(i) of the IT Act. Decided in favour of the assessees

Issues:
Whether expenses incurred towards professional services for the transfer of capital asset are deductible under Section 48 of the Income Tax Act, 1961?

Analysis:
1. Background:
The appeals were filed against the ITAT's order disallowing expenses incurred towards fees paid to KPMG, Khaitan & Co., and other charges related to the transfer of capital asset. The main issue was whether these expenses were allowable under Section 48 of the Income Tax Act, 1961.

2. Arguments by Assessees:
The assessees argued that the services of KPMG and Khaitan & Co. were essential for the transfer of shares, as expert advice is required for such transactions. They contended that the expenses had a direct nexus with the transfer of shares, as per the provisions of the Companies Act, 2013.

3. Revenue's Position:
The Revenue contended that the services provided were of a consultancy and financial nature, not directly related to the transfer of shares. They argued that the engagement was with the Company, not the shareholders, and therefore, the expenses were not incurred wholly and exclusively in connection with the transfer of the capital asset.

4. Court's Analysis:
The Court examined the engagement letter and found that the professional services included activities like negotiation, due diligence, and structuring the transaction, all directly related to the transfer of shares. The Court referred to relevant legal provisions and past judgments to establish the requirement of a direct nexus between expenses and the transfer of the capital asset.

5. Legal Precedents:
The Court cited legal precedents such as Kaushalya Devi Vs. CIT and Commissioner of Income Tax Vs. Venkata Rajendran to support the argument that expenses must have a direct connection with the transfer of the capital asset to be deductible under Section 48 of the IT Act.

6. Decision:
After considering all arguments and evidence, the Court held that the expenses incurred by the assessees for professional services had a direct nexus with the transfer of shares. Therefore, the expenses were deductible under Section 48(i) of the IT Act. The appeals were allowed, and the question of law was answered in favor of the assessees, rejecting the Revenue's contentions.

This detailed analysis of the judgment showcases the legal reasoning behind the decision and highlights the key aspects considered by the Court in determining the deductibility of expenses related to the transfer of capital assets under the Income Tax Act, 1961.

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