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TMI Blog2009 (2) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... 1997 with the Indian company and their promoters. Pursuant to the agreement, the applicant decided to invest in the equity shares of the Indian company by way of preferential allotment. In the share holders agreement it was stated that the applicant would hold 30% of the equity share capital of the Indian company and would subscribe 29,95,000 equity shares at a price of Rs.21 per share (face value of Rs.10 plus premium of Rs.11) giving way to total investment of Rs.6.29 crores approximately. The approval of the RBI was also sought by the Indian company to issue requisite shares to the applicant. As per letter bearing No.597/208(G-B)/97-98 dated 28.11.97, RBI granted approval under section 19(1)(d) of the Foreign Exchange Regulation Act, 1973 and accordingly 29,95,000 equity shares were acquired by the applicant by way of making payments in foreign exchange. 2. The applicant further avers that in course of operations of the Indian company there arose various disputes relating to joint venture agreements among all the parties including the Indian company and the applicant. As a result, company petitions No.90/2007 and 133 of 2007 were filed by the applicant before the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. In the course of the hearing of the application under section 245R(4) of the Act, we have, for the sake of correct appreciation of the point-at-issue, recast the question No.2 in the following terms:- Que.No.2 Whether in computing the capital gains, deduction is admissible under section 48 of the IT Act on account of legal expenses incurred in relation to transfer of shares? 1st Question 5. The applicant contends that the second proviso to section 112(1) is attracted and therefore, the rate of 10(ten) per cent specified therein would apply. The applicant relies on the ruling of this Authority in the case of Timken France SAS, reported in 294 I.T.R. 513 which has subsequently been followed by the Authority in the cases of (a) McLeod Russel India Ltd. reported in 299 I.T.R. 79 and (b) Burmah Castrol Plc reported in 308 I.T.R 375. 6. In the comments furnished, the Revenue contends that the applicant cannot avail of the lower rate of 10(ten) percent envisaged by section 112 of the Act in as much as the 2nd proviso to section 48 of the Act is not applicable to a non-resident. The stand of the Department is that the expression 'before giving effect to the second proviso t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate provided therein as against the normal rate of 20 per cent only to the three categories of resident assesses specified in clause (a), (b) and (d). It may not be out of place to give the following extract from the Head Note of the ruling in the case of Timken France(supra) which is in the following terms:- "In plain and peremptory words, the proviso to section 112(1) limits the rate of tax on long-term capital gains from the transfer of listed securities to 10 per cent. but with an important rider that the quantum of capital gains should be arrived at without taking into account the formula laid down in the second proviso to section 48 based on the indexed cost of acquisition. In other words, while computing the gains on listed securities held for more than 12 months, one should not give effect to the calculation spelt out in the second proviso to section 48 wherever applicable. The indexation formula will not enter into the computation process - that is the mandate of the proviso to section 112(1). It does not say: deny the concessional rate of tax to the category of assessees who are not eligible to have the benefit of indexed cost of acquisition under the second proviso. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nees of Promoter No.1 in C.P.133/2007 agreed to purchase 25 lakh shares owned by the applicant @ Rs.65/- each. Besides, the parties agreed to the retention of remaining shares of 4.95 lakhs by the applicant. The CLB, thereafter, passed an order on 9.5.2008 to give effect to the terms of settlement. After narrating these facts, the applicant stated as follows :- "That the applicant till date during the entire process of settlement culminating into proposed transfer of shares of the Indian Company borne legal expenses to the tune of Euros 1,49,445.00 (equivalent to Rs.8,902,063/-)." The applicant has not furnished any break up of the said figure or the details pertaining to the expenses. The applicant's counsel has relied on the decision of Kerala High Court in V.A. Vasumathi vs. CIT in 123 I.T.R. 94 wherein the expenditure incurred for the purpose of litigation in the Civil Court, pursuant to a reference under section 20 of the Land Acquisition Act, was allowed as deduction under section 48(i). 13. In order to appreciate the above issue, it is desirable to refer to the provisions of section 48 of the Act which read as under:- "Mode of computation. 48.The income char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the transfer." Similarly, the following observation of Mysore High Court in the case of B.N.Pinto vs. CIT 96 I.T.R. 306 can be usefully recalled:- "What can be deducted under section 48(i) is expenses incurred wholly and exclusively in connection with the transfer. The damages for mental worry and suffering on account of wrongful withholding and detention of her property cannot, by any stretch of imagination, be said to be expenses incurred wholly land exclusively in connection with the transfer. The claim in respect of lawyer's fees is also indefinite and vague and is not specific that it was in connection with the transfer, like, for example, drafting of the deed or such purposes intimately connected with the transfer. Similarly, regarding the traveling expenses, it is not specific that it was in connection with the transfer." 15. In the light of the above exposition of law, it is clear that the legal expenses distinctly related to and integrally connected with the transfer of shares is admissible for deduction under section 48(i) of the Act. The sole object of the expenditure incurred towards legal fees should be in connection with the transfer of shares. Legal fees f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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