Commissioner of Income Tax and Others vs Venkata Rajendran

N. Kumar, J.

The Revenue has preferred this appeal against the order passed by the Tribunal allowing the entire legal and professional charges paid by the assessee to MTFL, in calculating the capital gains arising from the transaction in question. The assessee is an individual, carrying on the profession of technical consultancy under the field of design and development of telecom products. This appeal relates to the assessment year 2005-06. The assessee declared the capital gains of Rs. 13,41,19,572 in the return of income after claiming deduction of Rs. 2,00,84,088 which represented legal and professional charges paid to M/s. Marchmont International Finance Ltd. (hereinafter referred to as "MIFL"). The assessee was a shareholder in M/s. Deccannet Designs Ltd. (hereinafter referred to as "DDL"). He holds 9,01,080 shares out of the total shares of 30,73,299. Thus, he was the major shareholder in the company of which he was a director. There were six other substantial shareholders who between themselves held 19,90,746 shares but none of them individually holds as many shares as the assessee did. There were several other individual shareholders who together held 1,81,473 shares. On July 28, 2004, an agreement was entered into between DDL, the assessee and the six major shareholders on the one hand and M/s. Flextronix International Asia Pacific Ltd., under which the Flextronix decided to acquire the shares of these seven persons in DDL for consideration. The assessee''s shareholding was valued at USD 5,090,115 and the price per share came to USD 5.65. The shares of other six major shareholders was valued at USD 9,814,356 which gave per share the value of USD 4.93. Thus, the shares held by the assessee were valued at 72 cents more than the shares held by the other six major shareholders. Under the agreement, the fees payable to MIFL by the assessee and the other shareholders was USD 600,000 to be shared pro rata by the assessee and the other shareholders. However, the assessee has entered into a separate agreement with MIFL on November 25, 2003, which listed services rendered by MIFL in relation to the acquisition agreement. This agreement also prescribes the scale of fees payable to MIFL. A subsequent agreement was entered on March 25, 2004, where the assessee agreed to pay and compensate in his individual capacity the difference of the fee based on the percentage of the purchase consideration. In terms of the aforesaid agreement the assessee received Rs. 2,98,11,303 more for his shares than he would have got at the rate of 4.93 per share. Under the agreement dated March 25, 2004, he had to pay MIFL the difference of the fee based on the percentage of the purchase consideration and, accordingly, he paid Rs. 2,00,84,088 to MIFL as their charges. He claims the same as deduction while computing capital gains on the sale of shares. The assessing authority restricted the consultancy charges to 25 per cent, and disallowed the remaining 75 per cent. The said order was upheld by the Commissioner of Income-tax (Appeals).

In the appeal preferred by the assessee against the said order before the Tribunal it was held that they do not see any reason why the entire legal and professional charges paid to MTFL cannot be allowed when there is no dispute regarding the services rendered by the MIFL to the assessee and there is no objection by the Department of this score. Accordingly, the appeal was allowed directing the Assessing Officer to allow the entire legal and professional charges paid by the assessee to the MEFL. Aggrieved by the said order, the Revenue has preferred this appeal.

The appeal is admitted to consider the following substantial questions of law:

"1. Whether the Tribunal was correct in not considering the acquisition agreement dated July 28, 2004, entered into between M/s. Flextronics and the assessee and six other parties from whom the shares of M/s. Deccannet were acquired, wherein the acquisition agreement stipulates that fees payable to the investment bankers is to be shared pro rata by the assessee and other shareholders and the acquisition agreement was recognised by all the shareholders and approved by the RBI?

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?

Whether the Tribunal was correct in allowing the entire consultancy charges paid, when what was transferred is only the share capital held by the assessee and the entire consultancy charges cannot be claimed as deduction?"

The learned counsel appearing for the Revenue assailed the impugned order contending that when the sale transaction has taken place in pursuance of the written agreement and in the said agreement what is stipulated is 25 per cent, as the professional charges, the Tribunal was not justified in allowing remaining 75 per cent, based on the letter written prior to the date of the agreement. Therefore, he submits the impugned order requires interference.

Per contra, learned counsel appearing for the assessee supported the impugned order.

Section 48 of the Income-tax Act deals with the mode of computation of the capital gains. It provides, the income chargeable under the head "Capital gains" shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:--

(i) expenditure incurred wholly and exclusively in connection with such transfer; and

(ii) the cost of acquisition of the asset and the cost of any improvement thereto.

Therefore, wholly and exclusively in connection with such transfer should establish the expenditure incurred by him. The statute did not make any distinction between the amount agreed under the agreement and the amount paid outside the agreement. In the instant case, facts are not in dispute.

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 set out the pro rata of charges chargeable by each of the shareholders depending upon their shareholding. In so far 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 March 25, 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 Rs. 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 Rs. 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. Accordingly, the substantial questions are answered in favour of the assessee and against the Revenue. Hence, we pass the following:

Order

No merits.

Appeal is dismissed.