Case Law Details
RELEVANT EXTRACTS:
12. The applicant has given the details of legal proceedings that preceded the transfer of shares starting from the filing of Company Petition No. 19/2007 and 133 of 2007 by the Indian Promoters and by the applicant respectively before the Company Law Board (CLB). These Company Petitions were filed under Section 397 and 398 of the Companies Act for relief against oppression of minority shareholders and mismanagement of the company. Ultimately, as stated, the parties settled the disputes and arrived at a settlement. The Memorandum of Settlement was signed on 6.5.2008. According to the terms of the settlement, the Indian Promoters of Indian Company and/or nominees of Promoter No. l 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 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 assets the following amounts, namely:-(i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto:
14. The above section broadly contemplates three amounts for the purpose of computing income chargeable under the head ‘capital gains’. The first is the full value of the consideration for which the capital assets has been transferred. The second is the expenditure incurred wholly and exclusively in connection with such transfer and the third and the last is the cost of acquisition of the capital asset including the cost of any improvement thereto. In clause (i) of Section 48 of the Act, the legislature has used the expression “expenditure incurred wholly and exclusively in connection with such transfer”. The expression presupposes (a) there should be an expenditure (b) the said expenditure should be in connection with the transfer of the capital asset and (c) it should be wholly and exclusively incurred in connection with the said transfer. In regard to the expression “wholly and exclusively employed in Section 37(1) of the Act, the following Commentary from Sampath Iyengar’s Law of Income Tax (Edited by Shri Rajaratnam 10th Edition) is worth quoting: –
“……… The first adverb ‘wholly’ in the above phrase, laid out or expended, wholly and exclusively’ , refers to the quantum of the expenditure, the sum of money spent. The second adverb ‘exclusively’ , has reference to the motive or object behind the expenditure. Unless such motive or object is exclusively, i.e., solely, for promoting the business, the expenditure will not qualify for deduction.” While interpreting section 48(i) of the Act, Delhi High Court in the case of Smt Sita Nanda 2511.T.R. 575, 577 observed as under: –
“The crucial words in the provisions are “in connection with such transfer”. The expression means intrinsically linked with the transfer. Such expenditure has to be wholly and exclusively in connection with the transfer. Even if such expenditure has some nexus with the transfer it does not qualify for deduction unless it is wholly and exclusively in connection with 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 for seeking advice on the modalities of transfer and the drafting of agreement or deed of transfer would undoubtedly qualify for deduction. It must also be noted that the expression Nn connection with such transfer’ is wider and more liberal in meaning than the phraseology ‘for the transfer.'(Ref: CW vs. Shakuntala Kantilal, 190 I.T.R. 56,59, Bombay High Court). By reason of employing such a wide expression i.e. ‘in connection with’, something more than what is attributable to the final act of transfer of shares is also admissible for deduction provided the intimate connection between the expenditure and the act of transferring shares is established. For instance, if the services of legal or other professional extended to the process of valuation of shares or the participation in the deliberations that led to the settlement concerning the transfer of shares, the legal charges on that account will also be allowable as deduction. We do not think, however, that the legal fees etc. paid to the lawyers for filing the petitions under Sections 397 and 398 in the Company Law Board and for making appearance before the Board prior to the passing of final order giving green signal for the transfer of shares are admissible for deduction. In other words, the legal expenses for the initial period of dispute are not intrinsically linked with the transfer of shares and therefore it cannot be allowed as deduction. With these observations, we consider it appropriate to leave the issue open for the assessing officer to quantify the admissible amount, as we do not have a clear picture of the expenditure incurred wholly and exclusively in connection with the transfer of shares. If the assessee is not in a position to furnish the details of expenditure towards professional fees to lawyers, the assessing officer will allow a reasonable amount towards this item.
