Case Law Details

Case Name : Usharani Raghunathan Vs Commissioner of Income-tax (ITAT Chennai)
Appeal Number : IT Appeal No. 493 to 495 (MDS.) OF 2012
Date of Judgement/Order : 10/05/2012
Related Assessment Year : 2007-08
Courts : All ITAT (7813) ITAT Chennai (315)


Usharani Raghunathan


Commissioner of Income-tax

IT APPEAL NOs. 493 to 495 (MDS.) OF 2012


MAY 10, 2012


Abraham P. George, Accountant Member

These are appeals filed by different assessees for impugned assessment year. Since the fact situation giving raise to the appeals are similar, the appeals are disposed of through a consolidated order. All these appeals have been filed with a delay of 38 days. Condonation petitions were on record. Reasonable cause has been shown. Delay is condoned and appeals are admitted.

2. Facts are that all the three assessees were Directors in one M/s Raj Television Network Limited. The assessees had admitted in their respective returns for the impugned assessment year, capital gains of varying sums and some of them had claimed exemption under Section 54F of Income-tax Act, 1961 (in short ‘the Act’) as well. Capital gains shown by Smt. Usha Raghunathan was Rs. 2,71,99,556/- and exemption claimed under Section 54F of the Act was Rs. 2,50,00,000/-. Capital gains returned by Shri Raghunathan was Rs. 3,20,81,676/- and exemption was claimed for an equal amount. Capital gains returned by Smt. Amudha Rajendran came to Rs. 2,72,00,001/- and it seems there was no claim for any exemption under Section 54F of the Act. Assessees were required to file details of sale of shares which resulted in capital gains. Submission of the assessees was that such capital gains arose out of sale of shares of one M/s Raj Television Network Limited. As per the assessees, M/s Raj Television Network Limited in which they were holding shares, had gone for an Initial Public Offering (IPO) of its shares during the relevant previous year and the shares sold by the assessees were part of this IPO. According to assessees, the total pre-issue expenses incurred for such IPO was Rs. 7,80,19,016/- and the pro rata share of the assessees came to Rs. 3,16,43,013/-. While computing capital gains, assessees had considered their respective shares of such expenses as a part of expenditure incurred wholly and exclusively in connection with transfer of shares. Relying on Section 48 of the Act, assessees argued that such expenditure had to be deducted while calculating capital gains. A.O. sought explanation from the assessees as to whether there was any agreement between M/s Raj Television Network Limited and assessees for apportionment of the expenses. A.O. also sought details of IPO expenses. The break-up of the expenses were submitted by the assessees as under:-

S. No.  Particulars Amount Rs.
A  Total issue expenses (including actual amount incurred and provision created pre & post issue) and accounted in the AY 2007-08 10,44,09,778
B  Expenses borne by the promoter as per the prospectus 3,16,43,013
C  Net expenses accounted in company’s accounts 7,27,66,765

Assessees also admitted that there were no specific individual agreements between the assessees and M/s Raj Television Network Limited for bearing a part of the expenses. As per the assessees, the expenses were apportioned on the basis of number of shares. Assessees it seems produced details of bills and vouchers for the claim of expenditure. However, the A.O. was not impressed. According to him, the total issue expenses for the IPO was to be borne by the company Raj Television Network Limited. There was no specific agreement between the said company and assessees for sharing of expenses. As per the A.O., without any such specific agreement, the entire expenses on the IPO had to be considered only in the hands of the company and could not be attributed to any of the assessees. He, therefore, disallowed the claim of expenditure made by the assessees against share issue expenses and re-computed the capital gains accordingly.

3. In their appeals before CIT (Appeals), argument of the assessees was that the expression “wholly and exclusively” used in Section 48 was required to be understood in a wide connotation in view of the decision of Hon’ble jurisdictional High Court in the case of CIT v. Bradford Trading Co. P. Ltd. (261 ITR 222). Assessees also produced before CIT (Appeals) a copy of Memorandum of Understanding between the lead merchant banker for the IPO M/s Vivro Financial Services P. Ltd. and Raj Television Network Limited for justifying the claim of expenditure. CIT (Appeals) sought a remand report from the A.O. The A.O. once again relied on the fact that there were no agreements between the company and the assessees for sharing of expenses. CIT (Appeals) made an analysis of the expenses claimed by the assessees and M/s Raj Television Network Limited. Based on such analysis, he came to following conclusion:-

Vivro Financial Services P. Ltd. – merchant banker of IPO. Service rendered include preparation of draft prospectus obtaining compliance from respective authorities & completion of formalities with NSDL/CDSL and filing of draft prospectus with SEBI, overseeing IPO. The services rendered is for the company which is legally bound to carry out the work while going for IPO.

Rajini Associates – for professional service relating to vetting of prospectus, issue of certificates are all services rendered to the company in discharge of legal and procedural obligations in connection with IPO by the company.

Comfort Advertising – for the service of publisher of IPO in the media is service rendered in connection with wise publicity of IPO of the company which is legal obligation of the company as the Indian Companies Act.

Trans Union Courier – for courier service for IPO various expenditure relating to shipping of documents and forms to all corners of the country which is the obligation of the company.

Western Press Pvt. Ltd. – printing work in connection with IPO of applications, documents, brochures, prospectus etc. which are legal obligation of the company.

Carewell Consultancy – expenditure in connection with marketing of IPO – nature of expenditure specified u/s 73 of Companies Act and hence legal obligation of the company.

Cameo Corporate Services – being the Registrars to the IPO expenditure incurred is in connection with legal and procedural obligations of the company in connection with IPO (allotment, information of allotment, etc.) as per Indian Companies Act, and SEBI Act.

Skyed Network Pvt. Ltd. – relating to expenses reimbursement related with IPO and hence directly attributable to company.

Global business – expenses relating to trademark registration, directly attributable to the company.

Add Factors Advertising – advertisement expenses for the IPO for publicity to be given for IPO as mandated by the Companies Act and hence legal obligation to incur the expenditure.

TDS – as expenses as analysed above relate to the company, the TDS relating to those expenses also relate to the company.

Expenses reimbursed to Raj TV – the company itself incurred certain expenditure relating to IPO which was reimbursed by the lead manager in connection with IPO and hence relate to the company.”

Further, as per the CIT (Appeals), the expenditure incurred for IPO was statutory in nature and the company was not governed by the rule of ‘cavet emptor’. In view of rigorous conditions prescribed in the Companies Act, the company had to incur huge expenses in connection with the IPO. Assessees being only shareholders in the company, had no liability to bear a share of such huge expenditure for effecting the sale of their shares. CIT (Appeals) noted that liability to incur the expenditure was only with the company and not with the assessees. He, therefore, was of the opinion that the expenditure claimed by the assessees could not be considered for deduction while computing capital gains, and thus confirmed the disallowance made by the A.O.

4. Now before us, A.R., strongly assailing the orders of authorities below, submitted that undisputedly, the prospectus issued by M/s Raj Television Network Limited, for the IPO clearly mentioned that such IPO consisted not only fresh issue of shares, but also sale of shares by the assessees, who were shareholders. A.R. placed a copy of Prospectus before us. Relying on paper-book page 40, A.R. submitted that the issue expenses were to be borne proportionately by the company and the shareholders as per Prospectus itself. When the Prospectus itself mentioned that expenses had to be apportioned, it could not be considered that such expenses were not incurred for the purpose of selling the shares. Each of the assessees had considered proportionate expenses for deduction while computing capital gains. Relying on the Escrow Account for the initial public issue, A.R. stated that only the balance amount after deducting the proportionate share expenses were transferred to the account of the respective shareholders after the IPO. According to him, Escrow Account was started for crediting the realizations from the IPO and such realizations were transferred to M/s Raj Television Network Limited and other stake holders in accordance with the terms of the prospectus. As per the A.R., assessees were obliged to bear the pro rata expenses for share issue, since, but for the IPO, it would not have been possible for the assessees to sell their holding in one go. Therefore, according to him, lower authorities fell in error in not allowing deduction claimed by the assessees.

5. Per contra, learned D.R. supported the orders of authorities below.

6. We have perused the orders and heard the rival submissions. Mode of computation of capital gains is given under Section 48 of the Act and this is reproduced hereunder:-

“48. The 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;

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

It is clear that from the full value of consideration received, expenditure incurred wholly and exclusively in connection with such transfer has to be deducted. The terminology used is “in connection with” such transfer. There is no dispute that the expenditure claimed by the assessees was for effecting the sale of their shares. It is clearly mentioned in the Prospectus of M/s Raj Television Network Limited that the issue expenses were to be borne proportionately by the company and selling shareholders. A.O. himself has acknowledged the IPO was for 35,68,250 equity shares which consisted of fresh issue of 22,70,700 equity shares and offer for sale of 12,97,550 equity shares by the assessees. No doubt, as noted by CIT (Appeals), a company while making an IPO had to abide by the strict norms laid down under the Companies Act, and for complying with such norms it might be necessary to incur more expenditure than an ordinary shareholder effecting a sale of his/her shares. But, in our opinion, assessees here had an opportunity to sell their holdings in one block through the IPO. This convenience received by the assessees if weighed against the extra expenditure incurred for IPO gets more or less balanced. There is no dispute that pro rata expenditure alone was claimed by the assessees under Section 48 of the Act. There is also no dispute that such expenditure was wholly incurred for the purpose of IPO. A look at the Escrow Account, clearly shows that concerned assessees were transferred funds only to the extent of net amounts after meeting expenses. CIT (Appeals) analysed the expenses incurred and came to an opinion that the legal obligation for incurring such expenses was with M/s Raj Television Network Limited. No doubt, this might be true. Just because the expenditure was incurred based on a legal obligation would not render such expenditure as something not incurred wholly and exclusively in connection with the sale of shares. Expenses having been incurred for the IPO through which assessees were also able to sell their shares, the expenses necessarily were, in our opinion, in connection with sale of such shares. Assessees could take advantage of clause (1) of Section 48 of the Act. Assessees had produced evidence in the form of Escrow Account to show that it had received only net amount after incurring the expenses. Assessees also produced Prospectus of IPO which clearly shows that they were obliged to meet pro rata share of IPO expenses. There is no case for the Revenue that any of the assessees claimed more than their share of expenses based on the ratio of shares sold. We are, therefore, of the opinion that the deduction claimed by the assessees for expenses incurred was unjustly disallowed. This disallowance is deleted.

7. In the result, appeals filed by the assessees are allowed.

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