Ita/384/2009 Of The Commissioner Of Income Tax v. Sri Venkata Rajendran

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATBD THIS THER 2 DAY OF JANUARY, 2015 PRESENT THR HON' BLE MR. JUSTICK N. KUMAR ANT) THR HON' BLE MR. JUSTICEK B. VEBRAPPA INCOME TAX APPEAL No. 384/2009 BERITIWE 1.)THR COMMISSIONBR OF INCOME-TAX C.R. BUILDING, QUEENS ROAD, BANGALORE iaTHERE ADDITIONAL COMMISSIONER OF INCOME-TARANGE-Y,RANGE-Y, C.R. BUILDING, QUEENS ROAD, BANGALORE _ APPKRLLANTS~ (BY SRI K V ARAVIND, ADVOCATE) AND:SRI VENKATA RAJENDRAN,NO.305, 6 MAIN,HAL II STAGE,INDIRANAGAR,BANGALORE -560 O38. —. RBSPONDBENT (BY SRI A. SHANKAR & SRI M. LAVA, ADVOCATES)| THIS ITA IS FILED UNDER SECTION 260-A OFTHE INCOME TAX ACT, 1961 ARISING OUT OF ORDER)DATED|13.02.2009|PASSEDIN|ITANO.1276/BANG/2008, FOR THE ASSESSMENT YEAR2005-06,PRAYINGTO.RFORMULATETH FSUBSTANTIAL QUESTIONS OF LAW STATED THEREIN|AND TO ALLOW THR APPEAL AND SEI ASIDE THE!ORDBR PASSED BY THER |I.T.A.T. BANGALORE IN [TNO.1276/BANG/2008,DATED|13.02 2009AND,CONFIRM THR ORDBR PASSBD BY THE ADDITIONAL|COMMISSIONER.OFINCOMETAX,RANGE-CY,BANGALORE, IN THE INTEREST OF JUSTICE AND)EQUITY. THIS INCOME TAX APPEAL COMING ON FORHEARING THIS DAY, N. KUMAR, J., DELIVERED THE)KHOLLOWING: JUDGMENT The revenue has preferred this appeal against the|order passed by the Tribunal allowing the entire legal andprofessional charges paid by the assessee to MIFL, incalculating the capital gains arising from the transaction inquestion. oOThe 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 2005-2006. The assessee declared thecapital gains of Rs.13,41,19,572/- in the returns of incomeatterclaimingdeduction|OT|Rs.2,00,84,088 /-whichrepresented legal and professional charges paid to M/s.MarchmontInternationa]HKFinancLimited(hereinatter|referred to as ‘MIFL’). The assessee was a shareholder inM/s. Deccannet Designs Limited (hereinafter referred to as‘DDL). He holds 9,01,080 shares out of the total shares of30,73,299. Thus, he was the major shareholder in thecompany of which he was a director. There were six othersubstantial shareholders who between themselves held19,900,746 shares but none of them individually holds asmany shares as the assessee did. There were several otherindividual shareholders who together held 1,81,473 shares.On 28.07.2004 an agreement was entered into between DDL,the assessee and the six major shareholders on the one handand M/s. Flextronix International Asia Pacific Ltd., underwhich the Flextronix decided to acquire the shares of theseseven persons in DDL for consideration. The assessee’s shareholding was valued at USD 95,090,115/- and the priceper share came to USD 5.65. The shares of other six majorshareholders was valued at USD 9,814,356/- which gave pershare the value of USD 4.93. Thus, the shares held by theassessee were valued at 72 cents more than the shares heldby the other six major shareholders. Under the agreement,the fees payable to MIFL by the assessee and the othershareholders was USD 600,000 to be shared pro rata by theassessee and the other shareholders. However, the assesseehas entered into a separate agreement with MIFL on|29.11.2003 which listed services rendered by MIFL inrelation to the acquisition agreement. This agreement alsoprescribes the scale of fees payable to MIFL. A subsequentagreement was entered on 25.03.2004 where the assesseeagreed to pay and compensate in his individual capacity thedifference of the fee based on the percentage of the purchaseconsideration. In terms of the aforesaid agreement theassessee received Rs.2,98,11,303/- more for his shares thanhe would have got at the rate of 4.93 per share. Under the agreement dated 25.03.2004 he had to pay MIFL thedifference of the fee based on the percentage of the purchaseconsideration and accordingly he paid Rs.2,00,84,088/- toMIFL as their charges. He claims the same as deductionwhile computing capital gains on the sale of shares. TheAssessing Authority restricted consultancy charges to 29%and disallowed the remaining 79%. The said order wasupheld by the Commissioner of Income-Tax (Appeals). 3.In the appeal preferred by the assessee against|the said order before the Tribunal it was held that they donot see any reason why the entire legal and professionalcharges paid to MIFL cannot be allowed when there is nodispute regarding the services rendered by the MIFL to theassessee and there is no objection by the department of thisscore. Accordingly, appeal was allowed directing theAssessing Officer to allow the entire legal and professionalcharges paid by the assessee to the MIFL. Aggrieved by thesaid order, revenue has preferred this appeal. 4The appeal is admitted to consider the followingsubstantial questions of law: aWhether the Tribunal twas correct innot considering the acquisition agreement dated28.07.2004 entered into between M/s. Flextronicsand the assessee and six other parties fromwhom the shares of M/s. Deccannet wereacquired, wherein the acquisition agreementStipulates that fees payable to the investmentBankers is to be shared pro-rate by the assessee|and other share holders and the acquisitionagreement was recognized by all the shareholders and approved by the RBIP D2 Whether the Tribunal was justified inallowing the entire consultancy charges paid fortransfer of shares by violating the provisions ofsection 48 of the Act? 3.|Whether the Tribunal was correct inallowing the entire consultancy charges paid,when what was transferred is only the sharecapital held by the assessee and the entireconsultancy charges cannot be claimed asdeduction?”| 5The learned counsel appearing for the revenueassailed the impugned order contending that when the saletransaction has taken place in pursuance of the writtenagreement and in the said agreement what is stipulated is29% as the professional charges, the Tribunal was notjustified in allowing remaining 75% based on the letterwritten prior to the date of the agreement. Therefore, hesubmits the impugned order requires interference. 6.Per contra, learned counsel appearing for the|assessee supported the impugned order. T.Section 48 of the Income Tax Act deals with the|mode of computation of the capital gains. It provides, theincome chargeable under the head capital gains shall becomputed 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 inconnection with such transfer; andconnection with such transfer; and (11)the cost of acquisition of the asset and the costof any improvement thereto.of any improvement thereto. 8.Therefore, wholly and exclusively in connection|with such transfer should establish the expenditure incurredby him. The statute did not make any distinction betweenamount agreed under the agreement and amount paidoutside the agreement. In the instant case facts are not indispute. oaThe sale of shares took place on the account ofthe legal and professional assistance given by MIFL. Theagreement entered into between the shareholders and MIFLclearly setout the pro rata of charges chargelable by each ofthe shareholders depending upon their shareholding.Insofar as the assessee is concerned, he is a majorshareholder. Prior to the entering into the agreement theassessee had written a letter agreeing to pay an additionalamount in the event MIFL gets him a good price for hisshares. The evidence on record shows the assessee got 72%cents extra when compared to other shareholders. Underthe letter dated 25.03.2004 entered prior to the agreement oaThe sale of shares took place on the account ofthe legal and professional assistance given by MIFL. Theagreement entered into between the shareholders and MIFLclearly setout the pro rata of charges chargelable by each ofthe shareholders depending upon their shareholding.Insofar as the assessee is concerned, he is a majorshareholder. Prior to the entering into the agreement theassessee had written a letter agreeing to pay an additionalamount in the event MIFL gets him a good price for hisshares. The evidence on record shows the assessee got 72%cents extra when compared to other shareholders. Underthe letter dated 25.03.2004 entered prior to the agreement he had agreed to bear the extra charges. Therefore, he beingthe major shareholder and a director of the company who isa person who was actively involved and interested in sellingthe shares. He wanted additional amount to be paid to hisshares and therefore, he has agreed to pay the additionalcharges also on the basis of such amount which he wouldget. It is not in dispute that the assesseee got a sum ofRs.2,98,11,303/- more than tor his shares than what hewould not get at the rate of USD 4.93 that the othershareholders were paid. It is out of the said additionalamount he received, he paid a sum of Rs.2,84,898,000/- toMIFL as their charges. The payment is not in dispute.Therefore, that is the amount which the assessee incurred asexpenditure for sale of shares. That is the amount which iswholly and exclusively incurred by the assessee in|connection with such transfer. Under these circumstancesthe 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 536@0109�;3�852 41� 8�:/0�56606600�539�5=5;36:�:/0�1020340��� �03A0��@0�7566�:/0�8 << @;3='� ������ � �B01;:6�� �7705<�;6�9;6B;6609�� �9$(��������������������������������9$(�������������Sbs*