The Income Tax Appellate Tribunal (ITAT) Mumbai bench has allowed the deduction to the fees paid to legal and professional fees in connection with the transfer of shares.
Section 48 (i) of the Act lays down the mode of computation of income chargeable under the head “Capital Gain”. Clause (i) provides for computation of capital gain after deducting expenditure incurred wholly and exclusively in connection with the transfer of the capital asset from the full value of the consideration received or accruing as a result of such transfer.
In the instant case, the assessee, a foreign company, is carrying activities in India as a Foreign Institutional Investor (FII) and they sold 23,10,498 shares held in Indian Subsidiary viz. AIG Systems Solution Pvt. Ltd. In the return of income filed for the impugned assessment year, on 15th August 2010, the assessee offered long term capital gain of Rs. 5,54,49,453, on account of the sale of shares in the Indian Subsidiary. The assessee has claimed the deduction of U.S $ 13,27,609, as expenditure incurred towards the transfer of shares. The assessee claimed that the said expenditure represents legal/professional fees paid to lawyers/accounting firms for assisting in transfer of shares.
The Tribunal noted that the assessee and the Advocates / Accounting Firms clearly demonstrate that the legal/professional services were rendered in connection with Project Genesis.
The Tribunal further observed that the scope of work further clarifies that services to be rendered are in relation to advise on the sale of entire shareholding of the Indian Subsidiary and includes preparation of share sale / purchase agreement, rendering advise on and preparing necessary closing documentation including board resolution, share transfer forms, etc.
“Further, the invoices raised by the advocates / professionals clearly indicate that they were in connection with legal / professional services rendered for Project Genesis,” it said.
“Since the forwarding letter accompanying such invoice clearly mentions ‘Project Genesis’ and all other invoices raised by the concerned advocates clearly mention the name ‘Project Genesis’. Therefore, there cannot be any room for doubt that the expenditures were in relation to the transfer of shares of the India Subsidiary termed as ‘Project Genesis’. As could be seen from the scope of work for which the services were rendered by the legal/professional firm, it is closely and intrinsically related to transfer of shares of the Indian Subsidiary. Therefore, applying the ratio laid down in the decisions cited by the learned Sr. Counsel for the assessee, the expenditure incurred is wholly and exclusively in connection with the transfer of shares of the Indian Subsidiary. Hence, qualifies for deduction under section 48(i) of the Act. Non–disclosure / non–mentioning the name of the ultimate buyer of the shares in no way militates against the fact that the expenditure incurred by the assessee on account of legal and professional fees paid is in connection with the transfer of shares. The decision relied upon by the learned Departmental Representative on the other hand, will not be applicable to the facts of the present case, since, it involves allowability of PMS fee which is not the issue in the present appeal. Thus, in view of the aforesaid, we hold that assessee’s claim of deduction of U.S. $ 13,27,609 is allowable under section 48(i) of the Act,” the Tribunal said.
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