2016 (8) TMI 900 - AT - Income Tax

Tribunal Upholds CIT(A) Decisions on Share Sale Value & Brokerage Deduction

The Tribunal upheld the CIT(A)'s decisions in a tax case, ruling that the full value of consideration for the sale of shares was Rs. 10,40,09,705, ... Full value of consideration received on transfer - composite consideration - reading the agreement as a whole - apportionment of sale consideration - discharge of loan / repayment not forming part of sale consideration - allowability of brokerage as expenditure in computation of capital gains - computation of long term capital gainFull value of consideration received on transfer - composite consideration - reading the agreement as a whole - discharge of loan / repayment not forming part of sale consideration - computation of long term capital gain - Whether the lump-sum amount stated in the share purchase agreement includes the repayment of the assessee's loan to the subsidiary for purposes of determining the full value of consideration for computation of long term capital gains. - HELD THAT: - The Tribunal examined clauses 2.1 and 2.2 of the share purchase agreement and the factual matrix showing that the purchaser credited the subsidiary's books and that the subsidiary acknowledged the purchasers as its creditor in respect of the loan amount. Applying the principle that an agreement must be read as a whole, and having regard to the manner in which the Rs. 4,97,25,928 liability was discharged (by crediting the purchaser's account and debiting the assessee's loan account), the Tribunal held that the loan repayment was an existing liability of the assessee discharged as part of the overall transaction and could not be attributed to the consideration for sale of shares. The Tribunal followed the approach that where a lump-sum consideration comprises distinct elements, the elements must be examined on the facts to determine which portion constitutes consideration for the shares; here the loan repayment was separable and not part of the sale consideration for shares. The Tribunal therefore upheld the CIT(A)'s conclusion that only Rs. 10,40,09,705 was the full value of consideration chargeable for computation of LTCG and found no reason to interfere with that finding. [Paras 8, 9]The sum representing repayment of the loan is not part of the sale consideration for shares; full value of consideration for LTCG is Rs. 10,40,09,705 and the additions made by the AO are dismissed.Allowability of brokerage as expenditure in computation of capital gains - computation of long term capital gain - Whether the brokerage paid to an intermediary in connection with the transaction is deductible in computing capital gains on sale of shares where the transaction resulted in transfer of property owned by the subsidiary. - HELD THAT: - The Tribunal noted that the transfer of the assessee's entire shareholding in the subsidiary resulted in effective transfer of the property and that the broker acted as intermediary in the overall transaction. The AO did not dispute the payment or genuineness of the services; the description on the broker's bill referring to the property was held to be insignificant in the context of the transaction by share transfer. Given the close nexus between the brokerage payment and the transaction that produced the capital gain, the Tribunal agreed with the CIT(A) that the brokerage amount was allowable as expenditure in computing the capital gain. [Paras 16]The brokerage paid is allowable as expenditure in computing the capital gain arising from the share sale; the AO's disallowance is overturned.Final Conclusion: The Revenue's appeal is dismissed: the Tribunal affirms the CIT(A)'s allowance of the assessee's computation of long term capital gain (excluding the loan repayment from sale consideration) and the deduction of brokerage paid in connection with the transaction for AY 2010-11. Issues Involved:1. Determination of the full value of consideration for the sale of shares.2. Deduction of brokerage as an expenditure related to the sale of shares.Issue-wise Detailed Analysis:1. Determination of the Full Value of Consideration for the Sale of Shares:The Revenue contested the CIT(A)'s decision that the total consideration for the sale of shares was Rs. 10,40,705, arguing that the agreement for the sale of shares of KCCL was for Rs. 15,37,35,633, which included a sale consideration of Rs. 4,97,25,928. The Revenue also claimed that the CIT(A) erroneously applied the decision of the Hon'ble Supreme Court in CIT vs. Hooghly Mills Co. Ltd. (287 ITR 333), ignoring the fact that the cases were different.The Assessee argued that the real sale consideration for the shares was Rs. 10,40,09,705, as Rs. 4,97,25,928 out of the total consideration was a loan repayment by M/S.Khaitan & Co. Consulting Ltd. (KCCL) to the Assessee, which was discharged by the Purchasers and did not constitute part of the sale consideration of the shares. The Assessee supported its claim by showing that the loan was recorded as realized in its books and the Purchasers recognized KCCL as their creditor for the same amount.The AO rejected the Assessee's claim, stating that the agreement clearly defined the sale consideration as Rs. 15,37,35,633 and that the repayment of the loan was part of the sale consideration. The AO added back Rs. 4,97,25,928 to the sale consideration for computing the capital gains.On appeal, the CIT(A) agreed with the Assessee, stating that the agreement mentioned a lump sum amount of Rs. 15,37,35,633, which included the loan repayment. The CIT(A) emphasized that the loan repayment did not constitute part of the sale consideration for the shares and relied on the Supreme Court's decision in Hooghly Mills Co. Ltd. and the ITAT Mumbai decision in Voltas Ltd. vs. ACIT.The Tribunal upheld the CIT(A)'s decision, stating that the liability of KCCL was not part of the consideration for the sale of shares but an existing liability discharged by the Purchasers. The Tribunal concluded that the sum of Rs. 4,97,25,928 could not be attributed to the sale consideration for the shares and dismissed the Revenue's appeal.2. Deduction of Brokerage as an Expenditure Related to the Sale of Shares:The Assessee claimed a deduction of Rs. 12,13,300 as brokerage paid to Mr. Manish B. Thakkar while computing LTCG on the sale of shares of KCCL. The AO disallowed the deduction, stating that the brokerage was for the sale of premises, not shares, as per the brokerage bill.The Assessee argued that the brokerage bill mistakenly mentioned the sale of premises but was actually for the sale of shares. The CIT(A) accepted the Assessee's claim, noting that the broker confirmed the receipt of brokerage for the transaction and that the AO did not dispute the payment or the services rendered by the broker.The Tribunal upheld the CIT(A)'s decision, stating that the sale of the property was achieved through the sale of shares, and the brokerage was related to the same transaction. The Tribunal dismissed the Revenue's objection and allowed the deduction of brokerage as an expenditure related to the sale of shares.Conclusion:The Tribunal dismissed the Revenue's appeal on both issues, upholding the CIT(A)'s decisions that the full value of consideration for the sale of shares was Rs. 10,40,09,705 and that the brokerage paid was a deductible expenditure related to the sale of shares.