2026 (3) TMI 1229 - AT - Income Tax

Section 48 deduction for IPO and PMS expenses linked to share transfers allowed where nexus and record support are shown

Expenditure incurred wholly and exclusively in connection with the transfer of shares is deductible under Section 48 of the Income-tax Act, 1961, where ... Capital gain computation - expenses in connection with capital gain - disallowance of the proportionate Initial Public Offer (IPO) expenses and Portfolio Management Services (PMS) expenses. HELD THAT: - The Tribunal held that where a shareholder consents to offer shares for sale through an IPO (OFS) and proportionate IPO expenses are netted off from the sale proceeds, those expenses have the requisite nexus to the transfer and fall within the expression 'expenditure incurred wholly and exclusively in connection with such transfer' in section 48. Tribunal distinguished precedents addressing capital expenditure in respect of fresh issues to the extent that in the present facts only a small portion of shares were fresh issue and the majority were OFS; the shareholder was a direct beneficiary of the book-building and sale process; invoices and prospectus provisions showing pro rata apportionment and netting of sale proceeds were placed on record; and similarly situated selling shareholders had been allowed the claim. Tribunal found the DRP's conclusions - that the company was the sole beneficiary, that the arrangement was a colourable device, and that the shareholder did not incur the expenses - to be unsustainable on the material before it, and directed the AO to verify that netted sale proceeds were credited to the assessee and, if so, allow the expenditure to be deducted while computing capital gains. [Paras 11, 12, 13] Allowability of Portfolio Management Services expenses as deduction against capital gains - The Tribunal noted that part of the PMS expenses had already been allowed by the AO in computing short-term capital gains and that the remaining PMS expenses claimed against long-term capital gains were incurred pursuant to the PMS arrangement under which such expenses were deducted and net proceeds remitted to the assessee. As no show-cause was issued prior to disallowance and on parity with amounts allowed, the Tribunal directed the AO to allow the claimed PMS expenses and the AO is directed to permit the deduction when computing capital gains. [Paras 14] Final Conclusion: The appeal is partly allowed: proportionate IPO expenses claimed by the assessee are held deductible under section 48 subject to verification that netted sale proceeds were credited, and the claimed PMS expenses are directed to be allowed. Issues: (i) Whether proportionate IPO expenses borne by the company and apportioned to a selling shareholder who participated in Offer For Sale (OFS) as part of an IPO are deductible under Section 48 of the Income-tax Act, 1961; (ii) Whether portfolio management service (PMS) expenses deducted at source and reflected in net sale proceeds are deductible against capital gains.Issue (i): Whether proportionate IPO expenses apportioned to the selling shareholder are allowable as 'expenditure incurred wholly and exclusively in connection with such transfer' under Section 48 of the Income-tax Act, 1961.Analysis: The Tribunal examined whether the shareholder demonstrably bore a proportionate share of IPO expenses, the nexus between those expenses and the sale of shares via OFS, documentary evidence of net proceeds credited after apportionment, and precedent where coordinate benches allowed similar claims. The Tribunal contrasted this with DRP findings that IPO expenses are capital in nature in the hands of the company and that passing on the deduction is a colourable device, and evaluated factual matrix including proportion of fresh issue versus OFS, consent to bear expenses, prospectus disclosures, escrow/net receipts, and acceptance of similar claims in other assessments.Conclusion: In favour of Assessee. Proportionate IPO expenses shown to be netted off from sale proceeds and demonstrably connected to the transfer are allowable under Section 48 and the AO is directed to verify and allow such expenses where found in order.Issue (ii): Whether PMS expenses deducted under the PMS arrangement and reflected in net proceeds are allowable against capital gains.Analysis: The Tribunal noted that part of the PMS expenses had been allowed for short-term capital gains and that the remaining PMS expenses claimed against long-term capital gains were similarly incurred in connection with sale/transfer of shares and no show-cause was issued prior to disallowance. On parity of reasoning with the allowed portion, the Tribunal considered the PMS expenses to have sufficient nexus with the transfers.Conclusion: In favour of Assessee. The AO is directed to allow the claimed PMS expenses where supported by record.Final Conclusion: The appeal is partly allowed for statistical purposes by permitting deduction of proportionate IPO expenses and the claimed PMS expenses to the extent verifiable in the assessment record; remaining grounds are rendered academic.Ratio Decidendi: Expenditure that is incurred wholly and exclusively in connection with the transfer of shares is deductible under Section 48 of the Income-tax Act, 1961, and this principle applies where the company initially incurs IPO expenses but the selling shareholder has demonstrably borne a proportionate share reflected in net proceeds and supported by documentary evidence.