TaxTMI 
TaxTMI 
2026 (3) TMI 1229
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....as aforesaid. Being aggrieved by the variation, the appellant filed objections before the Dispute Resolution Panel-II ('DRP' for short). The AO in pursuance of the direction issued, passed an assessment order dated 20.05.2024 which was challenged by the appellant in Writ Petition before the Hon'ble Bombay High Court. The Hon'ble High Court disposed off the petition on 03.03.2025 remitting the matter back to the DRP for deciding it afresh in accordance with law. The DRP subsequently passed an order dated 30.06.2025 making the disallowance as aforesaid in pursuance of which AO has passed the impugned order on 15.07.2025 which is the subject matter of challenge in this appeal. 3. We have heard Shri K. Gopal, ld. Counsel for the appellant and Shri Krishna Kumar, ld. Sr. DR. With the assistance of the parties, we have gone through the record. 4. At the outset, it is necessary to note that the appeal was filed on certain grounds as set out in Form 36. Subsequently, additional grounds of appeal have been raised as under:- "A. The assessment order u/s 143(3) r.w.s. 144C(13) of the Act is without any valid jurisdiction: 1. The Ld. Income Tax Officer (International Ta....
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....e existing promoters/shareholders. It is pointed that apart from the appellant, there were other promoter shareholders who have offered their shares as part of OFS. It is submitted that the proportionate IPO expenses ought to have been allowed as the said expenses were incurred wholly and exclusively towards the sale / transfer of shares. It is pointed out that AO was not justified in making the disallowance as the appellant was entitled to the deduction of the expenses u/s. 48 of the Act as there was clear nexus of the said expenditure being incurred in relation to the long term capital gains arising on account of sale / transfer of shares. The ld. Counsel pointed that proportionate expenses has been allowed in respect of the other promoter shareholders which are similarly situated to the appellant. Further, our reference was drawn to the written submissions filed before the ld DRP and the contents thereof read as under: "3. Disallowance of IPO expense claimed against Long Term Capital Gain - Rs. 3,64,30,158/- The appellant has claimed IPO Expenses of Rs. 3,64,30,158/- against the long-term capital gain of Rs. 140,45,00,000/- offered to tax. The Ld. A.O. has disa....
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....cted u/s 48 of the Act. The A.O has mentioned the invoice and detailed breakup of the expenses in the draft assessment order itself. The detailed submission made by the appellant to the A.O vide letter dated 29.03.2024 is enclosed at annexure-2D for your reference. The A.O has disallowed the expenses only on the contention that the expenses are not supported by the documentary evidence of the company. It is to submit that the contention of the A.O has no merit as the expenses are incurred by the company and copy of the invoice has already been filed. Further the appellant has also given the breakup of the expenses and could not file the supporting due to paucity of time. This information was asked by the A.O giving one day time. It is to submit further that the volume of the expenses is so huge that it is very difficult to upload the same. However, as directed in the hearing dated 06.05.25, the supporting of the expenses are enclosed in a pen drive for your verification. The details of the IPO along with expenses and the full prospectus is enclosed at Annexure B (pen drive). The detailed breakup of the IPO along with shareholding is enclosed at Annexure-C. from th....
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....R 56 (Bom HC) The Bombay High court has held as under: "It could not be disputed that unless the assessee had settled the dispute with R Ltd. the sale transaction with the society would not, or could not, have materialized. If this transaction had not materialized there would have perhaps been no question of capital gains. One way of looking at the problem could be to say that the full value of consideration in this case was not the apparent consideration, Le Rs. 2,58,672 but Rs. 2,24,168 (Rs. 2,58,672 minus Rx 35,504). The Legislature while using the expression 'full value of consideration has contemplated both additions to as well as deductions from the apparent value. What it means is the real and effective consideration. That apart, so far as clause (1) of section 48 is concerned, the expression used by the Legislature in its wisdom is wider than the expression 'for the transfer The expression used is the 'expenditure incurred wholly and exclusively in connection with such transfer The expression 'in connection with such transfer is certainly wider than the expression 'for the transfer Here again any amount the payment of which is absolutel....
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....out of the assessee's pocket. Settlement of a claim and payment made can amount to expenditure. Again, the words "wholly and exclusively" used in section 48 are also to be found in section 37 of the Act and relate to the nature and character of the expenditure, which in the case of section 48 must have connection i.e., proximate and perceptible nexus and link with the transfer resulting in income by way of capital gain. Honda Motor Co. Ltd., In re (2018) 90 taxmann.com 180/253 Taxman 402/401 ITR 382/301 CTR 159 (AAR-New Delhi): The provision contained in section 48 shows that the words "wholly and exclusively" do not connote "necessarily". If the expenses have been incurred in connection with the transfer, they are to be allowed. The words "in connection with" are of wide import and if such expenses have an intimate connection with the transfer, they have to be allowed under section. The expression 'in connection with such transfer' is wider than the expression 'for the transfer Gopee Nath Paul & Sons v. Dy. CIT [2005] 147 Taxman 629/278 ITR 240/198 CTR 116 (Cal.) On similar facts that of the appellant, in the following ITAT cases have uph....
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....es are not wholly and exclusively incurred towards the transfer of the asset. It is noted that expenses incurred are part of IPO process towards listing of M/s Metro Brands Limited in which assessee is a shareholder. It is also noted that apart from IPO, shares were also Offered For Sale (OFS) by the existing share holder and assessee is one of them. Assessee has argued her case that amount incurred in process of IPO has been bifurcated as per prospectus of IPO. We have gone through the said document as mentioned as Annexure 2 of submission dated 09.05.2025. It is a very generic mention of apportionment of expenses without any details of actual payments made for each and every expense. As a matter of fact, the process of going public through IPO, is peculiar to a company. Individual shareholders are not bound by the same process for selling their holding. Since, this process is regulated through SEBI and mandatory for the company to follow the process in order to raise capital from the market, hence the incidental expenses are bound to happen. In this case also, OFS route is just one of many ways available to sell their stake but for company only way to raise mone....
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....areholders. Decision: Panel thus, rejects the Colourable Arrangement undertaken by the Applicant and the Company. The Hon'ble Supreme Court has repeatedly held that what cannot be done directly cannot be permitted indirectly (Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC)). The present arrangement is a tax-avoidance scheme designed to bypass the prohibition on deducting capital-related expenses. Therefore, the Panel: 1. Rejects the self-serving agreement as an avoidance arrangement. 2. Upholds the disallowance of the deduction claim since IPO expenses are capital in nature and not incurred by the Assessee. 3. Follows the principles laid down by the Supreme Court in Brooke Bond and Punjab State Industrial Development Corpn., ensuring that tax laws are not circumvented via artificial devices. Maxim is Quando aliquidprohibetur ex directo, prohibetur et per obliquum: "When anything is prohibited directly (In hands of the COMPANY), it is also prohibited indirectly (to the shareholder)." 6.4. Directions of the DRP: In view of above discussion, Panel is of considered view that no ....
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....dings of the DRP that the assessee has not incurred these expenses, it was submitted that though the expenses were initially incurred by the company, however, the assessee has consented to the incurrence and picking up her liability proportionate to her shares offered as part of the offer for sale, the company has issued invoices on the assessee and the assessee has received the net proceeds, after deducting the expenses on proportionate basis. It was submitted that the assessee has given her consent vide letter dated 25-11-2021 (APB Page 273) to the inclusion of 28,09,000 equity shares held by her as part of offer for sale subject to the terms of the issue as mentioned in the prospectus and other agreements executed in relation to issue and approval of SEBI and other regulatory authorities and has also authorized the company to deliver a copy of her consent to the Registrar of Companies, pursuant to Section 26 and Section 32 of the Companies Act and the rules and regulations there under as amended, the stock exchanges and any other regulatory authority as may be required and as part of the offer for sale, it has been clearly provided in the prospectus and our reference was drawn t....
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.... expenses and copy of the sample invoices and it was submitted that after due examination, the claim of the proportionate IPO expenses were allowed by the AO. 10. We have heard the rival contentions and perused the material available on record. We find that an identical issue had come up for consideration before the Coordinate Chennai Benches in case of Usharani Raghunathan & others (supra) wherein as part of IPO, the assessee's therein have sold their shares by way of OFS and had claimed proportionate IPO expenses and in that factual background, the Coordinate Bench has held that where the expenses having been incurred for the IPO through which assessee's were also able to sell their shares, the expenses necessarily were, in their opinion, in connection with sale of such shares and eligible for deduction u/s 48 of the Act and the relevant findings of the Coordinate Bench read as under: "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 ....
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....rily were, in our opinion, in connection with sale of such shares. Assessee's could take advantage of clause (1) of Section 48 of the Act. Assessee's had produced evidence in the form of Escrow Account to show that it had received only net amount after incurring the expenses. Assessee's 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 assessee's 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 assessee's for expenses incurred was unjustly disallowed. This disallowance is deleted." 11. In the instant case, the assessee has admittedly given her consent to offer a part of her shareholding as part of IPO by the company, Metro Brand limited and to bear proportionate share of IPO expenses. The OFS as part of IPO was undertaken by the company as per the extant SEBI, company law rules and regulations and necessary filings have been undertaken by the company with the regulatory authorities. OFS is an accepted mechanism available to the existing shareholders to realize fair market ....
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....epted after due verification. On this count as well, the Revenue cannot bring contrary position in case of similar situated assessee's. 12. The findings of the ld DRP are clearly on a week footing as we find that there is no increase in the capital base of the company except for fresh issue of 59,73,136 shares and to that extent, the company has not passed on the expenditure to the selling promoter shareholders. The selling promoter shareholders have clearly benefitted by realization of fair market value of their shares and the whole process was undertaken as per extant SEBI regulations and necessary filings have been done by the company and there is no material on record to hold that there are any violations or any adverse findings by the authorities and therefore, in absence of the same, the assessee having agreed to participate in IPO and offering her shares and in the process, agreeing to bear the expenditure proportionate to the her shares being sold cannot be held to be an arrangement which is impermissible in law or for that matter, a colourable avoidance agreement. 13. In light of aforesaid discussion and in the entirety of facts and circumstances of the case, we hold....