May 2019

Section 48 – Legal and professional expenditure incurred by assessee, a foreign company, for sale of shares of its Indian subsidiary is an expenditure incurred wholly and exclusively in connection with transfer and is allowable as deduction while computing capital gains

Jagdish T. Punjabi | Devendra Jain | Tejaswini Ghag
Chartered Accountants

5. [2019] 103 taxmann.com 297 (Mum) AIG Offshore Systems Services Inc. vs. ACIT ITA No.: 6715/Mum/2014 A.Y.: 2010-11 Dated:  18th January, 2019

 

Section 48 – Legal and professional expenditure incurred by assessee, a foreign company, for sale of shares of its Indian subsidiary is an expenditure incurred wholly and exclusively in connection with transfer and is allowable as deduction while computing capital gains

 

FACTS


During the previous year relevant to the assessment year in dispute, the assessee, a foreign company, carrying on activities as a Foreign Institutional Investor, sold shares held by it in its Indian subsidiary and offered long-term capital gains arising from sale of shares of the Indian subsidiary.

 

During the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee had claimed deduction of expenditure incurred towards transfer of shares. The assessee submitted that the said expenditure represented legal / professional fees paid to lawyers / accounting firms for assisting in transfer of shares. The AO, however, held that:

 

(i)   the expenditure claimed by the assessee was not of such nature that without incurring those expenses sale of shares could not have been done;

(ii)   the objective behind incurring the expenses was to optimise the economic value of the business and not for the purpose of transfer of shares; and

(iii)  the documentary evidences relied upon by the assessee also did not mention the name of the buyer.

 

The AO disallowed the assessee’s claim for deduction of expenditure while computing capital gains.

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