Tax authorities cannot decide commercial expediency by putting themselves in arm chair of assessee: ITAT

Brief facts of the case are that, the assessee filed return for the Assessment Year 2016-17 declaring an income of Rs. 29,92,980/- wherein claimed transfer expenses of Rs. 25,92,818/- against the sale consideration of Rs. 13,75,84,941/-. The case of the assessee was selected for scrutiny under CASS. The assessment proceedings came to be initiated, during the assessment proceedings, the assessee contended that expenses of Rs. 25,92,818/- were incurred wholly and exclusively for transfer of shares and such expenses are eligible as per Section 48 of the Income Tax Act 1961 (‘Act’ for Short).

The assessment order came to be passed on 09/12/2018 wherein the Ld. A.O. has disallowed transfer expenses on the basis that the said transfer expenses of Rs. 25,92,818/- claimed by the assessee in the nature of fees for advisory service and management consulting. Therefore, the same cannot be considered to be allowable transfer expenses as per Section 48 of the Tax Act.

Aggrieved by the assessment order dated 09/12/2018, the assessee has preferred an appeal before the CIT(A). The Ld.CIT(A) has allowed the transfer expenses to the extent of Rs. 1,50,000/- (being 0.1% of the transaction cost) and balance disallowance of Rs. 24,42,818/- has been confirmed vide order dated 18/06/2019.

As against the order of the Ld.CIT (A) dated 18/06/2019, the assessee has preferred the present appeal.

The Ld. Counsel for the assessee submitted at the Ld. A.O. and the CIT(A) have erred in not allowing the entire expenses of Rs. 25,92,818/- incurred in relation to earning long term capital gains. The said expenses was paid for seeking management consultancy from M/s. Signal Hill in respect of transfer of shares valued at Rs. 13,75,84,941/-, but the same has been disallowed on the basis that the said management, consultancy expenses cannot be considered to be eligible transfer expense as per Section 48 of the Act, without bringing any material on record. Further submitted that though the Ld. CIT(A) has not doubted the service received by the Assessee, committed an error in restricting in allowing the expenses only to 0.1% of the transaction cost. The Ld. Counsel for the assessee has taken through the paper book and also the synopsis filed in support of the oral submission.

Per contra, the Ld. DR has relied on the orders of the Lower Authorities and submitted that, The order of the Ld. CIT(A) in restricting the expenses to 0.1% of the transaction is reasonable, which requires no interference by the Tribunal.

Tribunal observed that the said payment of Rs. 28,79,121/- has been made as per the agreement dated 23/01/2014 enter into between assessee and M/s Signal Hill against the invoice dated 12/08/2015 in banking channel. The Ld. CIT (A) has not doubted the genuineness of the transaction at any point of time, on the other hand accepted the transaction, but allowed the expenses claimed under Section 48 of the Act by restricting only to 0.1% of the total transaction.

ITAT quoted the Judgement of Hon’ble jurisdictional Delhi High Court in the case of Kausaiya Devi Vs CIT ITA No 600/2004  where the court has had held that once the amount is spent and paid, the authorities cannot decide commercial expediency by putting themselves in the arm chair of the assessee to examine and consider whether they would have or the assessee should have incurred the said expenditure including the quantum having regard to the circumstances. The relevant portions of the Judgment are hereunder:-

“The words “wholly and exclusively” require and mandate that the expenditure should be genuine and the expression “in connection with the transfer” require and mandate that the expenditure should be connected and for the purpose of transfer. Expenditure, which is not genuine or sham, is not to be allowed as a deduction. This, however, does not mean that the authorities, Tribunal or the Court can go into the question of subjective commercial expediency or apply subjective standard of reasonableness to disallow the expenditure on the ground that it should not have been incurred or was unreasonably large. In the absence of any statutory provision, on these aspects discretion exercised by the assessee who has incurred the said expenditure must be respected, for interference on subjective basis will lead to unpalatable and absurd results. As in the case of Section 37 of the Act, jurisdiction of the authorities, Tribunal or Court is confined to investigate and decide as to whether the expenditure was actually incurred, i.e., the expenditure was genuine and was factually expended and paid to the third party. Secondly, the authorities, Tribunal and Court can examine whether the said expenditure was “wholly and exclusively” connected with the transfer, but once the amount was spent and paid, the authorities, Tribunal and Courts cannot decide commercial expediency by putting themselves in the arm chair of the assessee to examine and consider whether they would have or the assessee should have incurred the said expenditure including the quantum having regard to the circumstances. Excessive expenditure cannot be disallowed when it is “wholly and exclusively” in connection with the transfer, on the ground that prudence did not require the assessee to incur the expenditure. Disallowance on such grounds must be specified and provided by the statute.”

In the present case, the service of M/s Signal Hills has been utilized for sale of share s of private limited company shares exclusively; further the payment has been made by banking channel as against the invoice raised by M/s Signal hills. There is nothing on record to suggest or no material brought on record by the A.O. to suggest that that transfer expenses were not incurred wholly & exclusively for the purpose of transfer of shares held by the Assessee in companies M/s. Knowlarity Communications Pvt. Ltd. (Singapore) & M/s. Knowlarity Communications Pvt. Ltd. (India). On the other hand the Ld. CIT(A) has partly agreed with the Assessee by not doubting the transaction per se.

In view of the above discussion, by following the ratio laid down by the Jurisdiction High Court in the case of Kausalya Devi (Supra), we are of the opinion that, the expenses of Rs. 25,92,818/- incurred by the Assessee is allowable transfer expenses as per Section 48 of the Act and both the Lower authorities have committed an error in disallowing the expenses of Rs. 25,92,818/- incurred by the Assessee.

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