By TIOL News Service

AHMEDABAD, APR 15, 2019: THE ISSUE IS - Whether expenses incurred wholly and exclusively in connection with the transfer of assets is eligible for deduction under section 48. YES IS THE ANSWER.

Facts of the case

The assessee was an AOP and engaged in the activity of providing Venture Finance Assistance to Information Technology/Software units located in the state of Gujarat. The assessee holds 53,51,264/- shares of M/s 20 Microns Ltd "20 ML" which was equivalent to 43% of the total shares of 20 ML. The assessee had transferred its 26,75,632 shares of 20 Microns Ltd through the process of IPO. The assessee against such transfer of shares had claimed an expense of Rs. 50 lacs under the provisions of section 48 of the Act. However such expense claimed by the assessee was disallowed by the AO on the ground that same was not incurred in connection with such transfer of the shares. The CIT-A subsequently confirmed the view taken by the AO. Aggrieved assessee filed appeal before Tribunal.

On appeal, Tribunal held that,

++ as per the agreement between the assessee and "20 ML", there was no obligation on the assessee to incur any cost in connection with the transfer of the shares. As such it was the responsibility of "20 ML" to provide an exit route to the assessee for the disinvestment of the shares held by it. In this regard, it was noted that reimbursement of the expenses was decided in the board meeting of the assessee and after taking the report/opinion from the chartered accountant. 8 As per the report of the chartered accountant there was no prohibition for the assessee to share the cost in the IPO expenses. Therefore even the assessee was not under the obligation to incur such cost, but that cannot be the basis of disallowance of the expenses under section 48 of the Act;

++ the obligation of "20ML" was to provide the exit route to the assessee, but there was no clause or condition that the assessee shall not share the expenses in connection with the transfer. It is settled law that the AO cannot sit on the armchair of the assessee to decide/direct the business affairs of the assessee. It is the assessee who knows the best of its business affairs. The role of the AO is to establish whether the expenses were incurred wholly and exclusively in connection with the transfer of assets. There is no ambiguity that the expenses were incurred wholly and exclusively in connection with the transfer of the shares.Thus, the allegation of the AO that the assessee was not under the obligation to incur the cost for the transfer of shares has no relevance in the given facts and circumstances. The assessee is entitled to a deduction u/s 48 of the Act, for the expenses incurred wholly and exclusively in connection with the transfer of the shares. Accordingly, it was decided to reverse the order of the authorities below. In the result, the appeal of the assessee is allowed.

(See 2019-TIOL-780-ITAT-AHM)