Income Tax Appellate Tribunal - Hyderabad
Dcit., Circle-16(1), Hyderabad, ... vs Shri Y Harish Chandra Prasad, Hyderabad on 31 August, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No. 1592/Hyd/2014
Assessment Year: 2011-12
Dy. Commissioner of Income- Vs. Y. Harish Chandra Prasad,
tax, Circle - 16(1), Hyderabad. Hyderabad.
PAN - AAIPY 7375A
(Appellant) (Respondent)
Revenue by : Shri SVSS Prasad
Assessee by : Shri Vijay Mehta & Govind Javeri
Date of hearing : 27-07-2017
Date of pronouncement : -08-2017
O RDE R
PER S. RIFAUR RAHMAN, A.M.:
This appeal filed by the assessee is directed against the order of the learned Commissioner of Income-tax (A), Hyderabad, dated 07/04/2014 for AY 2011-12.
2. Briefly the facts of the case are that the assessee an individual deriving his income from salary and engaged in generation of wind mill power, filed his original return of income for the AY 2011-12 declaring an income of Rs.26,01,300/- on 23.09.2011 and subsequently revised it on 30.03.2012 with some modifications. The case was selected for scrutiny u/s 143(3) of the I.T. Act, 1961.
2.1 The AO noticed that the assessee sold 5000 shares held by him in M/s Navabharat Power Pvt Ltd to M/s Essar Power Ltd for a 2 ITA No. 1592/H/14 Y. Harish Cha ndr a Prasad sale consideration of Rs.50 crores and declared long term capital gains of Rs.30,99,28,471/-. While computing the capital gains, the assessee claimed deduction u/s 48(i) amounting to Rs.19 crores as expenditure incurred wholly and exclusively in connection with the transfer of 5000 shares.
2.2 The AO was not convinced that the said amount of Rs.19 crores represented expenditure incurred wholly and exclusively in connection with the transfer of the 5000 shares in question. He denied the deduction for 19 crores in the computation of long term capital gains.
3. Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A).
4. Before the CIT(A), the assessee argued that the remarks of the AO in Para 4.5 of his order were misconceived and based upon some misunderstanding. Firstly, it is incorrect to say that because the 5000 shares were not under pledge or no encumbrance was attached to them, the payment of Rs.19 crores cannot be linked to the sale of the said 5000 shares. A pledge or mortgage is not the only type of encumbrance that is allowable u/s 48(i) of the Act. There can be various other encumbrances to the transaction of sale. If an opponent has filed a civil suit seeking a declaration that the sale in question is illegal or non-est, that would definitely be an encumbrance to the transaction of sale and any amount paid to get rid of such an encumbrance would be allowable as a deduction u/s 48(i).
4.1 The AR also pleaded that the import of remarks of AO in para 4.6 of his order is not at all clear. He seems to think that the amount of Rs.19 crores was paid only to remove the encumbrance over his "250 crore company (MEVL). This is clearly a misunderstanding. The amount of Rs.19 crores was paid not to remove the encumbrance 3 ITA No. 1592/H/14 Y. Harish Cha ndr a Prasad attached to MEVL but to remove the encumbrance in the way of the transaction of sale of 5000 shares. M/s MEVL might have derived some benefit out of the payment of Rs.19 Crores by the assessee in the sense that the encumbrance to the sale of its 88,08,500 shares is removed. But that does not detract from the fact that the assessee is primarily interested in saving his transaction of sale of 5000 shares and the sale consideration Rs. 50 Crores and so paid the Rs.19 Crores in question. The AO also seems to think that simply because the assessee's name is included as a defendant in the suit filed by the PVP group, it cannot be said that Rs.19 crores was paid to remove the encumbrance on the transaction of sale of 5000 shares in MEVL. The AO seems to have ignored the fact that the suit was filed as much against the sale of 5000 shares as against the 88,08,500 shares held by MEVL in Navabharat Power. The AO also seems to think wrongly that the 5000 shares held by the assessee in NPPL are "paltry" compared to 88,08,500 shares held by MEVL in NPPL and so the suit filed by the PVP group somehow is against only the sale of 88,08,500 shares and not against the 5000 shares. This is totally erroneous in as much as the suit was filed clearly against the assessee and it questioned the sale of 5000 shares. The AO seems to ignore the fact that the sale consideration for the assessee's so called "paltry" 5000 shares was Rs. 50 Crores where as the consideration received by the M/s. MEVL for its 88,08,500 shares was only a meagre Rs. 12.17 Crores. The assessee relied upon the following cases:
1. CIT Vs. Rajendran [1981] 127 ITR 810
2. Gopeee Nath Paul & Sons V. DCIT [2005] 147 Taxman 629
3. CIT Vs. Bradford Trading Co. (P) Ltd., 179 CTR 324.
4. Sasson J. David & Co., (P) Ltd. Vs. CIT, [1979] 118 ITR 261
5. Naozr Chenoy Vs. CIT [1998] 234 ITR 95 (AP)
6. CIT Vs. Venkataraman [1982] 137 ITR 846
7. CIT Vs. Abrar Alvi [2001] 247 ITR 312 (Bom.)
8. CIT Vs. Smt. Shakuntala Kantilal [1991] 190 ITR 56 4 ITA No. 1592/H/14 Y. Harish Cha ndr a Prasad
5. The CIT(A) after considering the submissions of the assessee, elaborately discussed the factual matrix of the case from pages 4 to 15 of his order and points made by the AO were put to the assessee and his clarification was obtained, which reads as under:
Points made by the AO "I. How the Assessee received a consideration Rs. 50 Crores for the transfer of 5000 shares in M/s Navabharat Power Pvt Ltd (NPPL) to M/s Essar Power Ltd, whereas M/s Malaxmi Energy Ventures (I) Pvt Ltd (MEVL) received only RS.12.17 Crores for the transfer of 88,08,500 shares of the same company to the same transferee.
2. How the entire settlement amount of Rs.19 Crores was paid only by the Assessee, whereas the suit filed by the PVP Group was, inter alia, against both the following defendants:
1. Malaxmi Energy Ventures (India) Pvt. Ltd.
2. Mr. Y. Harish Chandra Prasad (Assessee) Clarifications by the assessee
1. So, far as the question at '1' above is concerned, it is common knowledge that the Assessee was the driving force behind Malaxmi Group. He is the technocrat with a Masters Degree from USA, and he was the MD of M/s Lanco Kondapalli Power Pvt Ltd., during the period 1995 to 2005. He was the founder of M/s Malaxmi Energy Ventures (India) Pvt Ltd and he owned the company along with his wife. He was the MD of M/s Navabharat Power Pvt Ltd in which his group had 50% share holding along with the Navabharat group. M/s Essar Power Ltd was not concerned how the sale consideration of Rs. 62.17 Crores (50+12.17 Crores) was divided between the Assessee and MEVL. They were interested in getting control of NPPL.
They were convinced that the Assessee would ensure the transfer of 88,13,500 (5000+88,08,500) shares, even if they paid 50 Crores to the Assessee and Rs.12.17 Crores to MEVL.
2. There is another substantial reason for the payment of the larger chunk of Rs. 50 Crores to the Assessee. The PVP group 5 ITA No. 1592/H/14 Y. Harish Cha ndr a Prasad was claiming ownership of MEVL by seeking the enforcement of the Original Agreement dated 14.06.2008 with them. A copy of the agreement may kindly be seen at Pages 46 to 53 of our paper book. They were taking the stand that the Loan Agreement dated 03.11.2009 in terms of which the Original Agreement dated 14.06.2008 stood cancelled, was obtained by fraud. Even though their entire investment in MEVL was returned, they were not willing to return the shares of the Assessee and his wife in MEVL, which were pledged with the PVP group. In their letter written as early as on 11.12.2009, the PVP group was insisting on the enforcement of the Original Agreement and the cancellation of the Loan Agreement dated 03.11.2009. Considering the litigation involved about the ownership of the MEVL and its merger with the PVP group, the Assessee thought it safe to negotiate with M/s Essar Power Ltd and ensure that the larger chunk of the sale consideration was received by him so that it is beyond the pale of any controversy with the PVP group. In other words, at that stage, there was no controversy about the ownership of 5000 shares held by the Assessee in NPPL, whereas the ownership of the 88,08,500 shares held by MEVL in NPPL was embroiled in litigation and controversy. Subsequently, the PVP group involved even the 5000 shares in litigation and in the civil suit filed by them, they questioned the transfer of even the 5000 shares.
3. Ultimately, sale consideration is a matter of negotiation between vendor and vendee. Factually, the Assessee received Rs.50 Crores for the transfer of his 5000 shares and has disclosed the same.
4. So far as the question No. 2 above is concerned, the Assessee had received Rs.50 Crores for the transfer of his 5000 shares whereas MEVL had received only Rs.12.17 Crores for the transfer its 88,08,500 shares. As the recipient of the bulk of consideration, the Assessee was anxious to safe guard his transaction of: sale of 5000 shares and his Rs.50 Crores. Further, MEVL had to return the entire investment of the PVP group in terms of the Loan Agreement dated 03.11.2009 and also pay a further compensation of Rs.8,25,63,2401- to the PVP group to get out the Original Agreement. In effect, MEVL had to pay a total of Rs.15,85,50,232/(7,59,86,992+8,25,63,240). This may be seen at paras 1 & 2 of the Loan Agreement dated 03.11.2009. A copy of the Loan Agreement may be seen at pages 54 to 72 of our paper book. For the payment of Rs.15,85,50,232/-, MEVL had to raise other resources which had to be paid off from the sale consideration of Rs.12.17 Crores received from M/s Essar Power ltd. In the circumstances, MEVL had no resources to take up the responsibility of the payment of settlement amount of RS.19 6 ITA No. 1592/H/14 Y. Harish Cha ndr a Prasad Crores or any portion of it to the PVP group. At any rate, whether MEVL paid the amount or not, the Assessee could not allow the transaction of sale of his 5000 shares to be embroiled in litigation. So, the Assessee has paid the Rs. 19 Crores to the PVP group and the PVP group did not care as to from whom they received their Rs. 19 Crores.
5. In the hands of MEVL, for the Assessment year 2011-12, there is a huge brought forward Capital loss and the entire capital gain relatable to the sale of 88,08,500 shares was adjusted against the same resulting in a carried forward short term capital loss of Rs.6,86,61,997/-. Even if a portion of Rs.19 Crores was claimed in the hands of MEVL, it would have resulted only in a further increase of the carried forward short term capital loss.
6. Similarly, in the hands of the Assessee for the Assessment year 2011-12, the entire long term capital gain of Rs. 30,99,28,471/- relatable to the sale of 5000 shares was adjusted against the unabsorbed depreciation of Rs.36,23,88,771/- and there was a further carried forward unabsorbed depreciation of Rs. 4,13,77,430/-. By claiming the entire amount of Rs.19 Crores in the hands of the Assessee, he did not derive any particular benefit. It is not as though he reduced his taxable income and saved some tax by the claim for deduction of Rs.19 Crores. In other words, the claim had no revenue effect.
7. As the amount is actually paid by the Assessee, it is allowable as a deduction in the computation of the Capital Gains in the hand of the Assessee. As no portion of Rs.19 Crores was paid by the MEVL and they did not claim any deduction for the same, there is no reason for the apportionment of any portion of Rs.19 Crores to MEVL. The entire amount of RS.19 Crores may kindly be allowed in the hands of the Assessee as, factually, he has incurred the expenditure and paid it."
5.1 In the light of the above submissions, the CIT(A) was of the opinion that the claim of deduction of Rs.19 crores is allowable u/s 48(i) as there is no merit in the stand of the AO that as the amount of Rs. 19 crores did not represent the expenditure for redemption of pledge, it is not allowable as deduction. If the shares in question were under pledge at the time of their acquisition, the repayment of the loan or redemption of the pledge would clearly have been an 7 ITA No. 1592/H/14 Y. Harish Cha ndr a Prasad allowable deduction. That does not mean that there can be no other encumbrance, which constitutes an allowable deduction u/s 48(i). He observed that If expenditure is incurred wholly and exclusively in connection with the transfer to remove any other type of encumbrance, that expenditure would clearly be an allowable deduction. In the present case, the sale of 5000 shares is clearly under litigation because of the civil suit filed by the PVP group and if the litigation is not cleared, the sale of 5000 shares would not have gone through. To save his transaction of sale of 5000 shares the assessee incurred the expenditure in question of Rs.19 crores and so is an allowable deduction u/s 48(i).
5.2 The CIT(A) observed that "the AO also seems to think that simply because 5000 shares held by the assessee are paltry in number compared to 88,08,500 shares held by MEVL, somehow the civil suit is concerned only with the Rs.250 crore company i.e. MEVL and not with the assessee or his sale of 5000 shares. That is clearly against the plain language of the prayer in the civil suit filed before the Hon'ble Chief Judge, City Civil Court, Hyderabad. It has to be remembered that the consideration received by the assessee for the sale of 5000 shares is Rs. 50 crores whereas the consideration received by MEVL for the sale of its 88,08,500 shares is relatively small amount of Rs.12.17 crores. So, it cannot be said that the 5000 shares are "paltry". At any rate, the assessee had to incur the expenditure to save his transaction of sale of 5000 shares. It is not for the revenue to question the necessity of incurring the expenditure. Factually, the expenditure was incurred by the assessee and so constitutes an allowable deduction".
5.3 The CIT(A) also observed that "it cannot also be ignored that the PVP Ventures Ltd has acknowledged the receipt of Rs.19 crores by way of settlement of the disputes and they have reflected this amount as "Extraordinary Income" in their P&L A/c for the year ended 8 ITA No. 1592/H/14 Y. Harish Cha ndr a Prasad 31.03.2011. The relevant extract of their Annual Report for the year ending 31.03.2011 had already been extracted herein above. The company has clearly mentioned that it received Rs.19 Crores from the Assessee for the settlement of its disputes in respect of the "beneficial interests" it had in M/s NPPL. This clearly shows that the title of the assessee for the 5000 shares was in jeopardy and the amount of Rs.19 Crores was paid towards perfection of the title in order to effect the sale and so clearly falls within the ratio of the decision of Hon'ble High court of Calcutta, in the case of Gopeee Nath Paul & Sons Vs. Dy CIT (supra)".
5.4 Further, the CIT(A) observed that "it also deserves to be mentioned as claimed by the Assessee in Para 9.2 of this Order that there are substantial losses both in the hands of the Assessee and M/s. MEVL and the claim for deduction of Rs. 19 Crores in the hands of the assessee does not seem to have conferred any particular additional advantage to the assessee or his group."
5.5 The CIT(A) observed that "the claim of the assessee for the deduction of Rs.19 crores is clearly supported by the case law on which he relied before me. In the case of CIT Vs Smt. Shakuntala Kantilal (1991) 190 ITR 56, the Hon'ble Bombay high Court had clearly held that the expression "in connection with such transfer". In this case, an amount paid to be relieved of the obligations under an earlier agreement into which the seller entered with another party, was allowed as a deduction in the computation of capital gains. In the present case the facts are similar. There was an earlier agreement for the merger of MEVL with the PVP group and the assessee entered into a loan agreement to be relieved of the earlier merger agreement. Even after the loan was repaid, the assessee was dragged into litigation by the PVP group to enforce the earlier merger agreement and the assessee had to pay the 19 crores in question to be relieved of that earlier merger agreement."
9 ITA No. 1592/H/14Y. Harish Cha ndr a Prasad 5.6 CIT(A) observed that "similar is the situation in the case of CIT Vs Abrar Alvi (2001) 247 ITR 312 (Bom). In this case, the assessee paid a certain sum to his own son who had instituted a suit seeking injunction restraining the assessee from selling his property. It was held that the amount was paid to remove the encumbrance to sell the property and so the expenditure incurred was an allowable deduction."
5.7 CIT(A) noted that "in the case of Sassoon ] Davi & Co. (P) Ltd Vs CIT (1979) (118 ITR 261), the Apex Court clearly held that the expression "wholly and exclusively" held in section 48(i) does not mean that the expenditure should have been "necessarily" incurred. Even if the amount was incurred voluntarily, it is an allowable deduction. Actually, in the present case, the assessee had necessity to incur the expenditure of Rs.19 crores. The litigation thrust on him was not of his choice. If he did not pay the amount, the transaction of sale would have fallen through. The assessee also explained why he footed the bill. He explained that MEVL did not have sufficient resources to pay the amount as it has already paid about Rs. 7,59,86,892/- by way of repayment of loan to the PVP group and a further sum of Rs.8,25,63,240/- by way of compensation to them."
5.8 In the light of the above discussion, the CIT(A) held that the amount of Rs. 19 crores was incurred wholly and exclusively for the purpose of transfer of 5000 shares and thus is an allowable deduction u/s 48(i) of the Act. He accordingly directed the AO to recompute the capital gains in question allowing the deduction.
6. Aggrieved by the order of the CIT(A), the revenue is in appeal before us raising the following grounds of appeal:
10 ITA No. 1592/H/14Y. Harish Cha ndr a Prasad "1. The learned CIT(A) erred both in law and on facts of the case.
2. The learned CIT(A) ought to have noticed that there is no encumbrance to the 5000 shares of Navabharat Power (P) Limited held by the assessee in his individual capacity.
3. The learned CIT(A) should have appreciated that the assessee himself has admitted that the 5000 shares of Navabharat Power (P) Limited held by him in his individual capacity were not pledged to anyone and only the shares held by him and his wife in Malaxmi Energy Ventures India (P) Limited were only pledged to PVP Ventures (P) Limited in connection with merger of Malaxmi Energy Ventures India (P) Limited with PVP Ventures (P) Limited.
4. The learned CIT(A) should have noticed that the expenditure of Rs.19 crores stated to have incurred towards transfer of 5000 shares is not against the shares sold by the assessee in his individual capacity but is against the obligation annexed to the transaction of shares of Malaxmi Energy Ventures India (P) Limited in connection with merger."
7. Ld. DR relied on the order of AO and submitted that to claim deduction u/s 48(i), the expenditure should be connected to the transfer of capital asset, in the given case, the assessee has transferred 5000 shares in his individual capacity, there is no encumbrance on those shares held by the assessee, which was the subject matter of transfer. He brought to our notice the share purchase agreement, which was entered on 12/07/2010 between ESSAR Power Ltd with assessee and M/s Malaxmi Energy Ventures India (P) Ltd. (MEVPL). He submitted that as per clause (c) of the recitals of the agreement, it is clearly mentioned that assessee was holding 5000 equity shares, which are equal to 0.028% of the issued and paid up capital of NPPL whereas the issued and paid up share capital of NPPL is 1,76,27,000 equity shares. He submitted that nowhere in the agreement it is mentioned that assessee is selling his 5000 shares. He further brought to our notice that as per the agreement, initial purchase price was quoted at Rs. 45 crores. (refer page 129 of paper book). Further, he brought to our notice the civil 11 ITA No. 1592/H/14 Y. Harish Cha ndr a Prasad suit filed by PVP Group against the assessee and Malaxmi Energy Ventures (India) P. Ltd. (MEVPL), NPPL including ESSAR Power Ltd. and he submitted that these civil appeals are against the pledge of shares belongs to MEVPL and against the conduct of the assessee. This is not relating to the shares held by the assessee, which was transferred. He submitted that CIT(A) has allowed the claim of the assessee for the payment of 19 crores in settlement of disputes with PVP group u/s 48(i), which is not proper and the order of the CIT(A) should be quashed.
8. The ld. AR submitted that the facts of the case of assessee brought out by the CIT(A) in his order are proper. He brought to our notice, the agreement entered by the assessee and Prasad V. Potluri, which was entered on 14 th July, 2008, as per which, they desired to merge MEVPL and PVPL. As per the agreement, MEVPL was valued at Rs. 252 crores. The proposal to merge MEVPL with PVPL, for the consideration, the equivalent shares of PVPL will be issued. Subsequently, PVPL was not in a position to infuse capital for the NPPL projects and disputes arose between the parties and funds invested by PVPL in the MEVPL group was converted into loan by way of mutual agreement by entering into loan agreement dated 3 rd November, 2009, the same is placed as part of paper book. He submitted that as per the loan agreement, it is clearly highlights the reasons for cancelling proposed mergers between PVPL and MEVPL group and compensation for the same. He submitted that assessee has paid the compensation as per the loan agreement and claimed back the shares belongs to MEVPL pledged with PVP group.
8.1 Ld. AR submitted that subsequent to settlement of loan as per the agreement with PVP group, assesse in his personal as well as representing MEVPL as the M.D. entered into agreement with ESSAR Power Ltd. to sell the shares held by him as well as MEVPL on 12/07/2010. He submitted that in between assessee came to know 12 ITA No. 1592/H/14 Y. Harish Cha ndr a Prasad that PVP group filed civil and criminal cases against the assessee as well as MEVPL group and also included ESSAR Power Ltd. as defendents instead of returning the shares pledged by them, even though, the agreed compensation as per the loan agreement was settled by MEVPL group. He submitted that the intention of the PVP group is to stall the proposed sale of shares to ESSAR Power Ltd. He brought to our notice various issues raised by the plaintiff in the civil proceedings and copy of the above civil case is placed on record. Ld. AR submitted that assessee is part and parcel of sale agreement with ESSAR Power Ltd. In support of that and also to counter ld. DR, he brought to our notice clause 1.37 of the sale agreement, which is part of paper book at page 131, it is mentioned as definition of sale of shares, which includes shares held by the assessee.
8.2 Ld. AR submitted that assessee being founder and main person in floating the company, MEVPL, in which he holds 50% shares, he is main instrumental person to bring the ESSAR Power Ltd for negotiations and being the important person in the deal, he managed to negotiate better price for his own shares from overall sale consideration of Rs. 62.17 crores. He submitted that the CIT(A) has recorded the reasons for difference in sale consideration and submitted that MEVPL is only a special purpose vehicle in order to facilitate the assessee to invest in NPPL as well as facilitate smooth functioning of power projects in the company NPPL by representing various government organisations to get the approvals for smooth functioning of the projects. He submitted that the company MEVPL is only a facilitator for the whole set up and accordingly, the assessee has valued the shares of MEVPL as well as his own shares. He further submitted that as per the agreement of sale with ESSAR Power Ltd., as per clause 2.1, as per the condition in that clause, assessee irrevocably agrees to sell shares and clear all encumbrances. He submitted that in order to clear the encumbrances, assessee has agreed to settle Rs. 19 crores as a 13 ITA No. 1592/H/14 Y. Harish Cha ndr a Prasad compensation to PVP group in order to withdraw the civil cases, which was filed by them against assessee, MEVPL, NPPL, wife of assessee as well as ESSAR Power Ltd. He submitted that it is not possible for the assessee to close the deal with ESSAR Power Ltd without making above arrangement with PVP group. He submitted that MEVPL being a special purpose vehicle in order to facilitate operation in NPPL, which is not in a position to take any financial commitment, the assessee has to settle the compensation to PVP group in order to close the deal with ESSAR Power Ltd. for sale of shares. He submitted that it can be noted that without the above arrangement, the deal with ESSAR Power Ltd. would not have been possible and, hence, the above arrangement is directly relating to transfer of assessee's share and in fact the settlement also was made by only assessee, hence, the assessee alone is eligible to claim the above deduction u/s 48(i). For this proposition, ld. AR has relied on various decisions:
1. CIT Vs. Bradford Trading Co. P. Ltd., 261 ITR 222
2. ACIT Vs. Pushkar Dutt Sharma, 68 SOT 278 (Delhi)
3. Addl. CIT Vs. Mrs. Madhur I. Teckchandaney, 93 ITD 65 (Mum.)
4. I Parvatha Vardhini Vs. ITO in ITA No. 590/Hyd/2015, dated 31/08/16
5. SM Wahi Vs. DIT and others, 324 ITR 269
9. Considered the rival submissions and perused the material facts on record as well as the decisions cited by ld. AR. The case of the revenue is that assessee has paid Rs. 19 crores to settle the dispute with PVP group for which assessee and the company MEVPL has pledged the shares of MEVPL group with PVP group, but, the assessee has sold 5000 shares held by him in NPPL, which is not a subject matter of dispute but the shares held in pledge of shares of MEVPL with PVP group, hence, such payment of Rs. 19 crores cannot be claimed as a deduction u/s 48(i) of the Act.
14 ITA No. 1592/H/14Y. Harish Cha ndr a Prasad 9.1 Considered the submissions of both the parties and the brief facts coming out of the submissions are, assessee has entered into a sale agreement for sale of shares in NPPL with ESSAR Power Ltd. for a consideration of Rs. 62.17 crores, this transaction includes selling of 5000 shares held by the assessee on his personal capacity and 88,08,500 shares which was held by MEVPL.
9.2 Prior to the sale transaction in the earlier period, assessee as a MD of MEVPL entered into an agreement with PVP group to merge the MEVPL group into PVP group and to receive shares of PVP group as consideration. Accordingly, PVP group has infused some funds to MEVPL in order to develop projects in NPPL. Later, some dispute arose between MEVPL group and PVP group and with mutual consent, the funds given by PVP group was converted as loan and loan agreement was signed by both the parties agreeing to pledge shares of MEVPL as a security for repayment of such loan. The loan was repaid by MEVPL group subsequently and as per the terms of loan agreement, PVP group is supposed to return the pledged shares to the MEVPL group. In the meantime, assessee has entered into an agreement of sale with ESSAR Group. The PVP group came to the know of such development and aggrieved with the MEVPL group, PVP group has filed a civil case against assessee, MEVPL, wife of assessee, NPPL and ESSAR Power Ltd., in order to stall the sale agreement which was entered between MEVPL and ESSAR Power Ltd.
9.3 As per the terms of agreement entered by assessee, MEVPL with ESSAR Power Ltd, the shares should be free of all encumbrances and the stake involved in this transaction, assessee in his individual capacity as well as MD of MEVPL has to take a decision in order to safeguard the sale transaction. According to the situation, explained by the ld. AR, one of the best option available to the assessee is to sell these shares to ESSAR Power Ltd, otherwise, it 15 ITA No. 1592/H/14 Y. Harish Cha ndr a Prasad may not have better opportunity coming forth in the near future and assessee was not willing to let go the situation and agreed under distress to settle the issue with PVP and accordingly, agreed to pay financial compensation of Rs. 19 crores in order to withdraw the civil appeal, so that ESSAR Group can buy the shares free of any encumbrances. Even though, the encumbrances were not on the shares of NPPL held by MEVPL or by the assessee himself, but, there is an indirect link to the sale transactions of NPPL shares, which assessee has to clear encumbrances in the shares of MEVPL. Since MEVPL is fully owned by the assessee and his wife and any encumbrances relating to shares of the MEVPL being majority shareholder of the NPPL, ESSAR Power Ltd would not have shown interest to go with the sale agreement, hence, there is a live-link of encumbrances to the shares of NPPL also. We are inclined to follow the ratios of the following decisions:
9.4 In the case of CIT Vs. Bradford Trading Co. P. Ltd., (supra), the Hon'ble Madras High Court has held that expenditure incurred in removing encumbrances to transfer is eligible expenditure u/s 48(i).
For the sake of clarity, we reproduce the ratio laid down by the Hon'ble Court, which is as under:
"We therefore hold that the amount of Rs. 2 lakhs was paid to get over the difficulties created by A. M. Buhari for the sale of the property and unless the amount was paid, the transfer of property would not have taken place at all. We, therefore, hold that the Appellate Tribunal was right in holding that the payment had an intimate connection with the transfer of the undertaking as F by allowing the litigation to go on the hands of the company would be tied against the transfer of the undertaking in favour of India Tobacco Company Limited and the assessee would not have realised the sale consideration from the prospective purchaser."
9.5 Similarly in the case of ACIT Vs. Pushkar Dutt Sharma (supra), the Delhi Bench has opined in the similar manner as held in the above case, that the language of this provision that it provides for deducting any expenditure incurred wholly and exclusively in connection with 16 ITA No. 1592/H/14 Y. Harish Cha ndr a Prasad such transfer. The expression 'in connection with such transfer' is to be seen in contradistinction to the expression 'for the transfer'. Whereas the latter is relatively narrower so as to embrace only such expenses which are incurred for the purposes of transfer of capital asset, the former is quite wide in its ambit and also encompasses expenditure of any nature which is connected with the transfer of property. It was further held that any expenditure which has to be incurred to effectively transfer the property falls within its purview. Not only the expenses directly connected with or for the immediate purpose of the transfer of capital asset, but, also all expenses which facilitate the transfer of the capital asset, fall within its scope. It would also include the expenses incurred to remove the impediments or encumbrances in the way of the instant transfer of capital asset. It implies that, any amount paid by the assessee for removing any encumbrance falls under section 48(i) of the Act.
9.6 Similarly, the coordinate bench of ITAT, Hyderabad in the case of I Parvatha Vardhini (supra), has held as under:
"9.1. Coming to the issue of compensation paid to K. Krishna and K. Gnaneswar , there was a Memorandum of Compromise dt. 04-01-2006 wherein, both the parties are claiming absolute ownership of the impugned lands and perpetual injunction in O.S. No. 68/198 on the file of Pr. Senior Civil Judge, RR District was obtained against those parties. There was a compromise to settle the dispute amicably and as a part of that Rs. 1 Crore was paid by way of cheques, as detailed in the Memorandum of Compromise. Therefore, the expenditure incurred to improve the title of the property should also be allowed as a deduction in computation of capital gains, as held by the Hon'ble Bombay High Court in the case of CIT Vs. Abrar Alvi [247 ITR 312] (Born). In view of this, since Ld. AO's order is according to the provisions of the Act, as well as principles laid down in various cases on similar nature of expenditure, we are of the opinion that there is no error in the order passed by the AO."
9.7 Considering the above decisions and the decision of CIT(A), we are in agreement with the finding of the CIT(A) with respect to the expenses being incurred for the purpose of clearing the 17 ITA No. 1592/H/14 Y. Harish Cha ndr a Prasad encumbrances to facilitate the transfer. However, we are not in agreement with CIT(A) that whole expenditure was incurred to remove encumbrances which relates to transfer of shares held by assessee only. In our considered view, the assessee was under pressure to safeguard sale transaction which involves not only shares held by the assessee as well as shares held by MEVPL. Assessee and his company entered into sale agreement with ESSAR Power Ltd to sell whole chunk of shares held by them in NPPL company. Even ESSAR Power Ltd agreed to buy the whole shares for purchase consideration of Rs. 62.17 crores in order to have control and interest in NPPL company, as they are not concerned how the price of each individual shares is quoted by the assessee. In our view, ESSAR Power Ltd has paid the sale consideration to buy 50% of shares held in NPPL. Hence, the payment of Rs. 19 crores in order to remove encumbrances, relates to the total shares held by assessee himself and the company MEVPL.
9.8 Even though, assessee himself paid Rs. 19 crores to clear encumbrances, the expenditure has to be apportioned to the shares transferred by assessee and the company MEVPL. Normally, the proper way to apportion is based on the number of shares transferred. However, in the present case, the value of shares transferred were not evenly valued, the value of shares held by assessee i.e. 5000 shares were valued at Rs. 50 crores and MEVPL was holding 88,08,500 shares were valued at Rs. 12.17 crores. Considering the vast variation in the valuation, in our considered view, the expenditure should be apportioned based on total sale consideration paid by ESSAR Power Ltd. i.e. Rs. 62.17 crores. Accordingly, Rs. 19 crores is to be apportioned between assessee and MEVPL in proportion of Rs. 50 crores and Rs. 12.17 crores. Hence, the apportioned expenditure which comes to assessee is Rs. 15.28 crores. Accordingly, we direct the AO to allow Rs. 15.28 crores as 18 ITA No. 1592/H/14 Y. Harish Cha ndr a Prasad expenditure u/s 48(i). Thus, the grounds raised by the revenue in this regard are partly allowed.
10. In the result, appeal of the revenue is partly allowed.
Pronounced in the open court on 31 st August, 2017.
Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 31 st August, 2017.
kv
Copy to:-
1) DCIT, Circle - 16(1), Room No. 612, 6 th Floor, Aayakar Bhavan, Basheerbagh, Hyderabad.
2) Shri Y. Harish Chandra Prasad, Malaxmi Court Yard, Survey No. 157, Khajaguda (Village) Golconda Post, Hyderabad.
3) CIT(A) - V , Hyderabad
4) CIT - IV, Hyderabad.
5) The Departmental Representative, I.T.A.T., Hyderabad.
6) Guard File