Section 48 Income Tax Act | Proportionate IPO Expenses Deductible for Selling Shareholders as Transfer-Related Costs : ITAT Mumbai

The Income Tax Appellate Tribunal, Mumbai, has clarified that selling shareholders in an Initial Public Offering (IPO) may claim proportionate expenses incurred in connection with the transfer of shares under Section 48 of the Income Tax Act, even if the expenses were initially borne by the company. This ruling reinforces the principle that the nature of expenditure, not the entity that initially paid it, determines deductibility.

Background & Facts

The Dispute

The appellant, Zarah Rafique Malik, sold 28,09,000 equity shares of Metro Brands Limited as part of an Offer for Sale (OFS) during its IPO in A.Y. 2022-23. The company incurred total IPO expenses of Rs. 30,14,94,292, which were apportioned among the selling shareholders based on their proportionate shareholding. The appellant’s share of these expenses amounted to Rs. 3,66,14,854, which she claimed as a deduction against her long-term capital gains under Section 48. The Assessing Officer (AO) disallowed the claim, asserting that the expenses were incurred by the company, not the appellant, and were capital in nature.

Procedural History

• 30.12.2022: Appellant filed return declaring income of Rs. 139.40 crore.
• 29.03.2024: Draft assessment order issued by AO disallowing IPO expenses of Rs. 366.15 lakh.
• 20.05.2024: AO passed assessment order after DRP direction.
• 03.03.2025: Bombay High Court remanded matter to DRP for fresh consideration.
• 30.06.2025: DRP upheld disallowance, holding the arrangement as a colourable device to circumvent Supreme Court precedents.
• 15.07.2025: Impugned assessment order passed by AO.
• 21.01.2026: Hearing before ITAT Mumbai.

Relief Sought

The appellant sought deletion of the disallowance of Rs. 3,66,14,854 as IPO expenses and Rs. 1,84,696 as Portfolio Management Services (PMS) expenses, arguing that both were incurred wholly and exclusively in connection with the transfer of capital assets.

The Legal Issue

The central question was whether expenditure incurred by a company on an IPO, and subsequently recovered proportionately from selling shareholders, qualifies as expenditure incurred wholly and exclusively in connection with the transfer of shares under Section 48(i) of the Income Tax Act.

Arguments Presented

For the Appellant

The appellant relied on Usharani Raghunathan v. CIT (ITAT Chennai) and CIT v. Shakuntala Kantilal (Bombay HC) to argue that the phrase "in connection with such transfer" under Section 48(i) is wide enough to include expenses that are necessary to effect the sale, even if paid by a third party. She submitted that:

• Her consent to bear proportionate expenses was documented in the IPO prospectus.
• Net proceeds received were reduced by her share of expenses, establishing a direct nexus.
• Similar claims by other selling shareholders were allowed by the AO.
• The Supreme Court decisions in Brooke Bond and Punjab State Industrial were distinguishable, as they concerned capital expenditure by the company for raising capital, not recovery of expenses from shareholders selling their stakes.

For the Respondent

The Revenue, through the DRP, contended that:

• The expenses were incurred by the company, not the appellant, and Section 48 requires actual expenditure by the taxpayer.
• The arrangement was a colourable device to circumvent the Supreme Court’s ruling that IPO expenses are capital in nature and non-deductible by the company.
• The prospectus and invoices were insufficient to prove the appellant’s liability or payment.
• The principle of quando aliquid prohibetur ex directo, prohibetur et per obliquum applied: if the company cannot claim the deduction, neither can the shareholder.

The Court's Analysis

The Tribunal rejected the DRP’s characterization of the arrangement as a colourable device. It emphasized that the nature of the expenditure, not the identity of the initial payer, governs deductibility under Section 48(i). The Court noted that the appellant’s participation in the OFS was voluntary and contractual, with clear terms in the prospectus stating that selling shareholders would bear proportionate expenses.

"The fact that the company has initially incurred these expenses and later on, recovered from the assessee, the same cannot be held against the assessee as the whole IPO exercise has to be necessarily done by the company instead of by and at the level of the individual shareholders."

The Tribunal distinguished Brooke Bond India Ltd. and Punjab State Industrial Development Corpn., observing that those cases involved companies claiming expenses for increasing their own capital base. Here, the company raised only Rs. 59.73 crore through fresh issue (21.79% of total capital), while Rs. 214.50 crore was raised through OFS - meaning the bulk of the IPO proceeds benefited the selling shareholders directly.

The Court further held that the appellant had discharged her burden of proof by submitting:

• The IPO prospectus with explicit terms on expense sharing.
• Consent letters authorizing the company to deduct her share.
• Bank statements showing net proceeds after deduction.
• Invoices issued by the company to her.

The Tribunal also noted the inconsistency in the Revenue’s position: while allowing similar claims by other selling shareholders, it disallowed the appellant’s claim without any material distinction.

Regarding PMS expenses, the Court observed that since Rs. 23,694 was allowed as short-term capital gains deduction, denying Rs. 1,84,696 for long-term gains violated the principle of parity. The AO’s failure to issue a show-cause notice before disallowing this claim further invalidated the action.

The Verdict

The appellant won. The ITAT held that proportionate IPO expenses borne by selling shareholders under a transparent, documented arrangement are deductible under Section 48(i) as expenditure incurred wholly and exclusively in connection with the transfer of shares. The PMS expenses were also allowed. The AO was directed to allow the claims upon verification of net proceeds.

What This Means For Similar Cases

Deduction Is Not Dependent on Direct Payment

• Practitioners must argue that actual payment by the taxpayer is not mandatory under Section 48(i) - what matters is whether the expense was incurred in connection with the transfer.
• Evidence of contractual obligation (e.g., prospectus, consent letters, net proceeds calculation) is sufficient to establish nexus.
• Revenue authorities cannot disallow deductions merely because a third party (e.g., company) initially paid the expense.

Prospectus Terms Are Binding Legal Evidence

• IPO prospectuses are not mere informational documents; they constitute binding terms of the transaction.
• Any clause specifying that selling shareholders bear proportionate expenses must be treated as conclusive proof of liability and nexus.
• Practitioners should always annex the relevant prospectus excerpts in support of capital gains claims.

Consistency in Revenue’s Treatment Is Mandatory

• Where similar claims by other taxpayers in identical circumstances have been allowed, disallowance of one taxpayer’s claim without justification violates the principle of non-arbitrariness.

• Taxpayers may invoke doctrine of consistency to challenge selective enforcement.

• Practitioners should compile and submit comparable assessment orders of co-shareholders as evidence.

• Key takeaway: If net proceeds are reduced by proportionate IPO expenses, and the arrangement is documented, Section 48(i) allows the deduction - regardless of who paid the expense first.

• Action step: In all OFS transactions, ensure the prospectus clearly states expense allocation and retain all consents, invoices, and bank statements showing net receipt.