The Income Tax Appellate Tribunal, Bangalore Bench, has allowed the appeal of Shri Mohan Rajashekar by holding that the success fee of ₹1,47,50,000 paid to Singhi Advisors Private Limited for facilitating the sale of shares was deductible under Section 48(i) of the Income-tax Act, 1961. The Tribunal rejected the Revenue's contention that the expenditure lacked nexus with the assessee's share sale, affirming that the fee was incurred wholly and exclusively in connection with the transfer of a capital asset.
Background & Facts
The Dispute
The assessee, Shri Mohan Rajashekar, sold 13,770 shares of Team Concepts Private Limited to Varroc Polymers Private Limited for ₹25,76,43,000 during Assessment Year 2018-19. He claimed a deduction of ₹1,47,50,000 as commission paid to Singhi Advisors Private Limited for advisory services in connection with the divestment transaction. The Assessing Officer disallowed the deduction, treating it as brokerage commission without establishing a direct nexus with the assessee's share sale. The first appellate authority, the National Faceless Appeal Centre, confirmed the disallowance.
Key Facts
- The assessee was a shareholder and director of Team Concepts Private Limited, incorporated on 23.02.2000.
- On 19.08.2016, Team Concepts Private Limited (not the assessee in his individual capacity) entered into an engagement letter with Singhi Advisors Private Limited for advisory services, including identifying strategic partners and facilitating divestment.
- The engagement letter provided for a success fee of 3% of transaction value, subject to a minimum of ₹1,00,00,000.
- On 29.11.2017, Singhi Advisors Private Limited raised a pro forma invoice of ₹1,25,00,000 (plus service tax) on the assessee, who paid ₹1,47,50,000 by cheque on 05.12.2017 from his personal bank account.
- On 06.03.2021, Singhi Advisors Private Limited issued a certificate confirming that it had been appointed by the assessee to provide advisory services for the divestment of his shareholding in Team Concepts Private Limited and had charged a success fee of ₹1,47,50,000.
- The assessee also relied on newspaper reports and email correspondence to demonstrate Singhi Advisors' participation in the transaction.
- The buyer, Varroc Polymers Private Limited, stated in response to a notice under Section 133(6) that no middleman or agent was involved in the purchase.
Procedural History
- 07.04.2021: Assessment order passed under Section 143(3) by the Income Tax Officer, Ward 5(1)(1), Bengaluru, disallowing ₹1,47,50,000 and determining total income at ₹21,78,53,090.
- 24.02.2021: Similar deduction allowed to co-shareholder Shri Mahendra Jolapara in his case.
- Appeal before CIT(A): Assessee filed appeal before the National Faceless Appeal Centre, Delhi.
- Order of CIT(A): Dismissed the appeal, holding that the assessee had not filed new material and that the confirmation from Singhi Advisors was insufficient without supporting ledger statements or income-tax returns.
- Present Appeal: Filed before the Income Tax Appellate Tribunal, Bangalore Bench, against the order of the CIT(A).
Relief Sought
The assessee sought deletion of the addition of ₹1,47,50,000, contending that the success fee was incurred wholly and exclusively in connection with the sale of shares and was supported by documentary evidence, including the engagement letter, invoice, and confirmation from Singhi Advisors Private Limited.
The Legal Issue
The central question was whether the success fee of ₹1,47,50,000 paid by the assessee to Singhi Advisors Private Limited for advisory services in connection with the sale of his shares in Team Concepts Private Limited was deductible under Section 48(i) of the Income-tax Act, 1961, as an expenditure incurred wholly and exclusively in connection with the transfer of a capital asset.
Arguments Presented
For the Appellant
The authorised representative argued that:
- Singhi Advisors Private Limited was appointed by the assessee to provide advisory services for the divestment of his shareholding in Team Concepts Private Limited.
- The engagement letter, invoice, and confirmation from Singhi Advisors Private Limited established that the success fee was paid for services rendered in connection with the assessee's share sale.
- The notice issued under Section 133(6) to Varroc Polymers Private Limited and the response received could not be relied upon adversely without granting the assessee an opportunity to cross-examine that party.
- The co-shareholder, Shri Mahendra Jolapara, had been allowed an identical deduction in his case.
For the Respondent
The Departmental Representative supported the orders of the lower authorities, contending that:
- The engagement letter was between Singhi Advisors Private Limited and Team Concepts Private Limited, not the assessee in his individual capacity.
- The expenditure had no nexus with the assessee's sale of shares to Varroc Polymers Private Limited.
- The confirmation from Singhi Advisors Private Limited was insufficient without supporting ledger statements or income-tax returns.
The Court's Analysis
The Tribunal examined the engagement letter, invoice, confirmation from Singhi Advisors Private Limited, and the assessee's submissions. It noted that:
- The engagement letter dated 19.08.2016 was between Team Concepts Private Limited and Singhi Advisors Private Limited, but the success fee invoice was raised on the assessee and paid by him from his personal bank account.
- The confirmation issued by Singhi Advisors Private Limited on 06.03.2021 explicitly stated that it had been appointed by the assessee to provide advisory services for the divestment of his shareholding in Team Concepts Private Limited and had charged a success fee of ₹1,47,50,000.
- The assessee also relied on newspaper reports and email correspondence to demonstrate Singhi Advisors' participation in the transaction.
- The buyer's response to the notice under Section 133(6) merely stated that no middleman or agent was involved, but Singhi Advisors Private Limited was engaged as a consultant, not as an agent or broker.
The Tribunal held that the substance of the engagement was the divestment of shares of Team Concepts Private Limited, and the assessee was one of the two shareholders who sold their shares to Varroc Polymers Private Limited. The success fee was borne by the assessee in proportion to his share of the total fee payable to Singhi Advisors Private Limited. The services rendered by Singhi Advisors Private Limited had a direct nexus with the assessee's sale of shares to Varroc Polymers Private Limited.
"The substance of the engagement letter was the divestment of shares of Team Concepts Private Limited. The assessee was one of the two shareholders who sold their shares to Varroc Polymers Private Limited. The success fee was borne by the assessee in proportion to his share of the total fee payable to Singhi Advisors Private Limited. In substance, Singhi Advisors Private Limited rendered advisory services to the assessee by facilitating the sale of his shares in Team Concepts Private Limited to Varroc Polymers Private Limited, a third-party buyer."
The Tribunal further observed that Section 48(i) of the Income-tax Act provides that capital gains shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of a capital asset, the expenditure incurred wholly and exclusively in connection with such transfer. In the present case, the assessee incurred the expenditure wholly and exclusively in connection with the sale of shares of Team Concepts Private Limited to Varroc Polymers Private Limited.
The Verdict
The Tribunal allowed the assessee's appeal in its entirety. It held that the success fee of ₹1,47,50,000 paid to Singhi Advisors Private Limited was deductible under Section 48(i) of the Income-tax Act, 1961, as it was incurred wholly and exclusively in connection with the transfer of a capital asset. The Assessing Officer was directed to grant the deduction while computing capital gains arising from the sale of shares of Team Concepts Private Limited to Varroc Polymers Private Limited.
What This Means For Similar Cases
Expenditure Must Have Direct Nexus With Transfer
- Section 48(i) allows deduction of expenditure incurred wholly and exclusively in connection with the transfer of a capital asset.
- The nexus must be direct and proximate, not remote or incidental.
- Documentary evidence, such as engagement letters, invoices, and confirmations, is critical to establish the nexus.
Consultant's Role Is Distinguishable From Agent or Broker
- A consultant providing advisory services for divestment or sale of shares is not the same as an agent or broker facilitating the transaction.
- The Revenue cannot disallow expenditure solely because the buyer denies involvement of a middleman or agent.
- The assessee's individual capacity and payment from personal account are relevant factors in establishing the nexus.
Cross-Examination Opportunity Is Crucial
- Notices issued under Section 133(6) and responses received must be carefully evaluated.
- If adverse inferences are drawn, the assessee must be granted an opportunity to cross-examine the concerned party.
- Failure to provide such opportunity may vitiate the assessment order.
