FUSION LASTEK TECHNOLOGIES PRIVATE LIMITED,HYDERABAD V. DCIT., CIRCLE 8(1), HYDERABAD

ITA 1094/HYD/2024

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Fusion Lastek Technologies Private Limited appealed against the order of the Commissioner of Income Tax (Appeals), which had confirmed the disallowance of a deduction for compensation expenses claimed in relation to the transfer of shares. The assessee had received an advance from OXEECO for the purchase of shares and had incurred compensation expenses due to the non-completion of the share transfer. The Assessing Officer (A.O.) and the CIT(A) both found that the compensation paid to OXEECO was not wholly and exclusively connected to the transfer of shares to Harsco Investments Europe BV, leading to the disallowance of the deduction. The Tribunal agreed with this finding, emphasizing that the transactions were independent and the expenses did not meet the criteria set out in Section 48(i) of the Act.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 360614 (ITAT-HYDERABAD)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-05-2025
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Assessment Year: 2018-2019
• Other Referred Cases: Challapalli Sugars Ltd vs. CIT, CIT vs. Mithlesh Kumari, Addl. Commissioner of Income Tax, A.P vs. K.S. Gupta, CIT vs. K. Raja Gopala Rao, Naozar Chenoy vs. CIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Cost of acquisition; Capital Gains; Principle of natural justice; Search and seizure; Share purchase agreement
• Section: 143(3)

Judgement Text

" आयर अपीलीय ᭠यायािधकरण मᱶ, हैदराबाद ‘बी’ बᱶच, हैदराबाद IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘ B ‘ Bench, Hyderabad ᮰ी मंजूनाथ जी, माननीय लेखा सद᭭य एवं ᮰ी रवीश सूद, माननीय ᭠याियक सद᭭य SHRI G. MANJUNATHA, HON’BLE ACCOUNTANT MEMBER AND SHRI RAVISH SOOD, HON’BLE JUDICIAL MEMBER आयकरअपीलसं./I.T.A.No.1094/Hyd/2024 (िनधाŊरण वषŊ/ Assessment Year: 2018-19) Fusion Lastek Technologies Private Limited, Sanath Nagar, Hyderabad. PAN: AAACF7009D Vs. Deputy Commissioner of Income tax, Circle-8(1), Hyderabad. (अपीलाथŎ/ Appellant) (ŮȑथŎ/ Respondent) करदाता का Ůितिनिधȕ/ Assessee Represented by : Sri Pawan Kumar Chakrapani, CA राजˢ का Ůितिनिधȕ/ Department Represented by : Sri D. Praveen, Sr. AR सुनवाई समाɑ होने की ितिथ/ Date of Conclusion of Hearing : 06.05.2025 घोषणा की तारीख/ Date of Pronouncement : 22.05.2025 O R D E R Ůित रवीश सूद, जे.एम./PER RAVISH SOOD, J.M. The present appeal filed by the assessee company is directed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (in short “CIT(A)”), dated 2 23/08/2024, which in turn arises from the order passed by the A.O U/s. 143(3) r.w.s 144B of the Income-tax Act, 1961 (in short ‘the Act’) dated 27/04/2021 for the assessment year 2018-19. 2. The assessee company has assailed the impugned order on the following grounds of appeal before us: 1. The impugned order of the learned Authorities below insofar as it is against the appellant is opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the appellant’s case. 2. The appellant denies himself liable to be assessed over and above the total income returned an amount being Rs. 10,78,66,870/- under the facts and circumstances of the case. 3. The learned Authorities below are not justified in disallowing the expenses of an amount being Rs. 74,19,097/-, claimed by the appellant, under the facts and circumstances of the case. 4. The learned Authorities below are not justified in disallowing the amount of Rs. 74,19,097/-, as expenditure wholly and exclusively not in connection with transfer U/s. 48 of the Act, under the facts and circumstances of the case. 5. the appellant denied himself liable to be charged to interest under section 234C of the Income Tax Act, 1961 under the facts and circumstance of the case. 6. The appellant craves leave to add, alter, delete or substitute any of the grounds urged above. 7. In view of the above and other grounds that may be urged at the time of the hearing of the appeal, the appellant prays that the appeal may be allowed in the interest of justice and equity. 3. Succinctly stated, the assessee company had filed its return of income for A.Y 2018-19 on 15/10/2018, declaring an income of Rs. 10,78,66,870/-. Subsequently, the case of the assessee company was selected for scrutiny assessment U/s. 143(2) of the Act. 3 4. During the course of the assessment proceedings, it was, inter alia, observed by the A.O. that the assessee company while computing its income under the head “Long Term Capital Gain” (in short “LTCG\") arising from the transaction of transfer of shares, had raised a claim for deduction u/s 48 of the Act of “compensation expenditure” of Rs. 74,19,097/- stated to have been incurred wholly and exclusively in connection with the said transfer transaction. The A.O. called upon the assessee company to furnish details of compensation expenses, viz., nature and description of the commission expenses, the purpose for which commission was paid a/w supporting documents, share subscription agreement, details of shares, and the details regarding the transfer of the subject shares. In reply, it was submitted by the assessee company that it was a Joint Venture (JV) partner with Harsco Corporation (USA) in the formation and running of Harsco India Private Limited (HIPL). Elaborating further, it was stated that as per the shareholder agreement dated 31/08/2009, while Harsco Corporation (USA) was to subscribe to 74% of the equity, the assessee company viz., Fusion Lastek Technologies Private Limited (FLPL) and its group entity i.e., Ganapathy Finance and Investment Company (GFIC) were permitted to hold 26% of the shareholding in HIPL. The assessee company submitted that as the activities of HIPL kept expanding, therefore, to meet the growing financial requirements the assessee company had decided to obtain funds by getting equity 4 investments from M/s. Oxygen Equipment and Engineering Company Limited (OXEECO) by selling the shares of HIPL. The assessee submitted that an amount of Rs. 9.83 Crores was received by the assessee company as an advance from OXEECO in two installments, viz., (i) on 27/11/2014: Rs. 4.90 Crores; and (ii) 17/01/2015: Rs. 4.93 Crores, for purchase of HIPL shares as per the share purchase agreement dated 21/11/2014 entered into between them. 5. Elaborating on the terms of the share purchase agreement (SPA) dated 21/11/2014 entered into between the assessee company and OXEECO, it was stated that the same, inter alia, provided that in case Harsco Corporation (USA) did not permit the transfer of shares of HIPL by the assessee company to OXEECO due to any reason whatsoever; or OXEECO decided not to purchase the shares from the assessee company for any reason whatsoever, then the assessee company would be obligated to return the amount that was advanced by OXEECO for purchase of shares on or before 31/03/2016 along with compensation that would be mutually agreed upon. The assessee company submitted that as there was a considerable delay in completing the necessary formalities for the sale of HIPL shares by the assessee company to OXEECO, therefore OXEECO had decided not to go ahead with the purchase of HIPL shares. It was submitted by the assessee company that the subject HIPL shares (28,62,866 shares) were transferred by the assessee company to Harsco Corporation 5 (USA). It was further submitted that as per the “addendum”, dated 03/06/2016 to the “Share Purchase Agreement”, OXEECO had requested the assessee company to refund the advance that it had paid for the purchase of HIPL shares along with compensation. It was further stated that as per the terms of the “addendum”, the assessee company had agreed to pay a compensation of Rs. 175 lacs over and above the amount of Rs.9.83 Crores to OXEECO. Although, the agreed compensation as per the “addendum”, dated 03/06/2016 was Rs. 175 lacs, but, the assessee company had during the subject year claimed only Rs. 74,19,097/- as compensation expenditure. Elaborating on the aforesaid aspect, it was submitted by the assessee company that as the amount of Rs. 9.83 Crores (supra) was received by the assessee company from OXEECO for purchase of 67,52,864 shares but it had during the subject year only transferred 28,62,866 shares to Harsco Investments Europe BV (HIEBV), therefore, it had proportionately raised a claim for deduction of compensation expenses of Rs. 74.19 lacs (approx) as an expenditure incurred in connection with subject transfer U/s. 48 of the Act. 6. The A.O. after necessary deliberations did not find favour with the claim of the assessee company for deduction of Rs. 74.19 lacs (supra) as an expenditure incurred in connection with the transfer of shares of HIPL. The A.O. was of the view that to be an allowable expenditure U/s. 48 of the Act, expenditure should have been 6 incurred towards the cost of acquisition of the asset or the cost of any improvement incurred wholly and exclusively in connection with such transfer. The A.O. referred to the “Share purchase agreement”, dated 21/11/202014 and “addendum” dated 03/06/2016, and held a firm conviction that the same was something which was enforced upon by the parties themselves and was not a legal obligation mandated by any authority. The A.O. was of the view that it was not obligatory on the part of the assessee company to have raised a loan from OXEECO. Elaborating further, the A.O. observed that as raising of advance by the assessee company from OXEECO and selling the shares to Harsco Investments Europe BV were two independent transactions having no connection, therefore, the claim for deduction of compensation expenses of Rs. 74.19 lacs (supra) not being an expenditure incurred wholly and exclusively in connection with the transaction of transfer of shares of HIPL, therefore, the claim of the assessee company for deduction of the same did not merit acceptance. Accordingly, the A.O. based on his aforesaid deliberations declined the claim raised by the assessee company for deduction u/s 48 of the Act of compensation expenses of Rs. 74.19 lacs (supra) and added the same to the LTCG declared in its return of income. 7. Aggrieved, the assessee company carried the matter in appeal before the CIT(A) with but without success. 7 8. Ostensibly, the CIT(A) was of the view that as the transfer of shares of HIPL by the assessee company to Harsco Investments Europe BV had no connection with the compensation that was paid to OXEECO, therefore, both transactions were exclusive of each other. Accordingly, CIT(A) holding a conviction that the assessee company had failed to establish any connection of the amount of compensation paid to OXEECO and the transfer of shares of HIPL to Harsco Investments Europe BV, therefore, the same was rightly disallowed by the A.O. while computing the income of the assessee company under the head LTCG on the transfer of the subject shares. For the sake of clarity, the observations of the CIT(A) are culled out as under: 8 9 10 11 12 13 14 9. The assessee company being aggrieved with the order of the CIT(A), has carried the matter in appeal before us. 10. We have heard the Ld. Authorized Representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the Ld. AR to drive home his contentions. 11. Controversy involved in the present appeal lies in a narrow compass i.e., allowability of the assessee’s claim for deduction of compensation expenses of Rs. 74.19 lacs (supra) that was paid to OXEECO, while computing the LTCG arising on the transfer of the said shares to Harsco Investments Europe BV. 12. As is discernible from the record the assessee company had received an amount of Rs. 9.83 Crores (supra) from OXEECO for the purchase of HIPL shares. On a perusal of the Share Purchase Agreement, dated 15 21/11/2014, we find that as per Para-5 of the agreement, if in case Harsco Corporation (USA) would not permit the transfer of shares of HIPL as were held by the assessee company to OXEECO due to any reason whatsoever; or OXEECO decided not to purchase the shares of HIPL from the assessee company for any reason whatsoever, then, in either case the assessee company will return the amount advanced by OXEECO for purchase of shares on or before 31/03/2016 along with compensation as would be mutually agreed upon. For the sake of clarity the Para-5 of the aforesaid “agreement” is culled out, as under: “5. In the event the “HARSCO Share-holders” not permitting the transfer of FLPL shares to OXEECO due to any reason whatsoever or OXEECO deciding not to purchase the shares from FLPL for any reason whatsoever, FLPL will return the amount advanced by OXEECO to FLPL for share purchase on or before 31st March, 2016 along with compensation to be agreed mutually.” 13. Apart from that, we find that as per the “addendum” (to Share Purchase Agreement, dated 21/11/2014), dated 03/06/2016, it transpires that as there was a considerable delay in completing the necessary formalities for sale of HIPL shares by the assessee company to OXEECO, therefore, the latter had decided not to go ahead with purchasing the shares and had requested the assessee company to refund the advance that it had paid alongwith compensation. As can be gathered from the “addendum” (supra), the assessee company and OXEECO had mutually agreed for the compensation of Rs. 175 lakhs i.e., over and above the amount of Rs. 9.83 Crores (supra) that was received by the assessee company. As observed by us herein above, as the assessee company had received the amount of Rs. 16 9.83 Crores (supra) from OXEECO for the purchase of 67,52,864 shares and had during the subject year transferred 28,62,866 shares only to Harsco Investments Europe BV, therefore, for the said reason it had while computing the LTCG arising on the transfer of shares of HIPL raised a claim for deduction of compensation expenses of Rs. 74.19 lakhs ie., on a proportionate basis. 14. Be that as it may, we shall now advert to issue in hand for which our indulgence has been sought, i.e., as to whether or not the authorities below are justified in declining the claim of the assessee company for deduction u/s 48 of the Act of the compensation expenses of Rs. 74.19 lacs (supra) that it had paid for not transferring the shares of HIPL to OXEECO i.e while computing the LTCG on transfer of the subject shares of HIPL to Harsco Investments Europe BV? 15. Before proceeding any further, we deem it fit to cull out the provisions of section 48 of the Act, which reads as under: “Section. 48. The income chargeable under the head \"Capital gains\" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:— (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto:” (emphasis supplied by us) 17 16. Ostensibly, it is only the expenditure incurred wholly and exclusively in connection with the transfer of a capital asset that is allowable as a deduction U/s. 48(i) of the Act. Although the assessee company had claimed to have paid “compensation expenses” of Rs. 74.19 lakhs (supra) for not transferring the shares of HIPL to OXEECO, but, we are unable to comprehend that as to how the said expenditure/ payment could be held to have been incurred wholly and exclusively in connection with the transfer of 28,62,866 shares by the assessee company to Harsco Investments Europe BV. As observed by the A.O, and rightly so, as the advance of Rs. 9.83 Crores (supra) received by the assessee company from OXEECO and the transaction of sale of shares of HIPL to Harsco Investments Europe BV are two independent transactions that are in no way connected, therefore, the compensation paid by the assessee company to OXEECO cannot be brought within the meaning of an expenditure incurred wholly and exclusively in connection with the transfer of shares of HIPL. We say so, for the reason that the “Share Purchase Agreement”, dated 21/11/2014 did not bar the assessee company from selling its shares of HIPL to any party. Also, we concur with the A.O., that both the “Share Purchase Agreement”, dated 21/11/2014 and the “addendum” executed between the assessee company and OXEECO was something that was enforced upon by themselves and not a legal obligation mandated by any authority. 18 17. We shall now deal with the judicial pronouncements that have been relied upon by the ld. A.R in his attempt to impress upon us that the claim of the assessee company for deduction u/s 48 of the Act of the “compensation expenses” was allowable as a deduction while computing the LTCG on transfer of the HIPL shares, as under: A. Challapalli Sugars Ltd vs. CIT [1975] 098 ITR 0167 (SC) 18. The issue before the Hon'ble Apex Court was as to whether or not the interest paid on the loan before the commencement of the business for the purchase of machinery, plant etc., represented the element of the actual cost on which depreciation and development rebate was admissible. The Hon'ble Apex Court, after referring to the divergent views of various High Courts, had observed, that the said interest expenditure can be capitalized and included in the actual cost of the machinery and plant. 19. As the issue before us in the present appeal is as to whether or not the compensation expenditure incurred by the assessee company can be allowed as a deduction U/s. 48 while computing the capital gains arising from the transfer of shares i.e., a transaction that was totally independent of the aforesaid raising of loan and the consequent payment of interest, therefore, the same being distinguishable on facts would not carry the case of the assessee company any further. 19 B. CIT vs. Mithlesh Kumari [1973] 92 ITR 9 (Del.) 20. As in the aforementioned case, the issue was as to whether or not the interest paid by the assessee company on the loan borrowed for the purchase of land would constitute the actual cost of the land to the assessee, which we afraid is not the issue in the present case before us, therefore, the said judicial pronouncement would also not come to the rescue of the assessee company. C. Addl. Commissioner of Income Tax, A.P vs. K.S. Gupta [1979] 119 ITR 372 (AP): 21. As in the case of CIT vs. Mithilesh Kumari (supra), the issue involved in the captioned appeal was whether or not the interest paid by the assessee on the funds borrowed for the purchase of land would constitute part of the actual cost of land to the assessee for determining the capital gains arising on the transfer of the same, we are afraid that as the same is not the issue which we are seized of in the present appeal, therefore, the said judicial pronouncement being distinguishable on facts would not carry the case of the assessee company any further. D. CIT vs. K. Raja Gopala Rao [2001] 252 ITR 459 (Madras): 22. The issue before the Hon'ble High Court was that as to whether or not the mortgage expenses incurred by the assessee in connection with the acquisition of the property and the interest payable on the mortgage amount which was utilized as a part of the purchase 20 consideration would form part of the cost of acquisition of the property for computing the capital gains on transfer of the same. Answering the aforesaid question, the High Court had observed that the cost of acquisition to the assessee was not only the amount that he had paid to the vendors but also the cost of the borrowing made by him for paying the amount to the vendor and executing the sale deed. (ii) Once again, we find that the aforesaid judicial pronouncement pressed into service by the assessee company is distinguishable on facts. As the compensation expenses paid by the assessee company to OXEECO in the case before us is not connected with the transfer of the shares of HIPL to Harsco Investments Europe BV, therefore, the issue involved in the aforesaid judicial pronouncement relied upon by the assessee company being distinguishable on facts will also not carry its case any further. E. Naozar Chenoy vs. CIT [1998] 234 ITR 95 (AP): 23. The issue that was, inter alia, for which the indulgence of the Hon’ble High Court was sought was as to whether or not the expenditure incurred by the assessee by making payment to the tenants for vacating the premises, which was the subject matter of the sale transaction was allowable as a deduction while computing the capital gains arising on the sale of the said building. It was held that as the expenditure incurred by the assessee company towards 21 payment of the amount to the tenants for vacating the premises, which was the subject matter of the sale transaction had a clear nexus with the sale transactions, as without the tenants vacating the premises the building could not have been sold, therefore, the amount so paid to the tenants was held as an allowable expenditure. As observed by the A.O in the present case before us, as the “Share Purchase Agreement” dated 21/11/2014 did not bar the assessee company from selling its shares of HIPL to any third party, therefore, unlike the facts involved in the aforesaid case, wherein the payment to the tenants was indispensably required as otherwise, the property could not have been sold, therefore, the said case law being factually distinguishable would not carry the case of the assessee company any further. 24. We, thus, in terms of our aforesaid deliberations find no infirmity in the view taken by the authorities below, wherein they had rightly concluded that the compensation of Rs. 74.19 lacs (supra) paid by the assessee company to OXEECO had no connection with the transfer of shares of HIPL to Harsco Investments Europe BV, as both the transactions were independent and had no connection and, therefore, uphold the same. The Grounds of Appeal Nos. 3 & 4 being devoid and bereft of any substance are dismissed. 22 25. As the ld. AR has not placed any contention qua the Ground of appeal No.5, therefore, the same is dismissed as not pressed. 26. The Grounds of Appeal Nos. 1, 2, 6 and 7 being general are dismissed as not pressed. 27. Resultantly the appeal filed by the assessee company being devoid and bereft of any substance is dismissed. Order pronounced in the Open Court on 22nd May, 2025. Sd/- Sd/- Sd/- (मंजूनाथ जी) (MANJUNATHA G.) लेखा सद˟/ACCOUNTANT MEMBER Sd/- Sd/- (᮰ी रवीश सूद) (RAVISH SOOD) Ɋाियक सद˟/JUDICIAL MEMBER Sd/- Hyderabad, dated 22.05.2025. **OKK/SPS आदेशकी Ůितिलिप अŤेिषत/ Copy of the order forwarded to:- 1. िनधाŊįरती/The Assessee : Fusion Lastek Technologies Private Limited, C-37 and 38, Industrial Estate, Sanath Nagar, Hyderabad, Telangana- 500001. 2. राजˢ/ The Revenue : Deputy Commissioner of Income Tax, Circle-8(1), Signature Towers, Kothaguda, Botanical Gardens, Serilingampally, Hyderabad, Telangana-500084. 3. The Principal Commissioner of Income Tax, Hyderabad. 4. िवभागीयŮितिनिध, आयकर अपीलीय अिधकरण, हैदराबाद / DR, ITAT, Hyderabad 5. The Commissioner of Income Tax 6. गाडŊफ़ाईल / Guard file 23 आदेशानुसार / BY ORDER Sr. Private Secretary ITAT, Hyderabad By Order "