INCOME TAX ACT, 1961

Section 2(24)(iv)

Income - Benefit or perquisite under section 2(24)(iv) - -

Assessee was a promoter Director, in M/s. TMPPL. He, along with other individual share-holders and a foreign company, entered into an agreement for sale of total share holding of M/s. TMPPL to M/s. BSA International. In the process of transfer of shares, the company M/s. TMPPL entered into an agreement through an Engagement Letter (EL) with M/s. Barclays Bank PLC for evaluating value of shares of TMPPL and for searching a probable buyer to have control over its investments or its affairs. As per terms of the agreement M/s. TMPPL had to pay success fee on completion of transaction to M/s. Barclays Bank as per invoice raised by them. Accordingly, at the end of the transaction, M/s. Barclays raised invoice for Rs. 28,81,31,631 as success fee for transaction and same was met by company M/s. TMPPL. AO noticed that the amount of Rs. 28,81,31,631 was shown as payment below the line of profit and loss account by company meaning that company TMPPL paid transaction fee from taxed profits of the company. Therefore, AO held that assessee along with other stake holders who sold the shares being beneficiaries of payment made to Barclays, expenditure incurred towards sale of shares was required to be met by the share holders but not by company. Since company paid expenditure out of its taxed profits, proportionate share of expenses out of total expenditure of Rs. 28.81 crores paid to M/s. Barclays Bank was required to be taxed in the hands of directors under section 2(24)(iv). Accordingly made addition in assessee's hands. Held: There was no evidence to show that assessee had entered into agreement for transfer of shares or assessee was obliged to make payment to Barclays. As per engagement letters , Barclays was engaged as sole financial advisor in connection with transaction and no other person could be appointed by TMPPL. It was also made clear that promoters or the client might choose and appoint their own consultant or advisor. Such consultant had no right to claim fee, right to title for carrying out the services contemplated. Directors or shareholders were permitted to appoint their own consultant who would not have any say in the success fee. In view of this clause, holding of AO that the success fee was obligation of assessee was incorrect. As mentioned in the share purchase agreement (SPA), cost of transfer of shares had to be borne by the assessee. Accordingly, expenses in relation to the negotiation, finalization and execution of SPA had to be borne by shareholders including assessee. The success fee was for engaging services of Barclays as per EL dated 5-7-2013 and share purchase agreement was entered on 4-11-2013, much ahead of EL, hence, success fee could not be treated as expenditure incurred in connection with the EL. From plain reading of SPA and the EL, it was established that assessee had no obligation to make any payment towards success fee paid to Barclays, hence, it could not be held that the assessee got any benefit from the success fee paid by TMPPL. Also, Barclays fee was already recovered by BSA International and net consideration was paid to shareholders which established that amount of succession fee was paid to Barclays from profits and reserves of shareholders. Further, fee paid to Barclays was expenses in relation to transfer of shares which required to be allowed as deduction for computing the capital gains and could not be brought to tax under the head 'income from other sources'. AO did not show any material to substantiate that success fee paid to Barclays was not in relation to transfer of shares. Accordingly, there was no case for invoking section 2(24)(iv) and there was no case for taxing income under the head income from other sources.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2014-15

INCOME TAX ACT, 1961

Section 54F

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