ITAT Allows Expenses on Sale of Unlisted Equity Shares

Deepak Gurushankar Tripathi, an individual taxpayer, declared an income of ₹33,54,12,110/- for Assessment Year 2016–17, which included capital gains of ₹25,48,97,024/- derived from the sale of unlisted equity shares of M/s. Lilac Medicare Pvt. Ltd. In computing the capital gains, the assessee claimed incidental expenses amounting to ₹85,43,302/-, which included advisory fees, event and execution expenses, and stamp duty/notary charges.

During the scrutiny assessment, the Assessing Officer disallowed expenses totaling ₹83,47,183/—comprising advisory fees and event/execution charges—on the grounds that the assessee failed to establish a direct link between these professional payments and the securities sold. Dissatisfied with the assessment order, the assessee appealed before the Commissioner of Income Tax (Appeals), who sustained the disallowance, stating that the burden of proof under Section 48(i) of the Income-tax Act, 1961, was not met.

Before the Income Tax Appellate Tribunal, the assessee contended that the advisory fees paid to transaction advisors like 7i Advisors LLP, J. Sagar Associates, and S.R. Divatia were directly connected to finding a buyer, conducting due diligence, and successfully locking in the deal with the Japanese buyer, Tosoh Corporation. Conversely, the Revenue supported the orders of the lower authorities, arguing that the disallowance was correctly made for lack of direct nexus.

The Tribunal observed that the advisory fees and event/execution expenses were incurred collectively by the shareholders to negotiate and finalize the sale of their 24.75% shareholding in the unlisted company. Citing the Delhi High Court judgment in Kaushalya Devi v. CIT, the ITAT noted that expenditure incurred with an inextricable link and close nexus to the transfer of a capital asset qualifies for deduction under Section 48(i) of the Act.

Concluding that the professional advisory and event costs were incurred wholly and exclusively for carrying out the transaction of sale of unlisted equity shares, the Tribunal reversed the findings of the Commissioner of Income Tax (Appeals). Consequently, the ITAT deleted the disallowance of ₹83,47,183/- and allowed the appeal filed by the assessee.