ITAT Mumbai: Proportionate IPO Expenses Deductible Under Section 48(i) for Offer for Sale Shareholders

Case Overview

Case Name: Zarah Rafique Malik Vs ITO (ITAT Mumbai)
Assessment Year: A.Y. 2022-23
Tribunal: Income Tax Appellate Tribunal, Mumbai
Decision: Appeal Partly Allowed

The Mumbai Bench of the Income Tax Appellate Tribunal has delivered a significant ruling affirming that shareholders who participate in an Initial Public Offering through the Offer for Sale (OFS) route are entitled to claim their proportionate share of IPO-related expenses as a deduction while computing capital gains under clause (i) of section 48 of the Income Tax Act. This decision carries substantial implications for promoters and existing shareholders who exit via the OFS mechanism as part of a company's IPO process.

Background and Procedural History

The assessee, Ms. Zarah Rafique Malik, filed her Return of Income for A.Y. 2022-23 on 30.12.2022, declaring total income of Rs. 139,39,53,300/-. The case was selected for scrutiny assessment, following which a draft assessment order was passed on 29.03.2024, revising the total assessed income upward to Rs. 143,06,59,410/- by way of disallowance of certain expenses.

The assessee challenged the draft order before the Dispute Resolution Panel-II (DRP). Subsequently, the Assessing Officer passed an assessment order dated 20.05.2024 in pursuance of DRP directions, which was then challenged by the assessee through a Writ Petition before the Hon'ble Bombay High Court. The High Court disposed of the petition on 03.03.2025, remitting the matter back to the DRP for fresh adjudication in accordance with law.

Following fresh consideration, the DRP issued an order dated 30.06.2025 sustaining the disallowances, in pursuance of which the Assessing Officer passed the impugned final assessment order dated 15.07.2025 under section 143(3) r.w.s. 144C(13) of the Income Tax Act. This order became the subject matter of the present appeal before the ITAT.

The total disallowance in dispute amounted to Rs. 3,66,14,854/-, comprising:

Proportionate IPO expenses: Rs. 3,64,30,158/-
Portfolio Management Services (PMS) expenses: Rs. 1,84,696/-

Additional Grounds Raised and Their Fate

The assessee had raised several additional grounds of appeal, including:

Jurisdictional challenge — that the Income Tax Officer (International Taxation) Ward-3(2)(1), Mumbai had no authority to pass the assessment order in the absence of any authorization under section 120(4)(b) of the Act or a transfer order under section 127 of the Act.
Faceless assessment violation — that the notice under section 143(2) was issued by the Assistant/Deputy Commissioner of Income Tax (International Taxation), Circle-1(1)(1), Delhi, in violation of section 144B of the Act, which mandates faceless conduct of assessments.
Limitation challenge — that the final assessment order dated 15.07.2025 was passed beyond the time limit prescribed under section 153(1) of the Act, rendering it time-barred.
Reliance on judicial precedents — including CIT v. Roca Bathroom Products (P.) Ltd. [2022] 445 ITR 537 (Madras) and Shelf Drilling Ron Tappmeyer Ltd. v. ACIT [2023] 457 ITR 161 (Bombay).

However, the ld. Counsel for the assessee, on instructions, confirmed that grounds relating to the assessment order being time-barred and the question of JAO versus FAO jurisdiction were not being pressed. These grounds were accordingly dismissed as not pressed. The ITAT confined its adjudication to the substantive grounds concerning the disallowed expenses.

Issue 1: Deductibility of Proportionate IPO Expenses Under Section 48(i)

Nature of the Transaction

Metro Brands Limited conducted its IPO, which comprised both a fresh issue of 59,00,000 equity shares by the company and an Offer for Sale (OFS) of 2,14,50,100 equity shares by the existing promoters/shareholders. Ms. Zarah Rafique Malik, as one of the selling shareholders, offered 28,09,000 equity shares through the OFS route.

ITAT Mumbai Allows IPO Expenses as Deduction Under Section 48(i) for OFS Selling Shareholders