Sale of a subsidiary - Retention of money in an
escrow to meet future liabilities - whether consideration will include the
escrow amount as well for capital gains taxation
Facts:
Assessee sold their wholly owned subsidiary Modi Tyre
Company Ltd. (MTCL) to Continental India Ltd. (CIL) on 15th July,
2011 for a total agreed consideration of ₹117,61,90,000/ - on the basis
of a share purchase agreement (SPA). Out of the consideration of Rs. 117.61
crores a sum of Rs. 25.48 crores was retained in a Escrow account (EA) with an
Escrow agent (Yes Bank) in an interest yielding fixed deposit account. Assessee
filed his return offering Rs. 38.55 crores (117.61 less 79.06 as cost of
acquisition/net worth) as long term capital gains. Subsequently without filing
any revised return they made submissions to AO with a revised capital gain of
Rs. 13.07 crores. In short the difference in reducing the capital gains at the
time of assessment was that the escrow account amount was not part of the sale
consideration as assessee did not "receive" the same. The escrow
condition was that the amount standing thereto would be payable to the assessee
at the end of 2/4/8 years depending on certain liabilities and their quantum
devolvement. The escrow was to be operated by both parties. Subsequently in assessment
year 2014-15 Rs. 1.91 crore was received by the assessee from the escrow which
was offered to tax and the interest was also offered therin to tax in the
subsequent years. The plea of the revision of the capital gains to lower
quantum to the value of the escrow of Rs. 25.48 crores was not relished by the
AO/CIT(A) who rejected the same holding that the assessee was in receipt of a
consideration as per a SPA and the escrow was only an application of income.
There was no provision in section 48 to accommodate future cost of liabilities
in the cost of acquisition or costs incurred in relation to transfer under the
Income tax law was revenue's argument. This was bereft the fact that the
assessee pleaded in the subsequent developments the buyer Continental India
Limited (CIL) has slapped them with liabilities more than the escrow
amounts and that they might never receive any amount henceforth and if at all
they receive any amount with interest the same will be offered to tax on an
actual receipt basis. Thus the logic of taxing capital gains on due basis of
the escrow amount was incorrect was the moot point of the assessee. On
higher appeal -
Held in favour of the assessee that the escrow did not
accrue to them and on facts if anything gets paid they will offer the same to
income in the future years with interest accretions as well. What does not
accrue to assessee cannot be taxed on real income principles. Thus held the
ITAT.
Applied:
Dinesh Vazirani v. Pr.CIT (2022) 445 ITR 110 (Bom-HC) :
2022 TaxPub(DT) 2768 (Bom-HC)
CIT v. M/s. M.L. Raju Shete, (2016) 239 Taxman 176 (Bom-HC)
: 2016 TaxPub(DT) 2102 (Bom-HC)
CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144
(SC) : 1962 TaxPub(DT) 0307 (SC) for real income
principles
Dissented:
Caborandum Universal Ltd. v. ACIT (2021) 283 Taxman 312
(Mad.) : 2021 TaxPub(DT) 4727 (Mad-HC)
Ed. Note: The
decision does not address the issue under which section the subsequent receipts
will be taxed. Interest might be as income from other sources but with no
transfer in subsequent years if amounts are received can the same be subjected
to tax under capital gains remains to be seen. Perhaps a stand might be taken
as enhanced compensation on compulsory acquisition could be applied here. Can
such a provision be read into Section 50B or for simple capital gains taxation
it needs to be seen. Consider it otherwise an assessee postponing the
consideration will obviously be taxed under the same head either on accrual or
on receipt basis on protective assessment. This eventual reading might also be
applied here.
As for diversion of income by overriding title v.
application of income point, in Carborundum case escrow was for warranties with
exclusivity of operation, here it was for statutory liabilities with dual
control of operation perhaps this clinched the case in favour of the assessee.
Eventually an assessee cannot be called upon to pay tax out
of capital. This will be incorrect if real income principles are not applied.
Case: Modi Rubber
Ltd. v. Dy. CIT 2024 TaxPub(DT) 807 (Del-Trib)