2016 (4) TMI 1082 - HC - Income Tax

Mode of offering capital gains for tax on receipt basis - Held that - In this case the amount of ₹ 20 crores is neither received nor it has accrued to the respondent-assessee during the subject assessment year. We are informed that for the subsequent assessment year (save Assessment Year 2007-08 for which there is no deferred consideration on application of formula), the Assessee has offered to tax the amounts which have been received on the application of formula provided in the agreement dated 25th January, 2006 pertaining to the transfer of shares. The contention of the Revenue that the impugned order is seeking to tax the amount on receipt basis by not having brought it to tax in the subject assessment year, is not correct. This for the reason, that the amounts to be received as deferred consideration under the agreement could not be subjected to tax in the assessment year 2006-07 as the same has not accrued during the year. As pointed out above, accrual would be a right to receive the amount and the respondent-assessee alongwith its co-owners have not under the agreement dated 25th January, 2006 obtained a right to receive ₹ 20 crores or any specified part thereof in the subject assessment year. In the above view there could be no occasion to bring the maximum amount of ₹ 20 crores, which could be received as deferred consideration to tax in the subject assessment year as it had not accrued to the respondent-assessee.We find that both the Commissioner of Income-Tax (Appeals) and the Tribunal have in view of the clear clauses of agreement dated 25th January, 2006 have in the facts of the present case correctly held that the respondent-assessee and the co-owners of the shares did not have a right to receive ₹ 20 crores in the subject assessment year. - Decided against revenue

Summary

Issues Involved:
1. Justification of the Tribunal's decision to uphold the CIT(A)'s order accepting the assessee's mode of offering capital gains for tax on receipt basis.
2. Applicability of Section 45(1) of the Income Tax Act, 1961 concerning the assessment of capital gains.

Issue-wise Detailed Analysis:

1. Justification of the Tribunal's Decision:

The primary issue revolves around whether the Tribunal was justified in upholding the CIT(A)'s order, which accepted the assessee's method of offering capital gains for tax on a receipt basis over various assessment years. The respondent-assessee declared a total income of ?11,68,470 for the assessment year 2006-07, including a long-term capital gain of ?42,38,674 from the sale of shares. The Assessing Officer (AO) taxed the entire amount of ?20 crores, attributing ?4.48 crores to the respondent-assessee after exemptions. However, the CIT(A) deleted this addition, deeming it notional and contingent upon future profits of M/s. Unisol, as per the agreement dated 25th January 2006.

The Tribunal upheld the CIT(A)'s findings, stating that the ?20 crores was a maximum cap and not an assured amount. The deferred consideration was contingent on the performance of M/s. Unisol, with no guarantee of receipt. Therefore, the Tribunal concluded that only the amount received or accrued should be taxed, not any hypothetical income.

2. Applicability of Section 45(1) of the Income Tax Act, 1961:

The Revenue argued that under Section 45(1) of the Act, capital gains tax is triggered by the transfer of a capital asset, regardless of receipt. The AO's decision to tax the entire ?20 crores was based on this interpretation. However, the Tribunal and CIT(A) found that the deferred consideration was not guaranteed and depended on future profits. The agreement outlined that the deferred consideration was payable over four years and contingent on M/s. Unisol's net profits.

The Tribunal's analysis, supported by Supreme Court judgments, emphasized that income must accrue or be received to be taxable. In this case, the ?20 crores was neither received nor accrued in the assessment year 2006-07. The Tribunal cited precedents like Morvi Industries Ltd. vs. CIT and E.D. Sassoon & Co. Ltd. vs. CIT to reinforce that income accrues when it becomes due and a right to receive it is established. The Tribunal concluded that the ?20 crores was a contingent amount, not an accrued income, thus not taxable in the assessment year 2006-07.

Conclusion:

The Tribunal and CIT(A) correctly interpreted the agreement and the provisions of the Income Tax Act. They concluded that the ?20 crores was a maximum cap, contingent on future profits, and not an assured or accrued income in the assessment year 2006-07. The appeal was dismissed, affirming that no substantial question of law arose from the Tribunal's decision.