2022 (4) TMI 746 - HC - Income Tax

Revision u/s 264 - Refund of excess tax paid - computation of capital gain - Assessment completed taxing the capital gains at higher amount on the basis of sale consideration and without reducing the consideration - HELD THAT - In the present case, the real income (capital gain) can be computed only by taking into account the real sale consideration, i.e., sale consideration after reducing the amount withdrawn from the escrow account. Respondent no.1 has proceeded on an erroneous understanding that the arrangement between the seller and buyer which results in some contingent liability that arises subsequently to the transfer, cannot be reduced from the sale consideration as per Section 48 - We say this because the liability is contemplated in SPA itself and certainly the same should be taken into account to determine the full value of consideration. Therefore, if sale consideration specified in the agreement is along with certain liability, then the full value of consideration for the purpose of computing capital gains under Section 48 of the Act is the consideration specified in the agreement as reduced by the liability. For respondent no.1 to say that from the sale consideration only cost of acquisition, cost of improvement and cost of transfer can be reduced and the subsequent contingent liability does not come within any of the items of the reduction and the same cannot be reduced, is erroneous because full value of consideration under Section 48 would be the amount arrived at after reducing the liabilities from the purchase price mentioned in the agreement. Even if the contingent liability is to be regarded as subsequent event, then also the same ought to be taken into consideration in determining capital gain chargeable under Section 45 of the Act. We do not agree with respondent no.1 that the contingent liability paid out of escrow account does not affect the amount receivable as per the agreement for the purpose of computation of capital gains under Section 48 of the Act. Respondent no.1 has failed to understand or appreciate that the promoters have received only net amount of ₹ 125,00,00,000/- plus ₹ 20,82,95,760/- (₹ 30,00,00,000/- - ₹ 9,17,04,240/-). Such reduced amount should be taken as full value of consideration for computing capital gains under Section 48 of the Act. For respondent no.1 to hold that in the absence of specific provisions by which an assessee can reduce returned income filed by it voluntarily, the same cannot be permitted indirectly by resorting to provisions under Section 264 of the Act, is also erroneous. Certainly, assessee could file revised returned of income within the prescribed period, to reduce the returned income or increase the returned income. Petitioner filed an application under Section 264 because the assessment under Section 143 had been completed by the time the amount of ₹ 9,17,04,240/- was deducted from the escrow account. Section 264 of the Act in our view, has been introduced to factor in such situation because if income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about hypothetical income which does not materialize. Section 264 of the Act does not restrict the scope of power of respondent no.1 to restrict a relief to an assessee only upto the returned income. Where the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income even though an entry that might, in certain circumstances, have been made in the books of account. Therefore, respondent no.1 ought to have directed the Assessing Officer to recompute income as per the provisions of the Act, irrespective of whether the computation results in income being less than returned income. It is the obligation of the revenue to tax an assessee on the income chargeable to tax under the Act and if higher income is offered to tax, then it is the duty of the revenue to compute the correct income and grant the refund of taxes erroneously paid by an assessee. As regards the stand of respondent no.1 that the income returned by petitioner is sacrosanct and cannot be disturbed, the only thing that is sacrosanct is that an assessee can be asked to pay only such amount of tax which is legally due under the Act and nothing more. If returned income shows a higher tax liability than what is actually chargeable under the Act, then the assessee is entitled to refund of excess tax paid by it.We, therefore, quash and set aside the order dated 13th February 2015 passed by respondent no.1. Admittedly, petitioner has paid more capital gains than what should have been paid. Capital gains has to be calculated on the basis of what actual consideration has been received. Certainly, petitioner has not received his proportionate share to the extent from ₹ 9,17,04,240/- that was reduced from the escrow account.In the circumstances we hold that petitioner be entitled to refund of excess tax paid on the excess capital gains shown earlier. Assessing Officer is directed to pass fresh assessment order within 6 weeks from the date this order is uploaded on the basis that the capital gains on the transfer of the shares of the company should be computed after reducing proportionate amount withdrawn from the escrow account from the full value of the consideration and allow the refund of additional tax paid with interest.

Summary

Issues Involved:
1. Computation of capital gains.
2. Validity of reducing the sale consideration by the amount withdrawn from the escrow account.
3. Applicability of Section 264 of the Income Tax Act.
4. Interpretation of Section 48 of the Income Tax Act.
5. Refund of excess tax paid.

Detailed Analysis:

1. Computation of Capital Gains:
The petitioner, a promoter of WMI Cranes Ltd., sold shares under a Share Subscription and Purchase Agreement (SPA) and a second SPA, receiving part of the sale consideration while the rest was held in an escrow account. The issue arose when certain liabilities led to ?9,17,04,240/- being withdrawn from the escrow account, reducing the actual consideration received by the petitioner. The petitioner sought to recompute the capital gains by reducing this amount from the sale consideration.

2. Validity of Reducing the Sale Consideration:
The petitioner argued that the capital gains should be computed by reducing the amount withdrawn from the escrow account. The respondent rejected this, stating that only specific deductions (cost of acquisition, cost of improvement, and cost of transfer) are allowed under Section 48 of the Act. The court found that the respondent failed to understand that the amount withdrawn from the escrow account was neither received nor accrued to the promoters, thus it should not be included in the full value of consideration for computing capital gains.

3. Applicability of Section 264 of the Income Tax Act:
The petitioner applied under Section 264 for recomputation of capital gains after the assessment was completed. The respondent contended that there is no provision to reduce the returned income voluntarily filed by the petitioner. The court disagreed, stating that Section 264 is designed to address such situations where income does not materialize, and the revenue's obligation is to tax the real income earned by the assessee.

4. Interpretation of Section 48 of the Income Tax Act:
The court emphasized that the full value of consideration under Section 48 should be the amount actually received after adjusting for liabilities as per the SPA. The respondent's interpretation, limiting deductions to specific costs, was deemed erroneous. The court cited the Supreme Court's ruling in CIT Vs. Shoorji Vallabhdas and Co., emphasizing that tax is on real income, not hypothetical income.

5. Refund of Excess Tax Paid:
The court held that the petitioner is entitled to a refund of excess tax paid due to the erroneous computation of capital gains. The respondent's reliance on Section 240 to deny the refund was found to be incorrect. The court directed the Assessing Officer to recompute the capital gains, reduce the amount withdrawn from the escrow account, and issue a refund with interest, unless there are other claims against the petitioner.

Conclusion:
The court quashed the respondent's order and directed a fresh assessment, ensuring that the capital gains are computed based on the actual consideration received, thereby entitling the petitioner to a refund of excess tax paid. The petition was disposed of accordingly.