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2021 (9) TMI 163 - HC - Income TaxComputation of Capital Gains - Accrual of receipt - Inclusion of amount (as part of sale consideration) retained in the Escrow Account for meeting liabilities and obligation - HELD THAT - When we examine the Business Sale Agreement, it is not disputed by the parties that the full and final consideration after having agreed upon the full and final consideration, the parties agreed to retain a particular amount of money in an Escrow account which cannot be construed to take away the case of the assessee from the expression 'accrued' occurring in Section 48. Conduct of the assessee and the purchaser in retaining a particular amount of money in the Escrow account cannot take away the amount from the purview of full consideration received/accruing in favour of the assessee for the purpose of computation of capital gains under Section 48. As going by the case as projected by the assessee, the amount of ₹ 3.25 Crores is retained in an Escrow account and the right of the assessee has not been disputed and that amount was retained to cover four contingencies which are part of the indemnity clause and assuming certain payoffs were to be made from the retention money that will not in any manner alter the full and total consideration received by the assessee pursuant to the Business Sale Agreement and if such is the factual position, undoubtedly, the entire sale consideration had accrued in favour of the assessee during the assessment year under consideration. Even assuming that certain payments have been made from the amount retained in the Escrow account, it will not make or in any manner reduce the cost of acquisition.Tribunal was right in allowing the appeal filed by the revenue and set aside the order passed by the CIT(A). - Decided against assessee.
Issues Involved:
1. Whether the amount retained in the Escrow Account for meeting liabilities and obligations should be considered for the computation of Capital Gains in the assessment year 2003-04. Detailed Analysis: 1. Background and Substantial Question of Law: The appeal was filed under Section 260A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal (Tribunal) concerning the assessment year 2003-04. The substantial question of law was whether the Tribunal was right in holding that a portion of the sale consideration retained in the Escrow Account for meeting liabilities and obligations had accrued to the assessee in the assessment year and should be included for the computation of Capital Gains. 2. Facts of the Case: The assessee company, engaged in the manufacture and sale of Abrasives, Refractories, and Electrominerals, filed its return of income for AY 2003-04, admitting an income of ?36,38,36,539. The return was processed and selected for scrutiny. The issue in question pertained to the slump sale of the Electrocast Refractories Plant at Palghat sold for ?31.146 Crores to SEPR Refractories (I) Ltd. The assessee considered only ?27.89 Crores for capital gains computation, excluding ?3.25 Crores retained in an Escrow account to meet contingent liabilities. 3. Assessing Officer's Decision: The Assessing Officer (AO) noted that the total sale consideration was ?31.14 Crores and issued a show cause notice to the assessee for not including the entire amount in the capital gains computation. The AO concluded that the entire sale consideration accrued to the assessee upon executing the sale agreement and should be taxed in the assessment year 2003-04, regardless of the amount retained in the Escrow account. 4. Commissioner of Income Tax (Appeals) Decision: The CIT(A) held that the amount retained in the Escrow account had not accrued to the assessee in the assessment year 2003-04. The CIT(A) opined that since the amount was subsequently received by the assessee after the stipulated period, it should be taxed in the year of receipt, not in the year of sale. 5. Tribunal's Decision: The Tribunal, after considering the submissions and the Business Sale Agreement, held that the transfer of the asset took place during the assessment year 2003-04. The Tribunal noted that the Business Sale Agreement provided legally enforceable rights to the parties, and the assessee had a right to receive the lump sum consideration upon effecting the sale. The Tribunal stated that the retention money in the Escrow account did not change the agreed lump sum sale consideration. The Tribunal relied on Section 50B of the Act, which deals with the computation of capital gains in the case of slump sales, and held that the entire sale consideration accrued to the assessee in the year of transfer, AY 2003-04. 6. Assessee's Arguments: The assessee argued that the retention money in the Escrow account was meant to meet contingent liabilities and should not be considered as accrued income in the assessment year 2003-04. The assessee relied on several judicial decisions to support the contention that the amount set apart to meet contingent liabilities does not accrue as income. 7. Revenue's Arguments: The revenue contended that the entire sale consideration accrued to the assessee in the assessment year 2003-04, and the retention money in the Escrow account was merely an application of income. The revenue emphasized that the subsequent receipt of the amount without any deductions indicated that the entire sale consideration had accrued in the year of sale. 8. Court's Analysis and Conclusion: The Court examined the Business Sale Agreement and noted that the full and final consideration was ?325,000,000/-. The retention money in the Escrow account was to indemnify against specific contingencies, which did not materialize. The Court held that the entire sale consideration accrued to the assessee in the assessment year 2003-04, and the retention in the Escrow account did not alter this fact. The Court concluded that the Tribunal was right in allowing the revenue's appeal and restoring the AO's order. 9. Final Judgment: The tax case appeal filed by the appellant-assessee was dismissed, and the substantial question of law was answered against the assessee. The Tribunal's decision to include the retention money in the capital gains computation for the assessment year 2003-04 was upheld.
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