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TMI Blog2021 (9) TMI 163X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - T.C.A.No.1112 of 2010 - - - Dated:- 24-8-2021 - Honourable Mr.Justice T.S.Sivagnanam And Honourable Mr.Justice Sathi Kumar Sukumara Kurup For the Appellant : Mr.Vikram Vijayaraghavan For the Respondent : Mr.T.Ravikumar Senior Standing Counsel JUDGMENT T.S.SIVAGNANAM, J. This appeal, by the appellant/assessee, filed under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act ), is dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of the fact that an amount of ₹ 325 lakhs was kept in an Escrow account to meet any contingent liabilities. After taking note of the said submission, the Assessing Officer observed that it is true that an amount of ₹ 325 lakhs was kept in an Escrow account, however the total sale consideration for sale of the undertaking as per the agreement is ₹ 31.14 Crores and an amount of ₹ 325 lakhs which was kept in an Escrow account pursuant to the assessee agreed to the same would only constitute an application of its income and the whole consideration has accrued to the assessee immediately on the execution of the agreement for sale and since the total consideration has accrued to the assessee in the year of sale, namely, during the assessment year 2003-04, the same has to be offered in full for tax in the said assessment year itself and the fact that part of it is kept in Escrow account has not been received during the year is not relevant for such purpose. Accordingly, the capital gain was recomputed and the assessment was concluded. 5.Aggrieved by such order, the assessee preferred appeal before the Commissioner of Income Tax (Appeals)-III[CIT(A)], Chenn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. Referring to Section 50B of the Act, it was pointed out that it is a special provision for computation of capital gains in case of slump sale and net worth of undertaking is deemed to be the cost of acquisition and the cost of improvement for the purpose of Sections 48 and 49 of the Act as has been specifically provided under subsection (2) of Section 50B of the Act. Further, taking note of Explanation 1 in Section 50B of the Act, wherein, net worth was defined to mean the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account. After noting the statutory provision, the Tribunal held that it is not the case of the assessee that the value of its assets or liabilities for the purpose of cost of acquisition or cost of improvement taken is not in accordance with the books of account of the assessee. 8.Further, it was held that the monies kept in the Escrow account are for meeting out the claims that may arise on a future date and that the interest which accrued on the sums retained in the Escrow account have been agreed to be belonging to the seller, i.e. the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the Second Supplementary Agreement dated 18.10.2003 and in particular, Clause J, wherein there is a reference to a charge of theft of electricity and a demand raised by the Kerala State Electricity Board to the tune of ₹ 21,645,024/- from the purchaser of the asset. Further, the learned counsel has referred to Clause 14 of the Agreement which speaks about as to how the Escrow Agent has to be notified qua the claim made by the Kerala State Electricity Board. With regard to computation of amount of indemnity, the learned counsel has referred to Schedule 1 of the agreement and to point out that as to what was the liability to the Kerala State Electricity Board before the closing date, i.e. 17.04.2002 and after the closing date. These facts were referred to buttress his submission that the intention behind the parties agreeing to retain a certain sum in Escrow account is to meet the liabilities which may be fastened on to the purchaser on conclusion of the sale transaction. Therefore, it is contended that the amount of ₹ 325 lakhs which was retained in Escrow account was not received by the assessee during the assessment year under consideration nor it accrued in favou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ground, the learned counsel sought for sustaining the order of the CIT(A) by setting aside the order passed by the Tribunal. 11.Mr.T.Ravikumar, learned senior standing counsel appearing for the respondent/revenue submitted that the order passed by the Tribunal is a well considered order, wherein, the factual aspects were thoroughtly analysed and it was clearly brought out by the Tribunal on facts that the retention money which was retained in the Escrow account had accrued in favour of the assessee in the year under consideration. In this regard, the learned counsel has drawn our attention to the ground of appeal filed by the revenue before the Tribunal and it was pointed out that the entire amount of ₹ 325 lakhs which was retained in the Escrow account has been received by the assessee and offered for taxation and no deduction towards claims/warranties from the amount can kept in Escrow account was made as this important factual aspect goes to the root of the matter and it will clearly establish that the said amount accrued in favour of the assessee during the year under consideration and therefore, the finding of the Tribunal is legal and valid. 12.The learned couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other payments to the seller with respect to the liabilities for any taxes or levies whatsoever which may be assessed against the income or profit realised by the seller as a result of the transaction. The learned counsel has also referred to Clause 6.2 which speaks of the Retention money, Clause 17.1 which speaks with Non- Competition, Clause 23.1 which deals with Taxation. Further, the learned counsel has referred to Schedule 1 of the Agreement which deals with Seller's Warranties and in particular, to Clause 4.2 which deals with Possession and states that the seller has sole and exclusive possession of the property and there is no claim of adverse possession which could be made by any person and also Clause 10 which deals with Litigation. Therefore, it is submitted that the facts clearly demonstrate that the amount retained in the Escrow account which is a subsequent arrangement between the parties can have no impact of the purpose of computation of capital gains on the total sale consideration fixed under the Business Sale Agreement. 15.In support of his contention, the learned senior standing counsel placed reliance on the decision of the Hon'ble Supreme Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te clause has been mentioned as Clause 6.2 which deals with Retention money. The parties agreed that a sum of ₹ 32,500,000/- shall be held in the retention account on the terms and conditions provided in the Agreement and the Retention Account Agreement. The interest accrued on the retention sum shall belong to the seller and shall be paid to the seller as per the Retention Account Agreement. 19.In Clause 15, the parties have agreed as to for what purpose the retention sum has been retained and to what sums it would be used to indemnify the transaction. Clause 15.1 states that the retention sum shall be paid by the purchaser in the Retention Account at the closing date for the purpose of ensuring that sufficient funds will be available to indemnify the purchaser against any damages or losses arising from or any of the following, namely, (1) Indemnification for Breach of Warranty; (2) Indemnification for other losses; (3) Unpaid Accounts Receivables and (4) Pursuant to other obligations to pay or reimburse the Purchaser as provided in the Agreement. 20.Admittedly, in none of the four heads the indemnification had to be extended and it is not in dispute that the entire am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the dispute being real and substantial, the assessee was not permitted to withdraw the amount deposited by the State Government without furnishing security bond for refunding the amount in the event of the appeal being allowed. Therefore, it was held that there was no absolute right to receive the amount at that stage. 22.The said decision, in our considered view, would not render assistance to the assessee as the terms and conditions of the Business Sale Agreement are vivid and clear. The total sale consideration being the full and final payment has been clearly mentioned. After fixing the sale consideration to be full and final, the parties mutually agreed to retain a specified quantum of money in an Escrow account to meet any one of the exigencies as mentioned in Clause 15 of the Agreement. Therefore, for all purposes the entire sale consideration had accrued in favour of the assessee during the year under consideration and admittedly, possession of the asset was also handed over to the assessee. Apart from that, from the sum of ₹ 3.25 Crores which was retained in the Escrow account, no deductions were made from the said account and the entire amount has been recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of this case. 26.In N.M.A.Mohammed Haniffa , the term full value of consideration was explained and it was pointed out that the said term clearly indicates that what is required to be taken note of is the total consideration received for the transfer and in this context, the term 'total' and 'full value' would have the same meaning, the consideration may be received or it may accrue as a result of transfer. Further, it was pointed that the word 'received' does not necessarily connote the actual receipt of the cash into the hands of the assessee-transferor. Further, if the transferor instead of receiving the full value himself and thereafter discharge the mortgage to which the property has been made subject, allows the transferee to retain and apply part of the total consideration to effect such discharge, such discharge by the vendee is on behalf of the vendor and the payment of money to the mortgagee is from out of the moneys payable by the vendee to the vendor and the amount so applied for discharge of the mortgage forms part of the total consideration irrespective of whether the vendee or the vendor discharges the mortgage. 27.In George Hend ..... X X X X Extracts X X X X X X X X Extracts X X X X
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