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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 ..... o account for the purpose of computation of Capital Gains?" 3.The assessee Company engaged in the manufacture and sale of Abrasives, Refractories and Electrominerals, etc. filed their return of income for the assessment year under consider, AY 2003-04 admitting an income of Rs. 36,38,36,539/-. The return was processed under Section 143(1) of the Act and subsequently selected for scrutiny by issue of notice under Section 143(2) of the Act dated 14.10.2004. There were several issues which were discussed by the Assessing Officer with the authorized representative of the assessee and in the case on hand, we are concerned about the issue pertaining to the slump sale of Electrocast Refractories Plant at Palghat. The Assessing Officer has dealt with this issue in paragraph No.6 of the assessment order dated 28.02.2006. It is stated that during April 2002, the Electrocast Refractories Plant located at Palghat belonging to the assessee was sold for a total consideration of Rs. 31.146 Crores to M/s.SEPR Refractories (I) Ltd. [hereinafter referred to as "SEPR"]. The assessee had returned a long term capital gain of Rs. 235,781,805/- on the said transaction. The Assessing Officer noted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount has been subsequently received by the assessee after the stipulated period of agreement, the said amount has been offered to tax by the assessee under the head capital gains in the year of its receipt and therefore, the Assessing Officer was not justified to tax the said amount in the year under consideration. With this observation, the CIT(A) directed the Assessing Officer to delete the addition of Rs. 3.25 Crores pertaining to the said amount kept in Escrow account. 6.Aggrieved by such order, the revenue preferred an appeal before the Tribunal contending that the amount kept in Escrow account would represent application of income and the said amount is only a formality and this will be clear from the return of income filed by the assessee for the subsequent year wherein the entire amount of Rs. 3.25 Crores had been received and offered for taxation and no deduction towards claims/warranties from the amount kept in Escrow account was made. There were other grounds raised on other issues which we are not concerned in this appeal. 7.The Tribunal after elaborately considering the submissions made on either side and the covenants and conditions contained in the Business Sale A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gument of the assesee that the entire sale consideration is not received in the year of consideration and as such cannot be deemed as income of the year under consideration under the head "capital gains", was also considered by the Tribunal and held that it is sufficient if in the relevant year profits have arisen out of sale of capital assets, that is, to say when the assessee had a right to receive the profits in the year of consideration before us, it would attract liability to tax on capital gains under the Act. Further, it held that it was not necessary that the whole amount of lump sum consideration should have been received by the assessee in the previous year relevant to the assessment year under consideration out of the sale of its undertaking and whatever the parties did subsequent to that year, will have no barring on the liability to tax as deemed income of the year under consideration. In support of such conclusion, reliance was placed on the decision of this Court in the case of T.V.Sundaram and Sons Ltd. vs. CIT [(1959) 37 ITR 26 (Mad)]. The decisions which were referred to by the assessee were distinguished on facts. Ultimately, it was held that the CIT(A) erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Commissioner of Income Tax vs. Hindustan Housing & Land Development Trust Ltd. [(1986) 161 ITR 0524] for the same proposition. Reliance was placed on the decision of this Court in the case of PNP Power Generating Company Private Ltd. vs. Commissioner of Income Tax (appeals)-III [T.C.A.Nos.60 and 61 of 2018 dated 03.09.2020] with regard to the alternate submission on account of the fact that in the subsequent year the amount has been offered for taxation and it is submitted by the learned counsel for the appellant that the appellant would pray to sustain the main argument instead of the alternate submission. In support of the contention that the sum of Rs. 325 lakhs would never accrue to the assessee during the year under consideration, reliance was placed on the decision of the High Court of Gujarat in Anup Engineering Ltd. vs. Commissioner of Income Tax [(2001) 247 ITR 0457]. With regard to as to how retention money withheld by the Contractee has to be construed, the learned counsel relied on the decision of the High Court of Bombay in Commissioner of Income Tax vs. Associated Cables (P) Ltd. [(2006) 286 ITR 0596], wherein the decision of the Hon'ble Division B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the consideration received. 13.Referring to Clause 2.37 of the Business Sale Agreement dated 07.11.2001 which defines 'Purchase Price', it is submitted that the definition is very clear that the value of the assets and the Net Working Capital shall be considered full and final consideration. The learned counsel also referred to Clauses 3.1.1, 3.1.4, 5.1 and 5.2 of the Agreement to substantiate the contention raised on behalf of the revenue. Laying emphasis on Clause 5.2 of the Agreement which deals with 'Liabilities', it is submitted that all liabilities whether ascertained as of the closing date or contingent, potential or disputed including but not limited to all provisions and funds for payment of tax liabilities and employee retirement funds, other employee liabilities and any claims by customers or third parties for allegedly defective products, etc. from the operation of the business on or before the closing date shall be borne solely by the seller. Therefore, it is submitted that Clause 5.2 of the Business Sale Agreement clearly shows that all expenses after the closing date whether it is contingent, potential or disputed has to be borne solely by the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this Court in D.Zeenath vs. Income Tax Officer [(2019) 413 ITR 0258 (Mad)]. On the above ground, the learned senior standing counsel sought for sustaining the order passed by the Tribunal. 16.In reply, Mr.Vikram Vijayaraghavan, learned counsel for the appellant submitted that all the decisions relied on by the revenue are all pertaining to cases relating to mortgage and the terms and conditions of the Agreement between the assessee and the purchaser will clearly show that the retention money was neither received nor agreed in favour of the assessee in the assessment year under consideration. 17.We have heard the learned counsel for the parties and carefully perused the materials placed on record. 18.The controversy which has led to the present appeal emanates from the Business Sale Agreement dated 07.11.2001 entered into between the assessee and the SEPR. The said agreement was for selling of right, title and interest in the FCR business carried out in the factory at Palghat to the purchaser for a lump sum consideration. Clause 2.37 of the Agreement defines 'Purchaser Price' to mean the amount paid by the purchaser to the seller in consideration for the business which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as to whether the entire amount of Rs. 3.25 Crores has been received by the assessee without any deduction and offered for taxation. But the CIT(A) solely proceeds on the basis that the Escrow account has been opened and amount has been retained as retention money to be utilized by the purchaser for indemnification for breach of warranty or any other losses. As noticed above there were four heads under which the retention money would be used to indemnify against losses and admittedly on none of the four heads there was any payment which was required to be made. The CIT(A) concluded that the retention sum retained in the Escrow account had not accrued to the assessee in the year under consideration. 21.In the case of Hindustan Housing & Land Development Trust Ltd. relied on by the assessee, the question was whether the revenue can claim that the sum payable to the assessee as compensation can be said to have accrued to it as income during the previous year ended 31st march, 1956, relevant to the assessment year 1956-57. The meaning of the words 'arising or accruing' was considered and explained to mean that they describe a right to receive profits and that there must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of this case as it is not in dispute that the entire consideration had accrued to the assessee and out of the same by agreement between the parties a specified amount was retained in the Escrow account which would mean that the account is operatable only with the consent and consensus of both parties. This can in no manner be construed to take the case of the assessee outside the purview of accrual of the sale consideration in favour of the assessee during the assessment year under consideration. 24.The decision in Ignified Boilers (I) Ltd. was a case where the contract between the parties had a specific clause that 10% of the contract price would be retained by the principal contractor and it would be paid after one month subject to the satisfactory performance of the boilers. Such is not the facts in the case on hand as the Business Sale Agreement clearly specified that full and total sale consideration is payable and subsequent conduct of the parties in earmarking a particular sum of money in an Escrow account cannot change the facts and circumstances of the case. 25.The decision in the case of Amarshiv Construction Pvt. Ltd., wherein it was held that the retenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48 of the Act. 29.Therefore, the above decisions relied on by the revenue will clearly explain that the 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 of the Act. As already pointed out, the assessee has received the entire amount of Rs. 325,000,000/- without any deduction. Even going by the case as projected by the assessee, the amount of Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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