Case Law Details
Brief of the Case
Bombay High Court held In the case of CIT vs. Mrs. Hemal Raju Shete that as per agreement, the deferred consideration is payable over a period of four years and the formula prescribed in the agreement itself makes it clear that the deferred consideration to be received by the assessee in the four years would be dependent upon the profits made by M/s. Unisol in each of the years. Thus in case M/s. Unisol does not make net profit in terms of the formula for the year under consideration then no amount would be payable to the assessee as deferred consideration. The consideration of Rs.20 crores is not an assured consideration to be received. It is only the maximum that could be received. Therefore it is not a case where any consideration out of Rs.20 crores or part thereof has been received or has accrued to the assessee. Also the assessee has offered, amount received in subsequent years as taxable income of those years. Hence contingent deferred consideration cannot be tax in the assessment year 2006-07 itself.
Facts of the Case
The assessee filed her return of income for the assessment year 2006-07 declaring total income of Rs.11,68,470/-. The respondent-assessee had also shown the long term capital gain of Rs.42,38,674/- arising out of the sale of 75,000 shares of M/s. Unisol Infraservices Ltd. (M/s. Unisol) to one M/s.Radha Krishna Hospitality Services (P) Ltd. (RKHS) in terms of agreement dated 25th January, 2006. The Assessing Officer on perusal of the agreement dated 25th January, 2006 was of the view that under the agreement, the assessee as well as other co-owners (Shete family) of M/s. Unisol were to receive in aggregate a sum of Rs.20 crores and proceeded to tax entire amount of Rs.20 crores in the subject assessment year in the hands of all co-owners of shares. This resulted in the respondent-assessee being taxed on her share of capital gains at Rs.4.48 crores after availing exemption under Section 54EC.
Contention of the Revenue
The ld counsel of the revenue submitted that in terms of section 45(1) of the Act that transfer of capital asset would attract the capital gains tax. It is further submitted that the amount to be taxed under section 45(1) is not dependent upon the receipt of the consideration. In support of the above he invites our attention to Section 45(1)(A) and section 45(5) of the Act which in contrast brings to tax capital gains on amount received. In the above view, it is his submission that the Assessing Officer was justified in bringing to tax entire amount of the respondent assessee’s share in Rs.20 crores referred to in the agreement dated 25th January, 2006 as maximum amount that could be received on the sale of shares in M/s. Unisol by its co-owners from M/s. RKHS.
Held by CIT (A)
The CIT (A) deleted the addition of Rs.4.48 crores made by the Assessing Officer on the ground that it is notional. The CIT (A) on examination of the agreement dated 25th January, 2006 noted that in terms of the agreement the assessee along with other co-owners of the shares of M/s.Unisol were to receive Rs.2.70 crores as initial consideration. The assessee had offered her share out of Rs.2.70 crores received as initial consideration to tax in her return of income for the subject assessment year.
Further CIT (A) concluded that the amount of Rs.20 crores is the maximum amount that could be received by all co-owners under the agreement from M/s. RKHS. However, on working of the formula there was no guarantee that this amount or for that matter any amount would be received as was evident from the immediate succeeding assessment year i.e. assessment year 2006-07 when no amount was received as deferred consideration. In fact in terms of formula the amount to be received as deferred consideration was contingent upon the performance of M/s. Unisol in the succeeding assessment year. In the above view, he concluded that no amount of the deferred consideration can be brought to tax in the subject assessment year either on receipt basis or on accrual basis.
Held by ITAT
The ITAT upheld the order of CIT (A). It was held that there is no certainty of receiving any amount as deferred consideration, the bringing to tax the maximum amount of Rs. 20 crores provided as a cap on the consideration in the agreement dated 25th January, 2006 is not tenable. The Tribunal further held that what amount has to be brought to tax is the amount which has been received and/or accrued to the respondent-assessee and not any notional or hypothetical income as the revenue is seeking to tax the respondent-assessee in the subject assessment year 2006-07.
Held by High Court
High Court held that as per agreement the deferred consideration is payable over a period of four years i.e. 2006-07, 2007-08, 2008-09 and 2009-10. Further the formula prescribed in the agreement itself makes it clear that the deferred consideration to be received by the assessee in the four years would be dependent upon the profits made by M/s. Unisol in each of the years. Thus in case M/s. Unisol does not make net profit in terms of the formula for the year under consideration for payment of deferred consideration then no amount would be payable to the assessee as deferred consideration. The consideration of Rs.20 crores is not an assured consideration to be received by the Shete family. It is only the maximum that could be received. Therefore it is not a case where any consideration out of Rs.20 crores or part thereof (after reducing Rs.2.70 crores) has been received or has accrued to the assessee.
In this case, all the co-owners of the shares of M/s.Unisol have no right in the subject assessment year to receive Rs.20 crores but that is the maximum which could be received by them. This amount which could be received as deferred consideration is dependent/contingent upon certain uncertain events, therefore, it cannot be said to have accrued to the respondent-assessee. The Tribunal in the impugned order has correctly held that what has to be taxed is the amount received or accrued and not any notional or hypothetical income. Further in the case of K.P. Varghese vs. Income-Tax Officer, Ernakulam & Anr. 181 ITR Page 597, the apex court held that one has to read capital gain provision along with computation provision and the starting point of the computation is the full value of the consideration received or accruing. In this case the amount of Rs.20 crores is neither received nor has it accrued to the 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. In the above view there could be no occasion to bring the maximum amount of Rs. 20 crores, which could be received as deferred consideration to tax in the subject assessment year as it had not accrued to the assessee.
Accordingly appeal of the revenue dismissed.
