Caborandum Universal Limited Vs ACIT (Madras High Court)
On facts, when we examine the Business Sale Agreement, it is not disputed by the parties that the full and final consideration is Rs.325,000,000/- 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 of the Act.
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 the amount retained in the Escrow account, it will not make or in any manner reduce the cost of acquisition.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
This appeal, by the appellant/assessee, filed under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), is directed against the order dated 03.06.2009, made in I.T.A.No.594/Mds/2007 on the file of the Income Tax Appellate Tribunal, Chennai Bench (for brevity “the Tribunal”) for the assessment year 2003-04.
2. The appeal was admitted on 24.01.2011 to decide the following substantial question of law:-
“Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that a portion of the sale consideration retained in the Escrow Account for meeting liabilities and obligation has accrued to the assessee in this year and hence should be taken into 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 the assessee has sold the plant at Palghat for a total sale consideration of Rs.31.146 Crores but it has considered only Rs.27.89 Crores as sale consideration for computation of long term capital gain. Therefore, the Assessing Officer issued show cause notice to the assessee calling upon them to explain as to why Rs.31.14 Crores should not be considered for computation of long term capital gains.
4. The assessee by letter dated 04.01.2006 responded by stating that the difference between the consideration taken for computation of capital gains and that for which the plant was sold was on account of the fact that an amount of Rs.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 Rs.325 lakhs was kept in an Escrow account, however the total sale consideration for sale of the undertaking as per the agreement is Rs.31.14 Crores and an amount of Rs.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)], Chennai. The CIT(A) on examination of the fact held that the amount in Escrow account has been utilized by the purchaser to indemnify against breach of warranty or other losses or on account of further litigation as a result of non-compliance to the conditions of the agreement on behalf of the assessee. Therefore, the CIT(A) opined that the sum retained in the Escrow account had not accrued to the assessee in the year under consideration [AY 2003-04]. In other words, the CIT(A) held that the amount of Rs.325 lakhs kept in the Escrow account has neither been received nor accrued by/to the assessee and since the said amount 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 Agreement dated 07.11.2001 held that the transfer of asset took place during the year under consideration [AY 2003-04]; the Business Sale Agreement dated 07.11.2001 had given legally enforceable rights to the parties with respect to the transfer of undertaking and the assessee had a right to receive the lumpsum consideration upon effecting the sale in the previous year relevant to the assessment year 2003-04 and there was effective conveyance of capital asset to the transferee. Further the Tribunal noted that there was no change during the year under consideration. 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 assessee and also to be paid to him as per the instructions in the Escrow account. Thus, the Tribunal held that the assessee always had a right to receive the sums kept in the Escrow account which though were to be quantified after a specified period, it did not change the agreed lump sum sale consideration which stood finalised based on an agreement between the parties. Therefore, the Tribunal held that the quantification of deductions to be made from the sums lying in the Escrow account would not postpone the charge of such income deemed to be taxed in the year of transfer which is the year under consideration, AY 2003-04. The argument 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 reversing the order of the Assessing Officer and accordingly, the decision of the CIT(A) was set aside and the order passed by the Assessing Officer was restored. Aggrieved by the same, the assessee is before us by way of this appeal.
9. Mr.Vikram Vijayaraghavan, learned counsel appearing for the appellant has drawn our attention to the Business Sale Agreement and in particular, covenant No.14 with dealt with indemnities for other losses and covenant No.15 which dealt with retention sum for indemnities. The learned counsel has also drawn our attention 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 Rs.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 Rs.325 lakhs which was retained in Escrow account was not received by the assessee during the assessment year under consideration nor it accrued in favour of the assessee during the assessment year under consideration and therefore, the assessee was justified in not including the same while calculating capital gains.
10. In support of his contention, the learned counsel referred to the decision of the High Court of Bombay in Commissioner of Income Tax vs. Hemal Raju Shete [(2016) 239 Taxman 0176 (Bombay)] and submitted that in the said decision also it was a case where certain amounts were set apart to meet the contingent liability and it was held that the said amount was neither received nor accrued in favour of the assessee. Reliance was placed on the decision of the Hon’ble Supreme Court 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 Bench of this Court in Commissioner of Income Tax vs. Ignified Boilers (I) Ltd. [(2006) 283 ITR 295 (Mad)] was followed. For the same proposition, reliance was placed on the decision of the High Court of Gujarat in the case of Director of Income Tax [International Taxation] vs. Ballast Nedam International [(2013) 215 Taxman 0254 (Gujarat)] and the decision of the High Court of Gujarat in the case of Amarshiv Construction Pvt. Ltd. vs. Deputy Commissioner of Income Tax [(2014) 88 CCH 0229 GujHC. On the above 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 Rs.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 counsel referred to Section 48 of the act which deals with mode of computation and it is submitted that in terms of the said provision, the income chargeable under the head “capital gains” shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset. Laying emphasis on the words “full value” and “received” or “accruing”, it is submitted that either the full value of the consideration has been received by the assessee in the assessment year under consideration or it has accrued alone would be relevant and the subsequent act of the assessee and the purchaser by creating an Escrow account would not change the character 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 seller.
14. Further, the learned counsel has referred to Clause 6.1 of the Agreement which deals with ‘Purchase Price’, where the value of the asset has been mentioned as Rs.325,000,000/- and the said amount shall be considered full and final consideration for the business subject to the Post-Closing Adjustment of Bad Debts and accounts receivable provided in Clause 11.2.1 of the Agreement. Further, the condition also states that the purchaser shall have no obligation to make any 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 the case of Commissioner of Income Tax vs. Attili N.Rao [(2001) 252 ITR 0880(SC)] for the proposition as to what would full price realised would be in the context of computation of capital gains. Reliance was placed on the decision of the Hon’ble Division Bench of this Court in the case of Commissioner of Income Tax vs. N.M.A.Mohammed Haniffa [(2001) 247 ITR 0066], the decision of the Hon’ble Supreme Court in the case of Commissioner of Income Tax and another vs. George Henderson & Co. Ltd. [(1967) 66 ITR 0622 (SC)], the decision of the High Court of Delhi in the case of Commissioner of Income Tax vs. Smt.Nilofer I.Singh [(2009) 309 ITR 0233] and the decision of the Hon’ble Division Bench 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.
