HIGH COURT OF DELHI
Ajay Guliya
v/s.
Assistant Commissioner of Income-tax, New Delhi
IT APPEAL NO. 423 OF 2012
JULY 16, 2012
ORDER
S. Ravindra Bhat, J.
The appellant is aggrieved by an order dated 17.2.2012 of the ITAT by which the revenue’s appeal, against the order of the CIT(A) was allowed.
2. The assessee claims in this appeal the following substantial question of law arises for consideration i.e. “whether the Tribunal fell into error in holding that the amount of Rs. 26,25,000/-, which was yet to be received by the assessee, was subject to tax under the head ‘capital gains’ under Section 45 of the Income Tax Act (‘Act’, for short)”.
3. The brief facts of the case necessary to decide the appeal are that the appellant is a shareholder of one Orion Dialog Pvt. Ltd. It divested its shareholding (1500 shares) in favour of M/s Essar Investments Ltd. through a Share Purchase Agreement (‘SPA’, for short) dated 15.2.2006. The appellant had offered a sale consideration of Rs. 60 lakhs being the price of 1500 shares at Rs. 4,000/- per share. The SPA was concerned with the sale of 20,000 shares of the Orion Dialog of which the appellant held 1500 shares. The total consideration agreed upon in respect of each share of Rs. 5750/- of which Rs. 4000/- became payable on the execution of SPA and the balance was payable over a period of two years.
4. The Assessing Officer by assessment order dated 24.12.2008 held that the entire income accruing to the assessee was reckonable as capital gains. Aggrieved, the appellant approached the Commissioner of Income Tax (Appeals) who by the order dated 5.9.2011 allowed the appeal holding that such part of the consideration which was payable in future did not constitute income for the relevant assessment year and that the assessee would become entitled to it on the fulfillment of certain conditions which could not be predicated. On appeal by the Revenue, the ITAT in its impugned order took into consideration the submissions of both sides and posed the issue under :
“6. We have considered the facts of the case and submissions made before us. The facts of the case in so far as the assessee is concerned are that he transferred 1500 shares of Orion Dialog to Essar Investments Ltd. The overall consideration was Rs. 86.25 lakh. However, in this year a sum of Rs. 60.00 lakh only was received. The balance was to be received in three succeeding years subject to fulfillment of certain conditions by Orion Dialog. In the course of hearing, it has been ascertained that the whole of the cost has been claimed by the assessee while computing capital gains by taking the sale consideration at Rs. 60.00 lakh. The question is whether, the whole of the sale proceeds of Rs. 86.25 lakh or only a sum of Rs. 60.00 lakh is liable to be considered for the purpose of levy of capital gains?”
Before the Tribunal, the assessee relied upon the decision of Advance Ruling Authority in Anurag Jain, In re [2005] 277 ITR 1/145 Taxman 413 (AAR – New Delhi) and the judgment in CIT v. Bharat Petroleum Corpn. Ltd. [1993] 202 ITR 492/68 Taxman 429 (Cal.); CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 (SC). ITAT considered and discussed each one of these decisions in the impugned order in paras 6.6 and 6.9. It held in favour of the revenue reasoning as follows :
“6.1 We may at the first instance examine the statutory provisions contained in sections 45 and 48 in so far as they concern us. Section 45(1) provides that the profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income tax under the head “capital gains”, and shall be deemed to be the income of the year in which transfer takes place. There is no doubt that the transfer of shares has taken place in this year. The agreement has been signed in this year and the shares have been delivered in this year. On prima facie reading of this provision, which is in the nature of charging section, it will be clear that the capital gains are chargeable in the year of transfer as they are deemed to be the income of the previous year in which the transfer takes place. Section 48 regarding “mode of computation” is the machinery provision and the computation under it starts with ascertainment of the full value of consideration received or accruing as a result of the transfer. This provision does not speak of the year of accrual or receipt. This provision has to be read in conjunction with section 45 with clear understanding that it cannot over-ride section 45 implicitly. The reason for lack of the year in latter provision is that all sums accruing or received in connection with transfer are liable to be taxed in the year in which transfer takes place. With these preliminary remarks, we may examine the cases relied upon by the ld. counsel.
6.2 In the case of CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 (SC), the question before the court was-whether, on the facts and in the circumstances of this case, the five annas share of the income of Amrit Chemicals or any part thereof for the year 01.01.1955 to 31.12.1955, accrues to the assessee and whether it could be charged in his hand? At page 45 of the report, it is mentioned that under the Income Tax Act, income is taxable when it accrues, arises or is received, or when it is by fiction deemed to accrue, arise or is deemed to be received. Receipt is not the only test of chargeability to tax; if income accrues or arises it may become liable to tax. For the purpose of this case it is unnecessary to dilate upon the distinction between the income “accruing” and “arising”. But there is no doubt that these two words are used to contra-distinguish the word “received”. Income is said to be received when it reaches the assessee: when the right to receive the income becomes vested in the assessee, it is said to accrue or arise.
6.3 In the case of CIT v. Bharat Petroleum Corporation Ltd. [1993] 202 ITR 492, the main question before the court was-whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs. 44,47,482/- representing additional claim under COPE scheme (realized by the assessee during the relevant previous year by way of adjustment and never refunded to the Government) did not accrue to the assessee during the previous year relevant to assessment year 1975-76? At page no. 500 of the report, it is mentioned that the claim made by the assessee for the additional sum of Rs. 44,47,482/- is a mere claim and the said claim apparently was not in accordance with the clear directive of the Ministry of Petroleum, hence, the said amount cannot be said to have ripened into an income accruing to the assessee during the relevant year. The assessee maintains its account on mercantile basis. The said sum cannot be treated as assessee’s income because during the relevant year the assessee had not acquired any legal right to receive the same. The amount can accrue or arise to the assessee if it acquires a legal right to receive the amount or conversely said amount has become legally due to the assessee from the debtor. Mere raising of a claim or bill does not create any legal enforceable right to receive the same.
6.4 The ld. counsel drew our attention towards the head notes in the case of Anurag Jain (supra). The Authority ruled that – (i) the contingent payments were in substance and reality payments for ensuring performance under the employment agreement to achieve the desired object in exceeding threshold earnings before interest, tax and depreciation allowance, and had no real nexus with the consideration for sale of shares; (ii) the entire capital gain had to be assessed in assessment year 2004-05 as the sum of US$ 2.30 million was received on 01.07.2003; and (ii) the contingent payment had nexus with performance of the assessee for achieving defined target and had connection with not carrying on any activity in relation to any business. The consequence of failure was termination of the agreement coupled with not making further contingent payments as well as refunds of such payments if already received. These contingent payments did not fall u/s 25(va).
6.5 This decision was a matter of writ petition before Hon’ble Madras High Court. The questions before the Hon’ble Court were as under:-
“(i) Whether the gains arising from the transfer of 15,000 equity shares in M/s Vision Health Source India (P) Ltd. covered by the share purchase agreement dated 15th April, 2003 read with exhibits A and B namely which are share purchase agreement and associated employment agreement respectively is chargeable to capital gain taxes or not either wholly or in part ?
(ii) If the aforesaid gains arising from the above transfer is liable to be charged to capital gain tax either wholly or in part, in which year of assessment does the liability to pay capital gain taxes arise for the following amount received/receivable as consideration for the transfer of shares aforesaid, which, in aggregate amounts to 93 lakh US dollars (9.3 million U.S. dollars) termed as purchase price as per clause 1 of the share purchase agreement dated 15th April, 2003?
(i) Initial lump sum payment equal to 23 lakh US dollars (2.3 million US dollars) (referred in the share purchase agreement as the closing payment) received on July 1, 2003 in the previous year relevant to assessment year 2004-05.
(ii) Contingent payment as per clause (1) of the share purchase agreement dated April 15, 2003 (exhibit A) receivable for each of the three years in the following terms:
Having regard to the fact that these amounts, contingent on the existence of the EBITDA, namely earnings before interest-tax depreciation allowance, can be determined only when the EBITDA as per clause (1) of the said share purchase agreement dated April 15, 2003 relating to the three contingent payments as defined in clause (1) therein is computed.
