Deferred consideration contingent on uncertain future event cannot be taxed before vesting of right to receive

Brief of the case:

The Hon’ble Bombay High court in the above cited case held that a consideration receivable by the transferor which is contingent on happening of a future event the outcome of which is uncertain and cannot be predicted with a reasonable degree of certainty. Such a consideration cannot be said to have accrued merely on execution of agreement and can be taxed only on the vesting of right on favorable outcome of the event.

Facts of the case:

• The assessee filed here return of income for AY 2006-07 declaring total income of Rs.11,68,470/-. The 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. to one M/s.Radha Krishna Hospitality Services (P) Ltd.(RKHSPL) in terms of agreement dated 25th January, 2006.
• The Assessing Officer on perusal of the said agreement 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 (AY 2006-07) itself in the hands of all co-owners of shares. This resulted in assessee being taxed on her share of capital gains at Rs.4.48 crores after availing exemption under Section54EC of the Act.
• Henceforth, the AO passed an order assessing total income to Rs. 4.60 crores. On appeal to CIT(A) the said addition was deleted on the ground that the assessee had shown her share of initial consideration as received and the balance consideration which is conditional had not been shown because the agreed formula to which such balance consideration had been subjected to may or may not make assessee eligible to claim balance consideration  capped to a maximum of Rs.20
• On appeal before tribunal, tribunal also upheld the findings of CIT(A) holding that as 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 because the same has not accrued to the assessee in so far as the assessee has no right to claim the same.
• Aggrieved revenue is in appeal before High court.

 Contention of the Revenue:

• The learned counsel for the revenue contended that that the amount to be taxed under section 45(1) is not dependent upon the receipt of the consideration and its accrual to assessee is good enough to make it chargeable to tax.
• The agreement providing certain conditions to ultimate flow of consideration to assessee cannot come in way of taxing the same.
  

Held by Hon’ble High Court:

• The High court observed that as per the agreement the deferred/balance consideration is is payable over a period of four years i.e. 2006-07, 2007-08, 2008-09 and 2009-10 to be worked out as per the agreed formula. 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 respondent-assessee as deferred consideration.
• Therefore, it cannot be said that the balance consideration capped to maximum of Rs. 20 crores had accrued to assessee on execution of the agreement because such consideration receivable in future is contingent on some other event thereby not making assessee’s claim certain and absolute.
• HC relied on the case of E.D. Sassoon & Co. Ltd. vs. CIT (1954) 26 ITR 27 wherein the Hon’ble Supreme High court held that income may accrue to an assessee without the actual receipt of the same provided the assessee acquires a right to receive the income.
• In this case all the co-owners of the shares of M/s.Unisol have no right in the AY 2006-07 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 contingent upon certain uncertain events, therefore, it cannot be said to have accrued to the assessee.
• Therefore , the deferred consideration capped to maximum of Rs 20 crores cannot be taxed in AY 2006-07. In result revenue’s appeal was dismissed.