Assessee-Company, engaged in manufacture, selling and trading of automotive tyres, tubes and flaps, filed the return of income for AY 2012-13 declaring income of Rs. 12.62 Cr. Assessee entered into a share purchase agreement, and sold its shareholding in the wholly owned subsidiary, Modi Tyre Company Ltd (“MTCL”) to Continental India Ltd (“CIL”) for the consideration of Rs. 117.61 Cr. Out of the said total consideration, an amount of Rs. 25.48 Cr was kept aside in Escrow with Escrow Agent, Yes Bank, and an escrow agreement was entered into between the parties. During the course of scrutiny, assessee filed a revised computation of income and sought to revise the sale consideration to Rs. 92.13 Cr by reducing escrow amount kept aside from the gross sale consideration of Rs. 117.61, for the purposes of determination of capital gains.
Revenue declined assessee’s revised claim of lower LTCG. Revenue also made a disallowance of Rs. 1.03 Cr under Section 14A and also made addition to assessee’s book profit under Section 115JB towards such disallowance. CIT(A) affirmed the assessment order and confirmed rejection of assessee’s claim for reduction of sale consideration.
Aggrieved by the order of revenue, assessee preferred the present appeal.
Delhi ITAT allows exclusion of escrow deposits from the full value of consideration for computing capital gain for assessee on the sale of shareholding in its wholly owned subsidiary to Continental India (purchaser). ITAT observes that the recovery of the escrow amount is unlikely since the claims raised by the purchaser are higher than the amount lying in the escrow account, thus, opines “While the amount retained in escrow forms part of agreed consideration, such amount do not necessarily form part of ‘full value of consideration received or accruing’ as result of transfer of capital asset”.
Delhi ITAT further observes that a part of sale consideration (Rs. 25.48 Cr) towards sale of shareholding in the wholly owned subsidiary by the assessee was set apart in escrow account for unforeseen contingencies, however, the assessee only received Rs. 1.91 Cr till now, thus sought revision/exclusion of the remaining amount (Rs. 23.56 Cr) from the sale consideration for the purposes of determination of capital gains.
Further Delhi ITAT notes that the realisation of residual principal amount in escrow amount is neither received nor likely to be received in view of claims of Rs.78.94 Cr being raised by the purchaser against the amount lying in the escrow account. Reliance was placed on the judgment of the Bombay HC in Dinesh Vazirani wherein the capital gain was computed only on the net amount received after deducting the escrow amount since the claims of liabilities were more than the balance in the escrow account and the contrary Madras HC judgment in Carborundum Universal wherein the entire sale consideration including the amount placed in escrow was taxed in the year of transfer itself since the amount placed in the escrow account was realised in full subsequently. Delhi ITAT opines that facts in the present case are identical to the facts in Bombay HC judgment in Dinesh Vazirani and differs from the facts in Madras HC judgment in Carborundum Universal and hence states that, “the taxability of amount retained in escrow account which is neither received nor likely to be received is contrary to position of law enunciated in s. 45 rws s. 48”.
Further, Delhi ITAT takes note of assessee’s undertaking that amount recovered out of escrow account in the later years shall be offered to tax in the respective years of receipt or accrual and states, “AO while giving effect to this order may seek suitable indemnification and other safeguards to ensure taxation of escrow amount, as and when recovered.”
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