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Tax Publishers Sale of a subsidiary - Retention of money in an escrow to meet future liabilities - whether consideration will include the escrow amount as well for capital gains taxation *Facts:* Assessee sold their wholly owned subsidiary Modi Tyre Company Ltd. (MTCL) to Continental India Ltd. (CIL) on 15th July, 2011 for a total agreed consideration of ₹117,61,90,000/ - on the basis of a share purchase agreement (SPA). Out of the consideration of Rs. 117.61 crores a sum of Rs. 25.48 crores was retained in a Escrow account (EA) with an Escrow agent (Yes Bank) in an interest yielding fixed deposit account. Assessee filed his return offering Rs. 38.55 crores (117.61 less 79.06 as cost of acquisition/net worth) as long term capital gains. Subsequently without filing any revised return they made submissions to AO with a revised capital gain of Rs. 13.07 crores. In short the difference in reducing the capital gains at the time of assessment was that the escrow account amount was not part of the sale consideration as assessee did not "receive" the same. The escrow condition was that the amount standing thereto would be payable to the assessee at the end of 2/4/8 years depending on certain liabilities and their quantum devolvement. The escrow was to be operated by both parties. Subsequently in assessment year 2014-15 Rs. 1.91 crore was received by the assessee from the escrow which was offered to tax and the interest was also offered therin to tax in the subsequent years. The plea of the revision of the capital gains to lower quantum to the value of the escrow of Rs. 25.48 crores was not relished by the AO/CIT(A) who rejected the same holding that the assessee was in receipt of a consideration as per a SPA and the escrow was only an application of income. There was no provision in section 48 to accommodate future cost of liabilities in the cost of acquisition or costs incurred in relation to transfer under the Income tax law was revenue's argument. This was bereft the fact that the assessee pleaded in the subsequent developments the buyer Continental India Limited (CIL) has slapped them with liabilities more than the escrow amounts and that they might never receive any amount henceforth and if at all they receive any amount with interest the same will be offered to tax on an actual receipt basis. Thus the logic of taxing capital gains on due basis of the escrow amount was incorrect was the moot point of the assessee. On higher appeal - Held in favour of the assessee that the escrow did not accrue to them and on facts if anything gets paid they will offer the same to income in the future years with interest accretions as well. What does not accrue to assessee cannot be taxed on real income principles. Thus held the ITAT. *Applied:* Dinesh Vazirani v. Pr.CIT (2022) 445 ITR 110 (Bom-HC) : 2022 TaxPub(DT) 2768 (Bom-HC) CIT v. M/s. M.L. Raju Shete, (2016) 239 Taxman 176 (Bom-HC) : 2016 TaxPub(DT) 2102 (Bom-HC) CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC) : 1962 TaxPub(DT) 0307 (SC) for real income principles *Dissented:* Caborandum Universal Ltd. v. ACIT (2021) 283 Taxman 312 (Mad.) : 2021 TaxPub(DT) 4727 (Mad-HC) *Ed. Note:* The decision does not address the issue under which section the subsequent receipts will be taxed. Interest might be as income from other sources but with no transfer in subsequent years if amounts are received can the same be subjected to tax under capital gains remains to be seen. Perhaps a stand might be taken as enhanced compensation on compulsory acquisition could be applied here. Can such a provision be read into Section 50B or for simple capital gains taxation it needs to be seen. Consider it otherwise an assessee postponing the consideration will obviously be taxed under the same head either on accrual or on receipt basis on protective assessment. This eventual reading might also be applied here. As for diversion of income by overriding title v. application of income point, in Carborundum case escrow was for warranties with exclusivity of operation, here it was for statutory liabilities with dual control of operation perhaps this clinched the case in favour of the assessee. Eventually an assessee cannot be called upon to pay tax out of capital. This will be incorrect if real income principles are not applied. *Case:* Modi Rubber Ltd. v. Dy. CIT 2024 TaxPub(DT) 807 (Del-Trib)

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Sale of a subsidiary - Retention of money in an escrow to meet future liabilities - whether consideration will include the escrow amount as well for capital gains taxation

Facts:

Assessee sold their wholly owned subsidiary Modi Tyre Company Ltd. (MTCL) to Continental India Ltd. (CIL) on 15th July, 2011 for a total agreed consideration of ₹117,61,90,000/ - on the basis of a share purchase agreement (SPA). Out of the consideration of Rs. 117.61 crores a sum of Rs. 25.48 crores was retained in a Escrow account (EA) with an Escrow agent (Yes Bank) in an interest yielding fixed deposit account. Assessee filed his return offering Rs. 38.55 crores (117.61 less 79.06 as cost of acquisition/net worth) as long term capital gains. Subsequently without filing any revised return they made submissions to AO with a revised capital gain of Rs. 13.07 crores. In short the difference in reducing the capital gains at the time of assessment was that the escrow account amount was not part of the sale consideration as assessee did not "receive" the same. The escrow condition was that the amount standing thereto would be payable to the assessee at the end of 2/4/8 years depending on certain liabilities and their quantum devolvement. The escrow was to be operated by both parties. Subsequently in assessment year 2014-15 Rs. 1.91 crore was received by the assessee from the escrow which was offered to tax and the interest was also offered therin to tax in the subsequent years. The plea of the revision of the capital gains to lower quantum to the value of the escrow of Rs. 25.48 crores was not relished by the AO/CIT(A) who rejected the same holding that the assessee was in receipt of a consideration as per a SPA and the escrow was only an application of income. There was no provision in section 48 to accommodate future cost of liabilities in the cost of acquisition or costs incurred in relation to transfer under the Income tax law was revenue's argument. This was bereft the fact that the assessee pleaded in the subsequent developments the buyer Continental India Limited (CIL) has slapped them with liabilities more than the escrow amounts and that they might never receive any amount henceforth and if at all they receive any amount with interest the same will be offered to tax on an actual receipt basis. Thus the logic of taxing capital gains on due basis of the escrow amount was incorrect was the moot point of the assessee. On higher appeal -

Held in favour of the assessee that the escrow did not accrue to them and on facts if anything gets paid they will offer the same to income in the future years with interest accretions as well. What does not accrue to assessee cannot be taxed on real income principles. Thus held the ITAT.

Applied:

Dinesh Vazirani v. Pr.CIT (2022) 445 ITR 110 (Bom-HC) : 2022 TaxPub(DT) 2768 (Bom-HC)

CIT v. M/s. M.L. Raju Shete, (2016) 239 Taxman 176 (Bom-HC) : 2016 TaxPub(DT) 2102 (Bom-HC)

CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC) : 1962 TaxPub(DT) 0307 (SC) for real income principles

Dissented:

Caborandum Universal Ltd. v. ACIT (2021) 283 Taxman 312 (Mad.) : 2021 TaxPub(DT) 4727 (Mad-HC)

Ed. Note: The decision does not address the issue under which section the subsequent receipts will be taxed. Interest might be as income from other sources but with no transfer in subsequent years if amounts are received can the same be subjected to tax under capital gains remains to be seen. Perhaps a stand might be taken as enhanced compensation on compulsory acquisition could be applied here. Can such a provision be read into Section 50B or for simple capital gains taxation it needs to be seen. Consider it otherwise an assessee postponing the consideration will obviously be taxed under the same head either on accrual or on receipt basis on protective assessment. This eventual reading might also be applied here.

As for diversion of income by overriding title v. application of income point, in Carborundum case escrow was for warranties with exclusivity of operation, here it was for statutory liabilities with dual control of operation perhaps this clinched the case in favour of the assessee.

Eventually an assessee cannot be called upon to pay tax out of capital. This will be incorrect if real income principles are not applied.

Case: Modi Rubber Ltd. v. Dy. CIT 2024 TaxPub(DT) 807 (Del-Trib)