INCOME TAX ACT, 1961

Section 50B

Capital gains - Accrual - Money deposited in Escrow Account -

Assessee-company sold Its marketing division to M/s. 'APL' against sale consideration of Rs. 567 crore. However, in computation of income, assessee had shown Capital Gain of Rs. 477 crore only, on sale of marketing division, after deducting Rs. 90 crore. Assessee claimed that total sale consideration payable to assessee amounted to Rs. 567 crore, out of which Rs. 90 crore was placed by the purchaser in a Escrow Account opened with Hongkong and Shanghai Banking Corporation Ltd. (HSBC), which would accrue to assessee in five annual equal instalment annually, subject to fulfilment of certain obligation being on achievements of performance targets every year. Further, out of Rs. 90 crore, assessee had offered Rs. 18 crore being first instalment and remaining Rs. 72 crore was kept/shown/deposit in Escrow Account with HSBC Bank. AO taxed entire amount in Escrow Account as capital gain accrued to assessee on sale of marketing division. Held: Once condition of contract is reduced in writing, one must look at the substance of term of contract. The contract must be read as a whole, and not in a pick and choose manner. Further, intention of parties must be found in the words used by them and if more than one interpretation is possible, one which gives effect and proper meaning of all parts of the contract should be adopted. Perusal of clauses of business purchase agreement, supply agreement and Escrow Agreement would demonstrate that maintaining of Escrow Account was in consequence of business purchase agreement. The conditions of supply agreement could not be delinked from business purchase agreement. The Escrow Account agreement was executed in furtherance of BPA. Further, amount in Escrow Account would accrue to assessee only on fulfilment of certain condition. If the condition mentioned not get fulfilled, then business purchase agreement would be terminated. Thus, deposit in Escrow Account was intrinsic and integral to transfer of marketing division under business purchase agreement without it, the sale would be incomplete. The contingent consideration accrued only upon compliance of condition in subsequent assessment years, would chargeable only in the years in which the said income accrued. Income for the year under consideration of Rs. 447 crore and further Rs. 18 crore was accrued to assessee. The assessee offered the same under the head Capital gains and no other income which was not accrued to assessee, was not liable to tax in the year under consideration.

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