September 2013
DCIT v. Hemal Raju Shete ITAT Mumbai `H’ Bench Before P. M. Jagtap (AM) and Dr. S. T. M. Pavalan (JM) ITA No. 2198/Mum/2010 A.Y.: 2006-07. Decided on: 10th July, 2013. Counsel for revenue/assessee: P. K. Shukla/J. D. Mistry & M. A. Gohel.
By Jagdish D. Shah, Jagdish T. Punjabi, Chartered Accountants
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Section 45, 48. What is to be taxed is the gain received or accrued. Accordingly, deferred consideration under the share sale agreement cannot be taxed. Maximum cap provided in the agreement cannot be equalled either with sale value nor with full value of consideration since the said maximum cap is neither received nor accrued for the purposes of calculating capital gains.
Facts: The assessee filed its return of income for AY 2006-07 declaring total income of Rs. 11,68,470. The assessee had shown long term capital gain of Rs. 42,38,674 on sale of 75,000 shares of Unisol Infrastructures Ltd and had claimed exemption u/s. 54EC by investing the sale proceeds in bonds of SIDBI. In the course of assessment proceedings, on examining the agreement dated 25.1.2006 pertaining to transfer of shares the Assessing Officer (AO) noticed that the said agreement grants absolute right to the assessee as well as other transferors to receive the specified amount in a deferred manner with nomenclature of `initial’ and `deferred’ consideration being employed. The AO reworked the share of the assessee in the alleged total consideration `accrued’ to the transferors by clubbing the initial consideration and deferred consideration and thereby assessed the capital gain at Rs. 4,91,94,923. He therefore made an addition of Rs. 4,48,54,923 to the total income returned by the assessee.
Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal filed by the assessee since according to him the deferred gain could not be taxed as the gain was not received nor accrued to the assessee.
Aggrieved, the revenue preferred an appeal to the Tribunal where on behalf of the assessee it was pointed out to the tribunal that clause 3 of the agreement dealing with consideration provided that Rs. 20 crore is the maximum limit. This clause served as a cap to the effect that the aggregate of initial and deferred consideration shall not exceed the cap of Rs. 20 crore. The manner of computation of deferred consideration was explained to demonstrate that the assessee may or may not get the deferred consideration. It was pointed out that since there was no certainty of receiving the amount and also that the quantum to be received was not known, taxing the maximum cap provided is not tenable.
Held:
On perusal of the agreement the tribunal found that the amount of Rs. 20 crore was the maximum amount which could be received by the assessee’s group. This amount comprised initial consideration and deferred consideration. There was no guarantee for receipt of this maximum amount by the assessee’s group. In view of these facts, the tribunal agreed that what is to be taxed is the gain received or accrued and not the notional/hypothetical income. It held that the decision of the Supreme Court in the case of CIT vs. George Henderson & Co. Ltd. and that of ITAT in Mrs. Alpana Piramal, relied upon by DR have no application as the ratio in the said cases is applicable when the dispute relates to adopting the full value of consideration visà- vis the sale consideration which is not the case in the present appeal. Maximum cap mentioned in the agreement cannot be equated either with sale value consideration (sic sale consideration) or with full value of consideration since the said maximum cap is neither received nor accrued for the purposes of claiming capital gains. The Tribunal upheld the order passed by CIT(A).
The appeal filed by the revenue was dismissed.
