Month: June

Under India’s FEMA and NDI Rules 2019, foreign direct investment (FDI) strictly prohibits “assured returns,” such as pre-determined internal rates of return or guaranteed exit prices. While investors can utilize optionality clauses like put options, these require a minimum one-year lock-in and must base the exit price on fair market value determined at the time of exit. Common compliance pitfalls include embedding minimum floor prices or using downstream entities to bypass these rules. Although Indian courts may enforce arbitral damages for a promoter’s breach of exit obligations, the actual cross-border remittance of those damages remains subject to strict RBI banking scrutiny.

INTRODUCTION

This article provides a detailed, legally grounded examination of the prohibition on assured returns in foreign direct investment (FDI) under India’s Foreign Exchange Management Act, 1999 (FEMA) framework. It draws attention to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, applicable Reserve Bank of India (RBI) Master Directions and circulars, and leading judicial decisions.

1. UNDERSTANDING THE CONCEPT OF “ASSURED RETURNS” & “OPTIONALITY CLAUSE” IN FOREIGN DIRECT INVESTMENT

Assured Return

In the context of foreign direct investment into India, the term “assured return” refers to any arrangement under which a foreign investor is contractually guaranteed a pre-determined profit, a minimum internal rate of return (IRR), or a pre-agreed exit price or buy-back price at the time of making an equity investment – irrespective of the actual commercial performance of the investee company.

Optionality Without Assurance

A foreign investor may validly be granted an optionality clause, most commonly in the form of a put option, which gives the investor the contractual right to sell its equity shares or compulsorily convertible instruments back to the promoter or to a third party at a future date. However, even optionality is not allowed with the pre-agreed return at the exit.

Examples of Assured Return and Optionality Clause

Example 1 – IRR-Based Exit (Prohibited)

Investor shall be entitled to exit at a price that gives them 18% IRR.

Example 2 – Guaranteed Minimum Exit Value (Prohibited)

Investor will be bought out at not less than the original investment amount plus 12% per annum.

Example 3 – Put Option with Pre-Agreed Price (Prohibited)

Investor may sell its shares to the Promoters at ₹500 per share after 3 years.

Example 4 – Call Option at FMV (Allowed)

The Company may repurchase the Investor’s CCDs at FMV on the date of exercise, following the FEMA pricing guidelines.

Example 5 – Put Option at Fair Value (Allowed)

After the 1-year minimum lock-in, the Investor may require the Promoters to purchase the shares at fair market value determined at the time of exit.

2. THE REGULATORY FRAMEWORK: STATUTORY AND REGULATORY BASIS

2.1 The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019

The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules), notified by the Central Government in exercise of powers under Section 47 of FEMA, 1999, constitute the primary subordinate legislation governing foreign investment in equity and equity-linked instruments of Indian companies. The NDI Rules define the scope of “equity instruments” eligible for FDI, which include equity shares, fully and compulsorily convertible preference shares (FCPS), and fully and compulsorily convertible debentures (FCDs).

Rule 21(2)(c)(iii) Explanation: The guiding principle shall be that the person resident outside India is not guaranteed any assured exit price at the time of making such investment or agreement and shall exit at the price prevailing at the time of exit.

Explanation: The guiding principle shall be that the person resident outside India is not guaranteed any assured exit price at the time of making such investment or agreement and shall exit at the price prevailing at the time of exit.

Rule(9)(5) A person resident outside India holding equity instruments of an Indian company containing an optionality clause in accordance with these rules and exercising the option or right, may exit without any assured return, subject to the pricing guidelines prescribed in these rules and a minimum lock-in period of one year or a minimum lock-in period as prescribed in these rules, whichever is higher.

Rule(2)(k)(i) Equity instruments can contain an optionality clause subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price.

2.2 RBI Circulars on Optionality and Pricing

In addition to the NDI Rules, the RBI has issued two foundational circulars that operationalise the concept of permissible optionality for FDI investors:

A.P. (DIR Series) Circular No. 86 dated January 9, 2014

RBI Circular No. 86 (RBI/2013-14/436) was the first circular to explicitly permit optionality clauses in equity shares, compulsorily convertible preference shares, and compulsorily convertible debentures held by FDI investors. The circular simultaneously imposed three firm conditions that remain operative to this day:

• Minimum lock-in period: The option may not be exercised until the expiry of a minimum lock-in period of one year from the date of allotment of the instruments.
• No assured return: The exit must be made without any assured return. No minimum IRR, floor price, or guaranteed buy-back price may be stipulated.
• Pricing compliance: The exit price must conform to the applicable pricing guidelines, market price for listed securities and fair market value for unlisted securities.

A.P. (DIR Series) Circular No. 4 dated July 15, 2014

This circular (RBI/2014-15/129) revised the pricing guidelines for FDI transactions more broadly, and specifically reiterated the conditions applicable to optionality exits. It confirmed that for unlisted securities, the exit price under an optionality clause must be determined using an internationally accepted pricing methodology – typically a discounted cash flow or comparable company analysis or any another method of valuation certified by a SEBI-registered merchant banker, a Chartered Accountant, or a Cost Accountant and must not be pre-fixed at the time of the original investment. For listed securities, the exit price must be the prevailing market price on a recognised stock exchange. (The above-mentioned circulars have been discontinued, and the relevant provisions are now incorporated under the NDI Rules, 2019)

3. COMMON MARKET MISCONCEPTIONS AND COMPLIANCE PITFALLS

Notwithstanding the clarity of the regulatory framework, a range of misconceptions and structuring errors continue to arise in practice. The following are the most frequently encountered pitfalls, drawn from disputes, enforcement actions, and professional practice.

Pitfall 1: Including Guaranteed Minimum Returns or Set Buy-Back Prices in Contracts

One of the most common violations occurs when transaction documents, whether a shareholders’ agreement (SHA), share subscription agreement (SSA), or a side letter, contain a clause that ensures the foreign investor a minimum exit value, whether expressed as a fixed buy-back price, a minimum IRR, or a floor on the value of the investor’s shareholding. Such clauses, regardless of how they are labelled (for example, as “downside protection,” “capital preservation,” or “guaranteed returns”), constitute an assured return and are squarely prohibited by the NDI Rules, 2019 and the applicable RBI circulars.

Pitfall 2: Treating Legal Compensation for Losses the Same as Agreed-Upon Sale Prices

A nuanced but important misconception arises from the assumption that because Indian courts have enforced foreign arbitral awards granting damages arising out of a failed put option or exit obligation, the underlying assured-return structure itself has been validated. This is legally incorrect.

When a court enforces damages awarded by an arbitral tribunal for breach of a contractual obligation (for example, the promoter’s failure to honour a put option), it is enforcing a remedy for breach of contract, not endorsing or validating a pre-agreed assured exit price. The legal character of the payment – damages for breach, as opposed to the consideration for a share transfer, is what may take it outside the direct operation of the pricing guidelines under FEMA.

Critically, however, even where a court upholds such a damages award, the actual remittance of funds to the foreign investor (i.e., the cross-border transfer) remains subject to FEMA and must pass through the banking system with appropriate FEMA-compliant documentation. AD banks will scrutinise the transaction, and in certain cases, RBI consultation may be required.

Pitfall 3: Failure to Maintain Valuation and Reporting Discipline

Beyond the substantive prohibition on assured returns, compliance failures frequently arise in the procedural and reporting dimensions of FDI transactions. The key reporting obligations and timelines are:

• FC-GPR (Form Foreign Currency – Gross Provisional Return): Must be filed with the RBI through the AD Category-I bank within 30 days of allotment of FDI instruments to the foreign investor.
• FC-TRS (Form Foreign Currency – Transfer of Shares): Must be filed within 60 days of the date of receipt of consideration or the date of transfer, whichever is earlier, in respect of any transfer of FDI instruments between a resident and a non-resident.
• Form DI (Downstream Investment): Must be filed within 30 days of the downstream investment being made by an Indian entity that has received foreign investment (including a Foreign-Owned and Controlled Company or FOCC).

On the valuation side, parties must ensure that unlisted exit transactions are supported by an FMV certificate prepared using an internationally accepted valuation methodology by a SEBI-registered merchant banker or Chartered Accountant or a Cost Accountant. For listed transactions, the recognised stock exchange price applies. Valuation working papers should be retained and made available for AD bank review.

Pitfall 4: Attempting to Circumvent Restrictions Through Downstream or FOCC Layers

A significant structuring risk arises when parties attempt to achieve through indirect means what they cannot achieve directly. For example, an FOCC (a company incorporated in India but owned and controlled by foreign investors) might attempt to make a downstream investment into another Indian company on terms that include an assured return element on the implicit assumption that FEMA’s constraints apply only to direct FDI flows.

The RBI’s 2025 clarifications in the Master Direction on Foreign Investment have made clear that downstream investments by FOCCs are to be treated at par with direct FDI in all material respects, including pricing conditions, entry route requirements, sectoral caps, conditionalities, and reporting obligations. Accordingly, any assured-return structure that would be impermissible in a direct FDI context is equally impermissible when attempted through a downstream investment by an FOCC.

4. KEY JUDICIAL DECISIONS: ANALYSIS OF LEADING CASES

Indian courts and the Supreme Court have had occasion to examine the intersection of contractual exit rights, FEMA compliance, and arbitral award enforcement in several significant decisions. The following cases are the most frequently cited and analytically relevant.

4.1 NTT Docomo Inc. v. Tata Sons Ltd. Delhi High Court | April 28, 2017

“The sum of US$1.17 billion was granted as damages and not purchase consideration for Docomo’s Sale Shares; hence, pricing guidelines under FEMA for transfer of shares would not apply.”

Significance: This decision is the most important judicial authority on the distinction between damages for breach and purchase consideration. The Court upheld an ICC arbitral award in favour of NTT Docomo, holding that the payment constituted compensation for the promoter’s failure to honour the exit mechanism agreed in the shareholders’ agreement and not a transfer of shares at a pre-agreed price. As a result, the Court held that FEMA’s pricing guidelines for share transfers were not directly triggered. RBI’s objections to enforcement were dismissed. However, the decision does not validate assured-return structures per se; it underscores that where a foreign investor has been denied an exit and pursues damages before an arbitral tribunal, the remedy for breach may be enforced by courts, but actual cross-border remittance remains subject to FEMA banking norms.

4.2 IDBI Trusteeship Services Ltd. v. Hubtown Ltd. Supreme Court of India | November 15, 2016

Significance: This Supreme Court decision arose in the context of a summary suit involving a structured investment arrangement that was alleged to provide fixed returns through an optionally convertible debenture structure, which the defendant argued was prohibited under FEMA as it constituted ECB rather than FDI. The Court granted unconditional leave to defend, recognising that the FEMA characterisation of the transaction raised triable issues. While the decision does not decide the FEMA compliance question on the merits, it is frequently cited for two propositions: first, that courts will not summarily decide complex FEMA compliance questions in enforcement proceedings; and second, that structured investment arrangements that allegedly deliver assured returns through non-equity instruments will be subject to close judicial scrutiny.

4.3 GPE (India) Ltd. & Ors v. Twarit Consultancy Services Pvt. Ltd. Supreme Court of India (arising from Madras High Court enforcement) | SC Order: April 17, 2023 | Madras HC Judgment: January 5, 2023

“Notice will also be issued to the Reserve Bank of India to ascertain, if at all any approval or permission from them is required, and if yes, at what stage will it be required.”

Significance: This case illustrates an increasingly important dimension of post-award FEMA compliance. Even after a foreign arbitral award relating to a put option or exit mechanism has been upheld at the enforcement stage by the High Court, the Supreme Court directed that notice be issued to the RBI to ascertain whether any regulatory approval or permission was required and at what stage for the actual cross-border remittance of the award amount. This decision underscores that judicial enforcement of an arbitral award does not automatically complete the FEMA compliance cycle. The regulatory overlay persists at the remittance stage, and parties must plan for AD bank scrutiny and, where necessary, engagement with the RBI before funds can be transferred outside India.

5. PRACTICAL GUIDANCE: STRUCTURING, DOCUMENTATION, AND COMPLIANCE

The regulatory framework described above, read in conjunction with the judicial decisions analysed in the preceding section, yields a set of clear, actionable guidance points for legal practitioners, company secretaries, investment bankers, CFOs, and compliance professionals engaged in FDI transactions.

A. Structuring Principle: Preserve the Option, Remove the Guarantee

The foundational structuring principle is straightforward: an FDI investor may hold a valid exit right or put option, but the exit price must not be pre-determined at the time of investment. Agreements should be drafted to provide the investor with the contractual right to exit after the lock-in period, with the exit price to be determined at the time of exercise of the option in accordance with applicable pricing guidelines.

Documents should clearly and expressly state that no assured return is being provided and that the exit price will be determined at the time of exit. Boilerplate clauses copied from non-Indian investment agreements (particularly those from jurisdictions without similar exchange-control restrictions) are a significant source of non-compliance and should be carefully reviewed.

Compliant vs. Non-Compliant Language

Compliant: “The Investor shall have the right, exercisable after the Lock-in Period, to require the Promoter to purchase the Investor’s Shares at a price determined in accordance with the pricing guidelines applicable under FEMA and the NDI Rules at the time of exercise of such right.”

Non-Compliant: “The Promoter shall repurchase the Investor’s Shares at a price equal to the original investment plus 15% per annum IRR.”

B. Valuation and Documentation Hygiene

Rigorous valuation and documentation practices are essential for FEMA compliance, particularly at the time of exit:

• Unlisted Company Exits: Obtain a formal FMV certificate from a SEBI-registered merchant banker or chartered accountant using an internationally accepted valuation methodology (such as DCF, comparable company analysis, or net asset value). Retain the working papers, assumptions, and methodology documentation for AD bank review.
• Listed Company Exits: The exit price must be the prevailing market price on a recognised stock exchange. Ensure documentary evidence of the exchange price on the date of transfer is retained.

C. Downstream and FOCC Compliance: Strict Parity with Direct FDI

As noted above, the RBI’s updated Master Direction (January 2025) has confirmed that downstream investments by FOCCs are subject to the same pricing conditions, entry route requirements, sectoral caps, conditionalities, and reporting obligations as direct FDI. Compliance teams should apply the same level of scrutiny to downstream transactions as they would to a primary FDI transaction. In particular, assured-return structures must not be introduced at the downstream level as a surrogate for what cannot be done at the primary level.

D. When a Put Option Fails: Arbitration and Post-Award Compliance

Where a put option or exit mechanism fails because the Indian promoter refuses to honour it, the foreign investor may pursue remedies through arbitration (whether domestic or international). As illustrated by the Docomo case, Indian courts have shown a willingness to enforce arbitral damages awards in such circumstances, characterising the payment as compensation for breach rather than as the enforcement of a pre-agreed exit price.

However, several practical steps must be planned for:

• FEMA Compliance at Remittance: Even after a court order enforcing an arbitral award is obtained, the foreign investor’s legal counsel must work with the AD bank to structure the cross-border remittance in a FEMA-compliant manner. The AD bank will need to satisfy itself as to the nature and regulatory characterisation of the payment.
• RBI Engagement: In complex cases (as illustrated by the GPE v. Twarit decision), it may be necessary to approach the RBI directly to seek guidance or a no-objection before remittance. Timelines for such engagement can be significant and should be factored into post-award planning.
• Tax Treatment: The tax treatment of damages received by a foreign investor (whether as income, capital gains, or otherwise) requires separate analysis under the Income Tax Act, 2025 and applicable tax treaties, and should be addressed in parallel.

6. FREQUENTLY ASKED QUESTIONS (WITH PRACTICAL ANSWERS)

Q1: Can we give a foreign investor a put option with an IRR formula “subject to FEMA pricing at exit”?

A1: Avoid IRR language for equity; state that exit will be at fair value determined at the time of exercise, complying with pricing guidelines. You can reference optionality (per RBI 2014; SEBI 2013), but the payout cannot be assured/guaranteed up front.

Q2: Can we fix a minimum floor equal to the invested amount (a “capital protection” clause)?

A2: No, if your drafting guarantees a minimum return on equity instruments at exit, that’s effectively an assured return and non compliant. Price must be set at exit time fair value, not a pre agreed floor.

Q3: Are CCPS/CCDs safer than equity shares?

A3: CCPS/CCD are equity instruments under NDI. Optionality in exit is allowed without assured returns. Optionally convertible or redeemable variants (i.e., hybrids) are problematic for FDI equity. If your intent is fixed return, consider debt (ECB) instead.

Q4: What about “downside protection” clauses?

A4: You may craft damages remedies for breach (e.g., where promoters fail to undertake actions they are obligated to perform), but do not conflate them with assured equity exit prices. Even damages payable overseas will be subject to RBI permissions at remittance. Courts have enforced foreign awards in specific cases, but that is not blanket permission to sidestep FEMA.

Q5: In real estate, can a foreign investor get an assured rental yield?

A5: FDI in the real estate business is prohibited, while construction development is permitted with conditions. Regardless of sector, any equity exit assured return is barred; rent is an operating cash flow, not an exit price. Ensure the sectoral policy (DPIIT/Press Notes) and instrument level FEMA rules both align.

Q6: Does the dividend on CCPS / interest on CCD amounts to an assured return?

A6: No, dividends on CCPS and interest on CCDs are not treated as “assured returns” under FEMA.

What FEMA prohibits is pre agreed fixed exit pricing (IRR / assured minimum amount) on equity instruments, not normal commercial payouts like dividends or interest that arise from their contractual terms.

KEY PRINCIPLE

An FDI investor may hold a put option or an exit right. What is not permitted is a pre-agreed, fixed exit price or minimum IRR guarantee embedded at the time of investment. The price must be determined at the time of exit, post lock-in, in accordance with RBI pricing guidelines.

The investment instrument is formally structured as equity, which, by its nature, carries risk and participates in the company’s fortunes, and it cannot guarantee a return without exposure to business risk.

BCAJ Admin

Despite stringent regulations, severe corporate scandals—including SecureKloud, Karvy, and IL&FS—highlight the persistent failures of Independent Audit Committees. Recently, the 2026 SAT order upheld penalties against SecureKloud’s committee members for assisting management in financial manipulation rather than functioning as independent watchdogs. To prevent such failures, Audit Committees must overcome their over-reliance on management and assert absolute independence. Implementing strategic reforms like stricter financial qualifications, more frequent meetings, and direct auditor engagement is crucial. Ultimately, committees must evolve from passive compliance bodies into proactive guardians overseeing modern risks, including cybersecurity and data privacy.

INTRODUCTION

Despite stringent regulations like the Companies Act 2013 and SEBI LODR, India’s corporate landscape continues to be rocked by financial scandals—from IL&FS to Karvy. At the center of these failures lies a crucial question: Where was the Independent Audit Committee? As business dynamics shift into the digital and AI era, the Committee must evolve from a passive rubber-stamp into an aggressive, independent watchdog.

The provisions relating to Audit Committee have been specified under Section 177 of Companies Act, 2013 and under Rule 6-Companies (Meetings of Board & its Powers) Rules, 2014. Under SEBI (LODR) Regulation, 2015, the provisions of Committee are subject to Regulation 18 & Part C of Schedule II of SEBI (LODR) Regulation, 2015.

Recent regulatory orders highlight the consequences of failure of Audit Committee in reputed corporates.

SEBI order on M/s Securekloud Technologies Ltd. for false financial statement¹

Securities and Exchange Board of India (SEBI) vide Adjudication Order No. Order/VV/PSS/2022-23/22968-22973 dt 20 January 2023 has imposed a penalty of Rs.55 lakh on three directors and three executives of Securekloud Technologies Ltd (formerly 8K miles Softwares) for submitting false disclosures, making false representations and misrepresentation in financial statements. The SEBI order noted that Audit Committee members Punniamurthy and Singaram acted as agents of the company rather than independent overseers. By failing to conduct due diligence or exercise independent judgment, they directly violated regulatory norms.

1 Source: https://www.moneylife.in/article/sebi-imposes-rs55-lakh-fine-on-directors-executives-of-securekloud-technologies-for-false-financial-statement/69592.html

The SAT order (2026) unequivocally upheld the penalties against the Audit Committee members

On appeals filed by SecureKloud and its officials, the Securities Appellate Tribunal (SAT) pronounced its judgment on March 6, 2026.

While the Tribunal granted partial relief to the company by setting aside a specific direction to recover Rs. 3.83 crores from its promoter, Suresh Venkatachari, it categorically dismissed the appeals filed by the Audit Committee members, Dinesh Raja Punniamurthy (Chairperson) and Babita Singaram.

SAT explicitly confirmed the penalties levied against the Audit Committee members under the SEBI Act and LODR Regulations. The Tribunal critically observed that the officials chose to ignore express “red flags” raised by the company’s statutory auditors. Furthermore, SAT noted that instead of functioning as the “watchdog for investors,” the Audit Committee was involved in the manipulation and actively assisted the management in inflating the financials.

SEBI delivers final order in Karvy demat scam, cracks down on MD and directors²

Similarly, SEBI cracked down on the MD and independent directors of Karvy Stock Broking Limited (KSBL), marking an inflection point in the stock market scam that siphoned off crores in investor wealth and prompted deep and structural investor reforms. Independent directors of the company have also been penalised.

IL&FS Crisis³

The Serious Fraud Investigation Office (SFIO) has charged accounting companies along with some of its partners, as well as members of the Committee, for their failure in not disclosing true financials of IL&FS Financial Services (I-FIN) and allegedly conniving with the management to suppress information. The SFIO’s charge sheet also levelled multiple allegations against Committee members in chargesheet.

Even after enactment of stringent Regulation under the Companies Act, 2013, SEBI LODR and several Guidance Note prescribed by regulatory body, systemic corporate governance failures continue to surface, which is detrimental to the interest of the Indian Economy and Investor confidence in capital market. A question arises on the effectiveness of the Independent Audit Committee.

Provisions for Audit Committee (AC) under the Companies Act 2013 and SEBI (LODR) Regulations 2015 can be enumerated as below mentioned:

2. Source:https://www.moneycontrol.com/news/business/markets/sebi-delivers-final-order-in-karvy-demat-scam-cracks-down-on-md-and-directors-10495611.html

3. Source:-   https://timesofindia.indiatimes.com/business/india-business/deloitte-kpmg-charged-with-helping-i-fin-cook-its-books/articleshow/69657703.cms

ROLES OF INDEPENDENT AUDIT COMMITTEE

There are several areas where the Independent Audit Committee plays an important role. Few important areas may be highlighted as below: –

A. Independence First

Independence of the Members on Audit Committee is first and foremost requirement for ensuring the effective functioning of the committee. The committee has to take an objective view of all matters under consideration. A member of the Committee who has close links with the promoters or the senior management may not, on all occasions, take such a view. Nonetheless, independent directors may not be less than Independent Auditors in my view.

A continuing loss of independence or conflict of interest may justify the director leaving the committee. A stark example of this occurred during the YES Bank crisis as below mentioned.

YES Bank crisis⁴

On 10th January 2020, Yes Bank’s audit committee chairman Uttam Prakash Agarwal resigned as independent director citing concerns regarding the deteriorating standard of Board oversight at the private lender. In a letter to the regulators, he said, “There are serious concerns as regards deteriorating standards of the corporate governance, failure of compliance, management practices and the manner in which the state of affairs of the company are being conducted.

4. https://www.livemint.com/industry/banking/yes-bank-s-audit-committee-chairman-resigns-citing-governance-concerns-11578648202811.html

B. The Audit Committee and Critical Audit Matters (CAMs)

While the independent auditor is solely responsible for writing and communicating CAMs, audit committees should engage in a substantive dialogue with the auditor regarding the audit and expected CAMs to understand the nature of each CAMs, the auditor’s basis for the determination of each CAM and how each CAMs is expected to be described in the auditor’s report. Further, these CAMs may provide a lead in future action and decision.

C. The Audit committee and internal control

The board is responsible for the total process of risk management, which includes ensuring that the system of internal control is adequate and effective. While the board holds ultimate responsibility for risk management, it delegates day-to-day oversight to the Audit Committee. Consequently, the Committee must actively monitor the adequacy of internal financial controls and ensure:

• review compliance with regulations, legislation and ethical practices (such as environmental policies and codes of conduct), and ensure that systems are in place to support such compliant behaviour;
• review the company’s fraud risk management policy, ensuring that awareness is promoted and reporting and investigation mechanisms exist;
• give its approval to the statements in the annual report relating to internal control and risk management;
• receive reports on the conclusions of any tests carried out on the controls by the internal or external auditors, and consider the recommendations that are made;’
• monitor and assess the role and effectiveness of the internal audit function within the company’s overall risk management system;
• check the efficiency of internal audit by quality of observations;
• approve the appointment, or termination of appointment, of the head of internal audit;
• ensure that the internal audit function has direct access to the board chairman and is accountable to the audit committee;
• review and assess the annual internal audit work plan;
• receive periodic reports about the work of the internal audit function;
• review and monitor the response of management to internal audit findings;
• ensure that recommendations made by internal audit are actioned;
• help preserve the independence of the internal audit function from pressure or interference.

The committee should meet with internal auditors at least once a year, without management present, to discuss audit-related matters.

D. THE AUDIT COMMITTEE AND EXTERNAL AUDITORS

Beyond internal metrics, the Committee must independently manage the relationship with external auditors. The audit committee should:

• Regarding external auditors, the Committee serves as the primary gateway for appointments, remuneration, and oversight of the audit’s scope to the board on the appointment, re-appointment or removal of the external auditors;
• oversee the selection process when new auditors are being considered;
• approve the terms of engagement of the external auditors and the remuneration for their audit services;
• ensure the independence and objectivity of the external auditors;
• review the scope of the audit with the auditor, and satisfy itself that this is sufficient;
• make sure that appropriate plans are in place for the audit at the start of each annual audit;
• carry out a post-completion audit review.

E. The Audit committee and compliance

Ensuring strict compliance with external reporting regulations remains a cornerstone of the Committee’s mandate. The audit committee needs to satisfy itself that the financial statements prepared by management and approved by the auditors are acceptable. It should consider:

• the material accounting policies that have been used, and whether these are appropriate;
• any critical estimates or judgements that have been made, and whether these are reasonable;
• the method used to account for any material or unusual transactions, where alternative accounting treatments are possible; and
• the clarity and completeness of the disclosures in the financial statements.

The committee should listen to the views of the auditors on these matters. If it is not satisfied with any aspect of the proposed accounting integrity, it should inform the board.

The committee should also re-review the Business Review section and the corporate integrity statements relating to audit and risk management in the Annual Report.

Impediments to Audit Committee Effectiveness and Common Mistakes

The Board and Audit Committee members view the Committee only as a legal or regulatory requirement to be fulfilled. A few common mistakes or misconceptions are below mentioned:

• Inadequate understanding of accounting, control, audit, reporting and complex business issues.
• Over-reliance on the company’s management and lack of inquisitiveness and healthy scepticism.
• Committee’s inability to assert itself in the face of dominant management.
• Lack of effective leadership leading to consequent lack of coordination with auditors and management.
• Ineffective meetings ridden with poor agenda planning and unfocussed discussions.

RECOMMENDATIONS FOR EFFECTIVE INDEPENDENT AUDIT COMMITTEE

Boards can implement the following strategic shifts to drastically improve Committee effectiveness:

1. Minimum financial qualification and functional experience to be an audit committee member should be raised from just comprehensive knowledge of financial statements where only the Chairman is required to be an expert in the committee.
2. There should be a minimum of six audit committee meetings in a year—two meetings devoted to evaluating the thorough control environment and risk management related matters comprehensively.
3. There must be a check on the maximum number of audit committees a person can be a member.
4. The audit committee meetings to be held at least a day before the board meeting, to allow for enough time to deliberate and discuss key issues.
5. Appointment of the audit committee should be ensured through a well-defined selection procedure and should not be done by the chairman or board or promoters.
6. The tenure of the audit committee membership should be well defined, and a transparent succession planning process must be there.
7. Appointment of internal auditor and their reporting should be done by and to the audit committee.
8. The Audit Committee reviews its charter at least once in a year and recommends any amendments to the Board.
9. The Audit Committee engages with the auditors on a regular basis.
10. The Committee reviews its own performance once in a year.
11. The Committee reviews areas concerning management’s assumptions, material accounting treatments that have a material impact on the financial statements.
12. The committee should follow guidance issued by ICAI in spirit on “Technical Guide on Functioning Audit Committee & Its Review Checklist”
13. The members use various AccountingRatio tools to check the health of the Financial statements.

CONCLUSION

Ultimately, these structural recommendations point to a single truth: the Audit Committee must evolve from a passive compliance body into a proactive, independent watchdog.

The role of the Audit Committee is no longer confined to finalizing financial statements. In an era of digital transformation, their mandate has expanded to encompass cybersecurity, sustainability reporting, and data privacy under the DPDP Act. To truly protect stakeholders, Audit Committees must shed their reliance on management, assert their independence, and embrace their role as the ultimate guardians of corporate integrity.

BCAJ Admin

The ICAI Code of Ethics mandates five fundamental principles for Chartered Accountants to ensure they consistently act in the public interest.

First, Integrity requires straightforwardness and honesty in all professional, business, and personal relationships. Second, Objectivity demands that professional judgment remains uncompromised by biases, conflicts of interest, or undue influence. Third, Professional Competence and Due Care entails maintaining up-to-date professional knowledge and acting diligently in accordance with technical standards. Fourth, Confidentiality obligates accountants to fiercely protect client information both during and after professional engagements. Finally, Professional Behaviour involves complying with laws and avoiding any conduct that might discredit the accounting profession.

OVERVIEW AND INTRODUCTION:

One of the hallmarks of the chartered accountancy profession is the underlying and tacit responsibility of acting in ‘public interest’. A chartered accountant plays various professional roles in society namely as an accountant, financial advisor, tax advisor, auditor and many more. The impact that each of these roles is able to create depends on the skills and values that accountants bring to the fore. More importantly, the agenda of public interest is served by adherence to ethical principles and professional standards, business knowledge, technical knowledge and lastly professional judgements.

While it is easy for us to sermonize that all accountants should act ethically, what does it mean in practice? Are there any fundamental principles on ethics that can guide the accountant’s behaviour? This article attempts to answer this question and provides an overview of the five fundamental principles of ethics for chartered accountants as enshrined in the Institute of Chartered Accountants of India (ICAI) Code of Ethics (CoE).

FIVE FUNDAMENTAL PRINCIPLES OF ETHICS

There are five fundamental principles of ethics for chartered accountants:

Let’s explore each of these in more detail:

A] INTEGRITY

The CoE defines this as ‘to be straightforward and honest in all professional and business relationships’.

Integrity is also when there is congruence between one’s thoughts, speech and actions. Simply put it means that what one thinks should be aligned with what one says and that is how it should translate into action as well.

Personal versus professional lives: A Chartered Accountant is expected to be honest and upright as a citizen, and in all his personal affairs. The term ‘work life balance’ has become quite fashionable nowadays where professionals want to carve out their office and personal lives with a pursuit to avoid any infringement in boundaries set by each part of these lives. However, when it comes to matters of integrity, there are no boundaries between one’s professional behaviour versus how one behaves in personal life. Only if one displays integrity in personal life, will they be able to have integrity in professional life with the reverse also holding true.

One cannot take the plea that ‘I am obliged to have integrity only while fulfilling my duties as a professional’. Integrity goes to the root of one’s personality and is engrained in each thought, emotion and action. Unless all these components are aligned, the professional will always struggle.

Guts and gumption – Integrity also involves dealing fairly, truthfully, and acting appropriately. It also means that the professional should not let go of his values, even when facing pressure to do otherwise or when doing so might create potential adverse personal or organizational consequences. Various situations may arise which tests one’s mettle irrespective of whether one is a practicing accountant or one employed in industry. When one is confronted by difficult situations, one should stand one’s ground if one believes that he is on the right path. The professional should also challenge others as and when the circumstances require so, in a manner which is appropriate.

False or misleading statements – As a chartered accountant, the professional will be involved in various deliverables such as generating reports, tax returns, email communications, representations etc. Integrity should be upheld at all times in all such activities. He should not be knowingly associated with any such information where he has a reason to believe that it contains any false or misleading statement. He should also put his foot down in case of any statements or information are provided in grossly negligent manner. It is important that one does not hide information where the act of such omission itself would be misleading. The professional’s argument that he did not say anything false would not hold good if he was involved in omitting any important information with full knowledge and awareness that such omission would be misleading. Upon becoming aware, he should also take all necessary steps to disassociate himself from that information. This may also mean taking tough and difficult steps such as issuing any written clarifications to this effect to the recipients of the information or to any other stakeholders.

B] OBJECTIVITY

One of the meanings of ‘objectivity’ by the Merriam Webster dictionary is ‘freedom from bias’ or ‘lack of favoritism toward one side or another’. It means dealing with situations without being influenced by personal feelings, biases, or prejudices. Being objective means relying on facts and evidence rather than the outcome being influenced by personal opinions or emotions.

The CoE requires every chartered accountant to comply with the principle of objectivity, which requires an accountant to exercise professional or business judgment without being compromised by:

• Bias;
• Conflict of interest; or
• Undue influence of, or undue reliance on, individuals, organizations, technology or other factors.

Biases – Bias can be defined as ‘a feeling of favour often not based on fair judgement or facts’. Unconscious or conscious biases may affect professional judgments of the chartered accountant.

1 ISA220 (Revised) published by International Auditing and Assurance Standards Board

Examples of unconscious biases1 that may impede the exercise of reasonable professional judgments may include:

• Confirmation Bias: The tendency to seek or focus on information that confirms preexisting beliefs or expectations, while ignoring evidence that contradicts them.
• Overconfidence Bias: Overestimating one’s own abilities, knowledge, or judgment, which can lead to insufficient testing or overlooking risks.
• Anchoring Bias: Relying too heavily on an initial piece of information (such as last year’s figures or management’s initial estimate) and not adjusting adequately when new, contradictory information arises.
• Familiarity Bias: Placing undue trust or reliance on clients due to long-standing relationships, which may lead to a reluctance to challenge management.
• Groupthink Bias: A phenomenon where team members agree with a consensus or senior member, suppressing dissent or alternative perspectives to avoid conflict.
• Availability Bias: Giving undue weight to information that is readily available or recent, while ignoring less accessible but more relevant evidence

Getting rid of biases does not happen by wishful thinking! it is a result of conscious and deliberate efforts.

Conflicts of interest: A conflict of interest arises if a firm or any of its associated persons has a relationship with another person, entity, or service that may reasonably be thought to bear on the ability of the firm or the associated person to exercise objective and impartial judgment in connection with their responsibilities under applicable professional and legal requirements with respect to an engagement not involving such other person, entity, or service².

A chartered accountant should not undertake a professional activity if a circumstance or relationship unduly influences the accountant’s professional judgment regarding that activity.

The below examples³ from some relevant overseas standards on this topic, may help clarify:

• There is a lawsuit filed against an existing Client A of the chartered accountant/firm and he has also been approached by the opposite party to assist them on the lawsuit.
• Providing tax and financial planning advice to a client and suggesting them to invest in a business in which he or she has a financial interest.
• Providing services for several members of a family who may have opposing interests.
• Having significant financial interest in a company that is a major competitor of a client for which the member performs consulting services.
• Serving on a government panel/ committee which considers matters involving several of his tax clients.

2 PCAOB standards on Integrity and Objectivity

3 PCAOB standards on Integrity and Objectivity

C] PROFESSIONAL COMPETENCE AND DUE CARE

The CoE states that a chartered accountant shall comply with the principle of professional competence and due care, which requires an accountant to:

(a) Attain and maintain professional knowledge and skills at the level required to ensure that a client or employing organization receives competent professional service, based on current technical and professional standards and relevant legislation; and

(b) Act diligently and in accordance with applicable technical and professional standards.

Professional competence is the most important reason that clients approach chartered accountants. The chartered accountant is expected to be proficient in the areas that he practices in. One cannot make an excuse that there was no time to read up on a latest professional update if the client poses a query on the same. Similarly, for any organization employing chartered accountants, the very reason that he is employed is that the underlying assumption that a chartered accountant always endeavors to be at the peak of his game. Irrespective of whether the chartered accountant is a practitioner or in industry, it is expected that he should perform his work based on all applicable technical and professional standards. By no means, is a chartered accountant expected to be an ‘antaryaami’! (colloquial for the almighty omniscient) expected to have expert knowledge on everything under the sun. There are myriad of areas which chartered accountants gain exposure to, however there are a few which the chartered accountant chooses to profess and specialise in. These are the areas where professional competence and knowledge becomes non-negotiable.

Considering that the chartered accountant’s team would very often interact with the clients more than him, it is also in the chartered accountant’s own interest to ensure that the team working under him is also sufficiently trained and supervised.

D] CONFIDENTIALITY

Confidentiality is the bed rock of every professional engagement. More so for an engagement with a chartered accountant, the client exposes every little innards of his organisation and practices in order to ensure that he receives sound advice based on accurate and complete information. Having been privy to such information, a chartered accountant is under an obligation to ensure that the client’s interests are always protected. Maintaining confidentiality of information is one such basic expectation from a chartered accountant.

The CoE states that a chartered accountant shall comply with the principle of confidentiality, which requires an accountant to respect the confidentiality of information acquired in the course of professional and employment relationships. An accountant shall:

•  Be alert to the possibility of inadvertent disclosure, including in a social environment, and particularly to a close business associate or an immediate or a close family member;
• Maintain confidentiality of information within the firm or employing organization;
• Maintain confidentiality of information disclosed by a prospective client or employing organization; and
• Take reasonable steps to ensure that personnel under the accountant’s control, and individuals from whom advice and assistance are obtained, comply with the accountant’s duty of confidentiality.

While confidentiality is a basic expectation arising from the CoE requirements, the same can also be enforced contractually by the client. Some clients may also apply onerous obligations for reimbursement of damages caused due to breach of confidentiality. At times these may be various multiples of fees depending on how the same is negotiated. Also, given the recent developments in enhancements in personal data laws, this requirement is more critical than ever.

WHAT SHOULD HE NOT DO:

All chartered accountants need to take appropriate safeguards to ensure that confidentiality is not breached. It is his responsibility to ensure that:

(a) No disclosure of confidential information acquired in the course of professional and business relationships;

(b) No using of confidential information acquired for any undue advantage;

(c) No use or disclosure of confidential information after that relationship has ended; and

(d) No use or disclosure of information even after the information has become publicly available, whether properly or improperly.

Exceptions when a chartered accountant may disclose or use confidential information:

There are some exceptions that are permitted by the CoE when it comes to disclosure of confidential information. These exceptions are to be carefully considered and all possible safeguards should be applied that sufficient criteria are met for disclosure.

Situations where disclosure is required by law or regulations: For example, if there are any legal proceedings and the chartered accountant is required to provide certain documents/ evidence as mandated by the regulator. There are also certain situations where the CoE requires the professional to report to the appropriate public authorities of infringements of the law that have come to his information. There are separate sections of the CoE which deal with the professional’s reporting obligations in case certain situations of NOCLAR (Non Compliance with Laws and Regulations) are noted by him in the course of his professional duties.

Other situations based on client consent: The ICAI performs quality reviews of work performed by practicing chartered accountants whereby he may be required to disclose certain confidential information of the client forming part of his working papers in order to comply with the requirements of peer review or quality review or such other review by the Institute. There may be other such situations as well, however the consent of the client is required to be taken before any such disclosure is made. Client consent should be the obtained in writing and should specify the end purposes for which the confidential information is sought to be disclosed.

The obligation for confidentiality is not merely driven by the contractual term but survives the completion of the engagements and he shall continue to comply with the principle of confidentiality even after the end of the relationship between the accountant and a client or employing organization.

E] PROFESSIONAL BEHAVIOUR

As per the CoE, a chartered accountant shall comply with the principle of professional behaviour, which requires an accountant to:

•  Comply with relevant laws and regulations;
• Behave in a manner consistent with the professional’s responsibility to act in the public interest in all professional activities and business relationships; and
• Avoid any conduct that the accountant knows or should know might discredit the profession.

If the action has the likelihood to adversely affect the good reputation of the profession, then it needs to be avoided. This again goes to the aspect that we talked about at the beginning of this article i.e. public interest.

Every chartered accountant is also bound by the Chartered Accountants Act (‘Act’) where the first and second schedule of the Act provides various aspects of behaviour which are considered as ‘professional misconduct’. The requirements of the CoE are harmonious with the requirements of the Act and therefore the chartered accountant needs to adhere to both the requirements.

To provide examples, some behaviours which are construed as professional misconduct are:

• Entering into partnerships outside of permitted professionals
• Sharing of fees with non-member
• Accepting share of fees from non-member
• Soliciting professional work in violation of permitted guidelines
• Advertising in violation of permitted guidelines
• Exaggerated claims for the services offered by, or the qualifications or experience of, the accountant;
• Disparaging references or unsubstantiated comparisons to the work of others.
• Engaging in non-permitted occupations
• Breach of client confidentiality
• Grossly negligent in performing duties
• Providing false information etc.

F] PRACTICAL ILLUSTRATIONS IN PROFESSIONAL PRACTICE – ETHICAL DILEMMAS

Now that we have discussed the tenets of professional ethics, let us explore a few situations which may be faced in professional practice. Situations involving such ethical dilemma are difficult to navigate and there are shades of grey. Each step in such situations needs to be carefully considered and deliberated by the professional as quite often, there is no turning back! One wrong action has the potential to irrevocably tarnish the professional’s reputation.

This article will intentionally not endeavour to provide solutions to these situations as it involves professional judgement.

Example #1

Your brother in law has faced massive losses in his business recently. His house is mortgaged and he is unable to repay his home loan. The bank authorities are now about to seize possession of his house. You are working on a confidential engagement with a listed client and you have come to know of a huge contract won by the client which is likely going to triple the profitability of the client in the next year. Your brother in law was sitting in the same room where you were having the conference call with the client and
he has overheard some part of the conversation but not fully. He has asked you to share more information with him so that he can use this to trade in the securities and recoup part of his business losses. What will you do ?

Example #2

You have recently joined a new organisation. You had created certain business templates/documents using publicly available sources for work in your previous employment and for some reason they are available in your personal email address storage. Your new boss is facing an urgent requirement and he has asked you for help for responding to a client request immediately that evening. The templates available on your personal email address exactly match the client’s request. You are due for promotion next month and if you are not able to help your boss today, the chances of your promotion are bleak. What will you do?

The idea of the above examples is to make you aware of various scenarios that can arise, how complex can they be and force you to think and apply the basic principles that we have just explored above.

Finally, in case the chartered accountant is dealing with situations where complying with one fundamental principle conflicts with complying with one or more other fundamental principles, he should consider consulting within or external to the organisation.

BCAJ Admin

In M&A transactions, buyers frequently deposit a portion of the sale consideration into escrow accounts to mitigate future risks or indemnify against potential liabilities. Because the seller lacks an unconditional right to these funds until specific conditions are met, the income does not legally “accrue” and is not taxable in the year of transfer. However, the Income-tax Act, 2025 contains a statutory lacuna: it lacks a specific deeming fiction to tax these escrow releases in the subsequent year they accrue. Strictly interpreted, subsequent escrow realisations constitute non-taxable capital receipts, although prevailing market practice pragmatically taxes them as capital gains in the year of release.

INTRODUCTION

It is increasingly common in contemporary acquisitions of shares or businesses for the consideration to include an element that is either deferred or contingent. Deferred consideration refers to consideration that is fixed as of the date of transfer but payable after a specified period. Contingent consideration, conversely, comprises additional consideration that becomes payable only upon the satisfaction of specified future conditions, such as the achievement of stipulated profit levels or EBITDA. Such arrangements are often structured as “earn-outs”, whereby the acquirer undertakes to transfer additional value to the seller upon the occurrence of agreed future events.

These mechanisms bridge valuation gaps and incentivize sellers to enhance operational performance post-transfer. However, while commercially effective, they create complex tax implications regarding the timing, characterisation, and computation of capital gains, particularly where additional consideration accrues or is received after the year of transfer.

The distinction between the two is critical. Deferred consideration involves an obligation that is fixed and unconditional, subject only to the passage of time. Contingent consideration, however, becomes due only upon the fulfilment of uncertain future events.¹

1 Illustration of Deferred vs. Contingent Consideration: Deferred Consideration: An investor acquires shares of A Ltd. 
for INR 500,000. INR 200,000 is paid upfront, and INR 300,000 is payable after two years. 
The obligation to pay the balance is fixed and unconditional; hence, it is deferred consideration. 
Contingent Consideration: Shares are sold for a maximum of INR 1,000,000 (INR 400,000 upfront). 
The balance is payable only if EBITDA exceeds specific thresholds (e.g., INR 200,000 if EBITDA > INR 5 million; 
INR 600,000 if EBITDA > INR 9 million). This is contingent consideration as the debt arises only upon fulfilment of performance conditions.

In practice, one must also distinguish between two closely related but conceptually distinct situations. The first is where a portion of the agreed sale consideration is deposited into an escrow account and released only upon the satisfaction of specified covenants, indemnity conditions, or the non-occurrence of identified liabilities. The second is where the seller becomes entitled to additional consideration only upon the achievement of future performance metrics or other stipulated milestones. Though both involve delayed receipts and uncertainty at the time of transfer, the legal architecture of the seller’s entitlement is not identical in the two cases. That distinction may have a material bearing on the tax analysis.

This article is therefore being presented in two parts. The present part introduces the broader issue and focuses in detail on the taxation of consideration placed in escrow, including the question whether such amounts accrue to the seller at the time of transfer, whether their subsequent release gives rise to capital gains taxation, and whether forfeiture of escrowed amounts has any tax consequences. The second part will deal with contingent consideration more specifically, including the possible application of the principles in Marren v. Inglis², the treatment of contingent rights under the Income-tax Act, 2025 (IT Act), valuation issues, characterization concerns where continued employment is involved, and related questions arising in the context of share purchase agreements.

2 (1980) 1 WLR 983 (HL), cited by HMRC in their capital gains manual,available at CG14950 
- https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg14950 (Last accessed 16 May 2026)

This distinction also assumes practical significance at the drafting stage. In a share purchase agreement, the precise manner in which the earn-out or escrow arrangement is documented may materially affect its eventual tax treatment. Language that clearly evidences that the amount forms part of the negotiated capital value for the shares—rather than compensation for future services—may support capital gains treatment. Likewise, the drafting of escrow release conditions, indemnity mechanics, and performance triggers may materially influence the timing and characterization analysis.

STATUTORY FRAMEWORK: THE CONCEPT OF ACCRUAL

Section 67(1) of the IT Act³ charges capital gains to tax in the year the transfer is effected⁴. While Section 67(1) creates the charge, the scope of total income is governed by Section 5 of the IT Act⁵, which includes income that is received, deemed to be received, or which accrues or arises or is deemed to accrue or arise to a person during the tax year.

3 Erstwhile Section 45(1) of the Income-tax Act, 1961 (Act)

4 The chargeability under this head is generally linked to the year of transfer, 
except in certain statutory exceptions, such as Section 67(6)[erstwhile Section 45(2)] 
(which deals with the conversion of a capital asset into stock-in-trade, 
where capital gains are taxable in the year in which such stock-in-trade is sold) 
and Section 67(12)[erstwhile Section 45(5)] (which governs the taxation of capital gains arising from compulsory acquisition,
 where initial compensation is taxable in the year of receipt or part thereof and any enhanced compensation is taxable in the year of receipt thereof).

5  Erstwhile Section 5 of the Act

Since deferred or contingent consideration is not “received” in the year of transfer, it is sine qua non that the income must have “accrued” to the assessee to be taxable. The IT Act does not define accrual; thus, it must be determined on general legal principles. Accrual postulates the creation of a present enforceable right to receive income—debitum in praesenti, solvendum in futuro.

The locus classicus on this concept is the Supreme Court’s judgment in E.D. Sassoon & Co. Ltd, which established that income does not accrue unless a debt is created in favour of the assessee. The Court emphasized that unless a debt due by somebody is created in favour of the assessee, it cannot be said that they have acquired a right to receive the income.⁶

Furthermore, the charging and computation provisions of the IT Act constitute an integrated code. As held by the Supreme Court in B.C. Srinivasa Setty, if the computation provisions (Section 72 of the IT Act⁷) cannot be applied, the charge itself fails.⁸ Under Section 72, only consideration that is received or has accrued can be taken into account for the purposes of computation of capital gains.

6  E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 (SC); 
see also CIT v. Walchand Industries Ltd. (2003) 262 ITR 212 (Bom), 
wherein it was held that an unenforceable claim to receive an undetermined 
or undefined sum does not give rise to accrual of income.

7  Erstwhile Section 48 of the Act

8  CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC).

In the case of deferred consideration, it is settled that such consideration accrues on the date of transfer because the right to receive it is unconditional. However, where an amount is parked in escrow and released only upon the satisfaction of specified conditions, the question is materially different. The seller may have divested the underlying capital asset, but whether the escrowed amount forms part of the taxable consideration in the year of transfer depends upon whether the seller has, in law, acquired an enforceable right to receive it in that year.

In certain transactions, contingencies may arise regarding contingent liabilities becoming due and payable, or adjustments may be contemplated based on issues identified during the due diligence process. These issues often relate to the company’s financials (e.g., inconsistent application of accounting policies or discrepancies in revenue recognition) or specific tax positions that could result in a demand, thereby adversely impacting the company’s cash flows and reducing its valuation.

Instead of making a direct debt adjustment to the valuation — which forms the basis for determining the purchase price — the parties may commercially agree to deposit an amount corresponding to the disputed issues into a separate escrow account. These escrowed funds are subsequently released to the sellers only upon the satisfaction of specific conditions, such as the rectification of the identified issues, the closure of pending tax proceedings, or the non-emergence of liabilities during a specified period agreed between the parties. Similarly, amounts may be deposited in escrow to safeguard the buyer against indemnities provided by the seller in the relevant agreements.

Commercially, therefore, escrow is not a mere payment deferral mechanism. It is ordinarily a risk-allocation device. The amount is held back not because the liability to pay is merely postponed, but because the buyer’s obligation to permit release to the seller remains subject to the outcome of specified events. That distinction is important because the tax law does not generally concern itself with commercial labels; it asks whether the seller has a present right to receive the amount.

Consequently, the question arises as to whether the seller is liable to pay capital gains tax on the amounts deposited into the escrow account at the time of deposit.

AMOUNTS DEPOSITED INTO ESCROW BY THE BUYER: ACCRUAL TO THE SELLER?

As previously discussed, for any income to form part of the total income, it must satisfy the referability criteria under Section 5 of the IT Act; that is, the income must have either been received by or accrued to the assessee. The seller possesses no right to demand the release of the escrowed amounts until the covenants stipulated in the relevant agreement are fulfilled. The right to receive the income, or the crystallization of the debt, occurs exclusively upon the satisfaction of these conditions. Until such time, the amounts deposited in escrow do not accrue to the seller and, therefore, should not be offered to tax. In this regard, reliance may be placed on the judgment of the Bombay High Court in Dinesh Vazirani⁹ and the order of the Mumbai Bench of the Income-tax Appellate Tribunal (ITAT) in Universal Medicare.¹⁰

9  Dinesh Vazirani v. Principal Commissioner of Income-tax [2022] 445 ITR 110 (Bom).

10  Universal Medicare (P.) Ltd. v. DCIT [2020] 185 ITD 250 (Mum).

The rationale is straightforward. A sum lying in escrow is not, merely by reason of such deposit, placed at the unrestricted disposal of the seller. The seller cannot ordinarily call for release at will; nor can it be said that a debt is due in presenti. The escrow arrangement interposes a contractual barrier between the seller and the money. Until that barrier is crossed by fulfilment of the conditions, the seller’s interest remains inchoate. Taxing such amount in the year of transfer would therefore amount to taxing a hypothetical receipt.

This reasoning also accords with first principles. If the buyer has deposited the amount into escrow to secure itself against warranties, indemnities, tax exposures, or identified diligence issues, the buyer has not accepted an unconditional liability to pay that amount to the seller. At most, the arrangement contemplates that the seller may become entitled to the amount in whole or in part depending on how the identified risks unfold. Such a conditional and defeasible entitlement is fundamentally different from deferred consideration payable merely upon the lapse of time.

To conclude at this stage, amounts deposited in escrow do not accrue in the year of deposit and, therefore, should not be offered to tax at that juncture. The subsequent realization of these escrowed amounts does not arise from a distinct transfer of a capital asset in the ordinary sense. Whether and how such subsequent realization may nevertheless be taxed under the present statutory framework requires closer examination.

THE LACUNA: TAXATION UPON RELEASE OF ESCROW AMOUNTS

The current framework of Section 5, Section 67(1), and Section 72 does not specifically provide for the release of escrow amounts upon satisfaction of the specified conditions. While it is judicially settled that escrow amounts are not taxable in the year of transfer if the seller has no enforceable right to receive them, the statute does not expressly address in any conclusive manner the way in which such amounts are to be taxed in the year in which the escrow conditions are actually satisfied and the amount is released.

More specifically, should the release of escrow amounts be subjected to tax as capital gains arising from the transfer of the original capital asset in the year of realization? If so, would this approach conflict with Section 67(1), which mandates that capital gains be charged to tax in the year in which the transfer takes place? Alternatively, does the release of the escrow amount merely represent the receipt of a capital sum outside the charging architecture of Section 67(1), since there is no separate transfer of a capital asset upon release?

At this juncture, it is apposite to acknowledge the prevailing market practice: taxpayers generally offer release of escrow amounts to tax in the year of accrual, characterizing it as capital gains of the same nature as the original transfer¹¹. If the original gains were long-term, the escrow release is also often treated as long-term capital gains, though not in the year of transfer, but in the year of accrual. While this may appear commercially logical and administratively convenient, its technical foundation under the IT Act is not free from doubt.

The issue, therefore, is not whether the market has adopted a pragmatic convention, but whether that convention is supported by the statute on a strict construction. In addressing this question, one may refer to Section 2(108) of the IT Act¹², which defines “total income”¹³ to mean the total amount of income referred to in Section 5, computed in the manner laid down in the IT Act. Accordingly, it is not sufficient that the referability requirement under Section 5—whether by way of accrual or receipt—is satisfied. The computation of such income must also be possible in the manner contemplated by the IT Act.

11 One may refer to the factual matrix before the Mumbai ITAT in Universal Medicare (P.) Ltd. v. DCIT (supra) 
(see para 23.1 and para 35 of the order), albeit the issue directly under consideration in that case was 
the taxability of escrow amounts in the year of transfer. While such a view may appear commercially logical, 
it is not strictly aligned with the statutory mandate of Section 67(1) of the IT Act. As per Section 67(1), 
capital gains are chargeable only in the year of transfer. However, escrow consideration is not subjected to 
tax in that year due to its failure to fall within the scope of Section 5 and the combined operation of Section 67(1) with Section 72, 
which permits taxation only of consideration that has accrued or been received. This approach may be viewed as 
an indirect extension of the principle underlying Section 67(12) [erstwhile Section 45(5) of the Act], 
which deals with the receipt of additional compensation and treats such additional compensation as having the same character 
as the gains arising from the receipt of the initial compensation, which is chargeable to tax in the year in which 
such consideration is actually received. In most cases, by the time such escrow amount accrues to the assessee, 
the statutory timelines for filing the return of income or a revised return, as the case may be, would have elapsed.
 Even where receipt occurs within such timelines, offering contingent consideration to tax by revising the return 
for the year of transfer may not be feasible, as it would result in the levy of interest under Sections 424 and 425 
(erstwhile Sections 234B and Section 234C), notwithstanding the absence of any actual default on the part of the assessee. 
Filing an updated return may also not be an attractive option, given the requirement to pay interest under Sections 424 and 425,
 together with additional tax under Section 267 (erstwhile Section 140B), which could significantly increase the effective rate of
 tax on long-term capital gains beyond the statutory rate applicable to the escrow amounts received.

12 Erstwhile Section 2(45) of the Act

13 On which Section 4 of the IT Act creates the charge. Section 4(1) provides that where any Central
 Act enacts that income-tax shall be charged for any tax year at any rate or rates, 
income-tax for such tax year shall be charged at that rate or those rates in accordance 
with and subject to the provisions of the IT Act. Section 4(2) further provides that the charge
 of income-tax under sub-section (1)shall be on the total income of the tax year of 
every person as determined in accordance with the provisions of the IT Act.

AN ALTERNATIVE PERSPECTIVE: COULD REALISATIONS FROM ESCROW ACCOUNTS BE CAPITAL RECEIPTS NOT CHARGEABLE TO TAX?

There is a nuanced distinction between the tax treatment of escrow amounts and contingent consideration. For present purposes, the discussion is confined to escrow amounts. The technical sustainability of classifying escrow realisations as capital receipts not chargeable to tax is discussed below.

1. Capital Receipts vs. Income: The Principle of Strict Interpretation

At the outset, it is pertinent to understand that a “capital receipt” in common parlance does not constitute “income.” Capital receipts are taxed by exception and strictly through the usage of specific deeming fictions in the statute.

It is a settled principle of interpretation that charging provisions (and, more importantly, deeming fictions) must be strictly construed. There is no equity about a tax, and there can be no tax by intendment. Capital gains are specifically made taxable only by virtue of an extended meaning attributed to the term “income” under Section 2(49)(k)¹⁴ of the IT Act. Accordingly, the analysis that follows is based on a literal reading of the law, applying the principles of strict interpretation as famously propounded by Lord Cairns in Partington v. Attorney General¹⁵ and subsequently adopted by the Supreme Court of India in landmark decisions such as A.V. Fernandez v. State of Kerala¹⁶, CST v. Modi Sugar Mills Ltd¹⁷ and CIT v. Kasturi & Sons Ltd.¹⁸ Equally famous words to this effect are those of Justice Rowlatt in Cape Brandy Syndicate v. IRC¹⁹ “in a taxing statute one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.” These principles were recently reiterated by the Supreme Court in American Express²⁰.

14 Erstwhile Section 2(24)(vi) of the Act

15 [1869] LR 4 HL 100, wherein Lord Cairns observed: 
“If the person sought to be taxed comes within the letter of the law he must be taxed, 
however great the hardship may appear to the judicial mind to be. On the other hand, 
if the Crown seeking to recover the tax, cannot bring the subject within the letter of the law, 
the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. 
In other words, if there be admissible in any statute what is called an equitable construction, 
such a construction is not admissible in a taxing statute where you simply adhere to the words of the statute.”

16 AIR 1957 SC 657.

17 [1961] 12 STC 182 (SC).

18  [1999] 237 ITR 24 (SC).

19  [1921] 1 KB 64. Cited with approval, inter alia, in Ranbaxy Laboratories Ltd v UOI [2011] 10 SCC 292; CCE v Acer India Ltd. [2004] 8 SCC 173.

20 DIT (International Taxation) v American Express Bank Ltd. [2026] 484 ITR 137, see pp. 160-165

2. The Sine Qua Non of Section 67(1)

The sine qua non for the applicability of Section 67(1) of the IT Act is the “transfer of a capital asset” during the tax year. Consequently, two essential conditions must be satisfied concurrently to trigger capital gains tax:

(a) The existence of a capital asset; and
(b)The transfer of such capital asset during the relevant tax year.

In the case of an escrow release, the transfer of the shares or business has already taken place in an earlier year. In the year of release, no fresh transfer takes place. This creates the central difficulty in fitting the receipt within the language of Section 67(1).

3. Characterisation of Escrow Realisations

As discussed in preceding sections, amounts are typically deposited into an escrow account to protect the buyer against future, unforeseen liabilities or realisation of indemnity payout on breach of covenants provided by the seller. The release of these funds is generally not linked to any active performance conditions by the seller. Therefore, there should be little debate regarding the characterisation of escrow realisations: they are fundamentally capital receipts.

Such a realisation does not meet the traditional test of “income” as propounded by the Privy Council in CIT v. Shaw Wallace & Co.,²¹ where income was likened to a periodical monetary return coming in with some sort of regularity from a definite source. As a capital receipt, it can only be taxed if the specific statutory provisions governing the taxation of capital gains are entirely satisfied. Capital gain is an artificial income created by the relevant provisions of the IT Act. Therefore, these provisions should be strictly construed. In case of doubt, the assessee would be entitled to the benefit of doubt.²²

21 AIR 1932 PC 138.

22 CIT v. Bhupender Singh Atwal [1983] 140 ITR 928 (Cal).

4. Absence of a Distinct Capital Asset

Crucially, the assessee does not acquire a distinct, independent capital asset in the form of a “right to receive escrow amounts.” Rather, the escrow mechanism is merely a contractual covenant designed to protect the buyer’s interests. One may refer to the below observation made in Decoding Section 5²³:

23 Decoding Section 5, pp. 151-152.

“In the course of negotiation, the seller may have held a bundle of promises and the consideration may have been fixed on the basis of the same. The bundle of promises may include a promise about the sustainability and profitability of the business being sold (either a slump sale or share transfer – where the promise would be for the business of the company). The buyer may decide to pay the first part of the consideration instantly and second part of the consideration only if the promise about the sustainability and profitability of the business is met. Second part of the consideration would thus be contingent upon the promise being fulfilled.”

Basically, the contractual covenants may be understood as mere promises under the contract rather than a distinct capital asset. Put differently, the contract may be seen as the legal source of reciprocal rights and obligations, but not every right that arises under it necessarily assumes the character of an independent capital asset. If one were to contend otherwise, the consequences would be far-reaching. For instance, in an ordinary contract for supply of goods, once the seller supplies the goods, a corresponding right arises to demand payment from the buyer. Yet, the subsequent realization of that amount is never understood as giving rise to capital gains on the transfer or extinguishment of a separate capital asset in the form of a contractual right. It is simply taxed under the ordinary head referable to the transaction — typically business income.

The same reasoning applies more generally across contractual arrangements. Rights to receive salary under an employment contract, fees under a services agreement, or sale proceeds under a trading contract are all rights traceable to contract. However, their realization is not, for that reason alone, treated as the transfer or satisfaction of a distinct capital asset attracting capital gains tax. If every enforceable contractual right were to be elevated into a separate capital asset, the consequence would be to distort the entire scheme of the IT Act, under which receipts are ordinarily taxed under specific heads such as Salaries or Profits and Gains of Business or Profession, depending on their true character. That would suggest that the mere existence of a contractual right cannot, without more, justify treating its realization as capital gains.

As established, these amounts do not accrue to the seller until the contingency associated with the escrow is resolved. The right to receive the funds — and the consequent accrual — only crystallizes in the year the covenant is satisfied.

5. Statutory Lacunae in the IT Act²⁴

24 Various budget representations have consistently raised this issue. Illustratively, refer  
https://bombaychamber.com/wp-content/uploads/2026/01/Part-A-BCCI-Pre-Budget-Representations-Direct-Tax-2026-Legislative-issues.pdf 
(Last accessed on 15 May 2026).

The inability of the current statutory framework to tax such escrow realisations stems from a distinct legislative lacuna, which can be deconstructed as follows:

• Mismatch of Timing under Section 67(1): Section 67(1) mandates that capital gains arising from the transfer of a capital asset shall be deemed to be the income of the tax year in which the transfer took place.
• Interplay with Section 72: Reading Section 67(1) harmoniously with the computation mechanism in Section 72, the escrow amounts cannot be taxed in the year of the transfer because there is an absolute absence of accrual at that point in time.
• Failure of the Referability Criteria (Section 5): Even when the escrow amounts finally accrue in a subsequent year, the referability criteria under Section 5 of the IT Act are not met in the year of transfer to enable the application of Section 45(1). While the “full value of consideration” for the purpose of Section 48 might theoretically include such escrow amounts upon realization, the charging section fails.
• The “During Such Year” Requirement: Section 5 requires not just “accrual,” but specifically mandates that the income “accrues or arises or is deemed to accrue or arise to him in India during such year.” Because the accrual of the escrow amount does not occur in the year of transfer, the referability criteria fail. Consequently, the machinery to apply Section 67(1) and the computation provisions breaks down. One cannot tax the amount in the year of transfer (as it has not accrued – first limb of Section 2(108) fails), and one cannot tax it in the year of accrual (as there is no transfer in that year – second limb of Section 2(108) fails).

This, in substance, is the core lacuna. The charging event and the accrual event occur in different years, but the statute does not contain a specific fiction to bridge that mismatch in the case of escrow.

6. Legislative Intent and the Section 67(12)(b)²⁵ Analogy

One may draw robust support for this interpretation by examining specific legislative fictions introduced elsewhere in the statute, such as Section 67(12)(b).

Historically, the revenue faced identical difficulties in taxing enhanced compensation received on compulsory acquisitions, precisely because the additional consideration did not accrue and was not received in the year of the original transfer. The accrual often happened years later upon the final resolution by a Court. To cure this, the legislature introduced a specific deeming fiction under erstwhile Section 45(5)(b) of the Act to tax the enhanced compensation in the year of receipt, which is carried on into Section 67(12) of the IT Act.

In this regard, reference is made to the observations in Chaturvedi & Pithisaria’s Income Tax Law²⁶ concerning the introduction of erstwhile Section 45(5) of the Act, which are reproduced below:

“Since additional compensation under the 1894 Act was awarded in several stages, multiple rectification had to be made to the original assessment which caused great difficulty in carrying out the required rectification and in effecting the recovery of additional demand. Further, repeated rectifications of assessment on account of enhancement of compensation by the different Courts often resulted in mistakes in computation of tax. To obviate the contention that in the absence of any transfer of capital asset, the amount received in the subsequent years cannot be brought to tax, section 45(5) has been enacted. Similarly, the disputes as to year in which the additional amount should be brought to tax, and whether the year in which the transaction was originally taxed should be reopened, and whether limitation would apply for the purposes of reopening, etc., would all stand resolved by the operation of section 45(5)”

The absence of a similar deeming provision or legislative fiction to determine the year of taxability for delayed escrow realizations strongly implies a statutory lacuna. Applying the rule of strict interpretation, the revenue cannot stretch the existing provisions to cure this defect, rendering the receipt of such escrow amounts a capital receipt not chargeable to tax.

25 Erstwhile Section 45(5)(b)of the Act

26 Chaturvedi & Pithisaria's Income Tax Law, English Edition, Volume 5. p.8040

COULD THE REVENUE TAX THE RECEIPT UNDER SECTION 92²⁷?

For the sake of completeness, if the release of escrowed amounts escapes the charge of capital gains tax for the reasons discussed above, the Revenue may attempt to tax such receipts under the residuary head, “Income from Other Sources”. This approach should not be tenable for the following reasons:

• Relying on the landmark principle established by the Supreme Court in Nalinikant Ambalal Mody v. S.A.L. Narayan Row²⁸, if a receipt is inherently referable to a specific head of income (such as Capital Gains) but falls outside its charging provisions—for instance, due to the failure of the computation mechanism—it cannot automatically be thrust into the residuary provisions of Section 92(1) of the IT Act²⁹. The character of the receipt does not change merely because the computation machinery under the appropriate head fails.
• Furthermore, the specific anti-abuse provisions of Section 92(2)(m)(i)³⁰ of the IT Act, which seek to tax any sum of money received “without consideration”, should not apply to the release of escrow amounts. The realization of such amounts is by no means a gratuitous receipt; rather, it is backed by valid and binding commercial consideration. In the context of such transactions, the consideration for the subsequent receipt encompasses the seller’s contractual promises, covenants, indemnities, and commercial detriment suffered as part of the principal transfer arrangement.
• All these factors squarely fall within the wide ambit of “consideration” as defined under Section 2(d) of the Indian Contract Act, 1872, which recognizes acts, abstinences, and mutual promises as valid consideration. Section 92(2)(m)(i) concerns itself exclusively with the absolute absence of consideration, and does not grant the Revenue the authority to question the adequacy of such consideration. As long as valid legal consideration exists, which, notably, need not be strictly monetary in nature, the rigours of Section 92(2)(m)(i) are not triggered.

27 Erstwhile Section 56 of the Act

28 [1966] 61 ITR 428 (SC)

29 Although this principle was articulated in the context of section 12 of the Indian Income-tax Act, 1922, 
it should apply with equal force to section 56(1) of the Act—as indeed it has—and to section 92(1) of the IT Act

30 Erstwhile Section 56(2)(x)(a) of the Act

FORFEITURE OF ESCROW AMOUNTS

If the escrowed amount, or a part thereof, is ultimately forfeited or appropriated towards indemnity or identified liabilities, no separate tax consequence should ordinarily arise for the seller in respect of the forfeited amount, because the corresponding income never accrued to the seller and was never brought to tax. Equally, for the buyer, such appropriation would ordinarily operate as an economic reduction of the purchase price or as satisfaction of a contractual protection built into the consideration mechanics.

This is another reason why treating the escrow deposit itself as accrued income in the year of transfer may produce distortion. If the entire amount were taxed upfront, but a portion was later never released, the statutory framework does not provide an elegant corrective mechanism in all cases. The structure of the law therefore reinforces the conclusion that escrowed amounts should not be treated as accrued merely because they have been parked in a designated account.

PRACTICAL COMPLICATION: CLAWBACKS AND PRICE ADJUSTMENTS

Practical complications may arise where an agreement contains clawback or price adjustment provisions, requiring the seller to return consideration if specified conditions are not met or if representations are later found to be inaccurate. If the agreement is drafted such that the clawback or price adjustment is linked to the purchase price itself rather than a separate indemnity payout, it could be argued that the seller might seek to rely on principles analogous to those applicable in escrow situations.

However, a key distinction remains. In typical clawback scenarios, the seller has already received consideration, whereas in escrow cases the relevant amount is held back and does not reach the seller unless the stipulated conditions are satisfied. This distinction provides a far stronger basis in escrow cases to contend that the amount was neither actually received nor had accrued to the seller. Receipt of consideration may also raise questions under Section 72 of the IT Act. One could, however, argue that Sections 5(1)(a) and 5(2)(a) should apply only to cases where certain sums are deemed to be income only upon receipt, such as advance salary or gifts.

Conceptually, clawback provisions are analogous to warranties in the sale of goods. Under such warranties, if goods fail to meet agreed standards, the seller may be obliged to replace them or provide a refund. Importantly, the accrual of income — i.e., the sale price—has occurred at the time of the transaction; the subsequent obligation to return consideration does not alter the fact of accrual. Similarly, under SPA clawback clauses, the legal right to receive consideration for the transfer of shares has already accrued to the seller. The contingency of returning a portion of the consideration, therefore, may not affect the recognition of income in the year of transfer, as the accrual is already a fait accompli.

From a business contract perspective, there is continuity in the source of income, and subsequent payments may rightly be treated as expenditures under Section 34³¹. Nevertheless, capital gains differ in nature: it is generally considered that subsequent events requiring the return of part of the sale consideration do not allow for a reduction in the full value of consideration originally accrued. In this context, the Madras High Court in Caborandum Universal Ltd. v. ACIT³² observed:

31  Erstwhile Section 37 of Act

32  [2021] 283 Taxman 312 (Mad)

“…Even going by the case as projected by the assessee, the amount of Rs.3.25 Crores is retained in an Escrow account and the right of the assessee has not been disputed and that amount was retained to cover four contingencies which are part of the indemnity clause and assuming certain payoffs were to be made from the retention money that will not in any manner alter the full and total consideration received by the assessee pursuant to the Business Sale Agreement and if such is the factual position, undoubtedly, the entire sale consideration had accrued in favour of the assessee during the assessment year under consideration. Even assuming that certain payments have been made from the amount retained in the Escrow account, it will not make or in any manner reduce the cost of acquisition [sic full value of consideration].”

While these observations were made in the context of escrow arrangements, it is respectfully submitted that amounts deposited in escrow cannot, in strict terms, be regarded as having been received or accrued to the assessee where the seller has no enforceable right to demand release pending fulfilment of conditions. That distinction merits careful reconsideration. Nevertheless, the judgment does illustrate the risk that courts may, in certain fact patterns, treat escrow retention as merely a mode of application of consideration rather than as a true suspension of accrual. Drafting, therefore, assumes considerable significance.

To minimize ambiguities, amounts genuinely subject to a potential claim or adjustment should ideally be deposited in escrow accounts with clear release conditions and clear restrictions on the seller’s rights pending satisfaction of those conditions. The agreement should also make it evident that the escrow arrangement is not merely a payment routing mechanism but a substantive contractual allocation of risk. The agreement should explicitly state that the escrow arrangement is made at the Purchaser’s request, as this could help distinguish the current situation from the facts in Caborandum Universal Ltd. (supra). In that case, the court held that amounts placed in escrow were considered to have accrued to the seller since the escrow arrangement was mutually agreed upon. The court viewed the escrow deposit as a subsequent event and did not alter the original agreement’s terms.

CONCLUSION

The taxation of escrow consideration reveals a structural tension between commercial reality and statutory design. On first principles, and supported by judicial authority, an amount placed in escrow subject to substantive release conditions should not be regarded as having accrued to the seller in the year of transfer, because no enforceable right to receive such amount exists at that stage.

The more difficult question arises later: when the escrow conditions are satisfied and the money is released, the IT Act does not contain a specific mechanism equivalent to Section 67(12) to bridge the mismatch between the year of transfer and the year of accrual. This gives rise to a serious argument that the receipt, being capital in nature, may fall outside the charge altogether unless and until Parliament enacts a specific deeming provision.

At the same time, market practice continues to favour taxation in the year of release as capital gains of the same character as the original transfer. That practice may be commercially sensible, but it sits on uncertain statutory footing. The issue therefore remains open to debate and is likely to continue to generate controversy until legislative clarity is introduced.

The second part will examine whether similar or different conclusions follow in the case of contingent consideration, where the seller’s entitlement is not to a retained portion of an agreed price, but to an additional amount that itself comes into existence only upon the happening of uncertain future events.

BCAJ Admin