23/04/2022
The consideration for share sale reduced from the escrow account cannot be subject to capital gain tax: Bom HC
Dinesh Vazirani (Bom HC Writ Petition No. 2475 of 2015)
Facts:
1. The assessee, in this case, was an individual holding shares in WMI Cranes Ltd. During financial year 2010-11, the assessee sold these shares to Konecranes Finance Corporation under the share purchase agreement (SPA).
2. As per the SPA, the Purchaser was liable to pay a total consideration of INR 155 crores to the promoters including the assessee, of which INR 125 crores was paid at the time of transfer of the shares and balance INR 30 crores was deposited in an escrow account.
3. With respect to the escrow amount, the SPA provided that such amount shall be released on completion of 2 years provided there is no liability on the promoters towards the specific indemnity obligations envisaged under the SPA.
4. Taxpayer had filed his ITR considering the consideration of Rs 155 crores while computing capital gains.
5. Subsequently, certain liabilities arose in the Company to the tune of INR 9.17 crores, towards which the promoters had an indemnification obligation under the SPA. Accordingly, this amount was withdrawn from the escrow account by the Purchaser.
6. The assessee filed an application U/S 264 with the commissioner for reducing his capital gains in the ITR by reducing his share in Rs 9.17 crores.
7. The commissioner rejected his application since Section 264 of the IT Act allows the PCIT to revise an order passed by the tax officer, which is prejudicial to the interest of the Taxpayer. Thus, the capital gain which has been reported by the Taxpayer himself in his ITR cannot be revised under Section 264 of the IT Act.
The Hon Bombay HC held as below:
1. The amount of INR 9.17 crores was neither accrued nor received by the promoters and was withdrawn from the escrow account. Therefore, such an amount cannot form part of the full value of consideration for computing the capital gains.
2. Section 264 of the IT Act does not restrict the power of PCIT and can be invoked to amend the assessment order passed by the tax officer and recompute the capital gain, as there cannot be a tax on the income which has neither accrued nor received by the Taxpayer.
3. Thus the amount received for sale of shares but deposited in an escrow account and further withdrawn by the purchaser towards the liabilities, cannot be taxable.
Conclusion:
Tax can be levied only on the income chargeable under the IT Act and and if a higher tax is paid, then ITR may be revised U/S 264 too.
TaxByte by CA Aniket Kulkarni
