2025 (7) TMI 876 - AT - Income Tax

Reopening of assessment u/s 147 - Addition on account of LTCG - year of assessment - slump sale undertaken - AO initiated reassessment proceedings u/s 147/148 contending that the assessee had under-declared the taxable LTCG by not including the Escrow amount in the A.Y. 2012-13. As submitted as per provisions of Income Tax Act 1961 and section 53A of the Transfer of property Act the transfer of Assets took place in A.Y. 2012-13 - CIT(A)deleted addition - HELD THAT - We find that the reopening of the assessment was not justified and we also find that the original assessment for AY 2012 13 was completed under Section 143(3) of the Income Tax Act and all relevant facts including details of the slump sale agreement and the escrow amount were already disclosed during those proceedings. The reassessment was based solely on the same set of facts and no fresh or tangible material was brought on record by the AO to justify reopening. Therefore in our considered view the reopening of the assessment was merely a change of opinion which is not permissible under the law. Addition as Long-Term Capital Gain - We find merit in the assessee s contention that the amount kept in the escrow account was contingent in nature. The amount was not guaranteed to be received in AY 2012 13 as it depended on fulfilment of certain conditions mentioned in the agreement. We agree with the finding of the CIT(A) that the assessee did not have an absolute or enforceable right to receive the escrow amount during AY 2012 13 and the final amount became receivable only in the subsequent year. Therefore the addition made by the AO was not justified. Appeal of the Revenue is dismissed.

Summary

Issues Presented and Considered

The core legal questions considered in this appeal are:

1. Whether the reopening of the assessment for Assessment Year (AY) 2012-13 under Sections 147/148 of the Income Tax Act, 1961 was valid, given that the reassessment was initiated on the basis of the same facts already disclosed and assessed earlier.

2. Whether the addition of Rs. 3,34,37,500/- as under-declared Long-Term Capital Gain (LTCG) for AY 2012-13, representing an escrow amount held under a slump sale agreement, was justified under the Income Tax Act, 1961.

3. The applicability of accrual-based accounting principles and the timing of recognition of income arising from contingent consideration held in escrow under a slump sale agreement.

Issue-Wise Detailed Analysis

Issue 1: Validity of Reopening of Assessment under Sections 147/148

Legal Framework and Precedents: The reopening of an assessment under Sections 147/148 is permissible only if there is tangible material or new information indicating income has escaped assessment. A mere change of opinion by the Assessing Officer (AO) is not sufficient to justify reopening. This principle is well established by Supreme Court rulings such as CIT v. Kelvinator of India Limited and other authoritative decisions.

Court's Interpretation and Reasoning: The Tribunal noted that the original assessment for AY 2012-13 was completed under Section 143(3) with full knowledge and disclosure of the slump sale and the escrow amount. The AO's attempt to reopen the assessment was based solely on the same facts already on record without any fresh or tangible material. The Tribunal concurred with the CIT(A)'s finding that the reassessment was a mere change of opinion, which is impermissible.

Key Evidence and Findings: The slump sale agreement dated 06.04.2011 and the disclosure of the escrow amount were part of the original assessment record. No new evidence was produced by the AO to justify reopening.

Application of Law to Facts: Since no new material was brought forth, the reopening was invalid. The Tribunal relied on the settled legal position that reopening requires fresh information and cannot be based on re-evaluation of the same facts.

Treatment of Competing Arguments: The Revenue contended that the full sale consideration was determinable at the time of the agreement, justifying reassessment. The Tribunal rejected this, emphasizing the absence of new evidence and the prior disclosure of all relevant facts.

Conclusion: The reopening of the assessment under Sections 147/148 was held to be invalid and set aside.

Issue 2: Taxability of Escrow Amount as Long-Term Capital Gain in AY 2012-13

Legal Framework and Precedents: Income is taxable when it accrues or is deemed to accrue to the assessee. Under the Income Tax Act, capital gains arise on the date of transfer as defined in Section 2(47). However, where consideration is deferred or contingent, the right to income must be absolute and vested for taxability. Precedents such as CIT v. Hemal Raju Shete and Principal Commissioner of Income Tax-1, Chandigarh v. Shri Mahipinder Singh Sandhu clarify that contingent or deferred consideration is taxable only when the right to receive it crystallizes.

Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A) that the escrow amount of Rs. 3,34,37,500/- was contingent upon fulfillment of certain conditions, including breach of warranties or arbitral awards, and was held in an escrow account as security. The assessee did not have an absolute or enforceable right to this amount during AY 2012-13. The amount was neither accrued nor receivable in that year.

Key Evidence and Findings: Clause 4.8 of the slump sale agreement explicitly stipulated the escrow arrangement and conditions for release of funds. The escrow amount was received by the assessee only in the subsequent financial year after conditions were met.

Application of Law to Facts: The Tribunal applied accrual-based accounting principles and tax law to hold that the contingent escrow amount could not be taxed in AY 2012-13. Taxation was appropriate only in the year when the amount became vested and was actually received.

Treatment of Competing Arguments: The Revenue argued that the full sale consideration was determinable at the time of transfer and hence taxable in AY 2012-13. The Tribunal rejected this, holding that contingent deferred payments are not taxable until realization or crystallization of the right to receive them.

Conclusion: The addition of Rs. 3,34,37,500/- as LTCG in AY 2012-13 was not justified and was rightly deleted.

Issue 3: Applicability of Accounting Standards and Timing of Income Recognition

Legal Framework and Precedents: The Income Recognition Method under Accounting Standard 9 (AS-9) governs revenue recognition in business transactions but does not override provisions of the Income Tax Act regarding capital gains. The timing of recognition of capital gains is governed by the date of transfer under Section 2(47) of the Act. Judicial precedents emphasize that deferred or contingent consideration must be recognized in the year it accrues or becomes certain.

Court's Interpretation and Reasoning: The AO's rejection of AS-9 applicability was accepted to the extent that slump sale is not an ordinary business activity and capital gains recognition is governed by the Income Tax Act. However, the Tribunal agreed that the escrow amount was contingent and not accrued income in AY 2012-13. The Tribunal relied on judicial precedents affirming that the accrual of income must be based on the probability of realization in a realistic manner.

Key Evidence and Findings: The escrow clause and subsequent receipt of funds after conditions were met supported the conclusion that income recognition was deferred.

Application of Law to Facts: The Tribunal applied the principle that contingent consideration is taxable only when the right to receive it becomes absolute and not at the time of agreement.

Treatment of Competing Arguments: The Revenue's argument that the entire consideration was determinable and hence taxable upfront was rejected as inconsistent with the contingent nature of the escrow amount.

Conclusion: The timing of income recognition for the escrow amount was correctly aligned with the year of receipt and crystallization of the right, not the year of agreement.

Significant Holdings

"The reopening of the assessment was based solely on the same set of facts already disclosed and assessed, without any fresh or tangible material, and hence amounted to a mere change of opinion, which is impermissible under the law."

"The escrow amount held under the slump sale agreement was contingent upon future events and conditions and was not accrued or receivable in the AY 2012-13; therefore, it could not be taxed as Long-Term Capital Gain in that year."

"Income arising from contingent or deferred consideration under a slump sale agreement must be recognized and taxed only in the year in which the right to receive such income becomes absolute and vested."

"The principles of accrual-based accounting and the provisions of the Income Tax Act must be harmoniously applied to determine the correct timing of recognition of capital gains from contingent consideration."

"The Tribunal upheld the CIT(A)'s order deleting the addition of Rs. 3,34,37,500/- and setting aside the reassessment order dated 17.08.2017."