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The Commissioner of Income Tax-8, Mumbai Versus Mrs. Hemal Raju Shete

2016 (4) TMI 1082 - BOMBAY HIGH COURT

Mode of offering capital gains for tax on receipt basis - Held that:- In this case the amount of ₹ 20 crores is neither received nor it has accrued to the respondent-assessee during the subject assessment year. We are informed that for the subsequent assessment year (save Assessment Year 2007-08 for which there is no deferred consideration on application of formula), the Assessee has offered to tax the amounts which have been received on the application of formula provided in the agreement .....

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right to receive the amount and the respondent-assessee alongwith its co-owners have not under the agreement dated 25th January, 2006 obtained a right to receive ₹ 20 crores or any specified part thereof in the subject assessment year.

In the above view there could be no occasion to bring the maximum amount of ₹ 20 crores, which could be received as deferred consideration to tax in the subject assessment year as it had not accrued to the respondent-assessee.We find that b .....

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ondent : Mr. J.D. Mistri,Sr. Advocate i/b Mr.Atul Jasani P.C. : 1. This appeal under Section 260A of the Income Tax Act, 1961 (the 'Act') challenges the order dated 10th July, 2013 of the Income Tax Appellate Tribunal (the 'Tribunal'). The appeal relates to the Assessment Year 2006-07. 2. Mr. Pinto, learned counsel for the revenue urges the following question of law for our consideration : (a) Whether on the facts and in the circumstances of the case and in law, the Tribunal was .....

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of M/s. Unisol Infraservices Ltd. (M/s. Unisol) to one M/s.Radha Krishna Hospitality Services (P) Ltd. ( RKHS ) in terms of agreement dated 25th January, 2006. The Assessing Officer on perusal of the agreement dated 25th January, 2006 was of the view that under the agreement, the respondent-assessee as well as other co-owners (Shete family) of M/s. Unisol were to receive in aggregate a sum of ₹ 20 crores and proceeded to tax entire amount of ₹ 20 crores in the subject assessment year .....

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ncome-Tax (Appeals) deleted the addition of ₹ 4.48 crores made by the Assessing Officer on the ground that it is notional. The Commissioner of Income-Tax (Appeals) on examination of the agreement dated 25th January, 2006 noted that in terms of the agreement the respondent-assessee alongwith other co-owners of the shares of M/s.Unisol were to receive ₹ 2.70 crores as initial consideration. The respondent-assessee had offered her share out of ₹ 2.70 crores received as initial con .....

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receivable by the respondent-assessee in the immediate succeeding assessment year i.e. assessment year 2007- 08. On the analysis of agreement, the Commissioner of Income-Tax (Appeals) concluded that the amount of ₹ 20 crores is the maximum amount that could be received by all co-owners under the agreement from M/s. RKHS. However, on working of the formula there was no guarantee that this amount or for that matter any amount would be received as was evident from the immediate succeeding as .....

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ion made by the Assessing Officer was deleted. 5. Being aggrieved, the Revenue filed an appeal before the Tribunal. By the impugned order dated 10th July, 2013 the Tribunal upheld the findings of the Commissioner of Income Tax (Appeals) interalia holding that as there is no certainty of receiving any amount as deferred consideration, the bringing to tax the maximum amount of ₹ 20 crores provided as a cap on the consideration in the agreement dated 25th January, 2006 is not tenable. The Tri .....

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upees Twenty Seven million) less debt as on completion date plus cash as an completion date to be paid to Shete Group by RKHS in consideration for the shares in accordance with the provisions of clause 3.3. 7.7 Purchase price (for the transferee sale consideration for the transferor) the aggregate of initial consideration and deferred consideration under clause 3. Clause 2 Agreement to sell and purchase Shete Group shall on the completion date sell and transfer as legal and benefical owner, the .....

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the initial consideration as calculated in accordance with clause 3.3 and the deferred consideration as calculated in accordance with clause 3.4. The aggregate of the initial consideration and the deferred consideration shall be capped at ₹ 20,00,00,000/- (India Ruppes two hundred million) less debt plus cash. Subject to Clause 3.3.1 and 3.3.2 below the initial consideration shall be payable on completion and shall be satisfied by the payment to Shete Group on the completion date. Clause .....

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India excluding any one off profits or one off losses and consistently applied with previous years). (b) Where any capitalized letter is given any meaning in any of the remaining sub clauses of the clause 3.4 such capitalized letter shall also bear the meaning where it is used in any other of the sub clauses of this clause 3.4. (c) Cash and debt shall be calculated in accordance with the definition under clause 1.1 at their respective dates as mentioned above. Clause 3.4.2 The first deferred co .....

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consideration which shall then be made and payable on June 30, 2007. Clause 3.4.3 The amount payable in respect of B shall be capped at ₹ 20,00,00,00 (Indian rupee two hundred million) minus initial consideration payment of such sum shall be in full settlement of any sum due in respect of B notwithstanding the circumstances where the calculation of B would otherwise result in a figure in excess of ₹ 17,30,00,000/-(i.e India Rupees One hundred and seventy three million) Clause 3.4.4 I .....

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On 31th May, 2009, RKHS shall submit the calculation of the second deferred consideration to Shete Group for review. The parties shall agree within 30 days the amount of the second deferred consideration which shall then be made and payable on June 30, 2009 Clause 3.4.5 The amount payable in respect of E under clause 3.4.4 shall be capped at the sum calculated as follows: ₹ 20,00,00,000 - (A+B) And payment of such sum shall be in full settlement of any sum due under clause 3.4.4 notwithsta .....

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deferred consideration under clause 3.4.4 (if any) B = the first deferred consideration under clause 3.4.2 (if any) A = initial consideration Cash = Cash as on March 31, 2010 On 31st May, 2010 RKHS shall submit the calculation of the third deferred consideration to Shete Group for review. The parties shall agree within 30 days the amount of third deferred consideration which shall be made and payable on June 30, 2010 Clause3.4.7 The amount payable in respect of G under clause 3.4.6 shall be cap .....

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would attract the capital gains tax. It is further submitted that the amount to be taxed under section 45(1) is not dependent upon the receipt of the consideration. In support of the above he invites our attention to Section 45(1)(A) and section 45(5) of the Act which in contrast brings to tax capital gains on amount received. In the above view, it is his submission that the Assessing Officer was justified in bringing to tax entire amount of the respondentassessee's share in ₹ 20 crore .....

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in the four years would be dependent upon the profits made by M/s. Unisol in each of the years. Thus in case M/s. Unisol does not make net profit in terms of the formula for the year under consideration for payment of deferred consideration then no amount would be payable to the respondent-assessee as deferred consideration. The consideration of ₹ 20 crores is not an assured consideration to be received by the Shete family. It is only the maximum that could be received. Therefore it is not .....

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tself makes the amount which is receivable as deferred consideration contingent upon the profits of M/s.Unisol and not an ascertained amount. Thus in the subject assessment year no right to claim any particular amount gets vested in the hands of the respondent-assessee. Therefore, entire amount of ₹ 20 crores which is sought to be taxed by the Assessing Officer is not the amount which has accrued to the respondent-assessee. The test of accrual is whether there is a right to receive the amo .....

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must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in presenti, solvendum in futuro …. …. …. . In this case all the co-owners of the shares of M/s.Unisol have no right in the subject assessment year to receive ₹ 20 crores but that is the maximum which could be received by them. This amount which could be received as deferred consideration is dependent/contingent upon certain uncertain events, therefore, it cannot be said to have acc .....

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substance of the matter is income, if income does not result, there cannot be a tax, even though in book-keeping an entry is made about a hypothetical income, which does not materialize. In this case ₹ 20 crores cap in the agreement is not income in the subject assessment year. It has been observed by the Apex Court in the case of K.P. Varghese vs. Income-Tax Officer, Ernakulam & Anr. 181 ITR Page 597 that one has to read capital gain provision along with computation provision and the .....

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