TMI Blog2020 (4) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... crore. In our view, the assessee is legally entitled to claim the set off of legitimate losses under the same head if it accrues to the assessee. As noted above the Hon ble Jurisdictional High Court in CIT vs. Nagri Mills Co. Ltd. [ 1957 (9) TMI 30 - BOMBAY HIGH COURT ] held that as to why the Income-tax authorities, in a matter such as where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate. Applying the same analogy that the assessee being a corporate entity is taxed at the marginal rate, the revenue should not fritter away its energies in fighting matters. The case law relied by the ld. DR for the revenue are not applicable on the facts of the present case as the same are based on different set of facts. In the present case, though the price was determined but was payable on fulfillment of certain condition as agreed in Escrow Agreement and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Year 2012-13. 2. Brief facts of the case are that the assessee is a company engaged in manufacturing and trading of Pharmaceutical Products. The assessee filed its return of income for relevant Assessment Year on 28.11.2012 declaring total income of ₹ 495,49,42,070/-. During the assessment, the Assessing Officer noted that Universal Medicare Pvt. Ltd. (UMPL) assessee has sold its marketing division to M/s Aventis Pharma Ltd. (APL), (now known as Sanofi) the assessee has shown total sale consideration against the sale of marketing division of ₹ 567.07 crore. However, in the computation of income, the assessee has shown Capital Gain of ₹ 477.30 crore only, on sale of marketing division, after deducting ₹ 89.73 crore. The assessee claimed that total sale consideration payable to the assessee amounts is ₹ 567.07 crore, out of which ₹ 89.49 crore is placed by the purchaser in a Escrow Account opened with Hongkong and Shanghai Banking Corporation Ltd. (HSBC), which will accrued to the assessee company in five annual equal instalment annually, subject to fulfilment of certain obligation being on the achievements of the performance targets ever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 567.07 crore i.e. 84% of total consideration. 7. Fifthly, the amount kept in Escrow Account has no relation, whatsoever with the transfer of marketing division. It has only bearing of supply agreement between the parties. 8. And sixthly on going through the Escrow agreement and supply agreement, the Assessing Officer took the view that interest on the amount kept in Escrow Account belong to the seller and that assessee has offered interest of ₹ 3.03 crore accrued on full Escrow Account from 03.11.2011 to 31.03.2012. The assessing officer took his view that these facts clearly establish that the amount is clearly earned by assessee. The Assessing Officer brought the remaining amount of ₹ 71.57 crore, kept in Escrow Account to tax as income of assessee for the assessment year under consideration. 9. On appeal before the ld. CIT(A), the action of Assessing Officer was affirmed. The ld. CIT (A) while affirming the action of Assessing Officer held that as per the agreement, the business of distributing and selling Pharmaceutical Products a going concern was sold on slum sale basis. The assessee also entered with business purpose agreement to supply ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax (A) has erred in confirming the addition of ₹ 71,56,00,000/- while computing the long term capital gain in case of slump sale of business during A.Y. 2012-13. The Learned Commr. Of Income Tax (A) has erred in concluding that the capital gains accrued to the extent of ₹ 71,56,00,000/- during the A.Y. 2012-13 and is chargeable to tax. The conclusion reached by the Learned Commr. of Income Tax (A) is erroneous and the appellant prays that the addition of₹ 71,56,00,000/- may be deleted. 2. On the facts circumstances of the case the Learned Commr. of Income Tax (A) has erred in concluding that sale consideration of ₹ 567.07 crores for transfer of marketing division accrued to the appellant during A.Y. 2012- 13 and consequently the resultant chargeable long term capital gain is to be increased by ₹ 71,56,00,000/-. The appellant prays that during A.Y. 2012- 13 the sale consideration of ₹ 477.30 crores only accrued to the appellant and the long term capital gain is to be worked out based on the sale consideration accrued to the appellant amounting to ₹ 477.30. The appellant prays that the addition made by the Learned Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee vide application dated 09.09.2017 raised the following additional grounds of appeal: On the facts and circumstances of the case and in law, the Ld.AO and the Ld.CIT(A) erred in computing capital gains arising from transfer of the Marketing Division even when the Full Value of Consideration arising as a result of transfer of the said division was not determinable and, thus, the mechanism to compute capital gains failed. 12. On service/filing the additional ground of appeal, the revenue filed its Cross Objection (CO) by raising following grounds of cross objection: Whether on the facts and circumstances of the case and in law, the assessee is justified in filing additional grounds of appeal disputing calculation of capital gain by AO, which was upheld by CIT(A), on the ground that the full value of consideration arising as a result of transfer of said division was not determinable, even though the company itself declared the said transfer as a slump sale by filing Audit Report in Form 3CEA and the purchaser M/ s Sanofi India Ltd has reflected the entire amount i.e. ₹ 567.07cr in A.Y 2012-13 . 13. We have heard the submission of Shri J.D. Mistry, ld. seni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital gain fails. In our view for deciding additional ground of appeal, no new facts are required. The facts are emanating from the order of lower authorities. Therefore, considering the fact that when no new facts are necessary to be brought on record and that the facts are emanating from the orders of lower authorities. We are inclined to admit the additional ground of appeal raised by assessee. 16. Now turning to the Cross Objection filed by revenue/Assessing Officer. In our considered view, the cause of action for filing cross objection against the additional ground of appeal arises only on service of the additional ground of appeal. The Cross Objections are filed on 07.11.2017. Considering the contention of Assessing Officer/revenue that the delay was due to administrative reason and paucity of staff. Moreover, we have noted that there is a delay of about 21 days in filing the said cross objection. We have noted that ld. AR of the assessee has not explained as to when the copy /notice of additional ground of appeal was served upon the revenue. However, on perusal of order-sheet, it is revealed that the hearing of this appeal was fixed on 15.09.2017, thus we assume t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come, the assessee offered a lump-sum payment of ₹ 477.30 crore as well as ₹ 17.89 crore (out of ₹ 89.45 crore), accrued to the assessee during the previous year. The ld. AR of the assessee also referred annual accounts, wherein the assessee has disclosed sale of marketing division as a slump sale. The ld. AR o the assessee submits that balance of ₹ 71.56 crore was offered in four subsequent AYs. The balance offered by assessee in four subsequent year i.e. in A.Y. 2013-14 to A.Y. 2016-17 was accepted by revenue in assessment order passed under section 143(3), copies of assessment order with the computation of income is also placed on record. The Assessing Officer and the ld. CIT(A) treated the business purchase agreement and Escrow Agreement independent to each other and held that Escrow Account could not be linked to supply agreement and therefore, entire consideration of ₹ 567.07 crore accrued to the assessee in the Assessment Year itself. The ld. AR of the assessee submits that ground no.1 to 4 relates to contingent consideration kept in Escrow Account. The ld. AR of the assessee submits that perusal of various clause of Business Purchase Agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness Purchase Agreement, without which the Business Purchase Agreement would not have closed and that supply agreement is an integral part of Business Purchase Agreement but has no mention of Escrow Account. From the above facts, it is clear that contingent consideration deposit in Escrow Account by purchaser was on account of transfer of marketing division on slum sale basis and such contingent consideration was to accrue only upon fulfilment of conditions over a period of five years. Accordingly, the assessee offered the said amount in respect of orders without it was accrued and was taxed in the year in which the said amounts were offered. 21. On the observation of Assessing Officer that interest accrued to the seller on this issue, it was pointed out that interest amount was received in as much as the first instalment has accrued to the assessee. Therefore, the interest accrued until such date has also accrued to the assessee. The said interest was duly offered to tax. In the event, contingent consideration was not receivable by assessee, the interest thereon would have to be refunded back to the purchaser such to same adjustment. Thus, interest was to be treated in accordan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntingent consideration, which may or may not have accrued/arisen to the assessee (depending on future condition being fulfilled) and therefore, in this Assessment Year it was not possible to compute full value of consideration . 22. In support of his submission, the ld. AR of the assessee relied upon the decision of Hon ble Supreme Court in Sunil Siddharthbhai [156 ITR 509 (SC)] and in CIT vs. Gorge Henderson Co. Ltd. [66 ITR 622 (SC)] wherein it was held that absence of quantifiable consideration result in failure of the assessee for charging capital gain tax. Accordingly, if contention of AO accepted then following the aforesaid ratio of Hon ble Apex Court, full value of consideration not being determinable, the Capital Gain accruing on account of Slum sale was not determinable at all. It was submitted that fundamental rule of law on taxation is that unless otherwise expressly provided, the income cannot be taxed twice. Thus, the lower authority erred in assessing the entire amount as chargeable to tax in the current year. In support of his other submission, the ld. AR of the assessee also relied on the following decisions: CIT vs. Mrs. Hemal Raju Shete (239 Taxman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequent years, the ld. DR submits that the chargeability arises only in the year in which transfer took placed and the relevant A.Y. is 2012-13 only. In any event the assessee has set it off against losses which would never have been the case had it been offered to tax in the year of transfer which is in A.Y. 2012-13 in this case. The ld. DR further submits that the assessee has shown ₹ 17.89 crore for each of subsequent AYs as net capital gain on transfer of business purchase agreement. However, for A.Y. 2014-15 and 2015-16 this amount of ₹ 17.89 crore in each year, has been set off against the Long Term Capital Loss on sale of mutual funds of ₹ 7.55 crore and ₹ 4.36 crore respectively. However, it is not known as to what amount were declared for A.Y. 2016-17. 26. The ld. DR further submits that in the business purchase agreement dated 24.08.2011 between assessee and Aventis Pharma Ltd. there is recital (A) The seller is, interalia engaged in the business (as defined below). Geltec is, interalia engaged in the business of manufacturing nutraceutical and pharmaceutical product . (B) The seller has agreed to sale the business and to assume the obli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B. This is in the face of the argument of the Ld Counsel stating that, slump sale is not a different animal. 2. With respect to the Ld Counsel's argument that this long term capital gains of ₹ 89.45 cr has been offered in the subsequent years, it is submitted that the chargeability arises in the year in which the transfer happened and this is relevant AY 12-13 only. In any event, the appellant has set it off against losses which auld never have been the case had it been offered to tax in the year of transfer, that is 12-13. The appellant filed a paper book on 17th August 2017 which contains 322 pages. Please see pp 1-31 at S1. No.1 of Index which is LTCG Working Statement from AY. 2013-14 to AY. 2015-16 along with computation of Income for claiming of Escrow Amount from AY. 13-14 to A.Y. 15-16. The appellant has shown ₹ 17,89,00,000/- for each of the following assessment years i.e. AY. 2013-14, 2014-15 and 2015-16 as Net Capital Gain on transfer of Business Purchase Agreement, However, for AY. 2014-15 and 15-16, this amount of ₹ 17,89,00,000/- in each year, has been set off against Long Term Capital Loss on sale of mutual funds of Rs. ,55,32,730/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce ). The Purchase Price paid at Closing is subject to the adjustments set out in Clause 8.3 and Clause 8.4 of this agreement: This clause establishes that the lump sum consideration for slump sale i.e. the purchase price is ₹ 567,07,00,000/-. That this purchase price is subject to adjustments is an event only subsequent to the slump sale. A sale as a going concern is either a slump sale or not a slump sale. Assessee cannot stake a claim to slump sale u/s. 50B and in the same breath stake a claim that it is not a going concern transaction but subject to adjustments. Having claimed the said transaction with Aventis Pharma as transfer of a going concern as slump sale, the computation of capital gains is against the lump sum consideration of ₹ 567,07,00,000/-. If the assessee is staking a claim that lump sum consideration of ₹ 567,07,00,000/- is subject to adjustment then it cannot be taxed as a slump sale u/s. 50B and the assessee would have to calculate Capital Gains of individual assets. 6. Please see Clause 4.2 which reads as follows The Seller will instruct the Purchaser to place an amount of ₹ 894,500,000 (Rupees eight hundred ninety four milli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. Please refer to internal pp 5 and 92 of the PB, wherein Closing Amount means an amount equal to the Purchase Price less the Escrow Amount. 11. Please refer to internal pp 10 and 97 of the PB, wherein Purchase Price has the meaning set out in Clause 4.1; 12. Please refer to internal pp 14 and 101 of the PB, wherein Clause 2 reads as, Agreement to Sell the Business Sale of the Business 12.1.1 On an subject to the terms of this agreement, the Seller agrees to sell, and the purchaser agrees to purchase, the Business, as on the closing date, as going concern on a slump sale basis. 12.1.2 Subject to the terms of this Agreement, the Business to be sold pursuant to this Agreement shall comprise of: (i) the Products; [ii] the Business IPR; [iii] the Contracts (which are in force on the Closing Date), subject to the provisions Part 4 of Schedule 2; (iv) the Permissions, to the extent they can be transferred under law; (v) the Inventory subject to the provisions of Clause 6.2; (vi) the complete customer files and receivables thereon; [vii] the Relevant Employees of the Seller, together with any advances given to such Relevant Employees, subje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement in escrow in an interest bearing bank account (the Escrow Account'] opened with the Escrow Bank. The Escrow Account will be operated by the Escrow Agent in accordance with the terms and conditions of the Escrow Agreement. 4.3 The Escrow Amount (together with the relevant proportion of interest accrued thereon) will be released to the Seller and /or the Purchaser, as the case may be, in accordance with terms and conditions set out in Schedule 16 of this Agreement and the Escrow Agreement. 8.3 Adjustment of the Purchase Price for Liabilities (i) If there are any liabilities (other than liabilities relating to Expired Products) that have been transferred to the Purchaser as per the Closing Balance Sheet in addition to the Assumed Liabilities, the Seller shall repay (and the Promoters shall procure that the Seller shall repay) to the Purchaser an amount equal to such additional Liabilities as assumed by Purchaser as at Closing. (ii) If the Assumed Liabilities set out in the Closing Balance Sheet are more than ₹ 3,800,000 (Rupees three million eight hundred thousand), the Seller shall repay (and the Promoters shall procure that the Seller shall repay) to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be claimed against the lump sale consideration. It is also evident that the amount is placed in escrow at the instructions of the Seller; the amount placed in escrow account is thus an application of the lump sum sale consideration arising from slump sale and not allowable as a deduction therefore. 13. Please see Form No 3CEA filed by assessee appellant in the AY 12-13. Form 3 CEA is the Report of an accountant to be furnished by an assessee under sub-section (3) of Section 50 B of the Income Tax Act, 1961 relating to computation of capital gains in case of slump sale . 14. Also see copy of letter dt. 3.2.2012 , placed at Annexure 1, which is a letter addressed to Aventis Pharma Limited from Universal Medicare Pvt. Ltd, the subject line of which reads, Re: Adjustment of the Purchase Price Pursuant to Clause 8 of the Business Purchase Agreement dated 24th August 2011 . This letter reads as follows, ... Accordingly, the net consideration received by us for sale of the Business is as follows: Amount received from you on the Closing Date ₹ 5,670,700,0000 Less: amount refunded to you as mentioned a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... November 3, 2011 for a consideration of ₹ 5,670,700/- thousands. Subsequently due to change in net working capital, the consideration was revised to ₹ 5,612,195 thousands. Thus, it is evident that the purchaser, SIL, in this slump sale transaction has accounted for it entirely to the extent of a consideration of ₹ 5,670,700 thousands and revised the same to ₹ 5,612,195 thousands owing to change in net working capital, which is as per the BPA wherein the purchase consideration was subject to Adjustment of the Purchase Price for Liabilities and Adjustment of the Purchase Price for Net Working Capital . The argument that the lump sum consideration was contingent on the supply agreement cannot hold for only one party to the transaction; the slump sale consideration if at all it were to be contingent on the supply agreement would apply to both parties to the transaction, that is the seller and the purchaser. It cannot be that the contingency applies only to the seller and not to the purchaser. Thus, in this conspectus of the facts, the entire lump sum consideration is to be subject to capital gains tax. 18. There is nothing in the BPA which defines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In case of slum sale of the marketing division which is transferred as a whole, single unit without values being attached to the new asset and liabilities. The consideration of ₹ 567 Crore earned on transfer of marketing division, does not have any bearing on any other conditions. Once the agreement to sale is executed, the transfer took place and any payment or obligation can spread over some time, this does not mean that transfer is also happening over a period of time. The transfer is one time event whereas payment can happen over a period which is agreed between the parties and major part of consideration ₹ 477.62 crore was received on 03.11.2011 i.e. 84% of total consideration. The amount kept in Escrow Account has no relation, whatsoever with the transfer of marketing division. It has only bearing of supply agreement between the parties. And the amount kept in Escrow Account belong to the seller and that assessee has offered interest of ₹ 3.03 crore accrued on full Escrow Account from 03.11.2011 to 31.03.2012. On the aforesaid observation the Assessing Officer brought the remaining amount of ₹ 71.57 crore, kept in Escrow Account to tax is income o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s schedule to the business purchase agreement and Escrow Account agreement dated 28.10.2011. Perusal of aforesaid clauses of business purchase agreement, the clauses of supply agreement (annexure to BPA) and Escrow Agreement demonstrate that maintaining of Escrow Account was inconsequence of business purchase agreement. The conditions of supply agreement cannot be delinked from business purchase agreement dated 24.08.2011. The Escrow Agreement was executed on 28.10.2011. The Escrow account agreement was executed in furtherance of BPA. Further, the amount in Escrow Account would accrue to the assessee only on fulfilment of certain condition. Further, a joint reading of clause 7.3 and clause 7.4 shows that if the condition mentioned in clause 7.3 is not fulfilled, then business purchase agreement will be terminated. Thus, the deposit in Escrow Account is intrinsic and integral to the transfer of marketing division under business purchase agreement without it, the sale shall be incomplete. Further, clause 3.1 and clause 3.9 is prescribed that assessee and the purchaser shall enter into agreement for the supply by the seller of pharmaceutical product that is manufactured by assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is that he must have acquired a right to receive the income. It was further held that unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him. 38. Further, in CIT v. Excel Industries [2013] 358 ITR 295/219 Taxman 379/38 taxmann.com 100 (SC) the Hon ble Court by referring to various judgments on the expression accrues , and then held it is now well settled that income tax cannot be levied on hypothetical income. In CIT v. Shoorji Vallabhdas and Co. [CIT v. Shoorji Vallabhdas and Co., (1962) 46 ITR 144 (SC)] it was held that Income tax is a levy on income. No doubt, the Income Tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a 'hypothetical income', which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crore and further ₹ 17.89 crore was accrued to the assessee. The assessee offered the same under the head Capital Gain and no other income which is not accrued to the assessee is not liable to tax in the year under consideration. The remaining income was accrued only in subsequent Assessment Year i.e. A.Y. 2013-14 to 2016-17 that is an amount of ₹ 17.89 Crore each in four subsequent years, and the same has been offered for taxation under the head Capital Gain. Even this fact is not disputed by the revenue. 41. The objection of ld. DR for the revenue is that the assessee in subsequent year claim set off of Long Term Capital Loss on sale of mutual funds of ₹ 7.55 crore and ₹ 4.36 crore. In our view, the assessee is legally entitled to claim the set off of legitimate losses under the same head if it accrues to the assessee. 42. As noted above the Hon ble Jurisdictional High Court in CIT vs. Nagri Mills Co. Ltd. (supra) held that as to why the Income-tax authorities, in a matter such as where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed. The question as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o tax; if income accrues or arise it may become liable to tax. The word accruing and arising are used to contradistinguish the word receive . Income is said to be received when it reaches to the assessee; when right to receive the income vested to the assessee, it is said to be accrue or arise. The dormant profit cannot be equated with charged to tax under section 3 4 of the Income Tax Act. 44. In Ajay Gulliya vs. ACIT (supra) there was no evidence on record in agreement suggesting that entire consideration or part was not paid or the title to the shares will revert to the seller. In T.A. Taylor (P.) Ltd. (supra) there was no deferred consideration mentioned in the slump sale agreement. Depositing a part of consideration in an Escrow Account, equivalent to deferred consideration (para-8 of the order). In CIT vs. Equinox Solution (P.) Ltd. (supra) the assessee sold its entire running business with all assets and liability and one go. In CIT vs. Mrs. Hemal Raju Shete (supra) was not a case of slump sale and only income that was actually received or accrued to the assessee upon sale of shares was taxed and not any contingent deferred income. 45. Considering the aforesaid fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er hand the ld. DR for the revenue submits that this ground of appeal does not arise from the impugned assessment order or from the order of ld. CIT(A). Since the ld. AR during the hearing submitted that in ITA No. 2967-2971/M/16 for A.Y. 2006-07 to 2009-10 the Tribunal set aside the matter to the AO and submitted that defalcation loss must be allowed in one or the other and matter may be set aside to the file of AO. The ld. DR submits that issue may be restored to the file of AO and no comment on the merit of grounds was made. 50. We have considered the rival submissions of the parties and have gone through the orders of the lower authorities. We have noted that in assessee s appeal for A.Y. 2006-07 to 2009-10 in ITA No. 2967- 2971/M/16 the claim of assessee with regard to defalcation loss has been restored to the file of AO. Therefore, to avoid the duplicity, the issue is restored to the file of AO to examine the claim and pass the order in accordance with law. In the result this ground of appeal is allowed for statistical purpose. 51. We found on record that the assessee vide application dated 01.09.2017 and the revenue vide its application dated 24.10.2017 made applica ..... X X X X Extracts X X X X X X X X Extracts X X X X
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