2013 (7) TMI 960 - AT - Income Tax

Tribunal rules deferred consideration not taxable as capital gains, emphasizes actual gains.

The Tribunal upheld the Commissioner of Income Tax (Appeals)' decision to delete the addition of long term capital gains based on deferred consideration. ... Addition on account of long term capital gains - Held that:- The perusal of the provisions of the agreement indicates that the amount of ₹ 20 crore is the maximum amount that could be received by the assessee’s group which comprises of initial consideration and the deferred consideration. It also indicates that there is no guarantee for the receipt of this maximum amount by the assessee’s group. In view of that matter, we find merit in the contention of the senior counsel for the assessee that what is to be taxed is the gain received or accrued and not the notional/ hypothetical income as decided by the Hon’ble Supreme Court in the case of K.P. Varghese vs. ITO (1981 (9) TMI 1 - SUPREME Court). It is an established legal proposition that as per the provisions of capital gain, the amount can be brought to tax either on receipt basis or accrual basis. As regards the decision of the Supreme Court in the case of CIT vs. George Henderson & Co. Ltd and the decision of the ITAT in Mrs. Alpana Piramal case relied on by the Ld.DR, it is our considered view that these decisions have no application as the ratios in the said cases are applicable when the dispute relates to adopting the full value consideration vis-a-vis the sale value consideration which is not the case of the AO in this instant case as the maximum cap provided in the agreement cannot be equated neither with sale value consideration nor with the full value consideration since the said maximum cap is neither received nor accrued for the purposes of calculating the capital gains. In view of that matter, we do not find any infirmity in the order of the Ld.CIT(A) and the same is upheld. Issues:Addition of long term capital gains based on deferred considerationAnalysis:The appeal pertains to the addition of a significant amount as long term capital gains by the Assessing Officer (AO), which was later deleted by the Commissioner of Income Tax (Appeals) [CIT(A)]. The primary issue revolves around the treatment of deferred consideration in the calculation of capital gains. The assessee had declared a total income and shown long term capital gains on the sale of shares, claiming exemption under section 54EC by investing in specified bonds. The AO, upon reviewing the agreement related to the share transfer, clubbed the initial and deferred consideration to assess the capital gain. However, the CIT(A) overturned this decision, stating that the deferred gain, being notional, cannot be taxed as it was neither received nor accrued to the assessee.In the subsequent appeal, the Revenue argued that the entire amount of consideration, including deferred, should be subject to capital gains tax as the transfer was completed within the assessment period. The Revenue relied on legal precedents to support their stance, emphasizing the concept of 'full value consideration' for calculating capital gains. Conversely, the assessee's counsel contended that the agreement's terms capped the consideration at a certain amount, with no guarantee of receiving the deferred portion. They argued that taxing the maximum cap without certainty of receipt was not justified, citing the option to tax based on receipt or accrual basis in capital gains provisions.Upon thorough examination of the agreement's provisions, the Tribunal found that the maximum amount specified was not guaranteed to be received by the assessee's group, rendering it notional. Citing legal precedent, the Tribunal affirmed that only gains received or accrued should be taxed, not hypothetical income. The Tribunal distinguished the Revenue's cited cases, clarifying that the maximum cap in the agreement did not equate to full value consideration and, thus, was not taxable. Consequently, the Tribunal upheld the CIT(A)'s decision to delete the addition of the long term capital gains.In conclusion, the Tribunal dismissed the Revenue's appeal, affirming that the notional deferred consideration should not be subject to capital gains tax, as per the provisions of the Income Tax Act and established legal principles.