Interim attachment under tax law modified to allow asset sale, with escrow and undertakings protecting Revenue interests.

The interim attachment under section 281B of the Income-tax Act was modified because the underlying taxability dispute was still debatable at the interim stage and a complete restraint on alienation could reduce commercial value and affect the running business. While recognising the Revenue's legitimate apprehension over possible tax liabilities, the Court held that its interest could be safeguarded through alternative conditions. The petitioner was therefore permitted to sell assets to Microsoft, subject to a substantial escrow deposit, undertakings from the foreign parent, and continued payment of existing instalments to secure any eventual tax dues.

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Issues: Whether the interim attachment directions under section 281B of the Income-tax Act, 1961 should be modified to permit sale of the petitioner's assets to Microsoft while securing the Revenue's interest through alternative safeguards.

Analysis: The attachment order was founded on apprehended tax liabilities arising from pending reassessment, withholding and penalty proceedings, but the Court found the controversy over the underlying taxability issues to be debatable and not fit for final opinion at the interim stage. It also noted that the business was a running concern, that complete restraint on alienation could adversely affect commercial value, employment, and the possibility of realizing better value from the proposed transaction. At the same time, the Court accepted that the Revenue had a legitimate concern because substantial funds had been remitted as dividend and the anticipated liabilities were significant. Balancing both sides, the Court considered that the Revenue's interest could be protected by conditions including a substantial escrow deposit, undertakings by the foreign parent, and continued payment of existing instalments.

Conclusion: The interim order was modified and the petitioner was permitted to sell assets to Microsoft subject to protective conditions, including escrow deposit and undertakings securing possible tax dues.

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