2024 (8) TMI 222 - AT - Income Tax

Deferred contingent consideration accrues only when legally enforceable right exists, not upon contingent targets

ITAT Mumbai allowed assessee's appeal regarding deferred contingent consideration, holding that such consideration accrued only in AY 2022-23, not AY ... Year of taxability of deferred (i.e., contingent) consideration - AO not granting corresponding credit of taxes withheld by the buyer on the said deferred (i.e., contingent) consideration and appearing to the credit of the Appellant in AY 2022-23 - consideration whose accrual as well as timing and quantum was contingent at the time of entering into the Share Purchase Agreement (in short SPA) - HELD THAT:- As per clause 2.6 (c) if the Revenue reflected in the agreed Revenue Certificate did not exceed the Target Revenue, the Purchaser shall not be obligated to pay any portion of the deferred consideration to the Sellers. If this contingency occurs, then the assessee would not receive any part of the deferred consideration. Hence, it is not merely the point of time and quantum of consideration but also the right to receive deferred consideration which was contingent. As per SPA clause 2.6(d), if during this period any one or more of the agreed Revenue Certificates reflects Revenue higher than the Target Revenue but lower than the 2019 Revenue, then, the manner of determination of the quantum of deferred consideration and its time of accrual shall be as prescribed therein. We find that as per section 45 any profits or gains arising from the transfer of a capital asset shall be chargeable to income-tax in the previous year in which the transfer took place, such capital gains has to be computed as per section 48 of the Act. It is well settled by now that, the charging provision and the computation provision has to be read together. A bare perusal of section 48 shows that such income has to be computed by deducting from the 'full value of consideration received or accrued as a result of the transfer of the capital asset' the specified heads of expenses/cost as provided therein. Therefore, what is relevant is the full value of consideration 'received' or 'accruing' as a result of the transfer. In the present case, it is an admitted position that the deferred consideration was not received during the previous year relevant to AY 2021-22. Hence, the issue is whether such consideration could be regarded as accrued during the said year. The stage of 'accrual' is reached only when the assessee has a legally enforceable right to receive the said amount. In the present case, as explained in greater detail hereinabove, the deferred consideration was contingent on achievement of Revenue in excess of the Target Revenue/ the 2019 Revenue by HAMSPL. If the said event had not occurred, the assessee would not be entitled to any deferred consideration. AO has erred in not appreciating the deferred (contingent) consideration was contingent in nature and accrued only in the AY 2022-23. We respectfully relied on the order of Mrs.Hemal Raju Shete [2016 (4) TMI 1082 - BOMBAY HIGH COURT] and order of Universal Medical (P) Ltd [2020 (4) TMI 28 - ITAT MUMBAI]. So, the ground of the assessee succeeded. Accordingly, the appeal of the assessee in Ground no 1.1 is allowed. Adopting of the correct cost of acquisition of shares i.e. cost of Rs. 56 per share has been erroneously taken as Rs. 10 per share as there was a mistake in the computation of income with respect to the cost of acquisition of shares acquired on 05.05.2012 - AR submitted the documents against it’s claim. The said is fully technical - HELD THAT:- We remand back the matter to the file of the ld. AO for considering the claim of the assessee related cost of share Rs. 56/-.Accordingly, the appeal of the assessee in Ground No. 2.1 is allowed for statistical purposes. Admission of additional ground of the assessee - Most Favoured Nation clause in the Protocol to the Double Taxation Avoidance Agreement (DTAA) between the Government of India and the Government of Netherlands - charging of dividend income to tax at the rate of 5% as per a later DTAA between India and Slovenia - AR respectfully relied on the order of NTPC Ltd [1996 (12) TMI 7 - SUPREME COURT] related to admission of additional ground - HELD THAT:- The assessee earned dividend amount to Rs. 209,57,89,065/- and offered tax @5% in view of Most Favoured Nation (MFN) clause in the protocol to India Netherlands Treaty (DTAA) read with India Slovenia DTAA and the decree issued by the Netherlands accepting the lower tax rate applying MFN. The revenue has imposed tax @10% on dividend income and accordingly the DRP had taken the view against the assessee. But the assessee is interested in arguing the matter further before the AO. DR had not made any strong objection against the assessee. So, we admit the additional ground of the assessee and we remand the matter back to the file of the AO for adjudication denovo. Issues Involved:1. Year of taxability of deferred (contingent) consideration.2. Claim during assessment proceedings of revised cost of acquisition of shares sold during the year.3. Erroneous computation of tax, surcharge, and cess.4. Erroneous levy of interest under sections 234A and 234B of the Act.5. Erroneous mention of refund already issued.6. Application of the Most Favoured Nation (MFN) clause in the Protocol to the Double Taxation Avoidance Agreement (DTAA) between the Government of India and the Government of Netherlands.Detailed Analysis:Issue 1: Year of Taxability of Deferred (Contingent) ConsiderationThe primary contention was whether the deferred consideration of Rs. 131,18,91,783 should be taxed in the year of sale (AY 2021-22) or the subsequent year (AY 2022-23). The assessee argued that the deferred consideration was contingent upon certain conditions as per the Share Purchase Agreement (SPA) and should be taxed in AY 2022-23 when these conditions were fulfilled. The AO, however, included this amount in AY 2021-22, asserting that the right to receive the amount was legally enforceable during that year. The Tribunal sided with the assessee, citing that the deferred consideration was contingent and not accrued until the conditions were met in AY 2022-23. The Tribunal relied on the jurisdictional High Court's decision in Mrs. Hemal Raju Shete's case and the ITAT's decision in Universal Medical (P) Ltd.Issue 2: Claim During Assessment Proceedings of Revised Cost of Acquisition of Shares Sold During the YearThe assessee claimed an increased cost of acquisition of Rs. 41,34,40,564 during the assessment, arguing that the cost per share was erroneously considered Rs. 10 instead of Rs. 56. The Tribunal remanded this issue back to the AO for reconsideration, directing a fresh evaluation of the cost of acquisition based on the assessee's submissions.Issue 3: Erroneous Computation of Tax, Surcharge, and CessThe assessee contended that the computation of tax, surcharge, and health and education cess was incorrect. The Tribunal noted that these issues were consequential and remanded them back to the AO for reconsideration, ensuring the assessee gets a reasonable opportunity of hearing.Issue 4: Erroneous Levy of Interest Under Sections 234A and 234B of the ActSimilar to the previous issue, the Tribunal found the levy of interest under sections 234A and 234B to be consequential. This matter was also remanded back to the AO for reconsideration.Issue 5: Erroneous Mention of Refund Already IssuedThe assessee argued that the AO erroneously mentioned a refund of Rs. 19,75,190 as already issued. The Tribunal found this issue to be consequential and remanded it back to the AO for reconsideration.Issue 6: Application of the Most Favoured Nation (MFN) Clause in the Protocol to the Double Taxation Avoidance Agreement (DTAA) Between the Government of India and the Government of NetherlandsThe assessee claimed a lower tax rate of 5% on dividend income based on the MFN clause in the India-Netherlands DTAA, read with the India-Slovenia DTAA. The revenue imposed a 10% tax rate. The Tribunal admitted the additional ground raised by the assessee and remanded the matter back to the AO for a fresh adjudication, allowing the assessee to argue the matter further.Conclusion:The Tribunal allowed the appeal of the assessee on multiple grounds, directing the AO to reconsider and re-evaluate the issues based on the arguments and evidence provided by the assessee. The appeal was allowed for statistical purposes, ensuring that the assessee gets a fair opportunity to present their case.