TaxTMI 
TaxTMI 
2020 (4) TMI 28
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....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 Rs. 567.07 crore. However, in the computation of income, the assessee has shown Capital Gain of Rs. 477.30 crore only, on sale of marketing division, after deducting Rs. 89.73 crore. The assessee claimed that total sale consideration payable to the assessee amounts is Rs. 567.07 crore, out of which Rs. 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 every year. Further, out of Rs. 89.45 crore, the assessee has offered Rs. 17.89 crore being first instalment and remaining Rs. 71.56 crore was kept/shown/deposit in Escrow Account with HSBC Bank. The Assessing Officer issued show cause notice as to why the entire amount in the Escrow Account should not be taxed as the income being part of Capital Gain accrued to the assessee on sale of marketing division. The asses....
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....ed interest of Rs. 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 Rs. 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 certain Pharmaceutical Products to the purchaser. As per the supply agreement, the assessee shall supply certain product to purchaser/APL as per terms and conditions against which it would received separate amount for a period five years to ensure these supplies without any disruption to Escrow agreement was executed. As per the Escrow agreement, an amount of Rs. 89.45 crore was kept in Escrow account in HSBC Bank. The claim of assessee that amount of Rs. 17.8....
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..... 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 Rs. 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 Rs. 71,56,00,000/-. The appellant prays that during A.Y. 2012- 13 the sale consideration of Rs. 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 Rs. 477.30. The appellant prays that the addition made by the Learned Assessing Officer and confirmed by the Learned Commr. of Income Tax (A) amounting to Rs. 71,56,00,000/- may be deleted. 3. On the facts & circumstances of the case the Learned Commr. of Income Tax (A) has erred in rejecting the claim of the appellant that the sum of Rs. 89.45 crores being the part sale consideration out ofRs. 567.07 crores did accrue to the appellant and the appellant was entitled to the said sum only on happening of certain events in future. The sale consideration of Rs. 89.45 crores was to ....
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....ing 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. Rs. 567.07cr in A.Y 2012-13". 13. We have heard the submission of Shri J.D. Mistry, ld. senior Counsel/Authorised Representative (AR) of the assessee and Miss. S. Padmaja, ld. CIT-DR for revenue and perused the record carefully. We have also gone through the orders of lower authorities with the active assistance with ld. Sr. Counsel and ld. CIT-DR for the revenue. In support of submission of additional ground of appeal, the ld. AR of the assessee submits that vide application dated 09.09.2017, the assessee has raised the additional ground of appeal, which is purely legal in nature. The ld. Sr. Counsel submits that no additional facts are require....
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....ional 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 that the additional ground of appeal was served upon the revenue on 15.09.2017 and that the Assessing Officer/revenue could file its cross objection till 15th October 2017, however, the cross objection filed on 07.11.2017. Thus, there is delay of about 20/21 days. Considering the contents of application for condonation of delay that the delay in filing the Cross Objection is neither intentional nor deliberate but due to bonafide reason, the delay in filing the Cross Objection was condoned. 17. The admission of additional grounds of appeal and the Cross Objections incl....
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.... 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 Rs. 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 and Escrow Agreement clearly demonstrate that maintaining of Escrow Account was an integral part of Business Purchase Agreement, the sale would be incomplete without the same. The amount kept in Escrow Account would accrue to the assessee only upon fulfilment of certain condition, can be offered to tax only upon accrual and not otherwise. The ld. AR of the assessee submits that as per the various clauses mentioned in the Business Purchase Agreement, the "closing" of the transaction has been defined to mean as completion of sale and purchase of business pursuant to clause-7 of the Business Purchase Agreement. Fur....
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....id 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 accordance with the term of contractual agreement between the parties and cannot be considered as basis for calculating the entire contingent account accrued to the assessee. The Assessing Officer himself assessed the amount deposited in Escrow Account as capital gain of assessee. If the deposit in the Escrow Account was linked only to supply agreement then the same would be in the nature of Business Income and not capital gain. Once accepted that deposit in the Escrow Account is in the nature of capital gain, the only question arise is the point of accrual of such capital gain. On the observation of ld. CIT(A) regarding that Es....
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....resaid 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 Taxmann 176 (Bom. HC). * CIT vs. Balbir Singh Maini (398 ITR 531(SC). * E.D. Sassoon & Co. Ltd. vs. CIT (AIR 1954 SC 470). * CIT vs. Excel Industries (358 ITR 295 SC). * Morvi Industries Ltd. vs. CIT (82 ITR 835 SC). * Late Shri Gordhandas S. Garodia (Through LR's vs. DCIT (ITA No. 5097/Mum/2015. * CIT vs. M/s Nagarjuna Fertiliser (ITTA No. 100 of 2003 (AP High Court. * DCIT vs. Rohan Projects (113 taxmann.com 339 Bom.) 23. The assessee has placed following documents on record; * LTCG working statement from AY 2013-14 to 2015-16, * HSBC Bank Statement showing the amount received for sale consideration of assessee's market....
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.....55 crore and Rs. 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 obligation imposed on the seller under this agreement. (C) The promoter collectively holds 100% of the issued and paid-up share capital of the seller and Geltec. (D) The purchaser had agreed to purchase the business of a going concern and on a slump sale basis, and to assume the obligation imposed on the purchaser under this agreement." The ld. DR submits that from the above recital it is evident that the transaction between assessee and Aventis Pharma is that of slump sale and obligation imposed on the purchaser are separate from the slump sale transaction. The ld. DR further submits that clause 2 of Business Purchase Agreement (BPA) is the agreement to sale the business, thus wh....
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....13-14 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 Rs. 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 Rs. 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/- and Rs. 4,36,86,371/ respectively. It is not known what amounts were declared for AY. 2016-17. 3. Please see Business Purchase Agreement at S1. o. 5 of the Index which is at pp 82-196. This Business Purchase Agreement is dated 24.08.2011 and is between Aventis Ph arm a Ltd. and Universal Medicare Pvt. Ltd. Please see pp 91 where the recital is as follows" (A) the seller is, inter-alia engaged in the Business (as defined below). Geltec is, inter-alia engaged in the business of manufacturing nutraceutical and pharmaceutical products. (B) The seller has agreed to sell the Business and to assume the obligations imposed on the Seller under this agreement. (C) The Promoters, collectively, hold 100% of the issued ....
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....ideration of Rs. 567,07,00,000/-. If the assessee is staking a claim that lump sum consideration of Rs. 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 Rs. 894,500,000 (Rupees eight hundred ninety four million five hundred thousand) (the "Escrow Amount'] out of the Purchase Price payable under this Agreement 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." This clause makes it amply clear that the amount of Rs. 894,500,000/- placed in the Escrow Account is out of the purchase price payable under this agreement. Thus, this Rs. 894,500,000/- is an application of the lump sum consideration of Rs. 567,07,00,000/-. 7. Please see Clause 6.4 which is "Termination- Material Adverse Change". It reads as follows "If prior to Closing any Material Change shall occur, the Purchaser shall be....
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....ontracts (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, subject to Clauses 5.1.3 and 5.3.2; (viii] the Books and Records, subject to Clause 9.4.5; [ix] the goodwill relating to the Business, together with the exclusive right for the Purchaser to represent itself as carrying on the Business in succession to the Seller. (x) The Assumed Liabilities, and (xi) All tangible assets related to or held for use exclusively in connection with the Business as set out in Schedule 19. 2.1.3. The seller agrees and acknowledges that the assets-and liabilities being transferred as a part of the Business pursuant to Clause 2.1.2 (above) are sufficient to ensure the continuity of the Business by the Purchaser, as from the Closing Date, as a going concern. 2.1.4 The Business shall be sold free from all Encumbrances. " 3.4 Escrow Agreement The Selle....
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....ll 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 Rs. 3,800,000 (Rupees three million eight hundred thousand), the Seller shall repay (and the Promoters shall procure that the Seller shall repay) to the Purchaser an amount equal to Assumed Liabilities set out in the Closing Balance Sheet less Rs. 3,800,000 (Rupees three million eight hundred thousand). (iii) If the Assumed Liabilities set out in the Closing Balance Sheet are less than Rs. 3,800,000 (Rupees three million eight hundred thousand], the Purchaser shall pay to the Seller an additional amount equal to Rs. 3,800,000 (Rupees three million eight hundred thousand) less the Assumed Liabilities set out in the Closing Balance Sheet. (iv) Any payment pursuant to this Clause 8.3 shall be made on or before 10 (ten) Business Days after the date on which the process described in paragraph 3 of Part 1 of Schedule 9 is complete. 8.4 Adjustment of the Purchase Price for Net Working Capital (i) If the Net Working Capital set out in the Closing Balance She....
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....ement 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 Rs. 5,670,700,0000 Less: amount refunded to you as mentioned above Rs. 58,504,174 Net Consideration Received Rs. 5,612,195,826/-" 15. Please see PB 4 filed by appellant. Pp 21 and 29 is submission of assessee appellant vide letter dated 18.08.2016 and 21.03.2017 addressed to DCIT Central Circle 3(2), Mumbai and CIT A respectively. Herein it is unequivocally stated that, " our client has entered into an agreement dated 24.08.2011 for sale of Marketing Division for a total consideration of Rs. 567.07 crores, out of the above consideration Rs. 89.45 crores was deposited in an Escrow Account with HSBC and these amounts were payable to our client only on satisfaction of certain conditions ... ". It is amply clear that the consideration was Rs. 567.07 cr and out of this Rs. 89.45 cr was placed in Escrow Account. 16. Please refer to pp 35 of this PB 4 which is " Notes to Financial Statements for the Year Ended March 31, 2014" . Here too , it unequivocally stated that the gross....
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....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 the mechanism by which the transfer of marketing division shall fail, should there be a breach of the supply agreement. One cannot envisage a transaction which is contingent on the fulfillment of obligation in a supply agreement, which involves a consideration for transfer of intangible or tangible assets, in which the contingency and breach of obligation is not spelt out contractually and which defines the mechanism of the transfer falling through - this has not been brought out by the Ld Counsel in his arguments nor is it to be found anywhere in the documents filed. 28. We have considered the submissions of the ld. Sr Counsel (ld. AR) for the assessee and the ld. Commissioner of Income- Tax Departmental Representative (ld. CIT-DR) for the revenue. We have also deliberated on the various case laws relied by the ld. representatives of the parties. During the assessment the assessing officer noted that during the previous year the assessee has sold its marketing division to Aventis Pharma Ltd (APL) for consideration of Rs. 567.07 Crore, ....
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....cer brought the remaining amount of Rs. 71.57 crore, kept in Escrow Account to tax is income of assessee for the assessment year under consideration. 29. Before ld. CIT(A) the assessee made its detail submissions and submitted that the amount accrued to the assessee on fulfilment of certain obligation and the same was offered to tax as and when it accrued. The income taxed by the assessing officer is infact not accrued to the assessee. The income on hypothetical basis cannot be taxed. The assessee also relied on the various clauses of Escrow release agreement. 30. The ld CIT(A) on perusal of supply agreement took his view that the assessee are require to supply certain product to purchaser(APL). And as per the Escrow agreement the amount of Rs. 89.73 crore was kept in Escrow account in HSBC Bank. The claim of the assessee that amount of Rs. 17.89 Crore is liable to release in five annual equal instalments would accrue to the assessee whenever said instalment is realized; which is subject to fulfilling of certain conditions and should be taxed in relevant Assessment Year. However, as per business purchase agreement the date, place of closing, closing event, payment of closing and ....
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....ply by the seller of pharmaceutical product that is manufactured by assessee. A draft of supply agreement was also prepared as a part of business purchase agreement as a schedule to the agreement. 33. In our view, once the condition of contract is reduced in writing, one must look at the substance of term of the contract. The contract must be read as a whole and not in a pick and choose manner. Further, the intention of parties must be found in the words used by them and if more than one interpretation is possible, one which gives effect and proper meaning of all parts of the contract should be adopted. 34. The Hon'ble Supreme Court in Bharat Aluminium Company vs. Kaiser Aluminium Technical Services Inc. (Civil Appeal No. 7019 of 2005) (SC) and in Delhi Development Authority vs. Durga Chand (AIR 1973 SC 2609) also held that if two interpretations of the document are reasonably possible, as it seems possible, the principle to apply would be that the interpretation favouring the grantee as against the grantor should be accepted. 35. As we have noted above the ld. AR of the assessee vehemently submitted that Capital Gain is chargeable to tax only when income "accrues" to assessee. ....
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.... up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. In Morvi Industries Ltd. v. CIT [Morvi Industries Ltd. v. CIT, (1972) 4 SCC 451 : 1974 SCC (Tax) 140 : (1971) 82 ITR 835] the Hon'ble Apex Court also considered the dictionary meaning of the word "accrue" and held that income can be said to accrue when it becomes due. 39. The Hon'ble Bombay High Court in PCIT vs. Rohan Projects (supra) held that where assessee sold a land during relevant assessment year and as per Memo of Understanding (MOU), part of sale consideration was payable by purchasers on completion of assessee's obligation under MOU, assessee having not met conditions of MOU during relevant year such amount was not taxable in relevant assessment year. The Hon'ble High Court also referred its earlier decision in CIT vs. Nagri Mills Co. Ltd. [1958] 33 ITR 681 (Bom)] wherein it was held that as under: "3. We have often wondere....
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....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. 43. 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 CIT vs. Rohtak Textiles Ltd. (supra) it was held that section 55 clearly laid down that capital gains are to be deemed to be income of the previous year in which the transfer of the asset took place. There was no dispute about the point of time at which transfer took place. It was held that capital arise from the transfer were rightly charged in the year when undertaken vested in the Government, irrespective of whether the sale became complete on those dates or on later when price was determined and became payable. However, in the present case, though the price was determined but was payable on fulfillment of cer....
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....ring the aforesaid factual and legal discussions, we are of the view that the accrued capital gain in the year under consideration was offered by the assessee to tax and the remaining of the capital gain which was accrued only in the subsequent years have been offered to tax in AY 2013-14 to 2016-17. The assessee has placed on record the copy of computation and return of income for AY 2013-14 to 2016-17 46. In the result the ground No. 1 to 4 and are allowed. 47. Ground No. 5 relates to defalcation loss of Rs. 5.00 Crore. The ld. AR for the assessee submits that assessee suffered loss on account of defalcation of Rs. 19.04 Crore which was detected in AY 2006-07. The assessing officer while passing the assessment order for AY 2006-07 accepted the fact that the assessee suffered losses and in the assessment order gave working of the loss suffered year wise. However, the assessing officer reduced the claim of loss by Rs. 5.00 Crore and accepted the claim of Rs. 14.04 Crore as the Economic offence Wing attached the property of the culprit. The assessee, subsequently in the return filed in pursuance of notice under section 153A claimed the same loss of Rs. 5 crore as there was no reco....