Aaa Portfolios Pvt. Ltd & Ors v. The Deputy Commissioner Of Income

THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 24.07.2013 +W.P.(C) No.1272/2013 AAA PORTFOLIOS PVT. LTD & ORS. .....Petitioners versus THE DEPUTY COMMISSIONER OF INCOME TAX & ORS..…Respondents Advocates who appeared in this case:For the Petitioners: Mr Parag P. Tripathi, Sr. Advocate with Mr SimranMehta, Mr R.M. Mehta, Ms Yogita Sunaria and MsMahima GuptaFor the Respondent: Mr Sanjeev Sabharwal and Mr Puneet Gupta forR-1.Mr Sumit Bansal and Mr Ateev Mathur for R-2.Mr Y.K. Kapur for R-3. CORAM:-HON'BLE MR JUSTICE BADAR DURREZ AHMED, ACTING CHIEFJUSTICEHON’BLE MR JUSTICE VIBHU BAKHRU JUDGMENT VIBHU BAKHRU, J 1.This is a writ petition filed by the petitioners challenging the order dated01.02.2013 passed by Respondent no.1 (hereinafter referred to as the “AssessingOfficer”) and the consequential notice dated 04.02.2013 issued under Section226(3) of the Income Tax Act,1961 (hereinafter referred to as the "Act"). Thepetitioners are aggrieved on account of the action of the Assessing Officer inappropriating a sum of `95,85,30,934/- which was lying in escrow withrespondent No.2 bank. 2.The petitioners held shares in respondent No.3 company, namely, EscortsHeart Institute & Research Centre Ltd. (hereinafter referred to as the “assesseecompany”).Petitioner Nos.1 & 2 held 1,00,000 shares each of the assesseecompany and the petitioner No.3 held 16,00,000 shares of the assessee company.The petitioners along with three other entities, namely Charak AyurvedicInstitute, Escorts Employees Welfare Trust and Diamond Leasing and FinanceLimited who held 100 shares of the assessee company each entered into a sharepurchase agreement dated 25.9.2005 for sale of their shares in the assesseecompany to M/s Fortis Health Care Ltd. (hereinafter referred to as the“purchaser”). In all 18,00,300 shares of the assessee company which aggregated90.01% of the issued and paid up share capital of the assessee company wereagreed to be sold by the petitioners and three other entities (hereinaftercollectively referred to as the “sellers”). The consideration for the sale of18,00,300 shares of the assessee company was agreed at `585,00,97,485/- @`3249.51 per share. As agreed under the share purchase agreement, the purchaserwas required to deposit the entire consideration with the escrow agent and thesellers agreed to deposit certain documents including share transfer deeds andinstructions with the escrow agents in order to consummate the transaction forsale and purchase of an aggregate of 18,00,300 equity shares of the assesseecompany. The shares held by petitioner No.3 were pledged with certain lendersand the escrow agent was required to release part of the consideration to thelenders in order that the petitioner No.3 could redeem the pledge and transferunencumbered shares to the purchaser. 3.It was agreed between the sellers and the purchaser that the escrow agentwould release `3,24,951/- each to Charak Ayurvedic Institute, Escorts EmployeesWelfare Trust and Diamond Leasing and Finance Limited as consideration forthe sale of the 100 shares each held by them in the assessee company and out of the balance consideration deposited by the purchaser an aggregate sum of`149,99,02,514/- would be withheld with the escrow agent and the remainingbalance amount would be released to the petitioner No.3. The amount to bewithheld by the escrow agent included a sum of `64,99,02,514/- which was theentire consideration payable to petitioner Nos.1 and 2 for sale of their shares inthe assessee company to the purchaser. 3.It was agreed between the sellers and the purchaser that the escrow agentwould release `3,24,951/- each to Charak Ayurvedic Institute, Escorts EmployeesWelfare Trust and Diamond Leasing and Finance Limited as consideration forthe sale of the 100 shares each held by them in the assessee company and out of the balance consideration deposited by the purchaser an aggregate sum of`149,99,02,514/- would be withheld with the escrow agent and the remainingbalance amount would be released to the petitioner No.3. The amount to bewithheld by the escrow agent included a sum of `64,99,02,514/- which was theentire consideration payable to petitioner Nos.1 and 2 for sale of their shares inthe assessee company to the purchaser. 4.The purpose for withholding the sum of `64,99,02,514/- from the saleconsideration payable by the purchaser was on account of the income tax liabilityof the assessee company that was being contested. It is relevant to state that M/sEscorts Heart Institute and Research Centre, which was a charitable society wasmerged with another society and subsequently, the same was converted into acompany incorporated under the Companies Act, namely, the assessee company.The Assessing Officer denied the exemption to the assessee company underSection 35(1)(ii) of the Act and passed an assessment order for the assessmentyear 2001-2002 raising a demand of `124.36 crores. The said demand is disputedby the assesssee company. As there were disputes pending with the Income TaxDepartment regarding the tax liability of the assessee company, it was agreedbetween the purchaser and the petitioners that a certain sum would be held backfrom the sale consideration by the escrow agent and would not be released to thepetitioners until the income tax liability of the assessee company was finallyadjudicated. In the event that the income tax liability of the assessee companyexceeded the amount withheld by the escrow agent from the sale consideration,the same would not be released to the petitioners but would be returned to thepurchaser. However, in the event, the tax liability of the assessee company wasless than the amount withheld by the escrow agent then the amount equal to theincome tax liability of the assessee company would be refunded to the purchaserand the balance would be released to the petitioners. 5.Pursuant to the share purchase agreement dated 25.09.2005, the sellers andthe purchaser and respondent no. 2 entered into an Escrow Agreement dated27.09.2005 which, inter alia, recorded the obligations of respondent no.2 as theescrow agent. 6.The Assessing Officer issued a notice under Section 226(3) of the Act torespondent no. 2 bank in respect to the amount held by respondent no. 2 as anescrow agent in terms of the Escrow Agreement dated 27.09.2005. The saidnotice was objected to and it was clarified by respondent no. 2 that it was notholding any money on account of the assessee company. The Assessing Officersent another similar notice dated 15.02.2007 without considering the objectionsof the respondent no. 2 bank. 7.The Assessing Officer sent a notice dated 16.07.2008 directing therespondent no. 2/bank to remit a sum of ` 64,99,02,514/- which was lying infixed deposits to the Assessing Officer by 17.07.2008. 8.The notice dated 16.07.2008 was challenged by petitioner no. 1 and 2 byfiling a writ petition, being writ petition no. 5080/2008 in this Court. This Courtpassed an interim order dated 17.07.2008 staying the operation of the noticedated 16.07.2008 and after hearing parties, remanded the matter to the AssistantCommissioner of Income-tax to decide whether the petitioner had a locus standiin the matter and to pass a reasoned order after considering the submissions of thepetitioners. 7.The Assessing Officer sent a notice dated 16.07.2008 directing therespondent no. 2/bank to remit a sum of ` 64,99,02,514/- which was lying infixed deposits to the Assessing Officer by 17.07.2008. 8.The notice dated 16.07.2008 was challenged by petitioner no. 1 and 2 byfiling a writ petition, being writ petition no. 5080/2008 in this Court. This Courtpassed an interim order dated 17.07.2008 staying the operation of the noticedated 16.07.2008 and after hearing parties, remanded the matter to the AssistantCommissioner of Income-tax to decide whether the petitioner had a locus standiin the matter and to pass a reasoned order after considering the submissions of thepetitioners. 9.It was contended before the Assessing Officer on behalf of the petitionersthat the action under Section 226(3) of the Act was in the nature of garnisheeproceedings where the revenue steps into the shoes of the assessee and recoversmoney directly from a third party who owes money to the assessee. It was furthercontended that respondent no. 2 does not either hold any money on account of the assessee company or owe any money to the assessee company and therefore, thesums held by the respondent no. 2 in escrow pursuant to the Escrow Agreementdated 27.09.2005 cannot be demanded by the revenue. 10.The respondent no. 2 bank also furnished an affidavit dated 07.12.2012unequivocally affirming that the fixed deposit of ` 94,84,96,05.97/- was held byrespondent no.2 in terms of the Escrow Agreement and that no part of the samewas owed to or held on account of the assessee company. The relevant extractfrom the affidavit dated 07.12.2012 furnished by respondent no. 2 to theAssessing Officer is quoted below:- “4. That the Bank is holding Fixed Deposit of Rs 94,84,96,005.97(Rupees Ninety four crores eighty four lakhs ninety six thousandfive and paise ninety seven only) as ‘Escrow Agent’ in terms ofEscrow Agreement dated 27.09.2005 executed by and betweenEscorts Limited, AAA Portfolio Pvt. Ltd., Big Apple Clothing Pvt.Ltd., Charak Ayurvedic Institute. Escorts Employees WelfareTrust, Diamond Leasing & Finance Ltd., Fortis Healthcare Ltd.and HDFC Bank Limited.(Rupees Ninety four crores eighty four lakhs ninety six thousandfive and paise ninety seven only) as ‘Escrow Agent’ in terms ofEscrow Agreement dated 27.09.2005 executed by and betweenEscorts Limited, AAA Portfolio Pvt. Ltd., Big Apple Clothing Pvt.Ltd., Charak Ayurvedic Institute. Escorts Employees WelfareTrust, Diamond Leasing & Finance Ltd., Fortis Healthcare Ltd.and HDFC Bank Limited. 5. That no part of the amount lying in the 'Escrow Account' is owed toor belongs to or held by the Bank or may be subsequently held bythe Bank on account of M/s Escorts Heart Institute & ResearchCentre, Delhi”.or belongs to or held by the Bank or may be subsequently held bythe Bank on account of M/s Escorts Heart Institute & ResearchCentre, Delhi”. 11.The Assessing Officer after considering the submission of the petitionerspassed the impugned order dated 01.02.2013. After quoting the relevant clausesfrom the Escrow Agreement the Assessing Officer held as under:- “From the above quoted excerpts of the Escrow agreement, it isamply clear that any Income Tax Demand arising on account ofmerger of Escort Heart Institute and Research Center Delhi withEHIRCL, Chandigarh and/or the conversation of the merged entityinto a Part IX company under the Companies Act, 1956 has to bepaid by the ESCROW Account. The said demand has been raiseddue to the withdrawal of exemption of the Escort Heart Institute and Research Center, Delhi as it got merged with the Chandigarh Societywhich was a non-charitable society. Therefore, it can be concludedwithout doubt that the said amount of money has been kept in theESCROW Account for meeting Income Tax demands only. So thenotice u/s 226(3) sent by the ACIT dated 10.10.2006 is very much inaccordance with ESCROW Agreement and Income Tax Act.” “From the above quoted excerpts of the Escrow agreement, it isamply clear that any Income Tax Demand arising on account ofmerger of Escort Heart Institute and Research Center Delhi withEHIRCL, Chandigarh and/or the conversation of the merged entityinto a Part IX company under the Companies Act, 1956 has to bepaid by the ESCROW Account. The said demand has been raiseddue to the withdrawal of exemption of the Escort Heart Institute and Research Center, Delhi as it got merged with the Chandigarh Societywhich was a non-charitable society. Therefore, it can be concludedwithout doubt that the said amount of money has been kept in theESCROW Account for meeting Income Tax demands only. So thenotice u/s 226(3) sent by the ACIT dated 10.10.2006 is very much inaccordance with ESCROW Agreement and Income Tax Act.” 12.Pursuant to the impugned order, the Assessing Officer sent a notice dated04.02.2013 under Section 226(3) of the Act calling upon respondent no. 2 toforthwith pay the amount held by respondent no.2 by way of fixed depositspursuant to the Escrow Agreement. Thereafter, respondent no. 2 paid a sum of`95,85,30,934/- to the Assessing Officer in compliance of the notice dated04.02.2013. 13.The controversy in the present writ petition essentially revolves around thequestion whether respondent no. 2 held any money on account of the assesseecompany pursuant to the Escrow Agreement. While it is contended on behalf ofthe petitioners that the amount kept in escrow with the respondent bank belongsto petitioner no. 1 & 2 being the sale consideration receivable by them for sale oftheir shares to the purchaser, the impugned order holds to the contrary. 14.The other aspect that is required to be considered is whether respondentno.2 could be compelled to makeover the funds held in escrow despite anaffidavit being furnished on behalf of respondent no.2 that it did not hold anysum on account of the assessee company. 15.Before proceeding further it would be relevant to examine the provisionsof Section 226 of the Act. Section 226 falls within chapter XVII of the Act,which contains the machinery provisions for collection and recovery of incometax. Section 226 of the Act provides for other modes of recovery of tax due froman assessee. Section 226(3) of the Act is relevant for considering the controversy in the present matter and the relevant clauses of Section 226 of the Act are quotedbelow:- “226. - Other modes of recovery. xxxxxxxxxxxxxxxxxxxx (3) (i) The Assessing Officer or Tax Recovery Officer may, at anytime or from time to time, by notice in writing require any personfrom whom money is due or may become due to the assessee orany person who holds or may subsequently hold money for or onaccount of the assessee to pay to the Assessing Officer or TaxRecovery Officer either forthwith upon the money becoming dueor being held or at or within the time specified in the notice (notbeing before the money becomes due or is held) so much of themoney as is sufficient to pay the amount due by the assessee inrespect of arrears or the whole of the money when it is equal to orless than that amount. (ii) A notice under this sub-section may be issued to any personwho holds or may subsequently hold any money for or on accountof the assessee jointly with any other person and for the purposesof this sub-section, the shares of the joint holders in such accountshall be presumed, until the contrary is proved, to be equal. (iii) A copy of the notice shall be forwarded to the assessee at hislast address known to the Assessing Officer or Tax RecoveryOfficer, and in the case of a joint account to all the joint holders attheir last addresses known to the Assessing Officer or TaxRecovery Officer. (ii) A notice under this sub-section may be issued to any personwho holds or may subsequently hold any money for or on accountof the assessee jointly with any other person and for the purposesof this sub-section, the shares of the joint holders in such accountshall be presumed, until the contrary is proved, to be equal. (iii) A copy of the notice shall be forwarded to the assessee at hislast address known to the Assessing Officer or Tax RecoveryOfficer, and in the case of a joint account to all the joint holders attheir last addresses known to the Assessing Officer or TaxRecovery Officer. (iv) Save as otherwise provided in this sub-section, every person towhom a notice is issued under this sub-section shall be bound tocomply with such notice, and, in particular, where any such noticeis issued to a post office, banking company or an insurer, it shallnot be necessary for any pass book, deposit receipt, policy or anyother document to be produced for the purpose of any entry,endorsement or the like being made before payment is made,notwithstanding any rule, practice or requirement to the contrary. (v)xxxxxxxxxxxxxxxxxxxx (vi) Where a person to whom a notice under this sub-section is sentobjects to it by a statement on oath that the sum demanded or anypart thereof is not due to the assessee or that he does not hold anymoney for or on account of the assessee, then nothing contained inthis sub-section shall be deemed to require such person to pay anysuch sum or part thereof, as the case may be, but if it is discoveredthat such statement was false in any material particular, suchperson shall be personally liable to the Assessing Officer or TaxRecovery Officer to the extent of his own liability to the assesseeon the date of the notice, or to the extent of the assessee's liabilityfor any sum due under this Act, whichever is less.” 16.The provisions of Section 226(3) of the Act provide the machinery forenabling an Assessing Officer to recover the amount of income tax due from anassessee by recovering sums from any person who owes any money to theassessee or holds any money on his account. Section 226(3) of the Act confersupon an Assessing Officer a special jurisdiction to proceed directly against aperson, other than an assessee, for recovery of income-tax demands due from theassessee. The power conferred under Section 226(3) of the Act is a special powerthat enables the Assessing Officer to reach beyond the assessee in order toappropriate amounts due to or held by third parties on account of the assessee.The proceedings under Section 226(3) of the Act are in the nature of garnisheeproceedings whereby a garnishee is called upon to directly pay a debt to thecreditor of a person to whom the garnishee is indebted. The Assessing Officer issimilarly situated as a garnisher and is in a position to initiate action underSection 226(3) of the Act to reach out to the property of the assessee which isheld by a third party or to any sum which is owed by a third party to the assessee.The Assessing Officer steps into the shoes of an assessee with respect torecovering sums owed to or held by the garnishee on account of the assessee. AnAssessing Officer is not conferred with any additional rights in respect of anyamount due from the garnishee other than that which are available to theassessee. 17.Section 226(3) of the Act neither confers jurisdiction nor provides amachinery for an Assessing Officer to adjudicate the indebtedness of a third partyto the assessee and the provisions of section 226(3) must be confined to thosecases where a third party admits to owing money or holding any money onaccount of the assessee or in cases where it is indisputable that the third partyowes money to or holds money on account of the assessee. However, in caseswhere there are contentious issues raised by a third party who disputes hisliability to pay any money to the assessee there is no mechanism provided orjurisdiction conferred upon the Assessing Officer to proceed further in the matterand take upon himself the mantle of adjudicating the said disputes. 17.Section 226(3) of the Act neither confers jurisdiction nor provides amachinery for an Assessing Officer to adjudicate the indebtedness of a third partyto the assessee and the provisions of section 226(3) must be confined to thosecases where a third party admits to owing money or holding any money onaccount of the assessee or in cases where it is indisputable that the third partyowes money to or holds money on account of the assessee. However, in caseswhere there are contentious issues raised by a third party who disputes hisliability to pay any money to the assessee there is no mechanism provided orjurisdiction conferred upon the Assessing Officer to proceed further in the matterand take upon himself the mantle of adjudicating the said disputes. 18.A Division Bench of the Calcatta High Court in the case of Shaw Wallaceand Co. Ltd. v. Union of India: (2003) 262 ITR 528 (Cal.) also expressed asimilar view and held as under: “In the facts and circumstances of the case whether the decree hadbeen put to execution by VCVL or not is immaterial. If the decree isoffered, the Tax Recovery Officer is free to proceed upon it undersection 226(3) of the Act. But by reason of clause (vi) thereof thejudgment debtor/garnishee has a right to object. As soon as objected,to the Tax Recovery Officer cannot proceed to recover untildiscovery of falsity of the objection. If the executability of thedecree is challenged, the Tax Recovery Officer cannot assumejurisdiction to decide a dispute between the garnishee and theassessee. He cannot usurp the jurisdiction of the executing court.The jurisdiction of the Tax Recovery Officer is confined within thedispute between the assessee and the income tax authority. Hecannot assume jurisdiction in respect of any dispute between theassessee and the garnishee nor can he embark upon an exercise todetermine any such dispute unless it appears to be false on the faceof it. As soon there appears to be a dispute prima facie, the objectioncannot be presumed to be false. The proceedings under section226(3) of the Act would then be subject to the determination by theappropriate forum. Until determination, the Tax Recovery Officerhas no scope of discovering the falsity of the objection. When the garnishee does not admit or denies that he owes the debt to theassessee, the Tax Recovery Officer cannot sit in judgment over thedenial and come to his own conclusion. It was so held inMohamedaly Sarafaly and Co. v. ITO [1968] 68 ITR 128, 131 (Mad)and P. K. Trading Co. v. ITO [1970] 78 ITR 427, 433 (Cal). Once onoath the garnishee denies the liability towards the assessee, theburden of showing the statement on oath is false in any materialparticular would be upon the Revenue. The Revenue has to disclosematerial particulars that led it to a definite conclusion. Then only thepayment can be imposed on the garnishee under section 226(3)(vi)of the Act. The apex court had taken such a view in BeharilalRamcharan v. ITO [1981] 131 ITR 129, 137- 38. It is only when theobjection is altogether false and it is so apparent and is so discoveredthat the Tax Recovery Officer can proceed against the garnisheeunder section 226(3) of the Act. It is only the part, which cannot beobjected to would come within its purview.” 19.It is well settled that even in cases of garnishee proceeding under Order 21Rule 46 of the Code of Civil Procedure (hereinafter referred to as the “CPC”), theCourt may pass a garnishee order enabling a judgment creditor to obtainsatisfaction of his claim only in those cases which are similar in scope as tojudgments on admission under Order 12 Rule 6 of the CPC. A Court cannot issuegarnishee order under Order 21 Rule 46 of the CPC against a debtor of thejudgment debtor who disputes his indebtedness unless an issue in this regard isstruck and tried as provided under Order 21 Rule 46C of the CPC. Unlike theCPC, Section 226(3) of the Act does not have any provision similar to Order 21Rule 46C of the CPC which confers jurisdiction on the Assessing Officer toadjudicate the question regarding indebtedness of a third party to an assessee whodisputes the same. Once the third party noticee has disputed that he owes anymoney or holds any money on account of the assessee, the Assessing Officerwould not have any jurisdiction to proceed further against the third party. This isalso abundantly clear from the language of clause (vi) of Section 226(3) of theAct. 20.The Supreme Court has in the case ofSurinder Nath Kapoor v. Union ofIndia: AIR 1988 SC 1777, observed as under: “15. The object of serving a notice under clause (3)(vi) of section226 is to give the garnishee an opportunity to admit or deny hisliability for the amount mentioned in the notice. Under clause (i) ofsection 226(3), if the garnishee objects to the notice by a statementon oath that the sum demanded or any part thereof is not due to theassessee, then the garnishee will not be required to pay any such sumor part thereof, as the case may be.” 21.In the present case, respondent no. 2 bank has furnished an affidavitunequivocally affirming that no part of the amount held by respondent no. 2 inescrow is owed to or belongs to or is held by respondent no. 2 on account of theassessee company. In view of the affidavit dated 07.12.2012 furnished by therespondent no. 2 bank, the Assessing Officer had no jurisdiction to proceedfurther and call upon the respondent no. 2 bank to makeover the funds held byrespondent no. 2 as an escrow agent pursuant to the Escrow Agreement dated27.09.2005, to the Assessing Officer. In this view, the impugned order dated01.02.2013andimpugnednoticedated04.02.2013arewhollywithoutjurisdiction and are thus liable to be set aside. 22.In view of our finding that the decision of the Assessing Officer toproceed further despite the affidavit dated 07.12.2012 furnished by respondentno. 2 bank is without jurisdiction, it is not necessary to examine the questionwhether the amount held by respondent no. 2 bank pursuant to the EscrowAgreement could be stated to be any money which is due or may become due tothe assessee company or which is held for and on account of the assesseecompany.However, we have heard counsel for the parties in this regard anddeem it appropriate to examine the same. 23.Indisputably the monies held by respondent no. 2 bank are a part of theconsideration which has been deposited by the purchaser for purchase of theshares of the assessee company from the sellers in terms of the Share PurchaseAgreement dated 25.09.2005 entered into between the sellers and the purchaser.The assessee company is not a party to the said agreement. The Share PurchaseAgreement dated 25.09.2005 contains the agreed covenants with regard to theescrow arrangement as agreed between the petitioners and the purchaser. Clause2.9 of the Share Purchase Agreement is relevant and is quoted below:- “2.9The Escrow Agent, shall deal with the Heldback Amount No.2 asunder:- 23.Indisputably the monies held by respondent no. 2 bank are a part of theconsideration which has been deposited by the purchaser for purchase of theshares of the assessee company from the sellers in terms of the Share PurchaseAgreement dated 25.09.2005 entered into between the sellers and the purchaser.The assessee company is not a party to the said agreement. The Share PurchaseAgreement dated 25.09.2005 contains the agreed covenants with regard to theescrow arrangement as agreed between the petitioners and the purchaser. Clause2.9 of the Share Purchase Agreement is relevant and is quoted below:- “2.9The Escrow Agent, shall deal with the Heldback Amount No.2 asunder:- AAA and Apple agree that the amount of their respective shareof the Sale Consideration being Rs. 32,49,51,257 (RupeesThirty Two Crores Forty Nine Lakhs Fifty One Thousand TwoHundredFiftySevenOnly)eachaggregatingtoRs,64,99,02,514 (Rupees Sixty Four Crores Ninety Nine LakhsTwo Thousand Five Hundred Fourteen Only) to which they areentitled under this Agreement, shall be retained by the EscrowAgent and shall be invested by the Escrow Agent in capitalgains tax saving bonds in the names of AAA and Apple inequal proportions (the "Securities"). The Securities shall bekept in the custody of the Escrow Agent and shall be retainedas security towards settlement of the Income Tax claim/demandof the Company subject to such Income Tax claim/demandhaving been finally adjudicated in law or finally settled, as thecase may be. EL and the Purchaser hereby agree that theIncome Tax claim/demand shall be defended by EL at its owncost in mutual consultation with the Purchaser and theCompany. In the event EL is desirous of settling the IncomeTax claim/demand it shall do so only with the prior writtenconsent of the Purchaser and the Company, which consent shallnot be unreasonably withheld. For the purposes of this Article 2.9, Income Tax claim/demandshallmeananyIncomeTaxand/orCapitalGainTaxclaim/demand including interest and penalty thereon, if any,made on the Company on account of or in connection with the merger of Escorts Heart Institute and Research Centre Delhiwith Escorts Heart Institute and Research Centre, Chandigarhand/or the conversion of the merged entity into a Part IXCompany under the Companies Act, 1956, including all legalexpenses incurred by EL for defending the Income Taxclaim/demand. Provided that EL shall have right to substitute the Securitieswith cash or such other securities as may be acceptable to thePurchaser by depositing an amount with the Escrow Agent,equivalent to the value of total Securities including interestaccrued thereon up to the date of such substitution by EL. Inthe event EL substitutes the Securities with either cash or suchother securities, the Securities in the names of AAA and Appleshall be released by the Escrow Agent to AAA and Apple alongwith interest accrued thereon. The Parties hereby agree and undertake that the HeldbackAmount No.2 shall be utilized in the manner provided below: Provided that EL shall have right to substitute the Securitieswith cash or such other securities as may be acceptable to thePurchaser by depositing an amount with the Escrow Agent,equivalent to the value of total Securities including interestaccrued thereon up to the date of such substitution by EL. Inthe event EL substitutes the Securities with either cash or suchother securities, the Securities in the names of AAA and Appleshall be released by the Escrow Agent to AAA and Apple alongwith interest accrued thereon. The Parties hereby agree and undertake that the HeldbackAmount No.2 shall be utilized in the manner provided below: (a)In the event the Income Tax claim/demand is equal toRs.64,99,02,514 (Rupees Sixty Four Crores Ninety Nine LakhsTwo Thousand Five Hundred Fourteen Only) together with allinterest accrued thereon, the entire amount of Rs.64,99,02,514(Rupees Sixty Four Crores Ninety Nine Lakhs Two ThousandFive Hundred Fourteen Only) together with all interest accruedthereon shall be paid to the Purchaser in the first instance by ELunder intimation to the Escrow Agent by EL, within twoBusiness Days of the Company notifying EL, the Purchaser andthe Escrow Agent, failing which by the Escrow Agent in favourof the Purchaser from the amount invested in securities or heldin cash by the Escrow Agent as the case may be, together withall interest accrued thereon. In the event the said amount is paiddirectly by EL to the Purchaser the Escrow Agent, underinstructions of EL, shall release to EL and/or AAA and/orApple as the case may be, the amount (if in cash) or securities,as the case may be together with all interest accrued thereonheld by the Escrow Agent.Rs.64,99,02,514 (Rupees Sixty Four Crores Ninety Nine LakhsTwo Thousand Five Hundred Fourteen Only) together with allinterest accrued thereon, the entire amount of Rs.64,99,02,514(Rupees Sixty Four Crores Ninety Nine Lakhs Two ThousandFive Hundred Fourteen Only) together with all interest accruedthereon shall be paid to the Purchaser in the first instance by ELunder intimation to the Escrow Agent by EL, within twoBusiness Days of the Company notifying EL, the Purchaser andthe Escrow Agent, failing which by the Escrow Agent in favourof the Purchaser from the amount invested in securities or heldin cash by the Escrow Agent as the case may be, together withall interest accrued thereon. In the event the said amount is paiddirectly by EL to the Purchaser the Escrow Agent, underinstructions of EL, shall release to EL and/or AAA and/orApple as the case may be, the amount (if in cash) or securities,as the case may be together with all interest accrued thereonheld by the Escrow Agent. (b)IntheeventtheIncomeTaxclaim/demandexceedsRs.64,99,02,514 (Rupees Sixty Four Crores Ninety Nine LakhsRs.64,99,02,514 (Rupees Sixty Four Crores Ninety Nine Lakhs Two Thousand Five Hundred Fourteen Only), together with allinterestaccruedthereon,anamountofRs.64,99,02,514(Rupees Sixty Four Crores Ninety Nine Lakhs Two ThousandFive Hundred Fourteen Only) together with all interest accruedthereon shall be paid to the Purchaser in the first instance by ELunder intimation to the Escrow Agent by EL, within twoBusiness Days of the Company notifying EL, the Purchaser andthe Escrow Agent, failing which by the Escrow Agent in favourof the Purchaser from the amount invested in securities or heldin cash by the Escrow Agent as the case may be, together withall interest accrued thereon. The balance amount beingdifference between aforesaid Rs.64,99,02,514 (Rupees SixtyFour Crores Ninety Nine Lakhs Two Thousand Five HundredFourteen Only) together with all interest accrued thereon andthe Income Tax claim/demand shall be borne by EL and thePurchaser in the ratio of 1/3 and 2/3 respectively. EL hereby undertakes to pay its 1/3 share to the Purchaserwithin two Business Days of the Company notifying EL, thePurchaser and the Escrow Agent. In the event there is a delay inpayment to Purchaser by EL of its aforesaid 1/3 share, interest@ 15% per annum on the aforesaid 1/3 share or part thereofwhich shall remain payable by EL to the Purchaser shallcommence with effect from the expiry of two Business Daysuntil payment to the Purchaser. In the event the said amount ispaid directly by EL to the Purchaser, the Escrow Agent underinstructions of EL, shall release to EL and/or AAA and/orApple as the case may be, the amount (if in cash) or securitiesas the case may be together with all interest accrued thereonheld by the Escrow Agent. (c)In the event the Income Tax claim/demand is less thanRs.64,99,02,514 (Rupees Sixty Four Crores Ninety Nine LakhsTwo Thousand Five Hundred Fourteen Only) together with allinterest accrued thereon, the Income Tax claim/demand shall bepaid to the Purchaser by EL in the first instance underintimation to the Escrow Agent by EL, within two BusinessDays of the Company notifying EL, the Purchaser and theEscrow Agent, failing which by the Escrow Agent in favour ofthe Purchaser from the amount invested in securities or held incash by the Escrow Agent as the case may be, together with allRs.64,99,02,514 (Rupees Sixty Four Crores Ninety Nine LakhsTwo Thousand Five Hundred Fourteen Only) together with allinterest accrued thereon, the Income Tax claim/demand shall bepaid to the Purchaser by EL in the first instance underintimation to the Escrow Agent by EL, within two BusinessDays of the Company notifying EL, the Purchaser and theEscrow Agent, failing which by the Escrow Agent in favour ofthe Purchaser from the amount invested in securities or held incash by the Escrow Agent as the case may be, together with all interest accrued thereon. The Escrow Agent shall pay to EL thebalance amount along with interest accrued thereon availablewith the Escrow Agent after payment of the Income Taxclaim/demand. In the event the said amount is paid directly byEL to the Purchaser the Escrow Agent, under instructions ofEL, shall release to EL and/or AAA and/or Apple as the casemay be, the amount (if in cash) or securities as the case may betogether with all interest accrued thereon held by the EscrowAgent. The Escrow Agent is hereby authorised jointly and/or severallyby AAA, Apple and EL to deal with cash or the securities beingHeldback Amount No.2, to give effect to the provisions of thisArticle 2.9. On the Income Tax claim/demand being paid to the Purchaserin a manner as contemplated under this Article 2.9 (a), (b) and(c), EL and/or AAA and/or Apple shall stand discharged all ofits obligations.” 24.Pursuant to the Share Purchase Agreement dated 25.09.2005 the sellers,the purchaser and respondent no. 2 entered into an Escrow Agreement dated27.09.2005 which, inter alia, recorded the obligations of respondent no.2 as theescrow agent. Clause 4.4 & clause 4.5 of the Escrow Agreement are relevant asthe same relate to the sums agreed to be placed with the escrow agent withrespect to the income tax liability of the assessee company. Clause 4.4 and 4.5the Escrow Agreement are quoted below:- “4.4The Escrow Agent, shall deal with the Heldback Amount No.2as under:-as under:- (a) Parties agree that the amount under Heldback Amount No.2comprise of respective shares of AAA and Apple in the SaleConsideration being Rs.32,49,51,257 (Rupees Thirty TwoCrores Forty Nine Lakhs Fifty One Thousand Two HundredFifty Seven Only) each aggregating to Rs.64,99,02,514 (RupeesSixty Four Crores Ninety Nine Lakhs Two Thousand FiveHundred Fourteen Only).comprise of respective shares of AAA and Apple in the SaleConsideration being Rs.32,49,51,257 (Rupees Thirty TwoCrores Forty Nine Lakhs Fifty One Thousand Two HundredFifty Seven Only) each aggregating to Rs.64,99,02,514 (RupeesSixty Four Crores Ninety Nine Lakhs Two Thousand FiveHundred Fourteen Only). “4.4The Escrow Agent, shall deal with the Heldback Amount No.2as under:-as under:- (a) Parties agree that the amount under Heldback Amount No.2comprise of respective shares of AAA and Apple in the SaleConsideration being Rs.32,49,51,257 (Rupees Thirty TwoCrores Forty Nine Lakhs Fifty One Thousand Two HundredFifty Seven Only) each aggregating to Rs.64,99,02,514 (RupeesSixty Four Crores Ninety Nine Lakhs Two Thousand FiveHundred Fourteen Only).comprise of respective shares of AAA and Apple in the SaleConsideration being Rs.32,49,51,257 (Rupees Thirty TwoCrores Forty Nine Lakhs Fifty One Thousand Two HundredFifty Seven Only) each aggregating to Rs.64,99,02,514 (RupeesSixty Four Crores Ninety Nine Lakhs Two Thousand FiveHundred Fourteen Only). (b) Parties further agree that Heldback Amount No.2 shall beretained and invested on behalf of AAA and Apple by theEscrow Agent in two separate fixed deposits (the "FixedDeposits") of Rs.32,49,51,257 (Rupees Thirty Two Crores FortyNine Lakhs Fifty One Thousand Two Hundred Fifty SevenOnly) each maintained with the Escrow Agent in the name ofthe Escrow Account. The Fixed Deposits shall be of a tenor offive years and one day each and would be encashable/renewablefrom time to time by Escrow Agent without any furtherapproval, consent or notice from AAA, Apple, EL and/orPurchaser, as the case may be, unless Escrow Agent is in receiptof any joint instructions to the contrary from EL and Purchaser.retained and invested on behalf of AAA and Apple by theEscrow Agent in two separate fixed deposits (the "FixedDeposits") of Rs.32,49,51,257 (Rupees Thirty Two Crores FortyNine Lakhs Fifty One Thousand Two Hundred Fifty SevenOnly) each maintained with the Escrow Agent in the name ofthe Escrow Account. The Fixed Deposits shall be of a tenor offive years and one day each and would be encashable/renewablefrom time to time by Escrow Agent without any furtherapproval, consent or notice from AAA, Apple, EL and/orPurchaser, as the case may be, unless Escrow Agent is in receiptof any joint instructions to the contrary from EL and Purchaser. (c) Parties further agree that Heldback Amount No.2 in the form ofFixed Deposits shall be retained by the Escrow Agent ascustodian towards settlement of the Income Tax claim/demandof the Company.Fixed Deposits shall be retained by the Escrow Agent ascustodian towards settlement of the Income Tax claim/demandof the Company. Provided that EL shall have right to substitute the FixedDeposits with cash or such other securities (Fixed Depositsalong with cash and such other substituted securities shallhereinafter be referred to as the "Securities") as may beacceptable tothe Purchaser andthe Escrow Agent, bydepositing such Securities with the Escrow Agent, equivalent tothe value of total Fixed Deposits/substituted Securities includinginterest accrued thereon up to the date of such substitution byEL. In the event EL substitutes the Fixed Deposits with cash orother securities, the Fixed Deposits or any balance held inrespect of Heldback Amount No.2 shall be released by theEscrow Agent to AAA and Apple in the proportion of theirrespective shares in the Sale Consideration along with interestaccrued thereon. For the purposes of this Clause 4.4, Income Tax claim/demandshallmeananyIncomeTaxand/orCapitalGainTaxclaim/demand including interest and penalty thereon, if any,made on the Company on account of or in connection with themerger of Escorts Heart Institute and Research Centre Delhiwith Escorts Heart Institute and Research Centre, Chandigarhand/or the conversion of the merged entity into a Part IXCompany under the Companies Act, 1956, including all legal expenses incurred by EL for defending the Income Taxclaim/demand. 4.5The Parties hereby agree and undertake that the HeldbackAmount No.2 or any balance in respect thereof shall bedisbursed either to the Sellers or the Purchaser in accordancewith the manner specified below:Amount No.2 or any balance in respect thereof shall bedisbursed either to the Sellers or the Purchaser in accordancewith the manner specified below: expenses incurred by EL for defending the Income Taxclaim/demand. 4.5The Parties hereby agree and undertake that the HeldbackAmount No.2 or any balance in respect thereof shall bedisbursed either to the Sellers or the Purchaser in accordancewith the manner specified below:Amount No.2 or any balance in respect thereof shall bedisbursed either to the Sellers or the Purchaser in accordancewith the manner specified below: (a)In the event the Income Tax claim/demand is equal toRs.64,99,02,514 (Rupees Sixty Four Crores Ninety Nine LakhsTwo Thousand Five Hundred Fourteen Only) together with allinterest accrued thereon, the entire amount of the Securities orany balance in respect thereof shall be paid to the Purchaserupon receipt of a opinion in writing by the Escrow Agent fromthe Purchaser obtained by the Purchaser from one amongst thefollowing accounting firms, namely Price Waterhouse, Ernst &Young,Delloitte,Touche&TohmatsuandKPMGcertifying/stating that the demand pertains to Income Taxclaim/demand.Rs.64,99,02,514 (Rupees Sixty Four Crores Ninety Nine LakhsTwo Thousand Five Hundred Fourteen Only) together with allinterest accrued thereon, the entire amount of the Securities orany balance in respect thereof shall be paid to the Purchaserupon receipt of a opinion in writing by the Escrow Agent fromthe Purchaser obtained by the Purchaser from one amongst thefollowing accounting firms, namely Price Waterhouse, Ernst &Young,Delloitte,Touche&TohmatsuandKPMGcertifying/stating that the demand pertains to Income Taxclaim/demand. (b)IntheeventtheIncomeTaxclaim/demandexceedsRs.64,99,02,514 (Rupees Sixty Four Crores Ninety Nine LakhsTwo Thousand Five Hundred Fourteen Only), together with allinterest accrued thereon, the entire amount of the Securities orany balance in respect thereof shall be paid to the Purchaserupon receipt of a opinion in writing by the Escrow Agent fromthe Purchaser, obtained by the Purchaser from one amongst thefollowing accounting firms, namely Price Waterhouse, Ernst &Young,Delloitte,Touche&TohmatsuandKPMGcertifying/stating that the demand pertains to Income Taxclaim/demand. The balance amount after payment of the IncomeTax demand/claim as aforesaid shall be borne and paid by theSeller and the Purchaser in terms of the SPA.Rs.64,99,02,514 (Rupees Sixty Four Crores Ninety Nine LakhsTwo Thousand Five Hundred Fourteen Only), together with allinterest accrued thereon, the entire amount of the Securities orany balance in respect thereof shall be paid to the Purchaserupon receipt of a opinion in writing by the Escrow Agent fromthe Purchaser, obtained by the Purchaser from one amongst thefollowing accounting firms, namely Price Waterhouse, Ernst &Young,Delloitte,Touche&TohmatsuandKPMGcertifying/stating that the demand pertains to Income Taxclaim/demand. The balance amount after payment of the IncomeTax demand/claim as aforesaid shall be borne and paid by theSeller and the Purchaser in terms of the SPA. (c)In the event the Income Tax claim/demand is crystallised in partor is less than Rs.64,99,02,514 (Rupees Sixty Four CroresNinety Nine Lakhs Two Thousand Five Hundred FourteenOnly) together with all interest accrued thereon, the Income Taxclaim/demand crystallised in part shall be paid to the Purchaserupon receipt of a opinion in writing by the Escrow Agent fromthe Purchaser, obtained by the Purchaser from one amongst thefollowing accounting firms, namely Price Waterhouse, Ernst &or is less than Rs.64,99,02,514 (Rupees Sixty Four CroresNinety Nine Lakhs Two Thousand Five Hundred FourteenOnly) together with all interest accrued thereon, the Income Taxclaim/demand crystallised in part shall be paid to the Purchaserupon receipt of a opinion in writing by the Escrow Agent fromthe Purchaser, obtained by the Purchaser from one amongst thefollowing accounting firms, namely Price Waterhouse, Ernst & Young,Delloitte,Touche&TohmatsuandKPMGcertifying/stating that the demand pertains to Income Taxclaim/demand. The balance amount after disbursement of theIncome Tax claim/demand to the Purchaser as specified in thisparagraph shall be released by the Escrow Agent to EL and/orAAA and/or Apple as the case may be only upon receipt of jointinstructions from EL and the Purchaser that there is no otherIncome Tax claim/demand pending and/or to be discharged.” 25.A plain reading of the Share Purchase Agreement dated 25.09.2005 andthe Escrow Agreement dated 27.09.2005 would indicate that the conclusiondrawn by the Assessing Officer that respondent no. 2 held any money on accountof the assessee company is patently erroneous. Neither the Share PurchaseAgreement nor the Escrow Agreement provides for any contingency whichwould enable the assessee company or any other party to insist that the funds heldby the respondent no. 2 bank in escrow be paid either to the assessee company orto the Income-tax Department on account of the assessee company. 26.The reason why the purchaser and the sellers agreed to keep part of thesale consideration paid by the purchaser in es