Wp/2475/2015 Of Dinesh Vazirani v. The Principal Commissioner Of Income Tax - 7 And Anr

Digitallysigned by1/11MEERAMEERAMAHESHMAHESHJADHAVJADHAVDate: IN THE HIGH COURT OF JUDICATURE AT BOMBAY2022.04.1312:52:32ORDINARY ORIGINAL CIVIL JURISDICTION+0530WRIT PETITION NO. 2475 OF 2015 Dinesh Vazirani)2[nd] floor, Rushi House, Darabshaw)Lane, Off Napeansea Road,)Mumbai 400 006)….Petitioner V/s.1. The Principal Commissioner of )Income Tax-7, Room No.501,)Aayakar Bhavan, M. K. Road )Mumbai 400 020)2. The Union of India)Through the Secretary, Ministry of )Finance, Department of Finance)Government of India North Block)New Delhi 110 001)…Respondents ---- Mr. J. D. Mistri, Senior Advocate a/w Mr. Madhur Agarwal a/w Mr. UpendraLokegaonkar i/b Mint and Confreres for Petitioner Mr. Suresh Kumar for Respondents ---- CORAM : K.R. SHRIRAM &N.R. BORKAR, JJ DATED : 8[th] APRIL 2022 N.R. BORKAR, JJ ORAL JUDGMENT (PER K. R. SHRIRAM J.) : 1.Petitioner is an individual and resident of India. Petitioner, along withtwo other individuals, and one company (collectively referred to asPromoters) was the promoter of a company by the name WMI Cranes Ltd.(the Company) Petitioner held 2,35,900 equity shares out of 9,99,920issued and paid up share capital of the company of Rs.10 each. Promoters entered into Share Subscription and Purchase Agreement (SPA) dated 11thOctober 2010 with M/s Konecranes Finance Corporation (Purchasers).Under the agreement, promoters agreed to sell 51% of the paid up andissued equity share capital of the company to the purchasers. Between thepromoters, they held collectively 100% issued and paid up share capital ofthe company. 2.Simultaneously with SPA, the promoters and purchasers entered intosecond share purchase agreement (Second SPA) for the transfer of theremaining equity shares held by the promoters upon satisfaction of certainconditions under Second SPA so that at a future point of time, purchaserswill hold 100% of the issued and paid up equity share capital of thecompany. SPA provided for a value of Rs.155,00,00,000/- as considerationto be paid to the promoters which effectively was working out to aboutRs.3212.31 per share. SPA also provided that out of Rs.155,00,00,000/- thatwas payable as sale consideration, a sum of Rs.30,00,00,000/- would bekept in escrow, based on which a separate escrow agreement was enteredinto between promoters, purchasers and the escrow agent. At the time ofclosure of the deal, promoters received Rs.125,00,00,000/- as saleconsideration and the shares were transferred. Balance Rs.30,00,00,000/-was kept in escrow account. SPA provided for specific promoterindemnification obligations and it provides that if there is no liability ascontemplated under the specific promoter indemnification obligations(clause 7.2.1 of SPA) within a particular period, this amount of Rs.30,00,00,000/- would be released by the escrow agent to the promoters.Clause 7.8 of SPA provides for escrow arrangement. The escrow account wasto be in force for 2 years from the closing date. These specifics were given to give a background of the matter. 3.Petitioner filed his return of income for A.Y.-2011-2012 on 29[th] July2011 declaring income of Rs.22,51,60,130/-. The return of income includedRs.20,98,08,685/- as long term capital gains on the sale of shares of thecompany. The capital gains was computed by petitioner taking into accountthe proportion of the total consideration of Rs.155,00,00,000/-, includingthe escrow amount of Rs.30,00,00,000/-, which had not, by the time returnswere filed, received by the promoters but still parked in the escrow account.The assessment was selected for scrutiny and assessment under Section 143(3) of the Act was completed and an order dated 15[th] January 2014 waspassed accepting total income as declared by petitioner. These specifics were given to give a background of the matter. 3.Petitioner filed his return of income for A.Y.-2011-2012 on 29[th] July2011 declaring income of Rs.22,51,60,130/-. The return of income includedRs.20,98,08,685/- as long term capital gains on the sale of shares of thecompany. The capital gains was computed by petitioner taking into accountthe proportion of the total consideration of Rs.155,00,00,000/-, includingthe escrow amount of Rs.30,00,00,000/-, which had not, by the time returnswere filed, received by the promoters but still parked in the escrow account.The assessment was selected for scrutiny and assessment under Section 143(3) of the Act was completed and an order dated 15[th] January 2014 waspassed accepting total income as declared by petitioner. 4.It is petitioner's case and which has not been disputed that subsequentto the sale of the shares of the company, certain statutory and otherliabilities arose in the company which was about Rs.9,17,04,240/-, for theperiod prior to the sale of the shares. As per the agreement, this amount waswithdrawn from the escrow account and promoters, therefore, did notreceive this amount of Rs. 9,17,04,240/-. 5.As assessment had already been completed taxing the capital gains athigher amount on the basis of sale consideration of Rs.155,00,00,000/- andwithout reducing the consideration by Rs. 9,17,04,240/-, petitioner made an application to respondent no.1 under Section 264 of the Act. Petitionersubmitted that the amount of Rs.9,17,04,240/- has been withdrawn by thecompany from the escrow account and, therefore, what petitioner receivedwas lesser than what was mentioned in the return of income and, therefore,the capital gains needs to be recomputed reducing the proportionateamount from the amount deducted from the escrow account. Petitioner alsopointed out that the application was being made under Section 264 of theAct because the withdrawal of the amount from the escrow accounthappened after the assessment proceedings for A.Y.-2011-2012 wascompleted and it was not possible for petitioner to make such a claim beforethe assessing officer or even file revised returns. Petitioner, therefore,requested respondent no.1 to reduce the long term capital gains byRs.1,31,44,274 /- and further prayed for directions to the assessing officerto refund the excess tax paid. Petitioner also explained that the amountfrom the escrow account was never going to be recovered by the promotersunder any circumstances and this resulted in reduction in the totalrealisation towards sale of company. 6.Respondent no.1 by an order dated 13[th] February 2015 passed underSection 264 of the Act rejected petitioner’s application holding:- (a) The Petitioner was entitled to receive consideration at Rs.3,213.31 pershare as per the purchase price defined in the agreement. From the saidamount, only cost of acquisition, cost of improvement or expenditureincurred exclusively in connection with the transfer can be reduced to compute capital gains. The agreement between the seller and buyer formeeting certain contingent liability which may arise subsequent to thetransfer cannot be considered for reduction from the consideration receivedi.e, @ Rs.3,213.31 per share in computing capital gains under Section 48 ofthe Act. (b) Respondent No.1 further held that in the absence of specific provisionby which an assessee can reduce returned income filed by it voluntarily, thesame cannot be permitted indirectly by resorting to provisions of Section264 of the Act. Respondent No.1 further relied on the proviso to Section240 of the Act which states that if an assessment is annulled the refund willnot be granted to the extent of tax paid on the returned income.Respondent no.1 held that this shows that income returned by an assessee issacrosanct and cannot be disturbed and even annulment of the assessmentwould not have impacted the suo motu tax paid on the return income. (b) Respondent No.1 further held that in the absence of specific provisionby which an assessee can reduce returned income filed by it voluntarily, thesame cannot be permitted indirectly by resorting to provisions of Section264 of the Act. Respondent No.1 further relied on the proviso to Section240 of the Act which states that if an assessment is annulled the refund willnot be granted to the extent of tax paid on the returned income.Respondent no.1 held that this shows that income returned by an assessee issacrosanct and cannot be disturbed and even annulment of the assessmentwould not have impacted the suo motu tax paid on the return income. (c)The contingent liability paid out of escrow account does not have theeffect on “amount receivable” by the promoters as per the agreement whichremains at Rs.3,213.31 per share.” 7.Being aggrieved by this order dated 13[th] February 2015 petitioner hasapproached this court under Article 226 of the Constitution of India. 8.Having heard the learned counsel and considering the petition,documents annexed thereto and affidavit in reply, we are satisfied that theimpugned order passed by respondent no.1 is not correct and has to bequashed and set aside. 9.Respondent no.1 had erred in holding that the proportionate amountof Rs.9,17,04,240/- withdrawn from the escrow account should not bereduced in computing capital gains of petitioner. Capital gains is computedunder Section 48 of the Act by reducing from the full value of considerationreceived or accrued as a result of transfer of capital asset, cost ofacquisition, cost of improvement and cost of transfer. Respondent no.1 haserred in stating that only the cost of acquisition, cost of improvement andcost of transfer can be deducted from full consideration and, therefore,petitioner is not entitled to the proportionate reduction. Respondent no.1has failed to understand that the amount of Rs.9,17,04,240/- was neitherreceived by the promoters nor accrued to the promoters, as the said amountwas transferred directly to the escrow account and was withdrawn from theescrow account. When the amount has not been received or accrued to thepromoters, the same cannot be taken as full value of consideration incomputing capital gains from the transfer of the shares of the company. 10. We observe that respondent no.1 has not understood the true intentand the content of the SPA. Respondent no.1 has not appreciated that thepurchase price as defined in the agreement was not an absolute amount asthe same was subject to certain liabilities which might arise to thepromoters on account of certain subsequent events. The full value ofconsideration for computing capital gains, in our view, will be the amountwhich was ultimately received by the promoters after the adjustments onaccount of the liabilities from the escrow account as mentioned in the agreement. 11. Respondent No.1 has gone wrong in not appreciating that income orgain is chargeable to tax under the Act on the basis of the real incomeearned by an assessee, unless specific provisions provide to the contrary. The Apex Court in CIT Vs. Shoorji Vallabhdas and Co.1 has observed asunder: “Income-Tax is a levy on income. No doubt, the Income Tax Act takesinto account two points of time at which the liability to tax isattracted, viz., the accrual of the income or its receipt; but thesubstance of the matter is the income. If income does not result at all,there cannot be a tax, even though in book keeping an entry is madeabout a ‘hypothetical income’ which does not matrialise. Whereincome has, in fact, been received and is subsequently given up insuch circumstances that it remains the income of the recipient, eventhough given up, the tax may be payable. Where, however, theincome can be said not to have resulted at all, there is obviouslyneither accrual nor receipt of income, even though an entry to thateffect might, in certain circumstances, have been made in the books ofaccount.” 12. In the present case, the real income (capital gain) can be computed 12. In the present case, the real income (capital gain) can be computed only by taking into account the real sale consideration, i.e., saleconsideration after reducing the amount withdrawn from the escrowaccount. Respondent no.1 has proceeded on an erroneous understandingthat the arrangement between the seller and buyer which results in somecontingent liability that arises subsequently to the transfer, cannot bereduced from the sale consideration as per Section 48 of the Act. We saythis because the liability is contemplated in SPA itself and certainly the sameshould be taken into account to determine the full value of consideration.Therefore, if sale consideration specified in the agreement is along with 1. (1962) 46 ITR 144 (SC) page 148 certain liability, then the full value of consideration for the purpose ofcomputing capital gains under Section 48 of the Act is the considerationspecified in the agreement as reduced by the liability. For respondent no.1 tosay that from the sale consideration only cost of acquisition, cost ofimprovement and cost of transfer can be reduced and the subsequentcontingent liability does not come within any of the items of the reductionand the same cannot be reduced, is erroneous because full value ofconsideration under Section 48 would be the amount arrived at afterreducing the liabilities from the purchase price mentioned in the agreement.Even if the contingent liability is to be regarded as subsequent event, thenalso the same ought to be taken into consideration in determining capitalgain chargeable under Section 45 of the Act. 13. Further, we do not agree with respondent no.1 that the contingentliability paid out of escrow account does not affect the amount receivable asper the agreement for the purpose of computation of capital gains underSection 48 of the Act. Respondent no.1 has failed to understand orappreciate that the promoters have received only net amount of-Rs.125,00,00,000/- plus Rs.20,82,95,760/- (Rs.30,00,00,000/- Rs.9,17,04,240/-). Such reduced amount should be taken as full value ofconsideration for computing capital gains under Section 48 of the Act. 14. For respondent no.1 to hold that in the absence of specific provisionsby which an assessee can reduce returned income filed by it voluntarily, thesame cannot be permitted indirectly by resorting to provisions under Section 264 of the Act, is also erroneous. Certainly, assessee could file revisedreturned of income within the prescribed period, to reduce the returnedincome or increase the returned income. Petitioner filed an applicationunder Section 264 because the assessment under Section 143 had beencompleted by the time the amount of Rs.9,17,04,240/- was deducted fromthe escrow account. Section 264 of the Act in our view, has been introducedto factor in such situation because if income does not result at all, therecannot be a tax, even though in book keeping, an entry is made abouthypothetical income which does not materialize. Section 264 of the Act doesnot restrict the scope of power of respondent no.1 to restrict a relief to anassessee only upto the returned income. Where the income can be said notto have resulted at all, there is obviously neither accrual nor receipt ofincome even though an entry that might, in certain circumstances, havebeen made in the books of account. Therefore, respondent no.1 ought tohave directed the Assessing Officer to recompute income as per theprovisions of the Act, irrespective of whether the computation results inincome being less than returned income. It is the obligation of the revenueto tax an assessee on the income chargeable to tax under the Act and ifhigher income is offered to tax, then it is the duty of the revenue to computethe correct income and grant the refund of taxes erroneously paid by anassessee. 15. Reliance by respondent no.1 on the provisions of Section 240 of theAct to hold that there is no power on respondent no.1 to reduce the 15. Reliance by respondent no.1 on the provisions of Section 240 of theAct to hold that there is no power on respondent no.1 to reduce the returned income, is fraught with error because the circumstances providedin the provisio to Section 240 indisputably do not exist in the present case.Provisio to Section 240 provides that in case of annulment of assessment,refund of tax paid by the assessee as per the return of income cannot begranted to the assessee, which is not the case at hand. There is no provisionin the Act which provides, if ultimately assessed income is less than thereturned income, the refund of the excess tax paid by the assessee wouldnot be granted to such assessee. As regards the stand of respondent no.1that the income returned by petitioner is sacrosanct and cannot bedisturbed, the only thing that is sacrosanct is that an assessee can be askedto pay only such amount of tax which is legally due under the Act andnothing more. If returned income shows a higher tax liability than what isactually chargeable under the Act, then the assessee is entitled to refund ofexcess tax paid by it. 16. We, therefore, quash and set aside the order dated 13[th] February 2015passed by respondent no.1. 17. To sum up, admittedly, petitioner has paid more capital gains thanwhat should have been paid. Capital gains has to be calculated on the basisof what actual consideration has been received. Certainly, petitioner has notreceived his proportionate share to the extent from Rs.9,17,04,240/- thatwas reduced from the escrow account. 18. In the circumstances we hold that petitioner be entitled to refund ofexcess tax paid on the excess capital gains shown earlier. 19. The Assessing Officer is directed to pass fresh assessment order within6 weeks from the date this order is uploaded on the basis that the capitalgains on the transfer of the shares of the company should be computed afterreducing proportionate amount withdrawn from the escrow account fromthe full value of the consideration and allow the refund of additional taxpaid with interest. Unless there is any other claim of Revenue againstpetitioner that would permit Revenue to legally adjust the refund amount,the refund with interest shall be paid over within two weeks of passing thefresh assessment order. 20. Petition accordingly disposed. (N. R. BORKAR, J.) (K.R. SHRIRAM, J.)