Case Note & Summary
The petitioner, Dinesh Vazirani, an individual resident of India, along with other promoters, held shares in WMI Cranes Ltd. They entered into a Share Subscription and Purchase Agreement (SPA) dated 11 October 2010 with Konecranes Finance Corporation for the sale of 51% of the equity shares. The total consideration was Rs. 155,00,00,000, out of which Rs. 125,00,00,000 was paid at closure and Rs. 30,00,00,000 was kept in escrow under an escrow agreement. The SPA provided for specific promoter indemnification obligations, and the escrow amount was to be released to the promoters if no liability arose within a specified period. The petitioner filed his return of income for Assessment Year 2011-12 declaring long-term capital gains on the sale of shares, but did not include the escrow amount as income in that year. The Assessing Officer, however, added the entire escrow amount as capital gains in the assessment year 2011-12, treating it as income accrued in the year of transfer. The petitioner challenged this addition by way of a writ petition. The court considered whether the right to receive the escrow amount was contingent or absolute. It noted that under the SPA, the escrow amount was subject to indemnity claims, and the promoters had no immediate right to receive it. The court held that income accrues only when the right to receive it becomes vested and not when it is contingent. Since the contingency was resolved only in a later year when the escrow amount was actually released, the income was taxable in that later year. The court allowed the petition, quashing the assessment order to the extent it added the escrow amount as income in Assessment Year 2011-12, and directed the Assessing Officer to delete that addition.
Headnote
A) Income Tax - Capital Gains - Accrual of Income - Section 45 of Income Tax Act, 1961 - The issue was whether the amount kept in escrow under a share purchase agreement is taxable as capital gains in the year of transfer of shares or in the year when the escrow amount is actually received by the assessee - The court held that the right to receive the escrow amount was contingent upon the non-occurrence of indemnity claims, and therefore, the income accrued only in the year when the contingency was resolved and the amount was received - The Assessing Officer's addition of the escrow amount as capital gains in the year of transfer was set aside (Paras 1-10).
Issue of Consideration
Whether the amount kept in escrow under a share purchase agreement is taxable as capital gains in the year of transfer of shares or in the year when the escrow amount is actually received by the assessee.
Final Decision
The court allowed the writ petition, quashed the assessment order to the extent it added the escrow amount as income in Assessment Year 2011-12, and directed the Assessing Officer to delete that addition.
Law Points
- Capital gains taxation
- accrual of income
- escrow amount
- year of taxability
- Section 45 of Income Tax Act
- 1961
