INCOME TAX OFFICER, PARWANOO, H.P vs. DEYEM INDUSTRY, NALAGARH SOLAN

3.2 The AO initiated reassessment proceedings under Section 147/148, contending that the assessee had under-declared the taxable LTCG by not including the Escrow amount in the A.Y. 2012-13. The assessee argued that the Escrow amount was contingent upon certain conditions and was not ascertainable at the time of the original assessment, hence it was accounted for in the subsequent year when the amount was actually received. The assessee also contended that the reassessment was based on a mere change of opinion and relied on judicial precedents to support its stance.

3.3 However, the AO rejected these arguments, holding that the "transfer" of assets was completed on 07.04.2011, as per Section 2(47) of the Income Tax Act, 1961. The AO emphasized that the full sale consideration, including the Escrow amount, was determinable and agreed upon at the time of the agreement, and the receipt of the 3 Escrow amount in the next financial year did not alter the taxability of the entire consideration in A.Y. 2012-13. The AO also dismissed the applicability of the Income Recognition Method (AS-9) in this case, stating that slump sale is not an ordinary business activity and the recognition of capital gains is governed by the date of transfer under the Income Tax Act.

3.4 Consequently, the AO made an addition of Rs. 3,34,37,500/- to the assessee's income as under-declared LTCG and recomputed the total income at Rs. 25,04,43,560/-. Penalty proceedings under Section 271(1)(c) were also initiated for furnishing inaccurate particulars of income. The AO further noted that similar transactions were undertaken by the purchaser with other entities, and action in those cases would follow after due approval.

4.1 On Ground No. 2, which contested the reopening of the assessment under Section 147/148 of the Income Tax Act, the CIT(A) found that the reassessment was based on a mere change of opinion. The assessee argued, and the CIT(A) agreed, that no fresh evidence or information had surfaced to justify the reopening. All relevant details, including the slump sale and the escrow amount, were disclosed during the original assessment proceedings under Section 143(3). The Assessing Officer (AO) failed to provide new tangible material or evidence of suppression by the appellant to support the reassessment. The CIT(A) noted that the reasons for reopening relied solely on existing records, 4 and thus, the reassessment was invalid, allowing the appeal on this ground.

4.2 On Ground No. 3, the assessee challenged the AO’s addition of Rs. 3,34,37,500/- as under-declared Long Term Capital Gain (LTCG) for A.Y. 2012-13. The Ld. CIT(A) examined the Slump Sale Agreement (SSA) dated 06.04.2011, which stipulated that Rs. 26,75,00,000/- was the total consideration for the sale, with Rs. 23,40,62,500/- received in Financial Year 2011-12 and Rs. 3,34,37,500/- held in an escrow account, payable only after one year subject to specific conditions. The Ld. CIT(A) observed that the escrow amount was not accrued or receivable by the appellant in A.Y. 2012-13, as it was contingent on future events, such as claims for breach of warranties or arbitral awards. The final amount receivable from the escrow account was indeterminate during A.Y. 2012-13, and the appellant had no enforceable right to it in that year. The CIT(A) rejected the AO’s argument that the amount, received in F.Y. 2012-13 before filing the return, should be taxed in A.Y. 2012-13, as this violated accrual-based accounting principles. By relying upon the decision of Bombay High Court in case of CIT Vs. Hemal Raju Shete (2016) 136 DTR 417, the CIT(A) held that the escrow amount could not be treated as income for A.Y. 2012-13, allowing the appeal on this ground.

4.3 Grounds No. 1, 4, and 5 were deemed general and did not require specific adjudication. Consequently, the CIT(A) allowed the appeal in its entirety, setting aside the AO’s addition of Rs. 3,34,37,500 and the reassessment order dated 17.08.2017. 5. Against the order of the Ld. CIT(A) the assessee preferred an appeal before the Tribunal.

6.1 Therefore, the fact of the slump sale was well within the knowledge of the Department, and all relevant details had been duly disclosed during the original assessment proceedings.

6.2 The Ld. AR further argued that the reopening of the assessment was merely a result of a change in opinion by the Ld. AO and was not based on any new material facts or tangible information that had subsequently come to light. In support of this contention, the Ld. AR referred to the appellate order of the Ld. CIT(A) dated 27.02.2015, wherein at paragraph 5.1, it was observed that the reasons recorded for reopening were based solely on the information already on record, and no fresh or tangible material had been brought forth.

6.3 Hence, it is evident that the reassessment is based purely on a change of opinion, which is impermissible under the law. This legal position has been firmly settled by the Hon’ble Supreme Court in the case of CIT, Delhi v. Kelvinator of India Limited [(2010) 2 SCC 723, Compilation pages 3–5]. The Ld. AR also relied on the following judicial 6 precedents, which unequivocally hold that a mere change of opinion cannot constitute valid grounds for reopening an assessment: a. ITO, Ward No. 16(2) v. Techspan India Private Limited and Am.- (2018) 6 SCC 685 b. Maya Appliances Pvt. Ltd. v. Assistant Commissioner of Income Tax, WP No. 1212 & 1216 of2020 6.4 The Learned Ld. AR further argued that the reopening of the assessment is in gross contravention of law. He submitted that the assessment order dated 17.08.2017 is contrary to legal principles, as the payment received for the disposition of assets by the assessee does not reflect any economic benefit or constructive receipt. This is because, under the slump sale agreement, the parties agreed to defer income, and the taxpayer’s right to such income had neither matured nor vested at the relevant time.

6.5 In support of this, the Ld. AR referred to Clause 4.8 of the slump sale agreement, under which a sum of Rs. 3,34,37,500/- was placed in an escrow account. This amount served as security to ensure the due performance of obligations and was subject to deductions in the event of non-fulfilment of those obligations.

6.6 The Ld. AR further submitted that, as per Clause 4.8 of the slump sale agreement, until the "closing date," both the buyer and the seller had rights over the escrow amount, which served as a security for future liabilities. Therefore, the observation made by the Ld. AO that the entire amount should have been declared in AY 2012-13 is untenable, since the transfer of the escrow amount was contingent.

7 6.7 The Ld. AR contended that there was no certainty regarding the amount receivable by the assessee in AY 2012-13. Accordingly, it cannot be said that the assessee had acquired an absolute, unfettered, and vested right to receive the entire escrow amount in that year, as held by the Ld. AO. He submitted that the assessee had correctly offered an amount of Rs. 21,73,83,298/- to tax in AY 2012-13. The balance amount became ascertained and crystallized only at the end of the closing date, i.e., in AY 2013-14, when it was offered to tax. This tax treatment is in accordance with well-settled legal principles that deferred consideration under a contractual agreement cannot be subjected to tax in an assessment year in which it has not accrued.

6.8 The Ld. AR placed reliance on the judgment of the Hon’ble Punjab and Haryana High Court in Principal Commissioner of Income Tax-1, Chandigarh v. Shri Mahipinder Singh Sandhu [2019 (3) TMI 1358], which upheld the ITAT decision in Mahipinder Singh Sandhu v. ACIT, Circle 2(1), Chandigarh [2018 (3) TMI 1743]. The courts held that real accrual of income must be assessed based on the probability of realization in a realistic manner. Reliance was also placed on Commissioner of Income Tax-8, Mumbai v. Mrs. Hemal Raju Shete [2016 (4) TMI 1082].

6.9 The Ld. AR emphasized that the assessee has already paid tax on the entire consideration of Rs. 26,75,00,000/- over two assessment years. Specifically, the assessee received Rs. 23,40,62,500/- in FY 2011-12 and the balance Rs. 3,34,37,500/- (as per Clause 4.8 of the slump sale agreement at Annexure 3, Pages 21–22 of the paper book) was transferred to an escrow account and received in FY 2012-13, once the conditions were fulfilled. These amounts were duly offered to tax in the respective years of receipt.

6.10 Therefore, it was submitted that the reopening of the assessment and the subsequent order dated 17.08.2017 is revenue-neutral and has no adverse tax implications. Reliance was placed on the judgment of the Hon’ble Supreme Court in CIT v. Excel Industries Limited [(2014) 13 SCC 459], where it was held that if no tax has been evaded, the exercise becomes academic or has only a minor tax effect. Further reliance was placed on the decision in M/s T.A. Taylor Private Limited, Chennai v. The Assistant Commissioner of Income Tax, Corporate Circle 3(1), Chennai [Appeal No. 876 of 2018 & CMP No. 21261 of 2018], where the Hon’ble Madras High Court granted relief in a similar case, observing that the issues had become academic and that taxing the income again in AY 2012-13 was not warranted. The Ld. AR prayed for the dismissal of the appeal filed by the Department.

9 8.1 Further, on the issue of addition of Rs. 3,34,37,500/- as Long-Term Capital Gain, we find merit in the assessee’s contention that the amount kept in the escrow account was contingent in nature. The amount was not guaranteed to be received in AY 2012–13 as it depended on fulfilment of certain conditions mentioned in the agreement. We agree with the finding of the CIT(A) that the assessee did not have an absolute or enforceable right to receive the escrow amount during AY 2012–13 and the final amount became receivable only in the subsequent year. Therefore, the addition made by the AO was not justified.

8.2 Accordingly, we upheld the order of the CIT(A) and dismiss the appeal filed by the Revenue.