MAHIPINDER SINGH SANDHU,CHANDIGARH vs. ACIT, CHANDIGARH

Per Sanjay Garg, Judicial Member:

The present appeal has been preferred by the assessee against the order of the Commissioner of Income Tax (Appeals)-1, [hereinafter referred to as CIT(A)] Chandigarh dated 22.02.2017.

ITA NO. 650/CHD/2017-Mahipinder Singh Sandhu 2

The brief facts of the case are that the case of the assessee was processed

u/s 143(1) at the returned income of Rs. 5,27,15,240/-. The Assessing officer

discovered that the assessee has sold his majority shareholding in Telecom

(P) Ltd during the financial year 2007-08 relevant to assessment year 2008-

09 and thus was liable to capital gains tax but the assessee had not disclosed

part of the capital gain in the year of transfer. The Long Term Capital Gains,

however, were shown in assessment year 2010-11. After duly recording

reasons in writing the Assessing officer reopened the case under section 147

of the Income Tax Act. In the assessment order, the Assessing officer has

reproduced the reasons recorded.

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As observed above, in the assessment year 2010-11, the assessee declared

income of Rs. 40,28,748/- on account of remaining part of long term capital

gains with respect to the shares sold in F.Y. 2007-08 and claimed them to be

exempt u/s 54EC by making investment in bonds of Rural Electrician

Corporation Ltd. As the transfers of shares took place in assessment year

2008-09, the Assessing officer was of the view that they should have been

taxed in that year. Further that for claiming exemption us 54EC, the

investment had to be made within 6 months of the date of transfer but was

made in financial year 2009-10. The Assessing Officer, therefore, show

caused the assessee in this respect.

shareholding as set out in Clause 3.1 of the Share Purchase Agreement

(SPA) was settled at Rs.206,678,314/-, out of which a sum of Rs.

18,000,000/- was deposited in an Escrow Account by the transferee. Hence

on the date of transfer, shareholders received Rs.188,678,314/- and

remaining amount of Rs. 18,000,000/- was kept in an Escrow Account in the

bank under the name and Style of ‘XCEL – TCIS Balance Account’. The

above amount kept in Escrow account was fully recoverable by the transferee

by raising a claim against the representation and warranties of the transferor

and in such a case assessee would not have received any money. Further, the

Escrow Agent could not release any consideration to the assessee till the

dispute between assessee and transferee was settled. There was an actual

dispute raised by the transferee against the Escrow Balance and the same

was finally settled by way of arbitration before the Hon'ble Punjab &

Haryana High Court vide order dated February 02, 2010 in C.M. No.2127-

CH of 2010 in Arbitration Case No.150 of 2008 He further explained that

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in the present case, however, the very accrual of receipt of Rs. 40,28,748/-

was on February 02, 21010 when the same was awarded to the assessee by

the Hon'ble Punjab & Haryana High Court.

The Assessing officer, however, observed that the capital gains were to be

taxed in the year in which the shares were transferred. The delay in receipt

of consideration had no bearing on the year of taxability of the amount. The

Assessing officer further observed that the amount which was kept in an

Escrow account and received later formed part of the income from capital

gains of the assessee in the year of the share transfer. The Assessing officer

also denied the claim of exemption claimed u/s 54EC to the assessee as the

investment in EC bonds was not made within 6 months from the date of

transfer.

assessee preferred appeal before the Ld. CIT(A) not only challenging the

legality of the reopening of the assessment but also the additions made by

the Assessing officer on merits. The Ld. CIT(A), however, upheld the order

of the Assessing officer.

were made before the lower authorities and further submitted that the lower

authorities have wrongly observed that remaining part of the amount of Rs.

40,28,748/- had accrued to the assessee in AY 2008-09. He has further

submitted that, in fact, the amount was lying in the Escrow account and the

assessee had not got the right to receive the said amount. The transferee had

equal right on the amount and in fact as per the terms of the agreement in

respect of future litigations, the amount was directly transferable to the

ITA NO. 650/CHD/2017-Mahipinder Singh Sandhu 5

transferee. In fact, a dispute occurred between the parties about the amount

of Rs. 18,000,000/- deposited in Escrow Account which was settled by way

of compromise before the Hon'ble High Court vide which transferee got Rs.

40 lakhs out of that amount and the balance amount of Rs. 14,000,000/- along

with accrued interest was distributed to the shareholders in the proposition

of their shareholding. Hence, the assessee got his share upon the above

finalization of the dispute. That before that, the assessee had not got any

right to receive the said amount and, hence, it cannot be said that the amount

had accrued to the assessee in AY 2008-09. That, even, there was neither

any certainty about the time nor about the quantum of amount receivable by

the assessee. Under these circumstances, it could not be said that the above

amount had accrued to the assessee in the assessment year under

consideration. Mr. Goyal, the Ld. counsel for the assessee, has further

submitted that on the settlement of the dispute, the amount accrued to the

assessee only on 2.2.2010 and the same was offered for taxation in the

assessment year 2010-11 accordingly. The Ld. Counsel has further submitted

that when the assessee in fact had not received the said amount, it cannot be

expected from the assessee of the investment of the said amount in the Rural

Electrification Corporation Ltd. Bonds to claim the benefit u/s 54EC of the

Act. The amount was invested in the Rural Electrification Corporation Ltd.

Bonds when the same was received and, therefore, the deduction u/s 54EC

was rightly claimed by the assessee. The Ld. Counsel for the assessee has

also relied on the following decisions:-

i) CIT Vs. Hemel Raju Shete [(2016) 136 DTR 417 (Bom)] ii) E.D. Sassoon & Co Ltd Vs. CIT [(1954) 26 ITR 27 (SC)] iii) R. Dalmia Vs. CIT [(1982) 133 ITR 179 (Delhi)

ITA NO. 650/CHD/2017-Mahipinder Singh Sandhu 6

authorities.

of the parties and have also gone through the record. We find force in the

contention raised by the Ld. Counsel for the assessee. Admittedly, a sum of

Rs. 18,000,000/- was deposited in the Escrow Account. Both the transferor

and transferee had common rights over the said amount as the said amount

was deposited in the Escrow Account as a security in respect of future

liabilities of the company / transferor. There was no certainty about the

quantum of amount likely to be received by transferor or transferee out of

the said amount deposited in Escrow Account. Even there was no certainty

of the time of release of the said amount or the part of the amount to either

of the parties as a dispute between the parties had occurred and ligation was

going on. In these circumstances, it cannot be said that the assessee had got

a vested right to receive the amount in question. It was only at the end of

the litigation that the rights and liabilities of the transferor and transferee

were ascertained and there upon the share of the assessee was passed on to

the assessee for which the assessee offered capital gains in the immediate

assessment year 2010-11. The Hon'ble Bombay High Court in the case of

‘CIT Vs. Hemel Raju Shete’ (supra) while relying upon the decision of the

Hon'ble Supreme Court in ‘E.D. Sassoon & Co Ltd Vs. CIT’ (supra) has

observed that when the taxpayer did not have the vested right to receive a

particular amount, it cannot be said that the said amount has accrued to the

tax payer. The Hon'ble Delhi High Court in the case of ‘R. Dalmia Vs. CIT’

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(supra) has held that the capital gains would accrue only to an assessee when

they are ascertained.

that the amount was invested in Rural Electrification Corporation Ltd. Bonds

on receipt of the same and in the year of the taxability of the capital gains.

We , therefore, hold that the assessee is entitled to the benefit of deduction

u/s 54EC as the amount was invested by the assessee in the Rural

Electrification Corporation Ltd. Bonds in the year of receipt which was also

the year of taxability of the capital gains so recived. In view of this, the

order of the lower authorities on this issue is set aside and the additions

made into the account of the assessee are hereby ordered to be deleted.

Grounds No.1 & 2. Admittedly, the assessee did not offer the amount of

Rs.40,28,748/- for taxation in the return of income for the assessment year

2008-09. Whereas as per the agreement, the assessee had transferred his

shareholding in the company. The Assessing officer got the knowledge of

the receipt of additional amount of Rs. 40,28,748/- on the basis of the audit

objections raised by the audit party for assessment year 2010-11. Therefore,

the factum of the said receipt of the additional consideration in relation to

the transfer of shares came for the first time into the knowledge of the

Assessing officer pursuant to the said audit objections. Since, as per the

Assessing officer, the transfer had taken place in the financial year 2007-08

relevant to assessment year 2008-09 and he was of the view that the said

amount was liable for taxation in the year 2008-09, hence, he was of the

genuine and reasonable belief that the income of the assessee for assessment

year 2008-09 had escaped assessment. Whether the said amount had actually

ITA NO. 650/CHD/2017-Mahipinder Singh Sandhu 8

accrued to the assessee or not was a matter of evidence / discussion and

deliberation which could have been done during the assessment proceedings.

In view of the above, we do not find any infirmity in the action of the

Assessing officer so far as the reopening of the assessment is concerned.

Ground No.1 & 2 of the assessee’s appeals are, therefore, dismissed.

271(1)(c), which is consequential in nature and does not require any

adjudication at this stage.

treated as partly allowed.

Order pronounced in the Open Court on 14.03.2018

Sd/- Sd/- (Dr. B.R.R. KUMAR) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated : 14.03.2018 Rkk Copy to: 1. The Appellant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR