M&A Critique




Deferred Consideration Contingent on uncertain future events cannot be taxed before vesting of right to receive

Facts of the case:

The assessee filed here return of income for AY 2006-07 declaring total income of Rs.11,68,470/-. The assesse had also shown the long-term capital gain of Rs.42,38,674/- arising out of the sale of 75,000 shares of M/s. Unisol Infraservices Ltd.

The Assessing Officer on perusal of the said agreement view that the assesse along with his co-owners were to receive in aggregate a sum of Rs.20 crores. This resulted in assesse being taxed on her share of capital gains at Rs.4.48 crores after availing exemption under Section54EC of the Act. Henceforth, the AO passed an order assessing total income to Rs. 4.60 crores.

Contention of the Revenue:

The learned counsel for the revenue contended that the amount to be taxed under section 45(1) is not dependent upon the receipt of the consideration and its accrual to assesse is good enough to make it chargeable to tax.

The agreement providing certain conditions to ultimate flow of consideration to assesse cannot come in way of taxing the same.

Appeal to CIT / Tribunal

The said addition was deleted on the ground that the assesse had shown her share of initial consideration as received and the balance consideration which is conditional had not been shown.

Tribunal also upheld the findings of CIT(A) holding that as there is no certainty of receiving any amount as deferred consideration.

Appeal to High Court:

The High court observed that as per the agreement the deferred/balance consideration is payable over a period of four years i.e. 2006-07, 2007-08, 2008-09 and 2009-10 to be worked out as per the agreed formula. The formula prescribed in the agreement itself makes it clear that the deferred consideration to be received by the assessee in the four years would be dependent upon the profits made by M/s. Unisol in each of the years. Thus in case M/s. Unisol does not make a net profit in terms of the formula for the year under consideration for payment of deferred consideration then no amount would be payable to the respondent-assessee as deferred consideration.


Income accrues when the assesse acquires a right to receive the income. The assesse must have created a debt in her favor and she must have acquired a right to receive the payment.

Tax can be levied on real income and not any hypothetical or illusionary income

Similar Case Laws:

E.D. Sassoon & Co. Ltd. vs. CIT (1954) 26 ITR 27

CIT v. Shoorji Vallabhdas & Co.[1962] 46 ITR 144 (SC)

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M & A Critique