TC - Calisto

13th K.R. RAMAMANI MEMORIAL NATIONAL TAXATION

MOOT COURT COMPETITION, 2023

BEFORE THE HONOURABLE

SUPREME COURT OF INDIA

MOST RESPECTFULLY SUBMITTED BEFORE THE HON’BLE COURT UNDER

ARTICLE 136 OF THE CONSTITUTION OF INDIA

M/S. VULCAN ENERGY PVT. LTD………………………………………..…APPELLANT

VERSUS

PRINCIPAL COMMISSIONER OF INCOME TAX, CHENNAI…………… RESPONDENT

MEMORIAL ON THE BEHALF OF THE APPELLANT

DRAWN AND FILED BY THE COUNSELS FOR THE APPELLANT

 TABLE OF CONTENTS

1. LIST OF ABBREVIATIONS …………………………………………………………….2

2. INDEX OF AUTHORITIES ……………………………………………………………..3
3. STATEMENT OF JURISDICTION …………………………………………………….8
4. STATEMENT OF FACTS ……………………………………………………………….9
5. STATEMENT OF ISSUES ……………………………………………………………..10
6. SUMMARY OF ARGUMENTS ………………………………………………………..11
7. ARGUMENTS ADVANCED …………………………………………………………...12

1. WHETHER THE HIGH COURT WAS NOT RIGHT IN HOLDING THAT A

PORTION OF THE SALE CONSIDERATION RETAINED IN THE ESCROW
ACCOUNT FOR MEETING LIABILITIES AND OBLIGATION HAS ACCRUED
TO THE ASSESSEE IN YEAR OF ENTERING INTO SLUMP SALE AGREEMENT
I.E., IMPUGNED AY 2003-04 AND HENCE SHOULD BE TAKEN INTO
ACCOUNT FOR THE PURPOSE OF COMPUTATION OF CAPITAL GAINS IN
AY 2003-04 ITSELF?........................................................................................................12

[1.1] THE IMPUGNED AMOUNT CANNOT BE TREATED AS INCOME OF

PREVIOUS YEAR FOR AY 2003-04…………………………………………………...12
[1.2] THE AMOUNT RETAINED IN THE ESCROW ACCOUNT BY THE
PURCHASER HAS NOT ACCRUED TO THE APPELLANT IN AY 2003-04……...17

8. PRAYER …………………………………………………………………………………21

1|Page
 LIST OF ABBREVIATIONS

ABBREVIATION FULL FORM

AIR All India Reporter
SCC Supreme Court Cases
Hon’ble Honourable
Anr. Another
All Allahabad
Bom Bombay
Cal Calcutta
Del Delhi
Kar Karnataka
P&H Punjab and Haryana
HC High Court
SC Supreme Court
CIT Commissioner of Income-Tax
CIT(A) Commissioner of Income Tax (Appeals)
ACIT Assistant Commissioner of Income-Tax
DCIT Deputy Commissioner of Income-Tax
ITD Income Tax tribunal Decisions
AO Assessing Officer
PY Previous Year
ITAT Income Tax Appellate Tribunal
ITR Income Tax Report
ITO Income Tax Officer
IT Act Income Tax Act, 1961
s. Section
u/s under section
r/w read with
UOI Union of India

2|Page
 INDEX OF AUTHORITIES

PRIMARY SOURCES

SUPREME COURT CASES

S. FOOT
CASE LAW CITATION PAGE NO.
NO. NOTE NO.

(2013) 358 ITR

1. CIT v. Excel Industries Ltd. 36 19
295 (SC)

(1962) 46 ITR 144

2. CIT v. Shoorji Vallabhdas 35 19
SC

3. Bank of India v. K. Mohan Das (2009) 5 SCC 313 28 18

Bihar State Electricity Board v.

4. AIR 1990 SC 699 28 18
Green Rubber Industries

(1953) 23 ITR 230

5. Keshav Mills v. CIT 6 13
(SC)

6. E.D. Sasson & Co. Ltd. v. CIT AIR 1954 SC 470 16, 19, 25 16, 17

M/s P.G. & W. Sawoo Pvt. Ltd. (2016) 385 ITR 60

7. 21 16
v. ACIT (SC)

Godhra Electricity Co. Ltd. v. (1997) 225 ITR

8. 24 16
CIT 746 (SC)

(1999) 236 ITR

9. CIT v. Bokaro Steel Ltd. 26 17
315

3|Page
 DELHI HIGH COURT CASES

FOOT
PAGE
S. NO. CASE LAW CITATION NOTE
NO.
NO.

(2011) 331 ITR 10

1. CIT v. Dinesh Kumar Goel 1 13
(Del)

Deutsche Trustee Company Ltd. v. Tulip 2017 SCC OnLine

2. 31 18
Telecom Ltd. Del 11012

BOMBAY HIGH COURT CASES

FOOT
PAGE
S. NO. CASE LAW CITATION NOTE
NO.
NO.

(2006) 286 ITR 596

1. CIT v. Associated Cables Ltd. 2, 32 13, 18
(Bom)

(2016) 136 DTR

2. CIT v. Hemal Raju Shete 11, 15 14, 16
417 (Bom)

CIT v. Associated Commercial (1963) 48 ITR 1

3. 18 16
Corporation (Bom)

(1958) 33 ITR 681

4. CIT v. Nagri Mills 42 20
(Bom)

5. Dinesh Vazirani v. PCIT (2022) 445 ITR 110 13, 40 15, 19

4|Page
 CALCUTTA HIGH COURT CASES

FOOT
PAGE
S. NO. CASE LAW CITATION NOTE
NO.
NO.

CIT v. Simplex Concrete Piles (India) P. (1989) 179 ITR 8

1. 3, 34 13, 18
Ltd. (Cal)

(1993) 71 Taxman
2. CIT v. Bank of Tokyo Ltd. 8 14
85,87, 92 (Cal)

MADRAS HIGH COURT CASES

FOOT
PAGE
S. NO. CASE LAW CITATION NOTE
NO.
NO.

(2006) 283 ITR

1. CIT v. Ignifluid Boilers (I) Ltd. 4 13
295 (Mad)

GUJARAT HIGH COURT CASES

FOOT
PAGE
S. NO. CASE LAW CITATION NOTE
NO.
NO.

(2001) 247 ITR 7, 16,

1. Anup Engineering Ltd. v. CIT 14, 16
457 (Guj) 21

5|Page
 RAJASTHAN HIGH COURT CASES

FOOT
PAGE
S. NO. CASE LAW CITATION NOTE
NO.
NO.

(1995) 211 ITR

1. CIT v. Princess Trivikrama Kumari 9 14
833, 835, 836 (Raj)

KERALA HIGH COURT CASES

FOOT
PAGE
S. NO. CASE LAW CITATION NOTE
NO.
NO.

(1976) 105 ITR

1. Janatha Contract Co. v. CIT 33, 34 18
627 (Ker)

Brahmos Aerospace (2021) 483 ITR

2. 17, 37 16, 19
Thiruvananthapuram Ltd. v. ACIT 91(Ker)

INCOME TAX APPELLATE TRIBUNAL CASES

FOOT
PAGE
S. NO. CASE LAW CITATION NOTE
NO.
NO.

(2020) 185 ITD 250

1. Universal Medicare v. DCIT 14 15
(Mumbai - Tri.)

6|Page
 STATUTES REFERRED

1. Constitution of India

2. Income Tax Act, 1961

3. Finance Act, 2009

SECONDARY SOURCES

BOOKS REFERRED

1. M.P. Jain, Indian Constitutional Law (8th Ed., 2019)

2. V.N. Shukla, Constitution of India (13th Ed., 2019)

3. Arvind P. Datar, Kanga & Palkhivala, The Law and Practice of Income Tax (11th Ed.,

4. M.B Gabhawala &A.M Gabhawala, Tax Practice Manual (6th Ed., 2020)

ONLINE LEGAL DATABASES

1. Manupatra

2. SCC Online

3. Taxmann

7|Page
 STATEMENT OF JURISDICTION

The Hon’ble Supreme Court is vested with jurisdiction to hear the present appeal under Article
136 of the Constitution of India. The provision under which the Appellant have approached the
Hon’ble Court, is read as herein under as:

“136. Special leave to appeal by the Supreme Court

(1) Notwithstanding anything in this Chapter, the Supreme Court may, in its discretion,
grant special leave to appeal from any judgment, decree, determination, sentence or
order in any cause or matter passed or made by any court or tribunal in the territory
of India.

(2) Nothing in clause (1) shall apply to any judgment, determination, sentence or order
passed or made by any court or tribunal constituted by or under any law relating to
the Armed Forces.”

Under this aforementioned jurisdiction, the Counsels for the Appellant humbly approach the
Hon’ble Supreme Court.

8|Page
 STATEMENT OF FACTS

The Appellant sold a refractories plant to M/s SAPR Refractories India Ltd. on a Slump Sale
basis for a consideration of Rs.31.45 Crores in April 2002. Out of the sale consideration of
Rs.31.45 Crores, the Purchaser retained a sum of Rs.3.25 Crores in an escrow account which
was maintained in Deutsche Bank. The aforementioned retention sum was held back to
indemnify the purchaser against any damage or loss arising from liability on product warranty
given by the Appellant, dues payable by the Appellant to government/governmental agencies
for non-compliance of law before the date of sale, and liability on account of environment,
health and safety hazards. Amounts from the escrow account would be released only after due
verification and audit by the appointed auditor(s) for this. The Appellant in the impugned AY
2003-04 offered a sum of Rs. 28.2 Crores i.e., Rs. 31.45 Crores less Rs. 3.25 Crores retained
in escrow, under head long-term capital gains on the sale of the Plant. The Appellant offered
the entire escrow amount of Rs. 3.25 Crores, in the next AY 2004-05 for capital gains
computation when amounts were paid to the Appellant subsequently. The Appellant submitted
before the AO that it did not have a right to receive the amount maintained in the escrow
account. However, the AO did not agree and in the impugned year AY 2003-04, he disallowed
the said reduction of the retention money in escrow, and recomputed the capital gain tax on the
entire Rs.31.45 Crores, holding that the amount of Rs.3.25 Crores which was kept in an escrow
account pursuant to the sale agreement would only constitute an application of its income, and
the whole consideration has accrued to the assessee immediately on the execution of the
agreement for sale. The Appellant carried the order of the AO, impugning the addition of Rs.
3.25 Crores in AY 2003-04, in appeal before the CIT(A), who was pleased to rule in favour of
the Appellant by relying on precedents relating to retention money contracts and hypothetical
income. The Respondents further filed an appeal before ITAT against the order of the CIT(A)
which upheld the order of CIT(A) and thereafter, the Respondent filed an appeal before the
Hon’ble Madras High Court. The Hon’ble High Court while upholding the order of the AO,
stated that the entire sale consideration had accrued in favour of the Appellant during the year
under consideration. Thereafter, the Appellant filed a SLP before the Hon’ble Supreme Court
against the order of the High Court, subsequent to which, leave was granted by the Hon’ble
Supreme Court.

9|Page
 STATEMENT OF ISSUES

ISSUE 1

WHETHER THE HIGH COURT WAS NOT RIGHT IN HOLDING THAT A

PORTION OF THE SALE CONSIDERATION RETAINED IN THE ESCROW
ACCOUNT FOR MEETING LIABILITIES AND OBLIGATION HAS ACCRUED TO
THE ASSESSEE IN YEAR OF ENTERING INTO SLUMP SALE AGREEMENT I.E.,
IMPUGNED AY 2003-04 AND HENCE SHOULD BE TAKEN INTO ACCOUNT FOR
THE PURPOSE OF COMPUTATION OF CAPITAL GAINS IN AY 2003-04 ITSELF?

10 | P a g e
 SUMMARY OF ARGUMENTS

ISSUE 1

THAT THE HIGH COURT WAS NOT RIGHT IN HOLDING THAT A PORTION OF
THE SALE CONSIDERATION RETAINED IN THE ESCROW ACCOUNT FOR
MEETING LIABILITIES AND OBLIGATION HAS ACCRUED TO THE ASSESSEE
IN YEAR OF ENTERING INTO SLUMP SALE AGREEMENT I.E., IMPUGNED AY
2003-04 AND HENCE SHOULD BE TAKEN INTO ACCOUNT FOR THE PURPOSE
OF COMPUTATION OF CAPITAL GAINS IN AY 2003-04 ITSELF?

It is most humbly submitted before this Hon’ble Court that the High Court was not correct in
holding that a portion of the sale consideration retained in the escrow account for meeting
liabilities and obligation has accrued to the Appellant in year of entering into slump sale
agreement i.e., impugned AY 2003-04 and hence should be taken into account for the purpose
of computation of capital gains in AY 2003-04 itself. The argument is based on the assertions
that firstly, [1.1] whether the impugned amount cannot be treated as income of previous year
for AY 2003-04; and secondly, [1.2] the amount retained in the escrow account by the
Purchaser has not accrued to the Appellant in PY 2002-03.

11 | P a g e
 ARGUMENTS ADVANCED

1. WHETHER THE HIGH COURT WAS NOT RIGHT IN HOLDING THAT A

PORTION OF THE SALE CONSIDERATION RETAINED IN THE ESCROW
ACCOUNT FOR MEETING LIABILITIES AND OBLIGATION HAS ACCRUED TO
THE ASSESSEE IN YEAR OF ENTERING INTO SLUMP SALE AGREEMENT I.E.,
IMPUGNED AY 2003-04 AND HENCE SHOULD BE TAKEN INTO ACCOUNT FOR
THE PURPOSE OF COMPUTATION OF CAPITAL GAINS IN AY 2003-04 ITSELF?

It is most humbly submitted before this Hon’ble Court that the High Court was not correct in
holding that a portion of the sale consideration retained in the escrow account for meeting
liabilities and obligation has accrued to the Appellant in year of entering into slump sale
agreement i.e., impugned AY 2003-04 and hence should be taken into account for the purpose
of computation of capital gains in AY 2003-04 itself. The argument is based on the assertions
that firstly, [1.1] the impugned amount cannot be treated as income of previous year for AY
2003-04; and secondly, [1.2] the amount retained in the escrow account by the Purchaser has
not accrued to the Appellant in PY 2002-03.

[1.1] THE IMPUGNED AMOUNT CANNOT BE TREATED AS INCOME OF

PREVIOUS YEAR FOR AY 2003-04

It is most humbly submitted before the Hon’ble Court that the amount of Rs. 3.25 Crores kept
in the escrow amount, hereinafter referred to as “impugned amount”, cannot be treated as
income of PY for AY 2003-04. The argument is based on the assertion that firstly, [1.1.1] the
impugned amount does not come under the purview of “total income” under s. 5 of the IT Act,
hereinafter referred to as “the Act”; secondly, [1.1.2] the accrual of the amount rested upon
detailed contingencies; and thirdly, [1.1.3] right to receive did not arise in PY 2002-03,
hereinafter referred to as “relevant PY”.

12 | P a g e
 [1.1.1] THE IMPUGNED AMOUNT DOES NOT COME UNDER THE PURVIEW OF
“TOTAL INCOME” UNDER s. 5 OF THE ACT

It is most humbly submitted before the Hon’ble Court that the impugned amount does not come
under the purview of “total income” under s. 5 of the Act. The argument is based on the
assertion that the impugned amount cannot be treated as total income as defined under s. 5 of
the Act. Further, s. 4 of the Act states that income-tax shall be charged for an assessment year
in respect of the total income of the previous year. Further, s. 5 of the Act states that the total
income of any previous year of a person includes all income which:
(a) is received or is deemed to be received in India in such year by or on behalf of such person;
(b) accrues or arises or is deemed to accrue or arise to him in India during such year;
(c) accrues or arises to him outside India during such year

Therefore, under s. 5 of the Act, when the income accrues or arises or is deemed to accrue or
arise to the assessee in India during the previous year, it is to be taxed in that year. It is
important, therefore, that receipt of a particular amount in the relevant year should be an
‘income’ under the provision.1 In CIT v. Associated Cables Ltd.,2 the question was that whether
retention money did not accrue to assessee and could not be considered to be income of assessee
in year in which amount was retained. The Hon’ble HC while relying on CIT v. Simplex
Concrete Piles (India) P. Ltd.,3 and CIT v. Ignifluid Boilers (I) Ltd.,4 held that retention money
could be said to accrue only in the year it was actually received and not in the year in which it
was retained. In the present case, the year of actual receipt of the impugned amount is not in
the relevant PY but in the next year to the relevant PY and therefore, the amount could not be
said to accrue in the relevant PY.

Furthermore, as under the mercantile system of accounting, the date of receipt is immaterial
and the profits are computed on the basis of accrual and not on the basis of receipt.5 Under this
system, the unrealised income cannot be assessed on the basis of any constructive receipt as
under this system according to s. 5 of the Act only when income accrues or arises or is received
by the assessee.6 Therefore, in order to come under the purview of total income as defined
under s. 5 of the Act, the amount must accrue or be received by the assessee.

1
Commissioner of Income-Tax v. Dinesh Kumar Goel, (2011) 331 ITR 10 (Del).
2
(2006) 286 ITR 596 (Bom).
3
(1989) 179 ITR 8 (Cal).
4
(2006) 283 ITR 295 (Mad).
5
Arvind P Datar, The Law and Practice of Income Tax (Vol 1, 11th ed., Kanga and Palkhivala 2020) Pg No. 317.
6
Keshav Mills v. Commissioner of Income-Tax, 23 ITR 230 (SC).

13 | P a g e
Furthermore, in the context of income accruing in relation to the retention money, the Hon’ble
Gujarat High Court in case of Anup Engineering Ltd v. CIT,7 has held that such income would
not accrue when the bill was raised but only when amount was paid since there was every
possibility of part or full of the amount not being realized in favour of the contractor. In the
present case, the impugned amount was not paid in the relevant PY but it was paid in the
subsequent year and therefore, the impugned amount could not be said to accrue to the
Appellant in the relevant PY.

It is also submitted that in CIT v. Bank of Tokyo Ltd.,8 it was held that income from deferred
guarantee commission did not accrue or arise in the year in which the guarantee agreements
were entered into and the deferred guarantee commission should be spread over the period to
which the guarantee commission related and should be assessed properly.

Furthermore, it has also been held by the Apex Court,9 that if the income is contingent on
happening of anything or any event, it cannot be said to have accrued till that event happens
and the finding that it was contingent cannot be distributed without there being any evidence
on record. Similarly, in the present case, the Appellant had only contingent interest and not a
vested interest, therefore, the impugned amount could not to be said to accrue to the Appellant
in the relevant PY. Also, the amount which could be received as deferred consideration is
dependent/contingent upon some uncertain events,10 therefore, it cannot be said to have accrued
to the Appellant. Therefore, only the income that was actually received or accrued to Appellant
had to be taxed and not any contingent deferred income.11

It is therefore clear that in order for an amount to be treated as total income of the PY, it must
either accrue or be received by that person in “such year” i.e., the PY. In the present case, it is
submitted before the Hon’ble Court that the impugned amount was neither received nor did it
accrue to the Appellant in the relevant PY i.e., the year of slump sale.

Hence, the impugned amount cannot be treated as total income as defined under s. 5 of the Act.

7
(2001) 247 ITR 457 (Guj).
8
(1993) 71 Taxman 85,87, 92 (Cal).
9
Commissioner of Income-Tax v. Princess Trivikrama Kumari, (1995) 211 ITR 833, 835, 836 (Raj).
10
Annexure – I, Moot Problem, Pg 3.
11
Commissioner of Income-Tax v. Hemal Raju Shete, (2016) 136 DTR 417 (Bom).

14 | P a g e
 [1.1.2] THE ACCRUAL OF THE IMPUGNED AMOUNT RESTED UPON DETAILED
CONTINGENCIES

It is most humbly submitted before the Hon’ble Court that the accrual of the amount rested
upon detailed contingencies and the impugned amount was paid by the purchaser into the
retention bank account i.e., the escrow account with Deutsche Bank to indemnify it against any
damage or losses arising from:
(a) Liability on product warranty given by the Appellant.
(b) Dues payable to Government/Governmental agencies for non-compliance of law before the
date of sale by the Appellant.
(c) 50% indemnification of the liability arising on account of Environment, health and safety
hazards.12

It is submitted that the Bombay High Court in Dinesh Vazirani v. PCIT,13 wherein a portion of
the sale consideration was set aside in an escrow account via a share purchase agreement, stated
that:

“10. Respondent No.1 (Commissioner) has not understood the true intent and the
content of the SPA and has not appreciated that the purchase price as defined in the
agreement was not an absolute amount as the same was subject to certain liabilities
which might arise to the promoters on account of certain subsequent events

12. … if sale consideration specified in the agreement is along with certain liability,
then the full value of consideration for the purpose of computing capital gains under
section 48 of the Act is the consideration specified in the agreement as reduced by the
liability.”

The same principle was reiterated in the decision of Universal Medicare v. DCIT,14 wherein a
part of sale consideration was retained in an escrow account on Slump Sale of a division of an
undertaking.

In the present case, a part of the sale consideration was retained for meeting any contingent
liability that might arise, and hence, that amount which was retained couldn’t have come into
the hands of the Appellant as its accrual was subject to the aforementioned conditions. As the
receipt of the amount in itself was contingent on the happening of certain events, it cannot be

12
Annexure-I, Moot Problem, Pg 3.
13
(2022) 445 ITR 110.
14
(2020) 185 ITD 250 (Mumbai - Tri.).

15 | P a g e
said to have accrued to the Appellant,15 because there would be no right to receive the same,16
and that right may or may not arise in the future, depending upon the materialisation of the
contingencies. Further, imposing a tax on the said amount before it accrued to the Appellant
would be no less than imposing a charge on the its hypothetical income,17 over which the
Appellant had an unenforceable claim.18

Therefore, as a part of the sale consideration rested in the retention escrow account, the
Appellant did not have a vested right to receive the same,19 and couldn’t acquire such a right
over the amount, until the period of 18 months for which the amount was kept in the escrow
account would expire.20 Thus, the amount of Rs. 3.25 Crores has not accrued to the Appellant
in the A/Y 2003-04, as there was no right to receive the same in that year.21

Therefore, the accrual of the amount rested upon detailed contingencies.

[1.1.3] RIGHT TO RECEIVE DID NOT ARISE IN THE RELEVANT PY

It is most humbly submitted before the Hon’ble Court that the right to receive did not arise in
the relevant PY. The reason being that the right to receive the retention money had not accrued
in the relevant PY as such right would only have accrued after satisfactory completion of the
clause 15.1 of the agreement which was related to retention money.22 The mere fact that the
amount was received by the Appellant would not mean that income had accrued. Whether
income did accrue or not would depend on whether the right to receive of the said amount
would come into existence or not.23

The Apex Court on various occasions,24 has held that only real income can be taxed and income
cannot be taxed in vacuum. Additionally, In E.D. Sassoon & Co. & Ors. v. CIT,25 the Apex

15
Commissioner of Income-Tax v. Hemal Raju Shete, (2016) 136 DTR 417 (Bom).
16
E.D. Sasson & Co. Ltd. v. Commissioner of Income-Tax, AIR 1954 SC 470; Anup Engineering Ltd. v.
Commissioner of Income-Tax. (2001) 247 ITR 457 (Guj).
17
Brahmos Aerospace Thiruvananthapuram Ltd. v. Assistant Commissioner of Income-Tax, (2021) 483 ITR
91(Ker).
18
Commissioner of Income-Tax v. Associated Commercial Corporation, (1963) 48 ITR 1 (Bom).
19
E.D. Sasson & Co. Ltd. v. Commissioner of Income-Tax, AIR 1954 SC 470.
20
Annexure – I, Moot Problem, Pg 3.
21
M/s P.G. & W. Sawoo Pvt. Ltd. v. Assistant Commissioner of Income-Tax, [2016] 385 ITR 60 (SC), Anup
Engineering Ltd. v. Commissioner of Income Tax, [2001] 247 ITR 457 (Guj).
22
Annexure – I, Moot Problem, Pg 3.
23
Amarshiv Construction Pvt. Ltd. v. Deputy Commissioner of Income-Tax, (2014) 367 ITR 659.
24
Godhra Electricity Co. Ltd. v. Commissioner of Income-Tax, (1997) 225 ITR 746 (SC).
25
AIR 1954 SC 470.

16 | P a g e
Court held that income accrues only when the assessee gets a right to receive the same and if
the right to receive is not established, no income would accrue or arise to the assessee. In the
present case, as the impugned amount was a hypothetical income for the relevant PY, therefore,
the right to receive cannot be said to have arisen in the relevant PY.

Furthermore, as held by the Supreme Court in case of CIT v. Bokaro Steel Ltd.,26 unless there
is really any income, there can be no tax levied. The crucial question therefore is that can in
the present case, the right to receive the income accrued in favour of the Appellant. In this
context, it may be recalled that whenever the retention money is actually held back by a party
to the contract, the Hon’ble Courts have taken a view that the right to receive such income does
not accrue when the bills are raised, and the same cannot be taxed at that point of time.

Hence, the right to receive did not arise in relevant PY.

Thus, the amount of Rs. 3.25 Crores kept in the escrow amount cannot be treated as
income of Previous Year for AY 2003-04.

[1.2] THE AMOUNT RETAINED IN THE ESCROW ACCOUNT BY THE

PURCHASER HAS NOT ACCRUED TO THE APPELLANT IN AY 2003-04

It is most humbly submitted before this Hon’ble court that the amount retained in the escrow
account by the Purchaser has not accrued to the Appellant in AY 2003-04. The reason being
that firstly, [1.2.1] the escrow account had characteristics of a retention money contract;
therefore, secondly, [1.2.2] tax levied on the impugned amount would be a levy on hypothetical
income; and thirdly, [1.2.3] the amount was offered to tax in the year of accrual.

[1.2.1] THE ESCROW ACCOUNT HAD CHARACTERISTICS OF A RETENTION

MONEY CONTRACT

It is humbly submitted before the Hon’ble Court that the Hon’ble Madras High Court has erred
in holding the amount of Rs. 31.45 Crores to be the “full and final consideration” for the
business,27 as the Hon’ble High Court has not considered the intention of the parties from the
language they have used, and has not examined the same in the light of the object of the contract

26
(1999) 236 ITR 315 (SC).
27
Annexure – I, Moot Problem, Pg 3.

17 | P a g e
and the surrounding circumstances, which demonstrates an unequivocal intent of the parties to
treat the amount as retention money.28

The business sale agreement was clear in its terminology when it set aside a certain amount of
money in escrow to be retained as a security measure by the purchaser until the satisfactory
completion of conditions mentioned in the contract.29 Retaining a part of the sale consideration
in escrow, which is “A writing, deed, money, stock or other property delivered by the grantor,
promissor, or obliger, into the hands of a third person, to be held by the latter until the
happening of a contingency or performance of a condition”,30 signifies the intention of parties
to set aside an amount for meeting contingencies, as delivery and retention until materialisation
of a contingency are the essential elements of an escrow account.31 Thus, the right to receive
the same would accrue only after the obligations under the contract are fulfilled,32 therefore
granting the amount retained in escrow the character of retention money.33 Further, the
Appellant did not get a right to enforce payment until the amount was released from the escrow
account, i.e. the amount was not due to the Appellant until the expiry of the 18 month period,
therefore, the amount in itself was not assessable to tax in the year of Retention.34

[1.2.2] TAX LEVIED ON THE IMPUGNED AMOUNT WOULD BE A TAX LEVIED ON

‘HYPOTHETICAL INCOME’ OF THE APPELLANT.

It is most humbly submitted before the Hon’ble Court that the impugned amount is a
“hypothetical income” for AY 2003-04 as it was neither received nor did it accrue to the
Appellant in the impugned AY.

In the decision of CIT v. Shoorji Vallabhdas, the Hon’ble Supreme Court held that “income-
tax is a levy on income and if income did not result at all, there could not be a tax”.35 For an
income to accrue, it is important for it to become due, but it must also be accompanied by a
corresponding liability of the other party to pay the amount, as only then can it be said that for

28
Bank of India v. K. Mohan Das, (2009) 5 SCC 313; Bihar state Electricity Board v. Green Rubber Industries
AIR 1990 SC 699.
29
Annexure – I, Moot Problem, Pg 3.
30
Henry Campbell Black, Black’s Law Dictionary, 1486 (4th Ed.,1968).
31
Deutsche Trustee Company Ltd. v. Tulip Telecom Ltd., 2017 SCC OnLine Del 11012.
32
Commissioner of Income-Tax v. Associated Cables Ltd., (2006) 286 ITR 596 (Bom).
33
Janatha Contract Co. v. Commissioner of Income-Tax [1976] 105 ITR 627 (Ker.); Annexure – I, Moot Problem,
Pg 3.
34
Janatha Contract Co. v. Commissioner of Income-Tax [1976] 105 ITR 627 (Ker.); Commissioner of Income-
Tax v. Simplex Concrete Piles (India) Pvt. Ltd., (1989) 179 ITR 8 (Cal).
35
(1962) 46 ITR 144 SC.

18 | P a g e
the purposes of taxability the aforesaid income is not hypothetical.36 It is contended that firstly,
the Appellant did not receive the amount kept in the escrow account in AY 2003-04 and the
same was received in AY 2004-05. Secondly, the sum didn’t accrue to the Appellant because
there was no right to receive that amount due to it being contingent and also having
characteristics of retention money, as stated above.

Therefore, as the accrual or receipt of the impugned amount was not to be quantified in the
relevant previous year and the same was not received by or accrued to the Appellant in that
year, the amount cannot be considered to be the real income of the Appellant for the AY 2003-
04,37 and any tax levied on the amount in that Assessment year would be adjudged as a tax
levied on the “hypothetical income” of the Appellant for that year.38

[1.2.3] THE AMOUNT WAS OFFERED TO TAX IN YEAR OF ACTUAL ACCRUAL.

It is humbly contended before this Hon’ble Court that the business sale agreement between the
Purchaser and the Appellant had a detailed modus operandi for evaluation and release of the
amount of Rs. 3.25 Crores from the escrow account.39 Thus, it is after the expiry of period of
18 months, when the remaining amount was released from the escrow account, that the
Appellant acquired an enforceable right over the amount, which in the present instance, was
the entire retention sum.

As per the decision of the Bombay High Court in Dinesh Vazirani v. PCIT,40 it is only the
amount which finally comes into the hands of the assessee after release from the escrow
account, which is to be offered to tax, and not any other amount which is transferred directly
to the escrow account, and subsequently withdrawn from the account, without ever accruing to
the assessee. No amount was withdrawn from the escrow account, and therefore, the entire sum
of Rs. 3.25 Crores was correctly offered to tax next year (AY 2004-05) as per s. 5 of the Act,41
when it was accrued i.e., when the right to receive the same actually arose, leaving the

36
Commissioner of Income-Tax v. Excel Industries Ltd., (2013) 358 ITR 295 (SC).
37
Brahmos Aerospace Thiruvananthapuram Ltd. v. Assistant Commissioner of Income-Tax, (2021) 483 ITR 91
(Ker).
38
Ibid.
39
Moot Proposition, Pg 3.
40
(2022) 445 ITR 110.
41
Annexure – I, Moot Problem, Pg 3.

19 | P a g e
department none the worse,42 as the amount was taxable at a flat rate of 20% as Long-Term
Capital Gain.43

Therefore, it is clearly established that the amount of Rs. 3.25 Crores did not accrue to the
Appellant in AY 2003-04 as the Appellant had no right to receive the amount retained in the
escrow account, because firstly, its accrual rested upon detailed contingencies, and secondly,
it had characteristics of retention money, and therefore, it was correctly offered to tax in year
of actual accrual i.e., AY 2004-05.

Thus, the amount retained in the escrow account by the Purchaser has not accrued to the
Appellant in AY 2003-04.

42
Commissioner of Income-Tax v. Nagri Mills, (1958) 33 ITR 681 (Bom).
43
Income Tax Act 1961, s.112.

20 | P a g e
 PRAYER

Wherefore, in the light of the facts stated, arguments advanced and authorities cited, the
counsels for the Appellant humbly pray before this Hon’ble Court, to be graciously pleased to:

Adjudicate that the portion of the sale consideration retained in the escrow account for
meeting liabilities and obligation had not accrued to the Appellant in year of entering into
slump sale agreement i.e., impugned AY 2003-04 and hence should not be taken into
account for the purpose of computation of Capital Gains in AY 2003-04 itself

AND/OR

Pass any other order that the Court may deem fit in light of Justice, Equity and Good
Conscience.

And for this kindness, the Appellant, as duty bound as ever, shall humbly pray.

Respectfully Submitted
Counsels on the Behalf of the Appellant

21 | P a g e