India: No Capital Gains Tax On Contingent Payments If Neither Accrued Nor Received

Last Updated: 24 May 2016
Article by Radhika Parikh and T.P. Janani

When deferred consideration for transfer of a capital asset is contingent on one or more uncertain events, such deferred payment is not taxable in the year of transfer if it has not accrued to / been received by the transferor in that year.

A seller taxpayer does not have a right to an amount of deferred consideration when the amount is contingent on one or more uncertain events. As such, the amount cannot be said to have accrued until the contingent event is realized.

Recently, the Bombay High Court has rendered an important ruling in the context of taxation of deferred consideration which are contingent in nature and are payable on transfer of assets. The Court held that deferred consideration contingent on uncertain events does not accrue in the hands of the transferor in the year of the transfer. Such consideration is only be taxable if it actually accrues or is received by the transferor.1

In case of exit by promoters / investors, etc., very often the consideration receivable is composed of two components – a fixed amount and a performance / other formula based contingent amount. The taxability of such deferred consideration in the year of transfer has been a debated issue. In the year of transfer, if the deferred consideration is not received / has not accrued to the transferor, taxation of the same could be very onerous. Further, in a cross-border context where the seller is a non-resident and subject to tax on capital gains in India (i.e., in situations where there is no relief under an applicable tax treaty), the buyer is required to withhold applicable taxes from the transfer consideration and often, there is a lot of disagreement between the parties as to whether deferred consideration is taxable (and consequently subject to withholding tax obligations on the buyer). This becomes particularly significant considering the fact that failure to withhold can result in consequences such as interest at the rate of 1% per month until the withholding is made, and 1.5% per month until the withheld tax is deposited with the government. A penalty equal to the amount of tax that should have been withheld may also be levied.


Mrs. Hemal Raju Shete ("Taxpayer"), an Indian resident individual, along with her family members (together the "Sellers") held shares in M/s. Unisol Infraservices Ltd. ("Target Company"). They entered into an agreement on January 25, 2006 ("Agreement") with M/s Radha Krishna Hospitality Services (p) Ltd. ("Buyer") for the sale of shares in M/s. Unisol Infraservices Ltd. Pursuant to the Agreement, the Sellers were to receive INR 27 million (approx. USD 0.4 million) as initial consideration. The Agreement also provided for deferred consideration capped at INR 200 million (approx. USD 30 million). This deferred consideration was receivable over a period of 4 financial years subsequent to the year of transfer (i.e., 2006-07, 2007-08, 2008-09 and 2009-10) and contingent on the Target Company's performance during that period. It was to be calculated as per a formula outlined in the Agreement. As per the formula, no part of the deferred consideration accrued or was received in financial year 2005-06, (which was the year in which the shares were transferred as per the Agreement).

In her income tax returns with respect to financial 2005-06, the Taxpayer declared capital gains computed on the basis of her share of the initial consideration. With respect to subsequent financial years (except one financial year in which no deferred consideration accrued on application of formula), the Taxpayer offered to tax the amounts which were received on the application of the formula provided in the Agreement.

With respect to financial year 2005-06, the tax authorities were of the view that the entire deferred consideration of INR 200 million was also taxable in the hands of the Taxpayer.

Therefore, the key issue before the Bombay High Court was whether the deferred consideration of INR 200 million was taxable in the hands of the Taxpayer with respect to the financial year 2005-06.


The High Court held that the deferred consideration of INR 200 million was not received or accrued with respect to financial year 2005-06 and therefore, cannot be taxed in the hands of the Taxpayer in that year on any notional or hypothetical basis.

Based on precedents laid down by the Supreme Court2 the High Court in this case re-iterated that income can be said to accrue to a taxpayer only when the taxpayer acquires a right to receive such income.

In the present case, the High Court examined the terms of the Agreement wherein it was clear that the sum of INR 200 million was only the maximum amount that could be paid to the Sellers. The actual sum of deferred payment was contingent on the performance of the Target Company in a financial year. Therefore, the High Court held that, in financial year 2005-06, the Taxpayer did not have a vested right to receive the deferred consideration of INR 200 million or any part thereof.

Thus, the High Court found that the entire sum of INR 200 million could not be viewed as deferred income accruing to the Taxpayer in financial year 2005-06.


The disagreement with respect to taxation of deferred consideration (in the context of transfer of capital assets) stems from the manner in which capital gains are taxed. According to the charging provisions dealing with capital gains, "any profits or gains arising from the transfer of a capital asset" shall be deemed to be the income of the year in which the transfer takes place. Further, in order to compute the gains subject to capital gains tax, the computation provisions provide that capital gains shall be computed as the full value of "consideration received or accruing" to the transferor as reduced by the original cost of acquisition of the asset and any expenditure incurred in connection with transfer of the asset. Thus, capital gains is to be calculated using the total consideration accruing to the transferor, and is subject to capital gains tax in the year the asset is transferred, regardless of when payment is actually received by the taxpayer.

The issue, brought to light in the present case, arises when the total consideration is not a fixed amount guaranteed to be received in the year of transfer or at a later date, but rather an amount calculated pursuant to a formula based on uncertain events. In such a case, calculating the total amount of consideration that may eventually accrue to the assesse becomes impossible in the year of transfer. It is important to note at this point that the income tax law specifically provides that when consideration accruing to a taxpayer as a result of a transfer of a capital asset cannot be ascertained, the fair market value of the asset on the date of transfer should be used for the purposes of computing the amount of income chargeable to capital gains tax. However, Revenue Authorities use the maximum possible amount of consideration receivable in order to calculate a taxpayer's capital gains tax liability.

This issue has been dealt with by other High Courts in the past. For example, in 2012 the Delhi High Court3 held that pursuant to section 45(1), the entire amount of consideration must be offered to tax in the year of transfer even if part of such considerations is a deferred payment based on future contingencies. The High Court also held, relying on a Madras High Court4 decision, that in the event that that the entire consideration is not received by the assesse in subsequent years, such non-payment would be considered a capital loss in the year when the consideration becomes irrecoverable.

Interestingly, in the present case the Bombay High Court has approached the issue from a different perspective. Unlike the previously mentioned Delhi High Court and Madras High Court decisions, the Bombay High Court rightly does not start with the assumption that the entire amount of consideration has accrued to the taxpayer at the time of transfer. Instead, it relies on the decision of the Supreme Court to hold that income accrues to a taxpayer only when the he or she has the right to receive such income.

Although this position of law seems sound, and is a welcomed relief, taxpayers are likely to face difficulties till the matter is addressed by the Supreme Court in light of the existence of conflicting judgments of different High Courts. Further, this ruling leaves open the question of taxation of deferred consideration accrued or received in years subsequent to the transfer. One view could be that such consideration is taxable in the year it is accrued or received. However, such a view does not fit within the scheme of taxation of capital gains, which mandates that capital gains are taxable in the year of transfer of capital asset. Alternatively, after accrual or receipt of deferred consideration, it could be offered as income with respect to the year the transfer took place by revising previously filed income tax returns. However, this option would only be viable to the extent that such consideration accrues or is received within the time limit available for revising previous tax returns5. Of course, a taxpayer may also choose to follow the precedent laid down in the above-mentioned Madras and Delhi High Court decisions by offering the entire consideration to tax and claiming a capital loss (for any amount not actually accrued or received) in the year that the consideration becomes irrecoverable. With respect to the year of transfer, this may be very important from a liquidity perspective, particularly, where the proportion that the deferred consideration bears to the fixed consideration is very high. As none of these options provide a comprehensive solution to the tax treatment of deferred consideration contingent on uncertain events, litigation on the subject is likely to continue until required amendments to the ITA are made.

The uncertainty around this issue and the resulting risk of litigation can also have a significant impact on M&A involving earn-out payments, which are very common6. Parties often strive for tax certainty, and in doing so, generally tend to have long-drawn negotiations of the terms of earn outs.


1 CIT v Hemel Raju Shete, High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction, Income Tax Appeal No. 2348 of 2013

2 E.D. Sassoon & Co. Ltd. vs. CIT (1954) 26 ITR 27 and Morvi Industries Ltd. vs. CIT (1971) 82 ITR 835.

3 Ajay Guliya v ACIT TS 520 HC 2012 (Del)

4 T.V. Sundaram Iyenger & Sons Ltd. v CIT (1959) 37 ITS 26 (Chennai)

5 Pursuant to section 139(5) of the ITA a taxpayer can file a revised tax return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.

6 Earn out payments are typically payments calculated on the profits of the target company, and are made to the seller in years subsequent to the transfer of the target company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions