No Tax applicable on Interest Income in Escrow Account held for payment of Sales Tax Dues: ITAT

For the assessment year 2012-2013, the assessee has filed his return of income declaring a total income of Rs. 2,65,018.  During the course of assessment proceedings, it was noticed that as per 26AS a sum of Rs. 71,97,569 was credited in the assessee’s PAN but the same was not declared in the return of income filed by the assessee. This amount was added to the total income of the assessee by AO as an addition.

Appeal before CIT(A): Aggrieved by the interest addition, which was credited in the Escrow Account, the assessee preferred an appeal before the first appellate authority. The CIT(A) rejected the claim of the assessee stating that the interest of Rs. 71,97,569 accrued to the appellant on the amount of deposit in the Escrow Account has been rightly included in the total income of the appellant by the AO.

Appeal before ITAT: Aggrieved, the assessee has filed this appeal before the Tribunal. The tribunal relied on Sri.H.Shivanna, S/o Late Mallelingappa v. ACIT, where it was held that, “if the amount is received by the assessee on a certain condition or by imposing of any restriction, such as furnishing of security, the assessee does not become the real owner of the money, though received in his name, or the interest accrued, which could not be chargeable to tax till such dispute is resolved and the condition, or restriction, so imposed is removed or resolved.” The tribunal held that in the given case the condition was imposed for withdrawal of the money under SPA entered by the assessee and others with M/s. Exide Industries Limited. Also, under the Escrow Agreement, the assessee did not have any right to receive the interest credited in the Escrow Account unless and until the Sales Tax liability was cleared. The total sales tax liability in the instant case was far exceeding the consideration which was deposited in the Escrow Account by the purchaser. Moreover, the assessee had disclosed the entire interest income that was credited over a period of time and received by the assessee during Asst. Year 2018-2019. Thus, the addition made by AO was deleted.

With regards to another appeal regarding the addition of Rs. 17,73,900 by AO deposits made in Axis Bank. The assessee had furnished a copy of the cash flow summary and the cash book along with the bank statement, wherein it is seen that there are cash withdrawals to the tune of Rs.36 lakh.

The tribunal decided to restore the issue to the files of the A.O. The A.O. is directed to examine the cash flow summary and the cash book along with the bank statement and to decide the matter afresh in accordance with the law. Hence, appeals were allowed.