Short Overview: Where assessee had deposited sale consideration amount in the Escrow Account as a security in respect of future liabilities of the company/ transferor, the year of taxability, irrespective of the delay in making investment in REC Bonds on account of uncertainty involved for receiving the amount, the year of taxability was year of receipt and therefore, assessee was eligible for deduction under section 54EC.

Assessee claimed exemption under section 54EC, which was denied by revenue since the assessee had made investment in REC bond after a period of six months from the date of transfer of the shares. Case of assessee was that the amount was deposited in the Escrow Account as a security in respect of future liabilities of the company/ transferor and there was delay in receiving the sale consideration. Tribunal deleted the addition and held that admittedly the amount was deposited in the Escrow Account.

It is held that both the transferor and the 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. Since, 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 dispute between the parties had occurred and the litigation was going on, 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 thereupon the share of the assessee was passed on to the assessee for which the assessee offered capital gains in the relevant assessment year 2010-11. Further, the Tribunal rightly held that assessee was entitled to the benefit of deduction under section 54EC as the amount was invested by him in the Rural Electrification Corporation Ltd. bonds in the year of receipt which was also the year of taxability of the capital gains so received.

Decision: In assessee’s favour