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AAA PORTFOLIOS PVT. LTD & ORS. Vs. THE DEPUTY COMMISSIONER OF INCOME TAX & ORS.
July, 25th 2013
                 THE HIGH COURT OF DELHI AT NEW DELHI

%                                   Judgment delivered on: 24.07.2013

+                W.P.(C) No.1272/2013

AAA PORTFOLIOS PVT. LTD & ORS.                           .....   Petitioners

                                        versus

THE DEPUTY COMMISSIONER OF INCOME
TAX & ORS.                                               ....    Respondents

Advocates who appeared in this case:
For the Petitioners     : Mr Parag P. Tripathi, Sr. Advocate with Mr Simran
                          Mehta, Mr R.M. Mehta, Ms Yogita Sunaria and Ms
                          Mahima Gupta
For the Respondent      : Mr Sanjeev Sabharwal and Mr Puneet Gupta for
                          R-1.
                          Mr Sumit Bansal and Mr Ateev Mathur for R-2.
                          Mr Y.K. Kapur for R-3.

CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED, ACTING CHIEF
JUSTICE
HON'BLE MR JUSTICE VIBHU BAKHRU

                                   JUDGMENT

VIBHU BAKHRU, J

1.      This is a writ petition filed by the petitioners challenging the order dated
01.02.2013 passed by Respondent no.1 (hereinafter referred to as the "Assessing
Officer") and the consequential notice dated 04.02.2013 issued under Section
226(3) of the Income Tax Act,1961 (hereinafter referred to as the "Act"). The
petitioners are aggrieved on account of the action of the Assessing Officer in
appropriating a sum of `95,85,30,934/- which was lying in escrow with
respondent No.2 bank.



W.P.(C) No 1272/2013                                                    Page 1 of 20
2.      The petitioners held shares in respondent No.3 company, namely, Escorts
Heart Institute & Research Centre Ltd. (hereinafter referred to as the "assessee
company"). Petitioner Nos.1 & 2 held 1,00,000 shares each of the assessee
company and the petitioner No.3 held 16,00,000 shares of the assessee company.
The petitioners along with three other entities, namely Charak Ayurvedic
Institute, Escorts Employees Welfare Trust and Diamond Leasing and Finance
Limited who held 100 shares of the assessee company each entered into a share
purchase agreement dated 25.9.2005 for sale of their shares in the assessee
company to M/s Fortis Health Care Ltd. (hereinafter referred to as the
"purchaser"). In all 18,00,300 shares of the assessee company which aggregated
90.01% of the issued and paid up share capital of the assessee company were
agreed to be sold by the petitioners and three other entities (hereinafter
collectively referred to as the "sellers"). The consideration for the sale of
18,00,300 shares of the assessee company was agreed at `585,00,97,485/- @
`3249.51 per share. As agreed under the share purchase agreement, the purchaser
was required to deposit the entire consideration with the escrow agent and the
sellers agreed to deposit certain documents including share transfer deeds and
instructions with the escrow agents in order to consummate the transaction for
sale and purchase of an aggregate of 18,00,300 equity shares of the assessee
company. The shares held by petitioner No.3 were pledged with certain lenders
and the escrow agent was required to release part of the consideration to the
lenders in order that the petitioner No.3 could redeem the pledge and transfer
unencumbered shares to the purchaser.

3.      It was agreed between the sellers and the purchaser that the escrow agent
would release `3,24,951/- each to Charak Ayurvedic Institute, Escorts Employees
Welfare Trust and Diamond Leasing and Finance Limited as consideration for
the sale of the 100 shares each held by them in the assessee company and out of







W.P.(C) No 1272/2013                                                Page 2 of 20
the balance consideration deposited by the purchaser an aggregate sum of
`149,99,02,514/- would be withheld with the escrow agent and the remaining
balance amount would be released to the petitioner No.3. The amount to be
withheld by the escrow agent included a sum of `64,99,02,514/- which was the
entire consideration payable to petitioner Nos.1 and 2 for sale of their shares in
the assessee company to the purchaser.

4.      The purpose for withholding the sum of `64,99,02,514/- from the sale
consideration payable by the purchaser was on account of the income tax liability
of the assessee company that was being contested. It is relevant to state that M/s
Escorts Heart Institute and Research Centre, which was a charitable society was
merged with another society and subsequently, the same was converted into a
company incorporated under the Companies Act, namely, the assessee company.
The Assessing Officer denied the exemption to the assessee company under
Section 35(1)(ii) of the Act and passed an assessment order for the assessment
year 2001-2002 raising a demand of `124.36 crores. The said demand is disputed
by the assesssee company. As there were disputes pending with the Income Tax
Department regarding the tax liability of the assessee company, it was agreed
between the purchaser and the petitioners that a certain sum would be held back
from the sale consideration by the escrow agent and would not be released to the
petitioners until the income tax liability of the assessee company was finally
adjudicated. In the event that the income tax liability of the assessee company
exceeded the amount withheld by the escrow agent from the sale consideration,
the same would not be released to the petitioners but would be returned to the
purchaser. However, in the event, the tax liability of the assessee company was
less than the amount withheld by the escrow agent then the amount equal to the
income tax liability of the assessee company would be refunded to the purchaser
and the balance would be released to the petitioners.




W.P.(C) No 1272/2013                                                 Page 3 of 20
5.      Pursuant to the share purchase agreement dated 25.09.2005, the sellers and
the purchaser and respondent no. 2 entered into an Escrow Agreement dated
27.09.2005 which, inter alia, recorded the obligations of respondent no.2 as the
escrow agent.

6.      The Assessing Officer issued a notice under Section 226(3) of the Act to
respondent no. 2 bank in respect to the amount held by respondent no. 2 as an
escrow agent in terms of the Escrow Agreement dated 27.09.2005. The said
notice was objected to and it was clarified by respondent no. 2 that it was not
holding any money on account of the assessee company. The Assessing Officer
sent another similar notice dated 15.02.2007 without considering the objections
of the respondent no. 2 bank.

7.      The Assessing Officer sent a notice dated 16.07.2008 directing the
respondent no. 2/bank to remit a sum of ` 64,99,02,514/- which was lying in
fixed deposits to the Assessing Officer by 17.07.2008.

8.      The notice dated 16.07.2008 was challenged by petitioner no. 1 and 2 by
filing a writ petition, being writ petition no. 5080/2008 in this Court. This Court
passed an interim order dated 17.07.2008 staying the operation of the notice
dated 16.07.2008 and after hearing parties, remanded the matter to the Assistant
Commissioner of Income-tax to decide whether the petitioner had a locus standi
in the matter and to pass a reasoned order after considering the submissions of the
petitioners.

9.      It was contended before the Assessing Officer on behalf of the petitioners
that the action under Section 226(3) of the Act was in the nature of garnishee
proceedings where the revenue steps into the shoes of the assessee and recovers
money directly from a third party who owes money to the assessee. It was further
contended that respondent no. 2 does not either hold any money on account of the



W.P.(C) No 1272/2013                                                  Page 4 of 20
assessee company or owe any money to the assessee company and therefore, the
sums held by the respondent no. 2 in escrow pursuant to the Escrow Agreement
dated 27.09.2005 cannot be demanded by the revenue.

10.     The respondent no. 2 bank also furnished an affidavit dated 07.12.2012
unequivocally affirming that the fixed deposit of ` 94,84,96,05.97/- was held by
respondent no.2 in terms of the Escrow Agreement and that no part of the same
was owed to or held on account of the assessee company. The relevant extract
from the affidavit dated 07.12.2012 furnished by respondent no. 2 to the
Assessing Officer is quoted below:-

      "4. That the Bank is holding Fixed Deposit of Rs 94,84,96,005.97
          (Rupees Ninety four crores eighty four lakhs ninety six thousand
          five and paise ninety seven only) as `Escrow Agent' in terms of
          Escrow Agreement dated 27.09.2005 executed by and between
          Escorts Limited, AAA Portfolio Pvt. Ltd., Big Apple Clothing Pvt.
          Ltd., Charak Ayurvedic Institute. Escorts Employees Welfare
          Trust, Diamond Leasing & Finance Ltd., Fortis Healthcare Ltd.
          and HDFC Bank Limited.

      5. That no part of the amount lying in the 'Escrow Account' is owed to
          or belongs to or held by the Bank or may be subsequently held by
          the Bank on account of M/s Escorts Heart Institute & Research
          Centre, Delhi".

11.     The Assessing Officer after considering the submission of the petitioners
passed the impugned order dated 01.02.2013. After quoting the relevant clauses
from the Escrow Agreement the Assessing Officer held as under:-

        "From the above quoted excerpts of the Escrow agreement, it is
        amply clear that any Income Tax Demand arising on account of
        merger of Escort Heart Institute and Research Center Delhi with
        EHIRCL, Chandigarh and/or the conversation of the merged entity
        into a Part IX company under the Companies Act, 1956 has to be
        paid by the ESCROW Account. The said demand has been raised
        due to the withdrawal of exemption of the Escort Heart Institute and



W.P.(C) No 1272/2013                                                 Page 5 of 20
        Research Center, Delhi as it got merged with the Chandigarh Society
        which was a non-charitable society. Therefore, it can be concluded
        without doubt that the said amount of money has been kept in the
        ESCROW Account for meeting Income Tax demands only. So the
        notice u/s 226(3) sent by the ACIT dated 10.10.2006 is very much in
        accordance with ESCROW Agreement and Income Tax Act."

12.     Pursuant to the impugned order, the Assessing Officer sent a notice dated
04.02.2013 under Section 226(3) of the Act calling upon respondent no. 2 to
forthwith pay the amount held by respondent no.2 by way of fixed deposits
pursuant to the Escrow Agreement. Thereafter, respondent no. 2 paid a sum of
`95,85,30,934/- to the Assessing Officer in compliance of the notice dated
04.02.2013.

13.     The controversy in the present writ petition essentially revolves around the
question whether respondent no. 2 held any money on account of the assessee
company pursuant to the Escrow Agreement. While it is contended on behalf of
the petitioners that the amount kept in escrow with the respondent bank belongs
to petitioner no. 1 & 2 being the sale consideration receivable by them for sale of
their shares to the purchaser, the impugned order holds to the contrary.

14.     The other aspect that is required to be considered is whether respondent
no.2 could be compelled to makeover the funds held in escrow despite an
affidavit being furnished on behalf of respondent no.2 that it did not hold any
sum on account of the assessee company.

15.     Before proceeding further it would be relevant to examine the provisions
of Section 226 of the Act. Section 226 falls within chapter XVII of the Act,
which contains the machinery provisions for collection and recovery of income
tax. Section 226 of the Act provides for other modes of recovery of tax due from
an assessee. Section 226(3) of the Act is relevant for considering the controversy




W.P.(C) No 1272/2013                                                   Page 6 of 20
in the present matter and the relevant clauses of Section 226 of the Act are quoted
below:-

        "226. - Other modes of recovery.

        xxxx            xxxx          xxxx          xxxx          xxxx

        (3) (i) The Assessing Officer or Tax Recovery Officer may, at any
        time or from time to time, by notice in writing require any person
        from whom money is due or may become due to the assessee or
        any person who holds or may subsequently hold money for or on
        account of the assessee to pay to the Assessing Officer or Tax
        Recovery Officer either forthwith upon the money becoming due
        or being held or at or within the time specified in the notice (not
        being before the money becomes due or is held) so much of the
        money as is sufficient to pay the amount due by the assessee in
        respect of arrears or the whole of the money when it is equal to or
        less than that amount.

        (ii) A notice under this sub-section may be issued to any person
        who holds or may subsequently hold any money for or on account
        of the assessee jointly with any other person and for the purposes
        of this sub-section, the shares of the joint holders in such account
        shall be presumed, until the contrary is proved, to be equal.

        (iii) A copy of the notice shall be forwarded to the assessee at his
        last address known to the Assessing Officer or Tax Recovery
        Officer, and in the case of a joint account to all the joint holders at
        their last addresses known to the Assessing Officer or Tax
        Recovery Officer.

        (iv) Save as otherwise provided in this sub-section, every person to
        whom a notice is issued under this sub-section shall be bound to
        comply with such notice, and, in particular, where any such notice
        is issued to a post office, banking company or an insurer, it shall
        not be necessary for any pass book, deposit receipt, policy or any
        other document to be produced for the purpose of any entry,
        endorsement or the like being made before payment is made,
        notwithstanding any rule, practice or requirement to the contrary.

        (v )     xxxx          xxxx          xxxx          xxxx          xxxx



W.P.(C) No 1272/2013                                                     Page 7 of 20
        (vi) Where a person to whom a notice under this sub-section is sent
        objects to it by a statement on oath that the sum demanded or any
        part thereof is not due to the assessee or that he does not hold any
        money for or on account of the assessee, then nothing contained in
        this sub-section shall be deemed to require such person to pay any
        such sum or part thereof, as the case may be, but if it is discovered
        that such statement was false in any material particular, such
        person shall be personally liable to the Assessing Officer or Tax
        Recovery Officer to the extent of his own liability to the assessee
        on the date of the notice, or to the extent of the assessee's liability
        for any sum due under this Act, whichever is less."

16.     The provisions of Section 226(3) of the Act provide the machinery for
enabling an Assessing Officer to recover the amount of income tax due from an
assessee by recovering sums from any person who owes any money to the
assessee or holds any money on his account. Section 226(3) of the Act confers
upon an Assessing Officer a special jurisdiction to proceed directly against a
person, other than an assessee, for recovery of income-tax demands due from the
assessee. The power conferred under Section 226(3) of the Act is a special power
that enables the Assessing Officer to reach beyond the assessee in order to
appropriate amounts due to or held by third parties on account of the assessee.
The proceedings under Section 226(3) of the Act are in the nature of garnishee
proceedings whereby a garnishee is called upon to directly pay a debt to the
creditor of a person to whom the garnishee is indebted. The Assessing Officer is
similarly situated as a garnisher and is in a position to initiate action under
Section 226(3) of the Act to reach out to the property of the assessee which is
held by a third party or to any sum which is owed by a third party to the assessee.
The Assessing Officer steps into the shoes of an assessee with respect to
recovering sums owed to or held by the garnishee on account of the assessee. An
Assessing Officer is not conferred with any additional rights in respect of any
amount due from the garnishee other than that which are available to the
assessee.






W.P.(C) No 1272/2013                                                     Page 8 of 20
17.     Section 226(3) of the Act neither confers jurisdiction nor provides a
machinery for an Assessing Officer to adjudicate the indebtedness of a third party
to the assessee and the provisions of section 226(3) must be confined to those
cases where a third party admits to owing money or holding any money on
account of the assessee or in cases where it is indisputable that the third party
owes money to or holds money on account of the assessee. However, in cases
where there are contentious issues raised by a third party who disputes his
liability to pay any money to the assessee there is no mechanism provided or
jurisdiction conferred upon the Assessing Officer to proceed further in the matter
and take upon himself the mantle of adjudicating the said disputes.

18.     A Division Bench of the Calcatta High Court in the case of Shaw Wallace
and Co. Ltd. v. Union of India: (2003) 262 ITR 528 (Cal.) also expressed a
similar view and held as under:

        "In the facts and circumstances of the case whether the decree had
        been put to execution by VCVL or not is immaterial. If the decree is
        offered, the Tax Recovery Officer is free to proceed upon it under
        section 226(3) of the Act. But by reason of clause (vi) thereof the
        judgment debtor/garnishee has a right to object. As soon as objected,
        to the Tax Recovery Officer cannot proceed to recover until
        discovery of falsity of the objection. If the executability of the
        decree is challenged, the Tax Recovery Officer cannot assume
        jurisdiction to decide a dispute between the garnishee and the
        assessee. He cannot usurp the jurisdiction of the executing court.
        The jurisdiction of the Tax Recovery Officer is confined within the
        dispute between the assessee and the income tax authority. He
        cannot assume jurisdiction in respect of any dispute between the
        assessee and the garnishee nor can he embark upon an exercise to
        determine any such dispute unless it appears to be false on the face
        of it. As soon there appears to be a dispute prima facie, the objection
        cannot be presumed to be false. The proceedings under section
        226(3) of the Act would then be subject to the determination by the
        appropriate forum. Until determination, the Tax Recovery Officer
        has no scope of discovering the falsity of the objection. When the



W.P.(C) No 1272/2013                                                   Page 9 of 20
        garnishee does not admit or denies that he owes the debt to the
        assessee, the Tax Recovery Officer cannot sit in judgment over the
        denial and come to his own conclusion. It was so held in
        Mohamedaly Sarafaly and Co. v. ITO [1968] 68 ITR 128, 131 (Mad)
        and P. K. Trading Co. v. ITO [1970] 78 ITR 427, 433 (Cal). Once on
        oath the garnishee denies the liability towards the assessee, the
        burden of showing the statement on oath is false in any material
        particular would be upon the Revenue. The Revenue has to disclose
        material particulars that led it to a definite conclusion. Then only the
        payment can be imposed on the garnishee under section 226(3)(vi)
        of the Act. The apex court had taken such a view in Beharilal
        Ramcharan v. ITO [1981] 131 ITR 129, 137- 38. It is only when the
        objection is altogether false and it is so apparent and is so discovered
        that the Tax Recovery Officer can proceed against the garnishee
        under section 226(3) of the Act. It is only the part, which cannot be
        objected to would come within its purview."

19.     It is well settled that even in cases of garnishee proceeding under Order 21
Rule 46 of the Code of Civil Procedure (hereinafter referred to as the "CPC"), the
Court may pass a garnishee order enabling a judgment creditor to obtain
satisfaction of his claim only in those cases which are similar in scope as to
judgments on admission under Order 12 Rule 6 of the CPC. A Court cannot issue
garnishee order under Order 21 Rule 46 of the CPC against a debtor of the
judgment debtor who disputes his indebtedness unless an issue in this regard is
struck and tried as provided under Order 21 Rule 46C of the CPC. Unlike the
CPC, Section 226(3) of the Act does not have any provision similar to Order 21
Rule 46C of the CPC which confers jurisdiction on the Assessing Officer to
adjudicate the question regarding indebtedness of a third party to an assessee who
disputes the same. Once the third party noticee has disputed that he owes any
money or holds any money on account of the assessee, the Assessing Officer
would not have any jurisdiction to proceed further against the third party. This is
also abundantly clear from the language of clause (vi) of Section 226(3) of the
Act.




W.P.(C) No 1272/2013                                                    Page 10 of 20
20.     The Supreme Court has in the case of Surinder Nath Kapoor v. Union of
India: AIR 1988 SC 1777, observed as under:

        "15. The object of serving a notice under clause (3)(vi) of section
        226 is to give the garnishee an opportunity to admit or deny his
        liability for the amount mentioned in the notice. Under clause (i) of
        section 226(3), if the garnishee objects to the notice by a statement
        on oath that the sum demanded or any part thereof is not due to the
        assessee, then the garnishee will not be required to pay any such sum
        or part thereof, as the case may be."

21.     In the present case, respondent no. 2 bank has furnished an affidavit
unequivocally affirming that no part of the amount held by respondent no. 2 in
escrow is owed to or belongs to or is held by respondent no. 2 on account of the
assessee company. In view of the affidavit dated 07.12.2012 furnished by the
respondent no. 2 bank, the Assessing Officer had no jurisdiction to proceed
further and call upon the respondent no. 2 bank to makeover the funds held by
respondent no. 2 as an escrow agent pursuant to the Escrow Agreement dated
27.09.2005, to the Assessing Officer. In this view, the impugned order dated
01.02.2013 and impugned notice dated 04.02.2013 are wholly without
jurisdiction and are thus liable to be set aside.

22.     In view of our finding that the decision of the Assessing Officer to
proceed further despite the affidavit dated 07.12.2012 furnished by respondent
no. 2 bank is without jurisdiction, it is not necessary to examine the question
whether the amount held by respondent no. 2 bank pursuant to the Escrow
Agreement could be stated to be any money which is due or may become due to
the assessee company or which is held for and on account of the assessee
company. However, we have heard counsel for the parties in this regard and
deem it appropriate to examine the same.




W.P.(C) No 1272/2013                                                  Page 11 of 20
23.     Indisputably the monies held by respondent no. 2 bank are a part of the
consideration which has been deposited by the purchaser for purchase of the
shares of the assessee company from the sellers in terms of the Share Purchase
Agreement dated 25.09.2005 entered into between the sellers and the purchaser.
The assessee company is not a party to the said agreement. The Share Purchase
Agreement dated 25.09.2005 contains the agreed covenants with regard to the
escrow arrangement as agreed between the petitioners and the purchaser. Clause
2.9 of the Share Purchase Agreement is relevant and is quoted below:-

      "2.9     The Escrow Agent, shall deal with the Heldback Amount No.2 as
               under:-

               AAA and Apple agree that the amount of their respective share
               of the Sale Consideration being Rs. 32,49,51,257 (Rupees
               Thirty Two Crores Forty Nine Lakhs Fifty One Thousand Two
               Hundred Fifty Seven Only) each aggregating to
               Rs,64,99,02,514 (Rupees Sixty Four Crores Ninety Nine Lakhs
               Two Thousand Five Hundred Fourteen Only) to which they are
               entitled under this Agreement, shall be retained by the Escrow
               Agent and shall be invested by the Escrow Agent in capital
               gains tax saving bonds in the names of AAA and Apple in
               equal proportions (the "Securities"). The Securities shall be
               kept in the custody of the Escrow Agent and shall be retained
               as security towards settlement of the Income Tax claim/demand
               of the Company subject to such Income Tax claim/demand
               having been finally adjudicated in law or finally settled, as the
               case may be. EL and the Purchaser hereby agree that the
               Income Tax claim/demand shall be defended by EL at its own
               cost in mutual consultation with the Purchaser and the
               Company. In the event EL is desirous of settling the Income
               Tax claim/demand it shall do so only with the prior written
               consent of the Purchaser and the Company, which consent shall
               not be unreasonably withheld.

               For the purposes of this Article 2.9, Income Tax claim/demand
               shall mean any Income Tax and/or Capital Gain Tax
               claim/demand including interest and penalty thereon, if any,
               made on the Company on account of or in connection with the



W.P.(C) No 1272/2013                                                    Page 12 of 20
               merger of Escorts Heart Institute and Research Centre Delhi
               with Escorts Heart Institute and Research Centre, Chandigarh
               and/or the conversion of the merged entity into a Part IX
               Company under the Companies Act, 1956, including all legal
               expenses incurred by EL for defending the Income Tax
               claim/demand.

               Provided that EL shall have right to substitute the Securities
               with cash or such other securities as may be acceptable to the
               Purchaser by depositing an amount with the Escrow Agent,
               equivalent to the value of total Securities including interest
               accrued thereon up to the date of such substitution by EL. In
               the event EL substitutes the Securities with either cash or such
               other securities, the Securities in the names of AAA and Apple
               shall be released by the Escrow Agent to AAA and Apple along
               with interest accrued thereon.

               The Parties hereby agree and undertake that the Heldback
               Amount No.2 shall be utilized in the manner provided below:

        (a) In the event the Income Tax claim/demand is equal to
            Rs.64,99,02,514 (Rupees Sixty Four Crores Ninety Nine Lakhs
            Two Thousand Five Hundred Fourteen Only) together with all
            interest accrued thereon, the entire amount of Rs.64,99,02,514
            (Rupees Sixty Four Crores Ninety Nine Lakhs Two Thousand
            Five Hundred Fourteen Only) together with all interest accrued
            thereon shall be paid to the Purchaser in the first instance by EL
            under intimation to the Escrow Agent by EL, within two
            Business Days of the Company notifying EL, the Purchaser and
            the Escrow Agent, failing which by the Escrow Agent in favour
            of the Purchaser from the amount invested in securities or held
            in cash by the Escrow Agent as the case may be, together with
            all interest accrued thereon. In the event the said amount is paid
            directly by EL to the Purchaser the Escrow Agent, under
            instructions of EL, shall release to EL and/or AAA and/or
            Apple as the case may be, the amount (if in cash) or securities,
            as the case may be together with all interest accrued thereon
            held by the Escrow Agent.

        (b) In the event the Income Tax claim/demand exceeds
            Rs.64,99,02,514 (Rupees Sixty Four Crores Ninety Nine Lakhs




W.P.(C) No 1272/2013                                                    Page 13 of 20
               Two Thousand Five Hundred Fourteen Only), together with all
               interest accrued thereon, an amount of Rs.64,99,02,514
               (Rupees Sixty Four Crores Ninety Nine Lakhs Two Thousand
               Five Hundred Fourteen Only) together with all interest accrued
               thereon shall be paid to the Purchaser in the first instance by EL
               under intimation to the Escrow Agent by EL, within two
               Business Days of the Company notifying EL, the Purchaser and
               the Escrow Agent, failing which by the Escrow Agent in favour
               of the Purchaser from the amount invested in securities or held
               in cash by the Escrow Agent as the case may be, together with
               all interest accrued thereon. The balance amount being
               difference between aforesaid Rs.64,99,02,514 (Rupees Sixty
               Four Crores Ninety Nine Lakhs Two Thousand Five Hundred
               Fourteen Only) together with all interest accrued thereon and
               the Income Tax claim/demand shall be borne by EL and the
               Purchaser in the ratio of 1/3 and 2/3 respectively.

               EL hereby undertakes to pay its 1/3 share to the Purchaser
               within two Business Days of the Company notifying EL, the
               Purchaser and the Escrow Agent. In the event there is a delay in
               payment to Purchaser by EL of its aforesaid 1/3 share, interest
               @ 15% per annum on the aforesaid 1/3 share or part thereof
               which shall remain payable by EL to the Purchaser shall
               commence with effect from the expiry of two Business Days
               until payment to the Purchaser. In the event the said amount is
               paid directly by EL to the Purchaser, the Escrow Agent under
               instructions of EL, shall release to EL and/or AAA and/or
               Apple as the case may be, the amount (if in cash) or securities
               as the case may be together with all interest accrued thereon
               held by the Escrow Agent.

        (c) In the event the Income Tax claim/demand is less than
            Rs.64,99,02,514 (Rupees Sixty Four Crores Ninety Nine Lakhs
            Two Thousand Five Hundred Fourteen Only) together with all
            interest accrued thereon, the Income Tax claim/demand shall be
            paid to the Purchaser by EL in the first instance under
            intimation to the Escrow Agent by EL, within two Business
            Days of the Company notifying EL, the Purchaser and the
            Escrow Agent, failing which by the Escrow Agent in favour of
            the Purchaser from the amount invested in securities or held in
            cash by the Escrow Agent as the case may be, together with all




W.P.(C) No 1272/2013                                                     Page 14 of 20
               interest accrued thereon. The Escrow Agent shall pay to EL the
               balance amount along with interest accrued thereon available
               with the Escrow Agent after payment of the Income Tax
               claim/demand. In the event the said amount is paid directly by
               EL to the Purchaser the Escrow Agent, under instructions of
               EL, shall release to EL and/or AAA and/or Apple as the case
               may be, the amount (if in cash) or securities as the case may be
               together with all interest accrued thereon held by the Escrow
               Agent.

               The Escrow Agent is hereby authorised jointly and/or severally
               by AAA, Apple and EL to deal with cash or the securities being
               Heldback Amount No.2, to give effect to the provisions of this
               Article 2.9.

               On the Income Tax claim/demand being paid to the Purchaser
               in a manner as contemplated under this Article 2.9 (a), (b) and
               (c), EL and/or AAA and/or Apple shall stand discharged all of
               its obligations."

24.     Pursuant to the Share Purchase Agreement dated 25.09.2005 the sellers,
the purchaser and respondent no. 2 entered into an Escrow Agreement dated
27.09.2005 which, inter alia, recorded the obligations of respondent no.2 as the
escrow agent. Clause 4.4 & clause 4.5 of the Escrow Agreement are relevant as
the same relate to the sums agreed to be placed with the escrow agent with
respect to the income tax liability of the assessee company. Clause 4.4 and 4.5
the Escrow Agreement are quoted below:-

   "4.4      The Escrow Agent, shall deal with the Heldback Amount No.2
             as under:-

        (a) Parties agree that the amount under Heldback Amount No.2
            comprise of respective shares of AAA and Apple in the Sale
            Consideration being Rs.32,49,51,257 (Rupees Thirty Two
            Crores Forty Nine Lakhs Fifty One Thousand Two Hundred
            Fifty Seven Only) each aggregating to Rs.64,99,02,514 (Rupees
            Sixty Four Crores Ninety Nine Lakhs Two Thousand Five
            Hundred Fourteen Only).



W.P.(C) No 1272/2013                                                    Page 15 of 20
        (b) Parties further agree that Heldback Amount No.2 shall be
            retained and invested on behalf of AAA and Apple by the
            Escrow Agent in two separate fixed deposits (the "Fixed
            Deposits") of Rs.32,49,51,257 (Rupees Thirty Two Crores Forty
            Nine Lakhs Fifty One Thousand Two Hundred Fifty Seven
            Only) each maintained with the Escrow Agent in the name of
            the Escrow Account. The Fixed Deposits shall be of a tenor of
            five years and one day each and would be encashable/renewable
            from time to time by Escrow Agent without any further
            approval, consent or notice from AAA, Apple, EL and/or
            Purchaser, as the case may be, unless Escrow Agent is in receipt
            of any joint instructions to the contrary from EL and Purchaser.

        (c) Parties further agree that Heldback Amount No.2 in the form of
            Fixed Deposits shall be retained by the Escrow Agent as
            custodian towards settlement of the Income Tax claim/demand
            of the Company.

             Provided that EL shall have right to substitute the Fixed
             Deposits with cash or such other securities (Fixed Deposits
             along with cash and such other substituted securities shall
             hereinafter be referred to as the "Securities") as may be
             acceptable to the Purchaser and the Escrow Agent, by
             depositing such Securities with the Escrow Agent, equivalent to
             the value of total Fixed Deposits/substituted Securities including
             interest accrued thereon up to the date of such substitution by
             EL. In the event EL substitutes the Fixed Deposits with cash or
             other securities, the Fixed Deposits or any balance held in
             respect of Heldback Amount No.2 shall be released by the
             Escrow Agent to AAA and Apple in the proportion of their
             respective shares in the Sale Consideration along with interest
             accrued thereon.

             For the purposes of this Clause 4.4, Income Tax claim/demand
             shall mean any Income Tax and/or Capital Gain Tax
             claim/demand including interest and penalty thereon, if any,
             made on the Company on account of or in connection with the
             merger of Escorts Heart Institute and Research Centre Delhi
             with Escorts Heart Institute and Research Centre, Chandigarh
             and/or the conversion of the merged entity into a Part IX
             Company under the Companies Act, 1956, including all legal




W.P.(C) No 1272/2013                                                    Page 16 of 20
             expenses incurred by EL for defending the Income Tax
             claim/demand.

   4.5       The Parties hereby agree and undertake that the Heldback
             Amount No.2 or any balance in respect thereof shall be
             disbursed either to the Sellers or the Purchaser in accordance
             with the manner specified below:

      (a)    In the event the Income Tax claim/demand is equal to
             Rs.64,99,02,514 (Rupees Sixty Four Crores Ninety Nine Lakhs
             Two Thousand Five Hundred Fourteen Only) together with all
             interest accrued thereon, the entire amount of the Securities or
             any balance in respect thereof shall be paid to the Purchaser
             upon receipt of a opinion in writing by the Escrow Agent from
             the Purchaser obtained by the Purchaser from one amongst the
             following accounting firms, namely Price Waterhouse, Ernst &
             Young, Delloitte, Touche & Tohmatsu and KPMG
             certifying/stating that the demand pertains to Income Tax
             claim/demand.

      (b)    In the event the Income Tax claim/demand exceeds
             Rs.64,99,02,514 (Rupees Sixty Four Crores Ninety Nine Lakhs
             Two Thousand Five Hundred Fourteen Only), together with all
             interest accrued thereon, the entire amount of the Securities or
             any balance in respect thereof shall be paid to the Purchaser
             upon receipt of a opinion in writing by the Escrow Agent from
             the Purchaser, obtained by the Purchaser from one amongst the
             following accounting firms, namely Price Waterhouse, Ernst &
             Young, Delloitte, Touche & Tohmatsu and KPMG
             certifying/stating that the demand pertains to Income Tax
             claim/demand. The balance amount after payment of the Income
             Tax demand/claim as aforesaid shall be borne and paid by the
             Seller and the Purchaser in terms of the SPA.

      (c)    In the event the Income Tax claim/demand is crystallised in part
             or is less than Rs.64,99,02,514 (Rupees Sixty Four Crores
             Ninety Nine Lakhs Two Thousand Five Hundred Fourteen
             Only) together with all interest accrued thereon, the Income Tax
             claim/demand crystallised in part shall be paid to the Purchaser
             upon receipt of a opinion in writing by the Escrow Agent from
             the Purchaser, obtained by the Purchaser from one amongst the
             following accounting firms, namely Price Waterhouse, Ernst &



W.P.(C) No 1272/2013                                                  Page 17 of 20
             Young, Delloitte, Touche & Tohmatsu and KPMG
             certifying/stating that the demand pertains to Income Tax
             claim/demand. The balance amount after disbursement of the
             Income Tax claim/demand to the Purchaser as specified in this
             paragraph shall be released by the Escrow Agent to EL and/or
             AAA and/or Apple as the case may be only upon receipt of joint
             instructions from EL and the Purchaser that there is no other
             Income Tax claim/demand pending and/or to be discharged."


25.     A plain reading of the Share Purchase Agreement dated 25.09.2005 and
the Escrow Agreement dated 27.09.2005 would indicate that the conclusion
drawn by the Assessing Officer that respondent no. 2 held any money on account
of the assessee company is patently erroneous. Neither the Share Purchase
Agreement nor the Escrow Agreement provides for any contingency which
would enable the assessee company or any other party to insist that the funds held
by the respondent no. 2 bank in escrow be paid either to the assessee company or
to the Income-tax Department on account of the assessee company.

26.     The reason why the purchaser and the sellers agreed to keep part of the
sale consideration paid by the purchaser in escrow with respondent no. 2 bank is
apparent from the terms of the Share Purchase Agreement and the Escrow
Agreement. The assessee company whose shares were being transacted had been
converted from a society with whom a charitable society had been merged. As
per the Revenue these transactions had resulted in an income-tax liability upon
the assessee company which was disputed by the assessee company. In the
event, the income-tax as demanded was finally adjudicated to be payable, it
would have an adverse effect on the value of the shares of the assessee company
which were subject matter of the transaction. Thus, in order to indemnify the
purchaser against such adverse effect in the value of the shares of the assessee
company being acquired by the purchaser, an amount of `64,99,02,514/-
(referred to as "Heldback Amount no.2" in the Share Purchase Agreement and



W.P.(C) No 1272/2013                                                 Page 18 of 20
the Escrow Agreement) was agreed to be withheld and kept in escrow with
respondent no. 2 bank, from the consideration payable for purchase of the shares
of the assessee company. In the event the liability of the assessee company on
account of or in connection with the merger of Escorts Heart Institute and
Research Centre Delhi with Escorts Heart Institute and Research Centre,
Chandigarh and/or the conversion of the merged entity into a company under the
Companies Act, 1956, including all legal expenses incurred by petitioner no. 3
for defending the Income Tax claim/demand, (defined as income tax
claim/demand for the purposes of the Share Purchase Agreement and the Escrow
Agreement) as finally adjudicated was less than the amount available with the
respondent no. 2 bank, an amount equal to the income-tax liability would be paid
to the purchaser and the balance would be released to the petitioners. In the event
the income-tax claim/demand as finally adjudicated was greater than the amount
available in escrow with the respondent no. 2 bank, the entire amount would be
paid to the purchaser. The Share Purchase Agreement further recorded that in
addition, petitioner no. 3 would pay 1/3rd of the deficient amount to the
purchaser. It is clear from the language of the Share Purchase Agreement that
under no circumstances would the money held in escrow be released either to the
assessee company or to the Income-tax Department. This clearly indicates that no
amount was held by respondent no. 2 on account of the assessee company.

27.     There is also no reason why either the purchaser of shares of a company or
the selling shareholders have any occasion to pay any part of the consideration
for sale and purchase of shares of a company to the company. A company is an
independent entity completely distinct from its shareholders. A transaction
relating to sale and purchase of shares is a transaction inter-se the selling
shareholders and purchasers and a company cannot stake claim to any part of the
consideration as shares of a company are not the assets of the company but those




W.P.(C) No 1272/2013                                                  Page 19 of 20
of its shareholders. The assessee company is neither a party to the Share Purchase
Agreement or the Escrow Agreement nor can claim any sum from the parties to
the Escrow Agreement. No money is due to the assessee company by respondent
no.2 or is held by or may subsequently be held by Respondent no. 2 on account
of the assessee company. The conclusion of the Assessing Officer that the
amount of money kept with respondent no. 2 in escrow is available to the
assessee for meeting its income-tax demand is thus erroneous.

28.     For the reasons as stated above, we set aside the decision of Assessing
Officer dated 01.02.2013 and the notice dated 04.02.2013. Consequently, the
respondent no. 1 is directed to forthwith refund the amount recovered from
respondent no.2 bank pursuant to the notice dated 04.02.2013.

29.     Parties are left to bear their own costs.




                                                    VIBHU BAKHRU, J



                                             BADAR DURREZ AHMED, ACJ


JULY 24, 2013
MK/rk




W.P.(C) No 1272/2013                                                 Page 20 of 20
 
 
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