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By : phani kumar
On : 24 October 2009

Diversion of Income


let me share wid u an interesting case,which is not yet resolved.

This is all about whether the fortwith transaction is application/diversion of income.

the transaction is like this....

A limited company has acquired a company. As per the Share purchase agreement,the company is bound to pay to the shareholders of the acquired company.a portion of revenue derived by the company from the operations of its subsidiary.

Changing the facts,if the SPA is all about paying a portion of Earn out to the shareholders,will there is any change of opinion from the first one.


please do reply me...

awaitin 4 ur suggestions.



By : Vineet
On : 27 October 2009

Re:Diversion of Income

The SPA casts a perpetual liability on acquiring company to pay premium to owners of acquired company by way of revenue sharing arrangement. In my opinion, this is the liability of acquiring company and as such should not be allowed as deduction in the hands of acquired company as its business expenses.

This transaction is in the nature of application of income and not diversion as the entire revenue of acquired company is taxable in its hands.Any payment by this company to the earstwhile shareholders under the terms of SPA should be treated as dividend paid on behalf of its current shareholders i.e. the acquiring company.


By : Raghavendra
On : 17 November 2009

Re: Diversion of Income

Mr. Vineet Ji  I agree with ur openion about it.


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