TaxTMI 
TaxTMI 
2021 (2) TMI 717
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....nsequently the inference of the assessing officer, sustained by CIT (Appeals), that such receipts are revenue in nature, is arbitrary and unjust and consequently the taxing of option money received as a revenue receipt is bad in law. 2) That the assessing officer and CIT (Appeals) both have erred on facts and under the law to treat the option price received against a right to purchase shares granted to CUIH is a right separate and distinct from the right to an increase in the value of the shares and then taxing the option price received as a revenue receipt is arbitrary, unjust and bad in law 3) That the assessing officer and CIT (Appeals) both have erred on facts and under the law in holding that the joint-venture agreement as entered in between the appellant and CUIH to Co Promoted Company is a financial agreement, masquerading as a joint-venture agreement, is based on presumption and assumption and not based on the terms and conditions of the joint-venture agreement and consequently taxing the option price received against grant of right to purchase or sale of shares to CUIH is arbitrary, unjust and bad in law. 4) That the assessing Officer as well as ....
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....ly, the inference of the assessing officer and CIT (appeals) that the option money is taxable in the year of receipt is incorrect and against the principles of accrual contemplated u/s 4 and 5 of the act and consequently the taxation of option price received during the year Under appeal is based on resumption and assumptions, and is arbitrary, unjust and bad in law. 9) That the assessing officer and CIT (appeals) both failed to appreciate that the source of option money is only from CUIH , with which the appellant has no business transactions, and that too in terms of joint-venture agreements, made to regulate the relationship in respect of the promoted company, for the purpose to increase its controlling stakes at a future date, as per the revised applicable laws, by purchasing the shares from the appellant, is a capital receipt and would be accrued in the year of decision of CUIH to require the appellant to sale its stakes and consequently the assumption and inference of the assessing officer and CIT (appeals) to tax the same in the year of its receipt is bad in law. 10) That the assessing officer and CIT (appeals) failed to appreciate that while considering a c....
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.... to, CUIH, such number of shares held by assessee as would be required to take, CUIH shareholding in the company to the maximum revised applicable law percentage as and when the government policy changes and allow higher equity participations of foreign direct investment. Assessment proceedings 06. The case of the assessee was selected for limited scrutiny for the reason that large increase in investment in unlisted equity share is made during the year. However, on the details filed by the assessee, perused by the learned assessing officer, he noted that assessee has received an amount of Rs. 246.86 cores, which has been shown as a liability in its balance sheet. To examine the nature of the aforesaid receipt, proposal to convert the case from limited scrutiny into the complete scrutiny was moved and The Principal Commissioner of Income Tax - 16, New Delhi, on 13 December 2017, approved it. Therefore, the case of the assessee was converted in complete scrutiny. 07. On perusal of the audit report filed by the assessee and the 'Notes to the accounts' learned AO noted that at serial number [3] of such notes reads as under:- "The firm has received Rs. 2070.04 cores (i....
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....ore, according to the AO, it was not possible for the assessee to take advance option money against shares without taking prior permission of the Department of Economic Affairs and Insurance Regulation Development Authority [IRDA], which was not taken in 2001. Thirdly the option money cannot be taken over for an unknown period of time, when it is contingent upon government policy to increase shareholding of foreign direct investment, which was not at all in control of the above two parties. Therefore, the Ld. AO was of the view that alternate argument that advance received of advance option money remains unexplained credit in the books of the assessee , which are to be added u/s 68 of The Income Tax Act. In response to the above query letter, assessee submitted on 29th of December 2017, stating that both the parties have entered into a detailed joint-venture agreement to form a business venture in order to ensure better and clear governance. It ensures that all parties to the contract are clear about their rights and responsibility and there are no future disputes. It was stated that the joint-venture agreement has been approved by Insurance Regulation and Development Authority in ....
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.... The assessee explained the facts of that case and distinguished it by submitting a table with the facts of the case of the assessee. Main point of distinction raised by the assessee is that i. The value of exit in case of assessee is linked to market forces and fair determination of the net asset value of the shares of the assessee, which did not exist in the issue decided by the coordinate bench. ii. It was further stated that there was a difference between the risk and reward in case of the assessee, whereas case cited by the learned assessing officer, there was no risk taken by the investor. iii. With respect to the uncertainties of the income and risk reward metrics, assessee also pointed out a distinction that assessee has taken a risk in the new insurance business like an ordinary businessmen whereas in the case cited by the learned assessing officer there was no risk and reward metrics. iv. In the case cited by the learned assessing officer there was certainty on return as income is predetermined as a function of time, whereas in case of the assessee, it invested Rs. 461 cores and assessee did not get any return on investment to meet eve....
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....ned assessing officer did not agree with the argument of the assessee. He rejected the same holding that the joint-venture agreement was found to be conveying the right to receive the return on its investment in shares to the assessee at the rate of 20% of the subscription value as per the terms of the joint-venture agreement. He further noted that subscription value is for entire 74% stake held by the assessee and not restricted to the stake of 23%, which was divested by the assessee in 2016. He further noted that there is a guarantee to recover the above sum available with the assessee. He further noted that the rights are conferred by the clauses of the agreement to be exercised by the CUIH in each occasion when the shareholding of CUIH is lower than the revised applicable law percentage. Therefore, he interpreted that the option money payment will continue till perpetuity and it is in no way linked to 23% stake sale in 2016, except to the extent that the amount of subscription price will reduce by 23% of stake sold by the assessee. Therefore, he noted that in fact option price payment continued even after 2016 and assessee has shown such receipts into separate accounts namely "....
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....nothing out of the hedged amount of option money was refundable to commercial union International holding out of option price. He noted that on sale of 23% stake at Rs. 20.35 per share the assessee received an amount of Rs. 940 crore as foreign direct investment inflows first and thereafter was liable to pay the excess amount of Rs. 10.35 per share which is difference between the market price of Rs. 20.35 per share and purchase price of Rs. 10 per share, to be refunded as per the option which came to Rs. 478 cores i.e. 46,11,27,000 shares at the rate of Rs. 10.35 per share. He thereafter discussed the schedule 9 of the joint-venture agreement and noted that the option price received is therefore non-refundable and there is no part of it was refunded. He further held that receipt of option price is not contingent upon other events like exit in 2016 for 23% equity in 2016 or subsequent exit from balance 51% stake. Based on the above finding, the learned assessing officer held that it is clear that the assessee had irrevocable right to transfer and commercial union International holding had an irrevocable right to purchase the assessee's shareholding, in Aviva life insurance Co ....
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....of the joint-venture agreement, learned CIT - A held that the above agreement clearly shows that it is in fact an ironclad financial agreement, where commercial union International holding guarantees payment of 20% as option price to assessee by 31st January every financial year in return for exclusive rights conferred on that party to purchase shares of assessee in the event of change in the foreign direct investment policy of the government of India. He further held that foreign party is empowered to run the day-to-day insurance business of the JV partnership through a foreign entity appointed chief executive officer. The learned CIT (A) extensively referred to various clauses of the joint-venture agreement such as clause 6.10, clause 10, 13, 16, 11 and schedule 1, 3 and 9. On reading of the above clauses, she held that the joint-venture agreement is in fact a financial agreement masquerading as a joint-venture agreement. She holds that apparent is not the real. On the nature of the option price money received by the assessee and the treatment of the same, she noted that the payment of option price by the commercial union International holding to assessee has no link whatsoever w....
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....rt where the assessee has invested the option money into mutual fund and in other income generating securities. She held that the option price is received every year at the rate of 20% payable by 31st January and option price is received as a percentage of the subscription value of the shares held by assessee in that particular year. There is no transfer of any underlying asset against such a payment. She noted that the 23% shares were sold in 2016, whereas the option price of more than Rs. 2480 cores has been paid to assessee by CUIH from assessment year 2002 - 03 to AY 2016 - 17. Further, such payment continued subsequently. She also noted that there is no bar or provision on the use of option price money or the manner of the application of such money. She noted that the option price money is "Aladdin cave" of funds for the appellant concern whose business of investment in shares and mutual funds is securely tethered to the option price money. She therefore held that the option price received by the assessee had a fixed rate of return @ 20% annually on amount invested by the assessee in shares of Aviva Life Insurance Co Ltd can be regarded as an 'interest on investment' of the....
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.... treated by the learned assessing officer as business income in the hands of the assessee. Accordingly, the order of the learned assessing officer treating the option price of Rs. 2,468,462,400 as business income in the hands of the assessee was confirmed. Accordingly, appeal of the assessee was dismissed. Additional Ground by assessee 16. Thus, assessee aggrieved with the order of the learned CIT - A has preferred this appeal as per ground set forth earlier. However on 31st of October 2019 assessee raised an additional ground of appeal as Under:- "That in case, if it is held that the investment in Aviva life insurance Co Ltd is the business of the appellant and option price received from M/s commercial union International Holdings Ltd against the right to purchase the stocks held by the appellant in Aviva life insurance as business receipts, then the interest paid on the borrowed funds amounting to Rs. 732,205,896/-, capitalized on investment made in Aviva life insurance, ought to have been allowed as a revenue expenditure." 17. Assessee submitted that the aforesaid ground is an alternate ground and is being raised as an abundant precaution. The admission of the ....
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....the reason that assessee has already capitalized interest expenditure for making any investment in the shares of Aviva life insurance., The natural corollary would be that if there is an income which is treated by the assessee as a capital receipt now for taxation is considered as " income" for taxation purpose, the relevant expenditure incurred for the year for earning such income is also required to be granted as deduction to the assessee . We also understand the argument of the learned departmental representative that the interest accrued during the year incurred by the assessee as per the provisions of the act, only is required to be granted as deduction in this year. There is no quarrel on this issue. However, that is the matter of the computation and not of deciding the claim itself. Further, this is a legal claim, amount of interest capitalized is on record, and therefore such grounds can be raised. In view of this, additional ground raised by the assessee is admitted. It would be adjudicated, in case, we reach at a conclusion later on that the orders of the learned that AO and CIT appeal are correct, because only at that time this issue will arise, that is also the claim of....
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....to purchase shares of the appellant and the adjustable against the sale price as per formula designed in the joint-venture agreement would be a "capital receipt". For this proposition, he relied on the several judicial precedents stating that it is a settled proposition of law that only the income that is chargeable to tax and not the capital receipts. He further stated that all the receipts are not income but is only those very receipts, which have the characteristics of income, is only chargeable to tax and the onus is on the revenue to prove that the receipts are income. He further referred to the provisions of the joint-venture agreement stating that assessee is holding 74% equity in the Aviva life insurance Co Ltd and has the power to appoint the board of directors in majority. He submitted that to co-promote a company in the fields of insurance sector, the appellant had entered into a joint venture company with CUIH who was a prominent player in insurance sector in Europe. Initially, the said CUIH was interested to invest in the company as a major shareholder, but on account of the restrictions imposed by the FIPB meant for insurance sector, it has to contend with a stake of ....
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....ppellant having market value of Rs. 940 crore as per the formula contained in joint venture agreement, the appellant had to refund Rs. 478 crore out of option price being the proportionate amount of 23% stakes. He submitted that the investment in equity of the proposed company Aviva Life Insurance Co. (P) Ltd. was made by the appellant-company to acquire the 74% stakes in the company so promoted and not for dealing in shares of Aviva Life Insurance Co. (P) Ltd. The holding of investment in the form of shares in Aviva Life Insurance Co. (P) Ltd., as specified in the partnership deed, does not convey that the appellant is in the business of investment. The expression "business" has to be seen and interpreted according to the ordinary notions and common sense. iv. He stated that In the instant case, the appellant was not dealing in shares of Aviva Life Insurance Co. (P) Ltd., but has made the investment for acquiring controlling stakes of 74% in Aviva Life Insurance Co. (P) Ltd. Merely granting of right to purchase shares to the extent of permissible limit to CUIH at a later date, that does not mean that the appellant was dealing in shares of Aviva Life Insurance Co. (P) Ltd.....
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....ppellant is a capital receipt not liable to tax. Even if it is assumed, though not admitted, that such capital contribution is a trading asset, even then whatever the amount has been received by the assessee on account of such sterilization of the asset would be a capital receipt. vii. Thus, his argument was the joint venture agreement was made not to carry on any business transaction between the appellant and CUIH, but it was made to co-promote a company, who would carry the insurance business. By way of joint venture agreement, both the parties drafted the terms, conditions of mode of investment in co-promoted company, and laid down the terms and conditions for purchase of their stakes by each other. The investment so made by the appellant in the co-promoted company was not the appellant's business but investment as capital contribution. The option money was received by the appellant on account of this investment, which has to be taken into account for working out the selling price of stake at a later date. Apart from the investment in Aviva Life Insurance, the appellant has no business transaction with CUIH. Therefore, the option money so received is not an off....
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....vt. Ltd. in the year 2002, the appellant had sold only part of the stakes in Assessment Year 2017-18, i.e. after about 14 years. In the instant case, it is not the business of the appellant to deal in shares of Aviva Life Insurance and on the contrary, the appellant had made the investment in Aviva Life Insurance as a joint venture partner and had made the capital contribution to acquire controlling stakes to the extent of 74%. This investment held by the assessee remains continued until Assessment Year 2017-18 when a part of the controlling stake was sold to CUIH in terms of the joint venture agreement when the FIPB increased the limit for investment by a foreign partner. Thus, it shows that the investment in Aviva Life Insurance was not on account of the business carried out by the assessee, but on account of the capital investment, which is also proved from the conduct of the appellant. The appellant itself had offered the same for taxation purposes under the head "Capital Gain." In Assessment Year 2017-18, the appellant had offered the capital gain on selling price determined in accordance with the formula given under the joint venture agreement. The option price as well as the....
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....arket value received by Dabur for Dabur shares sold pursuant to clauses 16.6, 16.9.2.1 or 16.9.2.2 is higher than the subscription price, Dabur shall repay the option price (to be calculated in accordance with Schedule 3), pertaining to such Dabur shares within 30 days of receiving the market value. On account of this prohibitory clause contained in FIPB letter read with clause 16A of the joint venture agreement, CUIH first remitted the amount equal to the market value of the shares from abroad and then thereafter whatever the option money in terms of the joint venture agreement was refundable to CUIH, the same has been actually refunded. In Assessment Year 2017-18 when CUIH purchased 23% holding of Dabur, the appellant had refunded Rs. 478 crore of option money. Therefore, the very inference of the AO that no option money has been actually refunded is factually wrong. Perhaps the AO was of the view that the option money should not be refunded from the same coin as received by the appellant, but this was the intention neither of FIPB nor as per the terms of joint venture agreement. Under the law, no addition can be made merely based on assumption and presumption. It makes no differ....
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....e drawn by the AO. xii. He submitted that nature of option money could not be determined merely on the basis that it has been paid annually. The nature of option money has to be determined on the basis of the terms of the joint venture agreement, which has to be read as a whole, and the quality of the option money received has to be examined in the hands of the appellant based on the purpose it has been given. The nature of receipts cannot be branded as income merely because it is paid annually as held by the Hon'ble Supreme Court in the case of P.H. Divecha. The nature of option money cannot be determined merely on the basis that it has been paid annually. The nature of option money has to be determined on the basis of the terms of the joint venture agreement, which has to be read as a whole, and the quality of the option money received has to be examined in the hands of the appellant based on the purpose it has been given. xiii. In the instant case, all the rights and liabilities are embodied in the joint venture agreement and accordingly the taxing statute has to be applied in accordance with legal rights of the parties to the transaction. As ....
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....ld by AT&T Network Global. He further emphasizes that The AO for the purpose of taxation of the above money has relied upon the judgment of Mahindra Telecommunications Investment in 180 TTJ 434 wherein the Mumbai Bench of the ITAT, after having regard to the peculiar facts of that case, held that the option money calculated on the yield of 11% per annum, has accrued year after year. The facts of the case of Mahindra Telecommunications (supra) are different from the facts of the assessee's case and are distinguishable. In the case of Mahindra Telecom, the said company, as is evident from the ITAT order, had entered into a shareholders' agreement dated 7th March 2006 with AT&T Global Network Holding, USA (AT&T Network Global) and had agreed to subscribe to and invest in shares up to 26% in the AT&T Network Services (India) Pvt. Ltd. (AT&T Network India) promoted by AT&T Global. The balance 74% was held by AT&T Network Global. As per the shareholders agreement, AT&T Network Global had an irrevocable call option to increase its holding in AT&T Network India to the extent permissible by laws in India by requiring the said Mahindra Telecom to sell shares to it or its affiliate at the pre....
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....hen the option money so received by the assessee has to be refunded. In other words, the assessee made the investment not having in mind the fixed yield of return, irrespective of the performance of the company, but enjoyed the risk also in case of bad performance of the co-promoted company. If the performance of the company has been good, then naturally the market value of the shares would be much higher, and in those circumstances as per the formula, the assessee has to refund all the option money received to CUIH. More the market value showed more the quantum of refund of option price. xvi. In case of Mahindra Telecommunications, the said assessee claimed the borrowing cost, i.e. interest paid on borrowed capital and allowed by Department as revenue expenditure, whereas in the case of the appellant the borrowing cost has been capitalized. xvii. The assessee has also explained and brought the distinguishable facts between it and Mahindra Telecommunications before the Assessing Officer who has also reproduced the same at page 12 of the assessment order. It is reiterated. xviii. In the case of the appellant, there is no such fixed return on inves....
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....he position. In assessee's case, the exit price of the shares has not to be determined on a fixed rate of yield, but it has to be determined on the basis of market value, which depends upon the performance of the company, and the same would be determined by the financial experts. As per the formula, if the market value is more than the subscription price, then the option money so received by the assessee has to be refunded. In other words, the assessee made the investment not having in mind the fixed yield of return, irrespective of the performance of the company, but enjoyed the risk also in case of bad performance of the co-promoted company. If the performance of the company has been good, then naturally the market value of the shares would be much higher, and in those circumstances as per the formula, the assessee has to refund all the option money received to CUIH. More the market value showed more the quantum of refund of option price. In case of Mahindra Telecommunications, the said assessee claimed the borrowing cost, i.e. interest paid on borrowed capital and allowed by Department as revenue expenditure, whereas in the case of the appellant the borrowing cost has been capit....
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....the option money remains with the assessee. In this connection, it is stated that in the case of Siddheshwar Sahakari Sakhar Karkhana Ltd. vs. CIT in 270 ITR 1, it has been held by the Hon'ble Supreme Court that so long the amount is refundable on happening of certain contingencies or events, the same cannot be treated as uncertain though the time of repayment may be indefinite. On occurrence of the specified events, the right to demand refund would accrue to the depositor. The obligation, which had been in inchoate form ripened into a complete obligation on the occurring of specified events, stipulated in the contract. Such an obligation may be contingent in nature initially, but the right to enforce the obligation inhered in the payer from the beginning. In the instant case the right to appropriate option money accrued on the date as and when CUIH opted to purchase the share of assessee as a result of increases the FDI limit of shareholding in insurance sector and till that date such option money remain shall as advance in the hands of assessee . 21. Thus, the ld AR contested that i. The option price received by the assessee is capital receipt to be adjusted at the ti....
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....Of Orissa Versus Sudhanshu Sekhar Mishra 1968 AIR 647 (SC) and Bombay Kamgar Sabha versus Abdulbhai faizullabhai &Ors. 1976 AIR 1455, Union of India versus Paras laminates P Ltd 1991 AIR 696 (SC) and the decision of the coordinate bench in case of QUALCOMM Incorporated versus Asst Director Of Income Tax (2015) 56 taxmann.com 179 (del). 23. On the merits of the addition made by the learned assessing officer and upheld by the learned CIT - A, he submitted that the nature of receipt of the option price that the nature of such receipts will only come from definition and meaning given to the term "option price" in joint-venture agreement signed between the assessee and its partner CUIH. He further referred to the decision of the honourable Delhi High Court in CIT versus Dr R L Bhargava 256 ITR 42. He referred to the definition of 'option price' as per the schedule [1] of the joint-venture agreement and stated that from the definition it is crystal-clear that the option price is a revenue receipt and not a capital receipt because:- i. Option price is determined on signing of the joint-venture agreement itself on 7/8/2001. Return on investment to decide is decided on very firs....
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....e, which can never happen in share transaction. ix. Option price is shown as current liabilities in the balance sheet, assessee's contention that option price is refundable is proved false as per table A of his written submission is whatever may be the market value, entire option price is retained in all the circumstances even when the market value of the share is either zero or Rs. 26.72 or Rs. 20 Rs. 0.38 or Rs. 100/-. x. If annual recurring income is not to be refunded, it is not linked to divest of shares and not affected by market value of shares, it is clearly a revenue receipt and cannot be termed as a capital receipt. xi. Whether option price is an advanced to be adjusted against future sale of share by assessee to a foreign venture partner as given in notes to accounts, assessee after receiving an option price of Rs. 2480.48 cores, first receives from foreign partner sale consideration of 23% stake i.e. Rs. 940 crore before giving a refund of Rs. 478 crore. Hence, option price is not an advance. xii. Notes to accounts are incorrect as option price is also not in advance against the future sale of stake by assessee to CUIH. xiii.....
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....eceived by the assessee in assessment year 2015 - 16 no amount is offered as income in assessment year 2015 - 16 and only Rs. 76.72 cores that is proportionate amount of 23% stake divest and in assessment year 2017 - 18 out of 74% stake is offered in that year but that also nullified by the claim of expenses and indexation on them. He submitted that as per definition of option price as given in schedule 1 of the joint-venture agreement, option price not only accrues but it also received at the rate of 20% on investment. He submitted that the income accrues when it legally becomes recoverable. For this proposition he relied upon the decision of the H P Mineral and industrial development Corporation versus Commissioner of income tax (2008) 302 ITR 120 (HP). He further relied on the decision of the honourable Supreme Court in E D Sasson & CO Ltd versus CIT (1954) 26 ITR 27. He further stated that in the present case not only the income of Rs. 246.84 crore was ascertained but also accrued and received in assessment year 2015 - 16 itself. Hence, the same is taxable in assessment year 2015 - 16 only. 27. He further submitted that assessee has failed to explain if u/s 4 of the income t....
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.... possible opportunity as and when government policy on foreign direct investment in insurance changes. Such ancient intention was expressed right on the date of signing of the joint-venture agreement even before start of the business. The intention make it is a business receipt and a revenue income. Had there been a change in government policy on the next day, the assessee was duty-bound to sale its shares to a foreign investor and sales would have happened. 31. Intention at the time of purchase of shares to sale them at the first possible opportunity does not inspire any intent of investment, for a long-term so as to on dividend on them. It is also true that such shares were purchased from borrowed funds and no dividend was earned on them. 32. He further stated that the learned assessing officer has correctly that the joint-venture agreement as financial agreement. He referred to the several clauses of the joint-venture agreement and stated that it overrides the right arising to the assessee has a majority stakeholder of 74% and put the company Aviva life insurance Co private limited in complete control of CUIH and makes this is a pure financial transaction. 1) He s....
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....ee will help to refund entire option price. 4) He further submitted that assessee has received Rs. 26.72 per share, not on sale but much prior to it. In the real share transaction, the assessee will get market value of Rs. 20.38 per share only on sale of shares in the year when shares are transferred/sold. 5) With respect to the management, he submitted that as per clause 11.4 of the joint-venture agreement the CEO of the company shall be nominated by CU in consultation with assessee and shall be appointed by the board. In the present case CEO of company will always be from CU at thus day-to-day running of the companies given in the hands of the minority shareholder. Not a single decision of CEO reversed or vetoed by assessee appointed directors. He submitted that in share deal majority stakeholder assessee has right to appoint its own CEO of the company Aviva life insurance Corporation. 6) With respect to the right to sale , the assessee submitted that as per clause number 17 A assessee has no right to sale of shares except to CUIH. As per clause 17.1.2 of joint-venture agreement assessee requires CUIH to ensure that any prospective purchaser of CUIH sha....
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.... Mahindra Telecommunications Investment (P) Ltd.) are similar in the aspect that in the case of Mahindra Telecommunications Investment too, the appellant had entered into a shareholder's agreement with a company incorporated outside India to invest in shares of an Indian company, subject to the cap on total percentage of Foreign Direct Investment ('FDI') and related policies. Both the foreign companies had invested in shares of an Indian company to the maximum percentage allowed as per the Indian policies and the remainder portion was to be held by the Indian companies ("the appellants"). Both entities (Dabur and Mahindra) undertook transactions to beat the FDI cap and carry on business in India with the requisite holding being held by Indian entities under an agreement with the foreign company. The foreign company agreed to a certain consideration to be paid to the Indian company for extending this facility. Though the cap on FDI in both the cases was different due to the differing phases of Indian policy, the issue of accrual of income that arises for adjudication in both the cases is identical. (Para 2) ii. Various clauses of the agreement (6.9 and 6.10) entered into in....
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....ired to hold the shares in the Indian investee company to the extent of cap on the FDI percentage. Till the time there was no sale of shares, there was an element of income being embedded on the increased value of shares. The foreign companies had the first right to purchase the shares of their Indian counterpart and would avail this right as per the applicable FDI policy vi. The decision of the coordinate Bench in the case of Mahindra considers all dimensions of the issue, starting with the concept of accrual as per Section 5 of the Act defining the scope of total income of resident, which provides for it to include income that accrues or arises during the current year. The findings of the Apex Court in the case of Gajapathy Naidu [1964] 53 ITR 114 (SC) on the meaning of the word 'accrue' or 'arise' along with the decision in Ashokbhai Chamanbhai [1965] 156 ITR 42 (SC) on the same issue was considered. The terms 'accrue' and 'arise' were used to contra-distinguish the word "receive". Section 5 was also examined in conjunction with other provisions of the Act concerning the method of accounting to be followed. The coordinate Bench went into further depth to examine the rel....
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....f return, it would be lending it with a character of financial instrument. Various terms of the agreement were examined by the coordinate Bench and reading the agreement as a whole to interpret its true nature and meaning, the Bench concluded in favour of Revenue. The facts here are not materially different to warrant any other treatment. x. It was also held that there cannot be a situation where a right exists or has come into existence, and there is no corresponding debt attached to it. The Bench concluded that a debt, with all its attributes as to its realizability and legal enforceability, accrues or arises simultaneously with the accrual or creation of the corresponding right to receive. In the event of the realizability of the debt at a future date, it would stand to be legally enforced only on the debt becoming liable to be discharged. The issue was also considered from the viewpoint of accrual of corresponding expenditure. The decision in Madras Industrial Investment Corporation was relied upon to support this view. xi. In Mahindra also, a proposition similar to the one raised by the appellant was raised that the right to receive the consideration would en....
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....rket value Net amount retainer by 'A' [Col. 10] 1. 16.8.3.4 16.72 10 0 MV<SP 2480.48 crore 461.12 crore NIL 2941.60 crore (OP+SP) 2. 16.8.3.3 16.72 10 26.72 MV=SP+OP 2480.48 crore 2941.60 crore 2480.48 crore 2941.60 crore (OP+SP) 3. 16.8.3.2 (Assessee 's case) 16.72 10 20.38 (Actual Case) MV<OP+SP 2480.48 crore 940 crore (20.38 X 46,11,27,000) 478.7 crore (MV-SP) 2941.60 crore (OP+SP) 4. 16.8.3.1 16.72 10 100 MV>OP+SP 2480.48 crore 4611.27 crore 2480.48 crore 4611.27 crore xv. From this table it is amply clear that whatever may be the market value of shares, the entire option price is retained as the amount in Col. 10 in all scenarios higher or equal to the amount in Col. 7. This is even further clarified when we see that INR 2941.60 cores are the minimum guaranteed return on the Assessee 's investment even when the market value of the shares is zero. This shows that there is no refund in the case of Assessee as well. xvi. Therefore, in light of these submissions, it is prayed that the decision in the case of Mahindra Telecommunicatio....
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....t as to why the option money and sale of such shares be not considered as business income. Thereafter, the learned CIT has reproduced various submissions on merits as well as the law made by the assessee . 1.4 At page 53 of the order, the learned CIT had reproduced the decision of the AO made in Assessment Year 2015-16 vide order dated 29th December 2017 wherein the AO, after following the judgment of the Mumbai Bench of the Tribunal in the case of Mahindra Telecom (supra) held that the option money as received is taxable and then made the addition of Rs. 246.84 crore. 1.5 At page 57 of the order, in paragraph 18(1), the learned CIT has narrated and discussed the reason for proceeding u/s 263 of the Act and then held that the option money on granting of first right of stake pertains to CUIH and accretion in shares arising out of the joint venture agreement clearly falls under the head "Business Income" and this proves that the accounts of the assessee are false. 1.6 Thereafter at page 60, the learned CIT observed that on the nature of such receipt named as option money, the AO, while completing the assessment for Assessment Year 2015-16, had deli....
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.... as erroneous. 1.10 The Hon'ble ITAT in paragraph 39 onwards has dealt with the issue: (a) In paragraphs 39 to 42, the Hon'ble ITAT judicially noticed that earlier assessments are mostly completed as scrutiny assessment and the queries were also raised by the AO in relation to the joint venture agreement and option money. In paragraph 43, the Hon'ble ITAT has clearly held that the joint venture agreement right from the first year of scrutiny assessment have been scrutinized by the AO along with the balance sheet and notes to accounts and hence it cannot be said that right from Assessment Years 2005-06 to 2011-12, the AO continuously ignored the assessment of the option money. (b) In paragraph 45, the Hon'ble ITAT held that because the constitution of the assessee , the joint venture agreement and the joint venture company was examined by various Government authorities, hence by no stretch of imagination the assessee can be termed as a dummy stakeholder. The ITAT further observed that the appointment of a CEO to run day-to-day functioning of the business is the prerogative of the Board of Directors wherein majority of the Directors is held by Dabur. ....
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....he transfer of shares took place in Financial Year 2016-17 relevant to Assessment Year 2017-18, the AOs in the earlier assessment years rightly took a view that the capital gain, if any, would arise in Financial Year 2016-17 and therefore did not take any adverse view on the transactions done by the assessee since the option price received is totally linked with investment made by the assessee as a capital contribution in the company promoted by it and has a direct nexus/link with divestment of such holding in favour of CUIH which happened in Financial Year 2016-17. (i) In paragraph 54, the Hon'ble ITAT held that the allegation of Pr. CIT that the investment in shares of Aviva Life Insurance is business of the assessee is ill-founded and contrary to the facts of the case. (j) In paragraph 56, the Hon'ble ITAT reproduced the observation of Supreme Court made in the case of CIT vs. Maheshwari Devi Jute Mills Ltd. in 57 ITR 35 differentiating the income and capital. (k) In paragraph 57, the Hon'ble ITAT, while considering the judgment of the Supreme Court in the case of P.H. Dwivecha vs. CIT in 48 ITR 222, observed that the amount involved is large or that i....
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....g out of selling price of stake at a later date when the shares are actually transferred. 2. However, without prejudice to above, it is submitted that: Principle of consistency and judicial propriety. (i) In paragraphs 7 and 8, the Revenue has contended that the principle of estoppel or res judicata does not apply to the income-tax proceedings and the findings of the AO/CIT have got to be decided on its own merits. The Hon'ble Supreme Court in the case of Radha Soami Satsang vs. CIT in 193 ITR 321, while considering the principal of res judicata, observed as under: "We are aware of the fact that, strictly speaking, res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent case." The aforesaid conclusion was arrived at by the ....
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....AO has not examined any issues nor has not applied his mind (See 256 ITR 1 [Del]) [FB], Kelvinator India Ltd. vs. CIT. (iii) In paragraph 10, the Revenue had quoted certain observation from the judgment in the case of State of Orissa vs. SudhanshuShekhar Mishra, 1968 AIR 647 (SC). There is no dispute about such observation and such observation is rather beneficial to the assessee . The assessee also states that without comparing a factual matrix, the judgment of the Mahindra Telecom case cannot be blindly followed. (iv) In paragraph 11, the Revenue had again contended that in the proceedings u/s 263 of the Act, the CIT had not taken any view on merits and the arguments of Revenue were confined to the merit of CIT's finding. As already submitted above in earlier paragraph, the factual position is contrary to the stand of Revenue. (v) In paragraphs 12 and 13, the Revenue contended that the issue raised in the present appeal is not covered by the decision of the Hon'ble ITAT and the matter has to be examined in the merit of the addition. As already explained above, the basic issue forming part of the CIT's order u/s 263 of the Act ....
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....had quoted some observations of the ITAT Bench, New Delhi in the case of Qualcomm Inc. Though the said observation is not relevant to the issue before this Hon'ble Court, the basic issue before the Hon'ble Bench of the ITAT in the case of Qualcomm Inc. was whether any case judgment of the Andhra Pradesh High Court has to be followed in comparison to the earlier judgment of the ITAT in assessee 's case itself. The judgment of the Andhra Pradesh High Court was announced subsequent to the earlier judgment of the ITAT in assessee 's case. On such facts, keeping into consideration the judicial hierarchy, the Hon'ble Bench had restored the issue on the file of AO to consider the issue in the light of the judgment of the Andhra Pradesh High Court and in such context, the above observation was made by the ITAT. ISSUE 'B' 3. Paragraph 18 is a general paragraph. However, in paragraphs 19 and 20, the Revenue has tried to justify its own inference (based on the lines of Mahindra Telecom) in a preconceived notion in order to tax the assessee on the basis of pick and choose of the words of the contract without looking into the terms and conditions of the joint venture agreement....
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....ing words: "Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morris in Herrington Vs. British Railways Board (1972) 2 WLR 537. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases." In the case of Padmasundara Rao (supra), it was further observed by the Supreme Court "that court must avoid the danger of a prior determination of the meaning of a provision based on their own pre-conceived notions of ideological structure or scheme under which the provision to be interpreted is somewhat fitted. They are not entitled to usurp legislative function under the disguise of interpretation. 3.7 So relying upon the judgment of the Mumbai Bench of ITAT in the case of Mahindra Telecom, first of all it has to be found out whether ....
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....cordance with the legal rights of the parties to the transactions. The Revenue authorities have no right to rewrite the terms and conditions of the agreement, but it has to be read as such. While holding so, the Hon'ble Supreme Court has approved the observation of Lord Russell of Killowen made in the case of Duke Westminster vs. Inland Revenue Commissioner in [1926] 100 Tax Cases 302, 336 (HL), wherein Lord Killowen had rejected the contention that the substance of transactions prevails over the form. Such approval has been made by the Hon'ble Supreme Court at page 699 of the Report in following words: "We pass on to consider the argument of Mr. Narsaraju that in revenue matters it was the substance of the transaction which must be looked at and not the form in which the parties have chosen to clothe the transaction'. It was contended that, in the present case, there was in substance a sale of Sree Rama Talkies by the assessee -company for a money consideration of Rs. 1,20,000/-, though the mode of payment was by transfer of shares and the resolution of the Board of Directors dated September 9, 1955 clearly indicated that the intention of the assessee company....
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.... with this contention. To regard the payments under the deed as in effect payments of salary would be to treat a transaction of one legal character as if it were a transaction of a different legal character. With regard to the supposed contrast between the form and substance of the arrangement, Lord Russell of Killowen stated at page 524 as follows: "If all that is meant by the doctrine is that having once ascertained the legal rights of the parties you may disregard mere nomenclature and decide the question of taxability or non-taxability in accordance with the legal rights, well and good. That is what this House did in the case of Secretary of State in Council of India v. Scoble, (1903) A.C. 299 (4 T.C. 618); that and no more. If, on the other hand, the doctrine means that you may brush aside deeds, disregard the legal rights and liabilities arising under a contract between parties, and decide the question of taxability or non-taxability upon the footing of the rights and liabilities of the parties being different from what in law they are, then I entirely dissent from such a doctrine." 3.11 The principle enunciated by the Hon'ble Supreme Court in the case of Mo....
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....pital receipt or a revenue receipt as rightly pointed out by ITAT while dealing with the issue in Assessment Years 2013-14 and 2014-15 also. However, in order to determine the nature of receipts, one has to examine the very purpose of receipt of option money by Dabur from CUIH and for that very purpose, the terms and conditions of the joint venture agreement as executed between Dabur and CUIH has to be read as a whole and every part of the agreement has to be given effect and if the receipt of option price is on capital account and ultimately will form part of the sale proceeds of shares, then it would be taxable in the year of divestment of shares by Dabur in favour of CUIH and for that very purpose, the following clauses and the definition of net sale proceeds as given in the definition clauses forming part of Schedule 1 have to be seen: 16.1 In consideration of the terms of this Agreement and payment by CUIH of the Option Price, Dabur hereby grants to CUIH: (a) the right during the Ten Year Period to require Dabur to sell only to CUIH such number of shares held by Dabur as would be required to take CUIH shareholding in the Company to the maximum Revised Applica....
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.... calculated as per the formula set out in Schedule 3) become less than the Subscription Price, only such part of the Option Price shall be repaid so as to ensure that the Net Sale Proceeds per Dabur Share are not less than the Subscription Price (see illustrations A(2)(a), (b) & (c) in Schedule 9). 16.6.3 In the event that the Market Value is equal to the Subscription Price, Dabur shall retain the Option Price received on such Dabur Shares (see illustration A(3) in Schedule 9)." The net sale proceeds have been defined in Schedule 1 in following words: "Net sale proceeds" shall mean the difference between the gross sale receipts per Dabur share and such option price which shall be calculated as per the formula set out in Schedule 3." "16A. Repayment of Option Price by Dabur to CUIH Dabur shall repay to CUIH the Option Price under the Agreement only under the following circumstances: (a) If the Market Value received by Dabur for Dabur Shares sold pursuant to Clauses 16.6, 16.9.2.1 or 16.9.2.2 is higher than the Subscription Price, Dabur shall repay the Option Price (to be calculated in accordance with Schedule 3), pertaining to such Dabur ....
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....eement and the quantum of refund of option price would be ascertained in the year of divestment of shares. The quantum of refund of the option price so received depends upon the market value of shares which would be determined by an independent valuer. The amount of the option money, which was received in terms of clause 16 of the joint venture agreement and retained under clause 16A of the joint venture agreement, would form part of the Net sale proceeds as itself explained in clause 16A read with definition of Net Sale Proceed in the agreement. In fact, in the Assessment Year 2017-18 when Dabur has divested its 23% stake in the joint venture company, has actually refunded the option money to the extent of Rs. 478 crore and this conduct of the parties to the agreement shows the intention that the option money received would be on capital field, firstly because Dabur has made the capital contribution in the joint venture company for acquiring its controlling stake of 74% and secondly the option money was received by Dabur not to sell its stakes to any third party but only to CUIH as and when the CUIH would be able to exercise this right in accordance with the revised applicable law....
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.... capital receipts are not liable to tax except the capital gain. He relied up on 57 ITR 36 (SC) CIT vs. Maheshwari Devi Jute Mills Ltd., 249 ITR 265 (Bom) Caddle Weaving Mills Pvt. Ltd. vs. CIT, 273 ITR 1 (SC) CIT vs. D.P. Sandhu Brothers Pvt. Ltd. , 195 ITR 877 (SC) Padmaraje R. Kadambande vs. CIT, 57 ITR 36 (SC) CIT vs. Maheshwari Devi Jute Mills Ltd. 6.1 The nature and character of receipts is determined with reference to the purpose for which the payments are made. He relied up on 48 ITR 222 (SC) P.H. Dwivecha vs. CIT 53 ITR 261 (SC) Kettlewell Bullen& Co. Ltd. vs. CIT 275 CTR 532 (Ker) CIT vs. Sapthagiri Distilleries Ltd. 351 ITR 110 (Del) Khanna & Anandhanam vs. CIT 404 ITR 318 (Del) Pr. CIT vs. Aeren R. Infrastructure Ltd. 306 ITR 392 (SC) Ponni Sugar & Chemicals Ltd. , 400 ITR 279 (SC) CIT vs. Chaphalkar Brothers, 317 ITR 353 (Del) Dharam Pal Prem Chand, 88 ITD 273 (Mum) (Spl Bench), DCIT vs. Reliance Industries Ltd. 264 Tax 252 (Bom) Pr. CIT vs. Welspun Steels Ltd. 98 ITD 19 (Del Trib) Payal Kapur vs. ACIT In the instant case, the option money was paid by CUIH to Dabur not to sell its stake in the co-promoted company, i.e. Aviva Life Insurance Co. to any ....
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....8 cores being the proportionate amount out of the option money. The receipt of market value of 23% stake from CUIH first, and then refund of option money was not only in accordance with the terms and conditions of the joint venture agreement but as per the policy of the Government also, where they allowed transfer of stakes, only if the market value is remitted from outside India and in order to complete such requirement first the CUIH had remitted the market value of the proportionate stakes and then thereafter Dabur had refunded the amount of Rs. 470 crore. However, under the law, there is no statutory provision that the same coin received under the head of 'Option Money' should be refunded. 6.7 The extent of option price guaranteed by CUIH in favour of Dabur does not determine the nature of receipts. It only creates confidence in Dabur not to sell its stake to third person except to CUIH. 6.8 Similarly the use of option money by Dabur is also not prohibited under the law. However, by use of option money by Dabur, whatever income has been generated, the same has been offered to tax year after year and there is no loss to the Revenue. Had the amount been kept in ....
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....tical amount. In the instant case, Dabur and CUIH have understood that the investment in co-promoted company Aviva Life Insurance Co. is on capital account and since the inception of the agreement have understood in that sense which is very much clear from the Notes on Account forming part of balance sheet and actually offered the option money for capital gain tax in Assessment Year 2017-18. 9. In the written submissions, the Revenue has relied upon the judgment of Himachal Pradesh High Court in the case of H.P. Mineral & Industrial Corporation vs. CIT, 302 ITR 120 and the Supreme Court judgment in the case of E.D. Susoon& Co. Ltd. vs. CIT in 26 ITR 27 and as that of CIT vs. AshokbhaiChimanbhai in 1965 AIR 1343 and State Bank of Travancore, 1986 AIR 757. In all these cases, the facts and issue were totally different from the facts and issue in the case of Dabur. In all these cases, the issue before the court was when the income can be said to have accrued under the law. In all those cases, there was no dispute whether the receipt is capital or income. 10. In the written submissions, the Revenue has relied upon the Supreme Court judgment in the ca....
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....Years 1939- 40, 1940-41 and 1941-42, the company claimed that the surplus resulting from similar sales during the corresponding accounting year was not taxable income as it was a mere change of investment and was, therefore, a capital account. The Income Tax authorities rejected the claim of the said SardarInder Singh and taxed the surplus as profits and gains of business which was upheld by the ITAT and on a direct reference the Hon'ble Supreme Court also affirmed the order of ITAT by observing that because the sales have been affected during the course of business of purchase and sale of shares/securities, the profit is assessable as business profits. 10.2.1 In the case of Ram Narain& Sons Pvt. Ltd. vs. CIT, a larger Bench consisting of three judges held that the authorization in the memorandum to deal in shares is not an important criteria to decide the issue whether the purchase and sale of shares is on trading account and investment account and it depends upon the intention of the parties concerned. If the investment has been made to acquire a controlling stake, then it is a capital account. In the instant case, Dabur had made the investment for acqu....
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....nation of regulation on foreign equity holdings level, whichever is earlier. The option price for the purchase of the aforesaid purchase and sale is defined as the equity contribution plus return at 11% per annum compounded annually on the said contribution over the period of holding. 3. The issue arose before the Hon'ble Mumbai Bench of the ITAT was whether the option price which had to be compounded on a yield of 11% per annum to make out a predetermined price for sale of shares is taxable either at the time of transfer of shares on a predetermined price or the joint venture agreement is only a financial instrument wherein the yield has been allowed to Mahindra Telecommunications at the rate of 11% per annum and required to be compounded in order to determine the predetermined price of the shares on which Mahindra is required to transfer the shares irrespective of the performance of the company and market value of the shares. 4. The ITAT Mumbai having regard to the various clauses of the terms of joint venture agreement with reference to the conduct of Mahindra as well as fixation option price for transfer of shares by Mahindra to AT&T on a fixed rate of return ....
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....rein between the Parties get approved. ML agrees to vote all its shares in conformity with AT&Ts vote on all matters presented to the shareholders by the board , except as required by applicable law and except if reasonably seen to be detrimental to ML's economic interests or reputation, provided however, that ML shall vote all its shares in conformity with AT&T's vote in regard to actions relating to matters set forth in Sections 2, 4.3, 8 and 9 of this Agreement. Without limiting the generality of the forgoing, the actions specified in sub-sections 7.4(a) and (b) hereof may be undertaken by, or on behalf of, the Company only following a shareholder resolution thereon in which votes in respect of paid up equity capital of more than 75% are cast in favour of such resolution: (a) Winding up of the Company; and (b) If a matter is reasonably seen to be detrimental to ML's economic interests or reputation, provided however, that ML shall vote all its shares in conformity with AT&T's vote in regard to actions relating to matters set forth in Sections 2, 4.3, 8 and 9 of this Agreement. It is hereby clarified that the failure of ML to support AT&....
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....ice and if ML does not exercise the said offer within 10 business days then AT&T may sell the offered shares to a person resident in India or other eligible person identified by AT&T. 17.4.2 On termination of this Agreement by ML: (i) pursuant to Section 17.3(a) or (b) ML may elect to offer its shares in the Company to AT&T at the Option Price (subject to Sub-section 8.13) and the Call Option Fee pro-rated for the period between the prior anniversary of the Capitalization Date and the date of termination; or (ii) pursuant to Section 17.3(c) ML may sell the excess holding to an eligible person identified by AT&T at the Option Price (subject to Sub-section 8.13) and the Call Option Fee pro-rated for the period between the prior anniversary of the Capitalization Date and the date of termination." 6. Apart from the above, it was noticed by the ITAT Mumbai that the payment of interest as made by Mahindra Telecom has been claimed as revenue expenditure and accordingly on the basis of the matching principle, the return on investment has to be taken into account. In clause No. 17.4.1(i) of the joint venture agreement, it was agreed that amongst AT&T and ....
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....espective of the performance of the investee company during the holding period, or the intrinsic or the market value of its shares as on the date of transfer, the assessee is to, on the exercise of the option, or alternatively by AT&T, entitled to a (contractually agreed) price calculated to give a predetermined yield. That is, the said option is inconsistent with investment in risk capital?" Comments by Dabur Invest Corp. 9. At the outset, it is brought to your kind notice that in the case of Padmasundara Rao vs. State of Tamil Nadu in 255 ITR 147, the Hon'ble Supreme Court has cautioned while following a precedent in following words: "Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morris in Herrington vs. British Railways Board, (1972) 2 WLR 537. Circumstantial flexibility, one additional or....
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....h predetermined price, i.e. the option price, the said Mahindra Telecom is under obligation to sell its shares to AT&T irrespective of the performance and market value of the company. Even in the case of good performance, when the market value of the shares would be high, the said Mahindra Telecom has to sell its shares to AT&T at a predetermined price and similarly even in the case of bad performance of the company, the said Mahindra Telecom would be entitled to receive the selling price of shares at such predetermined price even though the market value of shares would be low. Accordingly, the Mahindra Telecom did not bear any risk by way of investment in AT&T as it was eligible at a fixed rate of return which is also clear from clause 2.6 of the said agreement. (b) As per clause 7.4 of the agreement, in a general meeting the said Mahindra Telecom had to cast its vote in conformity with the AT&T vote on all matters presented to the shareholders by the Board and failure of Mahindra Telecom to support AT&T in the manner envisaged in the agreement shall constitute a breach under the agreement. (c) As per clause 17.4 of the agreement, on termination of the agreement ....
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....would form part of the net selling price of shares as also explained in the definition clause of Schedule 1 of the joint venture agreement which reads as under: "NET SALE PROCEEDS" shall mean the difference between the gross sale receipts per Dabur share and such option price which shall be calculated as per the formula set out in Schedule 3." 17. Under the joint venture agreement, Dabur entails the risk also because the market value of shares at the time of divestment depends upon the performance of the company as well as the prevailing market condition. In case of good performance, the market value of shares would be high and in that situation, the quantum of refund of the option money would also be high, whereas in the case of bad performance, the market value of the shares would be low and in that situation the quantum of refund of the option money would also be low. 18. There is no clause in joint venture agreement as executed between Dabur and CUIH that Dabur will support CUIH in respect of all actions of CUIH, though in Mahindra Telecom such clause was there. 19. In the case of Dabur, the number of Directors in the Board of Directors of th....
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.... Act. The Hon'ble Bombay High Court held that the amount received towards the share subscription is a capital account and the premium thereon also remains to be on capital account. This judgment of the Bombay High Court has been accepted by Central Board of Direct Taxes in Instruction No. 2/2015 dated 29th January 2015 reported in [2015] 274 CTR [St] 65. 24. The Jurisdictional Delhi High Court in the case of Nestle SA vs. ACIT in 311 CTR 344, after following the judgment of Vodafone India (supra) held that the investment in shares of the subsidiary is a transaction on capital account not giving rise to any income. 25. In the case of Mahindra Telecom, the ITAT had no occasion to consider the effect of sterilization of an asset as has been done in the case of Dabur. In the case of CIT vs. Bombay Burma Trading Corporation in 161 ITR 386, the Hon'ble Supreme Court held that in the case of sterilization of trading asset and capital asset both, the compensation received on account of such sterilization would be a capital receipt. 26. In the case of Mahindra Telecom, the said Mahindra Telecom had claimed the borrowing cost as the revenue expenditure over which t....
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....he terms of the joint venture agreement read with its Schedule 3 of the joint venture agreement. 30. In the case of Mahindra Telecom, the Hon'ble Mumbai Bench of the ITAT was influenced with the concept that the substance of the transaction prevails over the form. However, such principle is not known to the law. In the case of Mahindra Telecom, the Hon'ble Mumbai Bench had no occasion to consider the principles laid down by the Hon'ble Supreme Court in the case of CIT vs. Motors & General Stores Pvt. Ltd. in 66 ITR 692. In the case of Motor General Stores, it has been held by the Hon'ble Supreme Court, while following its earlier judgment in the case of Bank of Chettinad Ltd. vs. CIT in [1940] 8 ITR 522 (PC) that the doctrine that in revenue cases the "substance of the matter" may be regarded as distinguished from the strict legal position is erroneous. The same has been followed by the larger Bench of the Supreme Court in the case of CIT vs. B.M. Kharwar in 72 ITR 603. In the case of Motors & General Stores, the Hon'ble Supreme Court further observed at page 699 of the Report that when a transaction is embodied in a document, the liability to ta....
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....before us by the rival parties, the order of the learned assessing officer and the learned and CIT - A. 39. The first contention raised by the learned authorised representative is that the issue involved in this appeal is squarely covered by the decision of the coordinate bench in case of the assessee for assessment year 2013 - 14 and 2014 - 15 in ITA number 1763 and 1764/del/2018 dated 11th of March 2019 where in coordinate bench quashed the order passed by the ld PCIT u/s 263 of the Act were quashed. . We have carefully considered the rival contentions on this issue. We find that both these appeals were preferred by the assessee against two separate orders of The Principal Commissioner of Income Tax - 16 New Delhi dated 6 February 2018 framed u/s 263 of the income tax act pertaining to those assessment years. On careful consideration of paragraph number 67 of that order wherein the coordinate bench held that assessing officer right from assessment year 2005 - 06 to 2011 - 12, after going through the joint-venture agreement and the balance sheet and notes on accounts filed by the assessee has taken a possible view. In paragraph number 74, the coordinate bench further held that ....
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....agreement was entered into. 41. The whole controversy in this appeal is solely based on the interpretation and understanding of Joint-Venture Agreement dated 7 August 2001 entered into between CUIH and the assessee. Therefore, it is important to cull out necessary ingredients, terms, and conditions between the two shareholders of a private limited company. The agreement, titled as a Joint-Venture Agreement, which was entered into on 7 August 2001 between the two shareholders i.e. commercial Union International Holdings Ltd (CUIH) and Dabur invest Corp (assessee). CUIH is a subsidiary of a company based out of England carrying on the business of life insurance and related business in United kingdom and other parts of the world whereas assessee is under the control of majority shareholders of Dabur India Ltd, which is engaged in manufacturing and marketing of healthcare, personal care, food products and related business in India and other parts of world. Both shareholders desires to co-promote and identified existing company in India which is Dabur - CGU Life Insurance Co Private Limited (company) for the provisions of life insurance, pension and long-term savings business in Indi....
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....ncy ratio. Such further financing is required to be contributed by both the shareholders in the company by way of subscription for further shares in proportion that the total amount of paid-up share capital bears to the amount of total of paid-up share capital of the company. However if annual business plan for a year requires capital contribution by Dabur in excess of the amount the amount is required to be contributed by Dabur in that year in terms of the five year business plan at the rate of 30% of the amount set out in such business plan. Further subscription by the shareholders shall be subject to approval of the aforesaid annual business plan by both the shareholders. However, the total financial commitment of Dabur towards the company shall not exceed Rs. 237 crores, which constitutes 74% of Rs. 320 crores the proposed total paid-up equity share capital of the company. Further if the funds are still required by the company after Dabur has completely discharged its commitment, Dabur shall have the option to contribute towards such an additional funding in proportion to its then existing shareholding in the company. If Dabur chooses not to exercise its option, to contribute f....
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.... unanimous approval in writing by both the shareholders. According to clause 15 there is a provision of transfer of shares by both the shareholders to its affiliated entities. The Dabur undertook that during the terms of this agreement it will not sell or transfer the Dabur shares to any company which is not an affiliate of Dabur and there will not be any new shareholding in any affiliate holding shares pursuant to the transfer Under this clause or in Dabur by any person other than Indian National if such transaction would prevent CUIH from maximizing its shareholding in the company. According to clause 16 CUIH agreed to pay the option price to Dabur for right granted to CUIH during the 10 year period to require Dabur to sell only to CUIH such number of shares as would be required to take CUIH shareholding in the company to the maximum revised applicable Law percentage (FDI norms) and after 10 year period to require Dabur to sell such Dabur shares to CUIH or its nominee to the maximum revised applicable Law percentage. Further, during the term of the agreement, on each option price payment date i.e. 31st of January, CUIH shall pay to Dabur the option price on the total number of sh....
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.... price it has received with respect to the retained shares. Further if the retained shares by the Dabur are required to be sold by the Dabur the right of first refusal rest with the CUIH. Further, if it is sold to other parties , then due diligence of the affairs of the company is to be allowed by CUIH. The option price received by the Dabur is required to be repaid to CUIH in certain circumstances as per clause number 16 A. Clause 16 B is with respect to the invocation of guarantee and clause number 16 C is placing the shares in escrow account in situation of the winding up of the company. Clause number 17 deals with the transfer of shares owned by CUIH within a 10-year period and after the 10-year period. According to that clause, if at any time during the 10 year period CUIH decides to sell its shares to any third party, the intention of such sale of shares is required to be given to the Dabur in the form of the notice and if Dabur wishes to acquire those shares it has to indicate its intention. Price shall be one, which has been given by an investment banker to CUIH as the indicative value.. If the Dabur does not wish to acquire those shares, it has also right of tag along and ....
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.... to Dabur annually in advance which is equivalent to 20% of the subscription price for each Dabur share. In the event of further capital contribution by Dabur in terms of clause 6 during the year, the option price payable in relation to the such capital contribution in that year shall be proportionate to the remaining period in that year. All taxes, including withholding taxes, if any, payable by CUIH on the option price, shall be to the account of CUIH. All taxes payable by Dabur, if any, shall be to the account of Dabur." "Retained Shares" shall mean the shares held by Dabur immediately after the expiry of the 10 year period which constituted 26% of the companies then paid up equity share capital and those shares in relation to which Dabur has returned the option price in terms of clause 16.9.2.4 "subscription price" shall mean the par value of a share. 43. There are various other schedules attached to the agreement. Schedule 2 is a five year business plan which shall mean the ruling business plan prepared by CUIH and jointly agreed by the shareholders first of which is attached therein. Schedule 3 is a formula for calculating the payment by Dabur to CUIH of ....
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.... 06 2006 - 07 59,66,47,200 177,74,99,200 5 2006 - 07 2007 - 08 91,46,13,095 269,21,12,295 6 2007 - 08 2008 - 09 108,13,17,600 377,34,29,895 7 2008 - 09 2009 - 10 212,50,69,101 589,84,98,996 8 2009 - 10 2010 - 11 243,09,48,361 832,94,47,357 9 2010 - 11 2011 - 12 249,70,84,708 1,082,65,32,065 Reopened assessment by issue of notice u/s 147 of the income tax and appeals for which are pending before the learned and CIT - A 10 2011 - 12 2012 - 13 246,84,62,400 1,329,49,94,465 11 2012 - 13 2013 - 14 246,84,62,400 1,573,34,56,865 For these two years the learned CIT took action u/s 263 of the income tax act which has been quashed by the coordinate bench by order dated 11 March 2019 12 2013 - 14 2014 - 15 246,84,62,400 1,823,19,19,265 13 2014 - 15 2015 - 16 246,84,62,400 2,070,03,81,665 Impugned assessment year in appeal 46. It is also interesting to note the rival contentions. The assessee's contention is that option price money received is linked with the value of transfer of Dabur share to CUIH , the contingency may arise that option p....
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....eived by the assessee as option money year to year is a capital receipt or any income chargeable to tax on yearto- year basis. 50. The judicial precedent gives a principle that while all revenue receipts are assessable under the Act, unless specifically exempt, a capital receipt may or may not be so chargeable to tax. A capital receipt would be chargeable to tax where it falls for consideration u/s 45 of the Act, subject to the provisions of the income tax act. To determine whether a particular receipt is a capital receipt or any income is always a vexed issue. The problem of discriminating between capital receipts and income receipts, and between capital disbursements and income disbursements, has very frequently engaged the attention of the Honourable courts. In general, the distinction is well recognized and easily applied, but from time to time cases arise where the item lies on the borderline and the task of assigning it to income or capital becomes one of much refinement. The Income tax Act does not define 'income' except by way of adding artificial categories. There are innumerable decided cases where on a particular facts and issues are decided. While each case is found ....
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.... investor will pay 20% option price for transfer of those shares according to clause number 16 of the jointventure agreement. The clause number 16 of the joint-venture agreement provides as Under:- "16. Transfer of Dabur shares and share option 16.1 In consideration of the terms of this agreement and payment by CUIH of the option Price, Dabur hereby grants to CUIH:- a) the right during the 10 year period to require Dabur to sell only to CUIH such number of shares held by Dabur as would be required to take CUIH shareholding in the company to the maximum revised applicable Law percentage, and b) the right after the 10 year period to require Dabur to sell to CUIH or its nominee such number of Dabur shares as would be required to take CUIH shareholding in the company to the maximum revised applicable Law percentage. The rights conferred by this clause to CUIH shall be exercisable on each occasion (if more than once) when CUIH shareholding in the company is lower than the revised applicable Law percentage. In consideration of the terms of this agreement, CUIH hereby grants to Dabur:- A) the right during the 10 year period to....
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....hall be calculated as per the formula set out in schedule 3) become less than the subscription Price, only such part of the option Price shall be repaid so as to ensure that the net sale proceeds per Dabur shares are not less than the subscription Price. 16.6.3 In the even the market value is equivalent to the subscription Price, Dabur shall retain the option price received on such Dabur shares 16.8 divestments during the 10-year period 16.8.1 Subject to the applicable law on the terms of this agreement, neither shareholders and sale, transfer, alienate or otherwise dispose of any shares or any interest in any shares to any third party during the 10 year period. 16.8.3 If it any point during the 10 year period, the applicable law requires as a shareholder to engage in a process which requires divestments of any shares, then the shareholder will cooperate in such process notwithstanding anything to the contrary in this agreement. If such provisions of the applicable law requires such process to be undertaken by a specified time then the process shall be commenced within six months before the time but not earlier. In the event, Dabur has to divest ....
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.... the Dabur shares to a Third party identified by CUIH (subject to applicable law). Dabur shall be obliged to sell such number of Dabur shares as specified in the sale notice at market value provided that if:- a) The market Value to be paid by the third parties lower than the subscription Price, CUIH shall pay the difference in the subscription Price and the market Value to Dabur Simon tenuously with the sale of Dabur shares. Dabur shall be entitled to retain the option price received on such Dabur shares b) The market Value is higher than the subscription Price, Dabur shall repay to CUIH the option price (to be calculated in accordance with schedule 3), pertaining to such shares within 30 days of receiving the market value. Provided however, if as a result of repayment of the option Price, the net sale proceeds per share received by Dabur becomes less than the subscription Price, only such part of the option Price shall be repaid so as to maintain the net sale proceeds per Dabur shares at the subscription Price c) The market Value is equal to the subscription Price, Dabur shall retain the option price received on such Dabur shares The sale/purcha....
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.... Dabur shall indicate such acceptance by way of a notice to CUIH within 15 days of receipt of the retention offer. Further subject to approvals, Dabur shall within 30 days of its acceptance, repay the total option price received by Dabur till date on the Dabur shares indicated in the retention offer. The amount of option price to be repaid shall be computed in accordance with the formula set out in schedule 3. The shares on which the option price is retained by Dabu to CUIH in terms of this clause 16.9.2.4 shall thereafter be treated as retained shares for purpose of this agreement. 16.9.6.1 Dabur shall repay the option price it has received in respect of the retained shares within 30 days of expiry of the 10 year period. The amount to be repaid by Dabur to CUIH by way of option price shall be calculated in accordance with the formula set out in schedule 3. 16.9.7 if Dabur entrance to transfer the retained shares to any third party, it shall offer all such shares, in the first instance, to CUIH in the manner set out in schedule 8. 16A Repayment of option price by Dabur to CUIH Dabur shall repay to CUIH the option Price Under thi....
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.... of share , such defined gain on transfer of Dabur share is to be retained by Dabur. The learned CIT - A has dealt with this issue at page number 26 - 29 of her order. As we have already held that option price received by the assessee, though received on a regular basis and generating constant cash flow in the hands of the assessee, however, there is a liability on the assessee to repay such option price when such shares are sold in certain events. Therefore, though it is received on a regular basis and used to generate an income regularly in the hands of the assessee, it cannot be said that it is an income. 55. The shares held by Dabur is a capital asset of the assessee. The shares are locked in for the reason that the right of first refusal to buy the shares of Dabur rests with CUIH. In return, CUIH has paid Dabur option price, which is merely an advance against the purchase of the shares by CUIH at a later point of time. Thus option price, is required to be adjusted in all the transactions wherever the shares of Dabur would be transferred either to CUIH, or its nominee, or to a third party in all the events. Therefore, even otherwise the option price received by the assess....
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....reement when CUIH guarantees payment of 20% as option price to Dabur by 31st January every year in return for exclusive right to purchase shares by CUIH in the event of change of foreign direct investment rules. On careful reading of the complete agreement, it is apparent that it is a shareholders' agreement for making investment in a company which is also incorporated in the articles of association of the company. There are Tag along and Drag along rights of both the shareholders enshrined therein. Further as per clause number 16 option price is to be refunded by the assessee in certain events to CUIH. In fact option price is refunded when FDI rules were relaxed and foreign party was entitled to hold 49% equity. At that moment 23% of Dabur shares were transferred in favour of CUIH in terms of provisions of clause 16 of the agreement and option price was refunded proportionately. Therefore, it cannot be said that the 20% return on subscription price has been paid by CUIH to the assessee as a return on its investment and hence it is income. 58. The revenue vehemently argued that assessee is receiving payments annually i.e. year to year, therefore it is an income of the assessee a....
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....ainst option price. Thus Dabur shares are also entitled to Dividend , If any. 61. It is also argued by the revenue that Dabur does not have any right of management of the business and the business will only grow because of AVIVA. The reference was specifically made to a provision in the agreement clause number 11.4 that the Chief Executive officer of the company shall be nominated by CUIH from one of the four directors nominated by it in consultation with Dabur and shall be appointed by the board. Looking at clause number 11 which provides for the composition of the board of directors, the total number of the directors of the company shall be 10 and Dabur shall be entitled to nominate maximum of 6 of the 10 directors and CUIH shall nominate maximum of 4 directors. The chairman shall be nominated by the annual rotation between the shareholders and shall not have a casting Vote. The Dabur will nominate the chairman in the first year. The Chief Executive Officer of the company is required to be nominated by CUIH out of its four directors. However such Chief Executive Officer would be appointed in consultation with Dabur. As the investment is made by the assessee in a private limite....
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....em have invested and give a right of purchase of stake of one another, issues counter guarantees to each other for their obligations, it makes their investment in the company somewhat illiquid and nonmarketable. And for that if another shareholder pays some advance money to be adjusted later on, when actual transfer of stake happens, such advance money received is a capital receipt and required to be adjusted only against the sale consideration received. It is not the case of the revenue that at the time of investment Dabur has not looked into the viability of business of insurance, government policies of foreign direct investment in insurance sector and continuity of CUIH in the business of insurance. After considering all these facts the Dabur has invested into the insurance business by assuming the risk as a business man. Thus, the treatment of the joint-venture agreement by the revenue and its interpretation that option price received by Dabur is a revenue receipt and is chargeable to tax as income is devoid of any merit. 63. One more reason assigned by the revenue to treat the option price as income is that the option price so received by the Dabur has been invested in inco....
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....ly the assessee did not transfer the assets and adjusted the option price against the sale consideration. Further whatever income is earned by the assessee in utilizing option money has already been offered to tax. In fact assessee has refunded the option price received in terms of the clauses of the agreement when subsequently the shares were transferred by the assessee to CUIH. 65. Another issue raised by the revenue is that the market value of the shares does not change the amount of return receivable by the assessee. It was stated that whether the market value of the share is zero or Rs. 26.72 per share or Rs. 20.38 per share the return remains the same i.e. it is equal to option price plus subscription price. The learned authorised representative submitted a table A along with his written submission placed at page number 12 of the submission. In that chart which has been reproduced by us earlier, the calculation is submitted according to clause number 16.8.3.4, 16.8.3.3, 16.8.3.2 and 16.8.3.1. of the agreement. The conclusion drawn by the revenue was that that whatever may be the market value of shares, entire option price is retained, because amount in column number 10 ....
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....is periodically receiving the minimum guarantee over a period of time as advance against sale of shares till such shares are transferred. But that does not make the sale consideration received in advance in part for transfer of shares as revenue receipt and thus income of the assessee chargeable to tax in the year of receipt of such option price as advance sale consideration. Further the clause number 16.8 referred to by the revenue is related to the divestments during the 10 year period ignoring clause number 16.6 which is with respect to the transfer of Dabur shares to another shareholder of the company. 66. Next argument of the revenue is that the terms of the joint-venture agreement clearly shows that it is a pure financial transaction and therefore the option price received by the assessee is chargeable to tax as income and not a capital receipt. The first point of distinction drawn by the revenue is that in case of a share deal assessee is entitled to get only dividend income and in the case before the AO the assessee was provided a fixed 20% annual return on subscription price. On careful consideration of the above argument it is evident that assessee is also entitled ....
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....unications Investment Private Limited (2016) 69 taxmann.com 431 stating that issue is squarely covered by the decision in favour of the revenue. Revenue says that facts in both the cases are similar wherein the foreign company agreed to certain consideration to be paid to the Indian Investor for extending the facility of holding the shares of an Indian Investor entity by an Indian party for subsequent sale to foreign party when there is a relaxation in foreign direct investment sectoral limits. It is also the contention that when the vital factual metrics of the issue decided by the coordinate bench and the issue before us remaining the same, the decision of the coordinate bench applies with all force in this case. In view of this argument, it is necessary to examine the facts and issue before the coordinate bench. In facts of case before that coordinate bench, assessee and Indian company entered into a shareholders' agreement with a foreign party to set up telecommunication business in India in terms of the foreign direct investment sectoral limits with respect to telecommunication industry. The Indian company invested 26% of the shares of an Indian company whereas the foreign ....
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....g the year, brought it to tax. Reliance is placed by it on Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC); State Bank of Travancore v. CIT [1986] 158 ITR 102/24 Taxman 337 (SC); and CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC)." [Underline supplied by us] 69. Therefore, only issue before the Coordinate bench in that case was in which year the income accrues. It was not the issue before the coordinate bench that whether the money received by the assessee as an option price is a revenue receipt or a capital receipt. In the facts of case relied up on before us, both the parties agreed that the option price received in that particular case is an income of the assessee and only dispute was about the year of taxability of such income. In the facts of that case, the coordinate bench decided that it is income of the assessee in the year in which it is received. The coordinate bench also considered the accounting standard issued u/s 145 (2) of The Income Tax Act as well as the Accounting Standard AS -9 issued by ICAI on Revenue Recognition. In that particular case, the income was received by the assessee without any uncertainty involved....
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....ng in case before us and, the shareholder agreement says that both have right according to their subscription value in the company. Further there was no doubt or uncertainty with regard to the realization or the ultimate collection of option price on transfer of shares in that case, in the present case before us the option price was to be refunded back to CUIH in certain circumstances. In fact, it has been refunded by assessee when 23 % shareholding was transferred from Dabur to CUIH. In view of above distinguishing feature between the decision of the coordinate bench cited before us in case of Mahindra Telecommunications Investment Private Limited ( supra) and issue before us, we do not find any similarity for determination of the option price received by the assessee whether income or a capital receipt. Therefore, that decision does not cover the issue before us. 70. It is also interesting to note in the case before us is that assessee is receiving the option price since financial year 2002 - 03. The assessment for the assessment year 2005 - 06, 2006 - 07, 2008 - 09, 2011 - 12, 2013 - 14 and 2014 - 15 were completed as a scrutiny assessment u/s 143 (3) of The Act, wherein duri....