TaxTMI 
TaxTMI 
2025 (6) TMI 804
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....mitted that the issue in appeal is decided by the Tribunal for the assessment years 2013-14, 2014-15 and 2015-16, wherein the Tribunal held that the option money received by the assessee is capital receipt which requires an adjustment only at the time of transfer of shares by the assessee to CUIH while working out resultant capital gain thereon. Ld. Counsel for the assessee submits that order of the Tribunal dated 11.03.2019 in ITA No.1763 and 1764/Del/2018 for the assessment years 2013-14 & 2014-15 is placed at pages 1 to 51 of the citation paper book. Similarly the order of the Tribunal for the AY 2015-16 is placed at pages 54 to 130 of the citation paper book. 4. The Ld. Counsel further submitted that against the order of the Tribunal for the assessment years 2013-14 & 2014-15 the Revenue had preferred appeals before the Hon'ble Delhi High Court in ITA No.483/2019 and 482/2019 respectively and the Hon'ble Delhi High Court vide its order dated 10.03.2025 dismissed the Revenue's appeals on the principle of consistency because in various years right from assessment years 2002-03 to 2023-24 the issue attained finality. Ld. Counsel submitted that the order of the High Court has be....
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....in favour of CUIH on account of change in policy by FIPB allowing the holding by a foreign entity at a higher percentage. For this purpose, necessary permission was sought for not only from FIPB but also from IRDA as well as RBI - copy of FIPB approval dated 18th March 2016 placed at page 200 of the paper book and IRDA approval dated 28th March 2016 at page 205 of paper book. 3.1 As per permission granted by FIPB, the market value of the shares was determined by competent commercial valuers at Rs. 940 crore and as per FIPB guidelines it has to be received from foreign remittances and accordingly CUIH, in order to acquire 23% shareholding in the joint venture company had remitted the same from foreign sources. 4. However, the proportionate option money of 23% shareholding which was cumulatively received by the assessee in various years was at Rs. 1003.16 crore, out of which as per the formula given in the JV agreement, only an amount of Rs. 524.29 crore was appropriated and retained by Dabur and the proportionate excess amount of option money Rs. 478 crore was refunded to CUIH as per JV agreement which was approved by RBI and over which there is no dispute. ....
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....o. 1763/Del/ 2018 and ITA No. 1764/Del/2018 has quashed the order u/s 263 of the Act vide order dated 11th March 2019. The ITAT, while passing the order, observed that the option money is a capital receipt and is an advance against the sale of shares and would be taken into consideration in the year in which the shares would be transferred in the Assessment Year 2017- 18. 7.1 Similarly, in Assessment Year 2015-16, the Hon'ble ITAT in ITA No. 8058/Del/2018 has also deleted the addition made by the AO and after analyzing the various clauses of the Joint Venture Agreement held that the option money so received by the assessee from CUIH in various years is a capital receipt against the capital investment made by the assessee in the form of shares in the joint venture company M/s Aviva Life Insurance Co. Ltd. and is in the nature of advance against sale of shares which would be ascertainable as per the terms of the agreement in the year of sale of shares and if any excess money received, that would be refunded to CUIH and has been actually refunded in Assessment Year 2017-18 when CUIH has further acquired 23% stakes in the company, as permitted by Government and accordingly not....
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....23% equity stakes the computation whereof has been reproduced by CIT (Appeals) at page 41-42 of the order, as under: (Rupees in crore) Sale consideration on sale of 23% stakes as per FIPB order 940.00 Option money received From 2002 to 2007 in respect of 23% shareholding 1003.16 Less: Option money refunded as per formula, i.e. para No.16A of JV agreement and approved by RBI 478.87 524.29 Net sale consideration of 23% stakes 1464.29 Less cost Subscription price 461.12 Interest cost + other expenses 209.36 (capitalized) 670.49 Index Cost 1465.85 10.1 However, the Assessing Officer, while framing the assessment, disregarded the capital gain disclosed by the assessee in view of the stand of the Revenue taken in Assessment Years 2013-14 and 2015-16 and proceeded in his own way on the lines of earlier years. The Assessing Officer treated the option money actually received in the year under consideration as revenue receipt and also treated the sale price of Rs. 94....
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....e gross option money received in relation to the sale of 23% equity stakes, the same has actually be refunded to CUIH in terms of JV agreement which was duly approved by RBI. Hence, for the purpose of computation of capital gain in relation to the 23% stake, only the actual option money appropriated by the assessee has to be taken into account. As already submitted above, out of total gross option money relating to 23% stake, which was at Rs. 1003.16 crore, the assessee was eligible for only Rs. 524.29 crore and the balance amount Rs. 478.87 crore was actually refunded to CUIH. The Assessing Officer be directed accordingly. 12.1 In view of such situation, when the assessee had disclosed the capital gain on sale of shares after taking into consideration the actual sale price received as per FIPB plus the eligible amount of option money appropriated as per the formula given in JV agreement and claimed the deduction in respect of the cost which includes the capitalization of expenses, but has been disregarded by the Assessing Officer due to the stand taken by him in Assessment Years 2013-14, 2014-15 and 2015-16 and proceeded accordingly. Now the issue has attained finality in....
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....he capital gains on sale of 23% stake. 7. Heard rival submissions, perused the orders of the authorities below and the submissions placed on record. On going through the order of the Tribunal for the AY 2015-16 in ITA No.8058/Del/2018 dated 11.02.2021 we observed that the Tribunal in its detailed judgment held that that option money received by the assessee is capital receipt which requires an adjustment only at the time of transfer of the shares by the assessee to CUIH while working out resultant capital gain thereon. The relevant observations of the Tribunal are as under: - "54. On careful consideration of above all clauses it is quite clear that option price received by Dabur from CUIH is subject to the determination of market value per share held by Dabur. This is evident from the reading of clause number 16 and 16 A of the agreement. Option price received by the assessee is directly linked with the transfer of Dabur shares. Dabur shares are to be transferred always at the market rate and if the Dabur incurs certain losses, then same shall be to an extent be recouped by CUIH. If there is upside in the market value of share, such defined gain on transfer of Dabur sha....
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....rein. The capital requirement of an Indian entity as well as foreign entity is also planned. Further on looking at clause number 6, wherein the provisions of further financing are incorporated. It is provided that in case the company requires further financing it would be in terms of the five year business plan and annual business plan presented to and approved by the board of directors. Further if the solvency ratio of the company falls below 120% of the statutory minimum solvency ratio, then also further financing is required. The board of the company may also decide on its own that further financing is required. All these are based on the business plan and annual business plan presented to the board. In the board of directors both the shareholders have a right to appoint the directors in proportion to their shareholdings. In the impugned year before us the Dabur was holding 74% of equity and thus was a majority partner. 57. It is also stated by the learned CIT - A that the joint-venture agreement is merely a financial agreement where Dabur confers exclusive rights upon CUIH for purchase of its shares. Thus it is only an agreement when CUIH guarantees payment of 20% as o....
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....eading of the comprehensive agreement of joint venture between the shareholders i.e. shareholders agreement, it is apparent that option price received by the assessee annually is merely an advance receipt of sale consideration of shares to be transferred by assessee in favour of CUIH, its nominee or to 3rd party. 59. Even such Option price received is always a liability of the assessee, as there are relevant clauses of the agreement where assess needs to refund the same to CUIH based on market value of shares. Undeniably, there are circumstances where the Option price is to be retained by the assessee, but all these depends on the triggering even of sale of Dabur shares, not before that. Further the option price is also to be adjusted in "full value of consideration of shares‟ as when those are transferred. Thus, Option price is capital receipt, received in advance by the assessee. 60. One more reason to say so is that when assessee has subscribed to the shares of the company, according to clause number 10 which describes the dividend policy amongst the shareholders, any dividend received by the assessee if at all, is not adjustable against option price. Thu....
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.... placed is shown to us. In view of this, it cannot be said that Dabur does not have a right of management in the new entity. 62. It has been also held by revenue that the joint-venture agreement is an ironclad financial agreement where CUIH, holding guarantee of 20% of option price on the rights of CUIH for buying further stake of the assessee due to change in the foreign direct investment percentage and therefore the option price received by the assessee is income of the assessee. We have already stated that the joint-venture agreement is in the nature of a shareholders‟ agreement. It may be possible that one shareholder may put in investment in the company and other party may put in investment as well as expertise for the business of the company. But both are investors in the company. Even otherwise any acquisition of a stake in a company is always a financial arrangement. The right of first refusal to buy the stake of another party is always enshrined in case of closely held companies for smooth conduct and efficient running of the business. Whenever the shareholders enters into a shareholder agreement with respect to a particular company where both of them have i....
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....he character of option price received whether capital receipt or income. 64. The learned lower authorities have also held that at the time of receipt of option price by the assessee there is no underlying asset transferred by the assessee and therefore it is an income in the hands of the assessee. Naturally, the option price received by the assessee is an advance towards the sale price of the shares at a future date therefore the transfer of the underlying asset will happen at a future date on happening of the certain events. Thus it cannot be said that as there is no transfer of an asset at the time of receipt of option price and therefore, the option price becomes an income of the assessee. If, this argument of the revenue is accepted then any advance received for the sale of a capital asset, where the sale will happen in the later time, Will become income of the assessee even if the transfer of such capital asset takes place in later years. This will tantamount to changing the character of a capital receipt (sale consideration for a capital asset) received in advance as income without there being any transfer of an asset. It is not the case of the revenue that ultimatel....
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....t sale proceed is stated to be the difference between the gross sale receipts per Dabur share and option price received by the assessee. Thus it is clear that when the market Value is higher than the total of subscription Price plus option price received by Dabur, in that circumstances the Dabur is entitled to retained such excess price. Thus it is clear that if market value of the share is higher than the total of subscription price plus option price, such higher value is to be retained by Dabur and not to be refunded. In view of this the argument of the revenue that in all circumstances the assessee gets only the option price or the option price is always to be retained is a fallacy. It is true that in such circumstances of the option price received by the assessee is always to be retained however, the assessee is also getting much more than option price if the market Value is higher than the subscription Price plus option price. The option price is a minimum guarantee given by CUIH as the minimum exit value of the investment made by assessee. Which is in general is found in many of the investment made by private equity funds. In this case the only differences that assessee is pe....
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.... the companies act in case of closely held companies the shareholders are not authorised to sell the shares to the third parties without giving an option first to the existing shareholders. Further in case of the winding up of the company the liability of the shareholders are only restricted to the extent of the subscription amount, none of the shareholders can be asked to pay to the creditors beyond the net worth of the company except in case where the individual shareholders have guaranteed such payment to the creditors separately. 67. The ld CIT (A) has held that the agreement is an eyewash and is to hoodwink the revenue. On careful reading of the orders, nowhere the lower authorities have doubted the content of the agreement. It is merely an issue of interpretation of an item of receipt, which is required to be determined whether it is capital receipt or revenue receipt. The Context of the agreement s stated is before several authorities such as IRDA, RBI, and FDI Committee and even before AO for eight long years without expressing any doubt by any of the authorities. 68. Lastly the revenue has relied heavily on the decision of coordinate bench in case of Mahi....
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....the time it accrues to the assessee on time basis and accordingly is taxable in the year of receipt. Para number [3] of that decision succinctly brings out the issue before the bench as Under:- "The respective cases 3. The issue arising for determination is whether the income by way of return on 'equity' accrues to the assessee from day to day, i.e., on the basis of the holding period, for each previous year comprising the holding period, or shall accrue only on the sale of shares, i.e., on the exercise of the put option or, equivalently, call option by AT & T Global. As per the assessee, the income had not accrued in-as-much as the option had not been exercised, i.e., accrued and shall only be so on the (sale) transfer of shares. Reliance stands placed by it on E. D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 (SC) and CIT v. Canara Bank [1992] 195 ITR 66/61 Taxman 79 (Kar.). In view of the Revenue, the income being defined to arise on the basis of time, i.e., as a linear function of and by elapse of time, accrues to the assessee on time basis and, accordingly, working out that accrued for the current year, reflected by an increase in the option price duri....
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....rice at which the shares are to be transferred by Dabur to the other shareholder is at market value and Dabur is also entitled to increase in market value of those shares above total of option price and subscription price. Further, according to clause number 7.4 of that agreement, the failure of Mahindra to support AT & T shall constitute a breach under that agreement. In Case before us, Dabur has right of veto and there is no clause that failure of Dabur to support CUIH constitutes a breach of the agreement. Further on termination of the agreement by foreign party, in that case the Mahindra was required to sale all its shares at their par value and in case of termination of agreement by Mahindra, Mahindra was to offer all its shares to AT & T at the option price. Thus, the shares were to be transferred by Mahindra in that decision to AT&T at option price only and any increase therein is only with respect to a predefined rate. Whereas in case before us it is linked to the market value of those shares. Coordinate bench further made a definite observation that shareholding of Mahindra or the rights of the shareholder of AT&T were qualitatively different, such case is missing in case ....
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....umber 212 onwards of the paper book. The assessment for assessment year 2013 - 14 and 2014 - 15 were subjected to revision by The Principal Commissioner of Income Tax - 16, New Delhi. On appeal before the coordinate bench against that order, the coordinate bench as per order dated 11 March 2019 has quashed assumption of jurisdiction by CIT u/s 263 of The Income Tax Act. Further, for assessment year 2011 - 12 and 2012 - 13 the action u/s 147/148 of the income tax act has been initiated by reopening of the assessment. The appeals of those years are pending before the CIT - A. However, up to assessment year 2011 - 12 i.e. For eight assessment years, consistently this position is maintained by assessee as well as the income tax authorities. Now revenue has changed its stand. Principles of Estoppels and Resujudciata do not apply to the tax matters is an established principle, but principle of consistency does. The principle of consistency is also cardinal principle of taxation as held by the honourable Supreme Court in Radhasoami Satsang v. Commissioner of Income-tax 193 ITR 321 and 358 ITR 295. Further, saying that there was an error in earlier acceptance of the order/stand of the asse....
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....lding that the option money received by the assessee is capital receipt which requires an adjustment only at the time of transfer of the shares by Dabur to CUIH while working out resultant capital gain thereon" and also stated that for the earlier years CIT(A) has also allowed the appeal of the assessee which was reproduced as under: ITAT 11.03.2019 taxable as Capital Gains in year of sale of shares. ITAT held that 263 jurisdiction is invalid and that Option Price taxable as Capital Gains in year of sale of shares. 4) 2014-15 (263)/ 143(3)/ ITAT 09/03/18, 11.03.2019 NIL High Court 5) 2015-16 (143(3)/ ITAT 31/12/17, 11.02.2021 111.62 (Appeal effect is pending, demand will be NIL after appeal effect) ITAT has passed an order in of assessee) Hon ITAT, Held that Option Price is taxable as Capital Gains in year of sale of shares 6) 2016-17 (148) 20/02/19 115.55 ITAT CIT (A) allowed issue related to option money 7) 2017-18 143(3) 19/2/19 469.91 ITAT CIT (A) allowed issue related to option money 8) 2018-19 143(3) 23/03/21 77.12 ITAT CIT {A) allowed issue related to option money ....
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....t allowed to be capitalized, as business expense." 11. With respect to ground no. 1 the Ld. Counsel for the assessee submitted that During the year under consideration, the assessee had sold its 23% stake to CUIG and had disclosed the capital gain on sale of such shares in its return but the assessing officer instead of computing the capital gain on sale of shares, proceeded to tax the option price and sale proceeds as revenue receipts. In the assessment year 2017-18, on account of change in policy by FIPB thereby allowing the holding of stakes by a foreign entity in the insurance sector to the extent of 49% and the assessee after seeking necessary permissions from FIPB, IRDAI and RBI, had sold its 23% stake to CUIH for a consideration of Rs. 940 crores being the market value determined by the commercial valuers and approved by FIPB which was to be remitted from a foreign source. However, out of cumulative proportionate option price of Rs. 1003 crores received in earlier years; the assessee had retained Rs. 524.29 crores as per clause 16A of the Joint Venture Agreement and had refunded the excess amount to the tune of Rs. 478 crores to CUIH. In the income tax return, the assesse....
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.... by the assessee, as disclosed in return, in accordance with law. 13. Ld. Counsel further submitted that since the earlier assessments have attained finality wherein the interest paid on borrowed funds and professional charges have been capitalized year after year, the proportionate interest capitalized to the extent of 23% holding amounting to Rs. 209.36 crores deserves to be allowed as deduction under section 48 of the Act while computing the capital gain. Ld. Counsel submitted that in the following cases, it has been held by the jurisdictional and other High Courts that the interest paid on borrowed funds utilized in acquisition of assets has to be capitalized till the date of sale of assets: * 92 ITR 9 (Delhi), CIT v. Mithlesh Kumari * 215 CTR 96 (Madras), CIT v. Trishul Capital Limited * 315 ITR 136 (Karnataka), CIT v. Shri Hari Ram Hotels Private Limited * 215 TTJ 515 (Delhi Tribunal), Zuari Investments Limited v. ITO" 14. On the other hand, Ld. DR supported the orders of the authorities below. 15. Heard rival submissions, perused the orders of the authorities below. The issue in assessee's appeal relates to deduction claimed by it....
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....urisdictional Delhi High Court in the case of CIT vs. Mithlesh Kumari in 92 ITR 9 held that the interest paid on borrowed fund utilized for acquisition of capital asset has to be capitalized from the date of acquisition till the date of sale. Similar principle has also been reiterated in the following cases: * 215 CTR 96 (Mad) CIT vs. Trishul Capital Ltd. * 315 ITR 136 (Kar) CIT vs. Hari Ram Hotels Pvt. Ltd. * 215 TTJ 515 (Delhi Trib) Zuari Investment Ltd. vs. ITO 18. On perusal of the facts and circumstances of the case, in the instant case because the AO had taken a view in Assessment Years 2013-14 and 2014-15 as well as in 2015-16 that the option price received by the assessee year after year is in the nature of revenue receipt and taxed the same as business income and based on this view in the year under consideration also, the AO disregarded the claim of capital gain disclosed by the assessee in its return on sale of 23% stakes in the joint venture company and taxed whatever the option money actually received by the assessee in the year under appeal as well as the market price of 23% stakes received amounting to Rs. 940 crore as revenue receipt an....
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....es in the books of accounts. Out of the same, the assessee had claimed the proportionate interest capitalized and professional expenses at Rs. 209.36 crores being the 23% proportionate stake sold during the year under section 48 of the Act and the balance amount of capitalization of interest and expenses remains stand at Rs. 550.82 crores pertaining to the balance stake. The assessing officer stated that the capitalization of such expenses cannot be allowed because the same is also revenue in nature on account of treatment of option money as business receipts. However, the assessing officer did not make addition in respect of Rs. 550.82 crores on account of the fact that the same was not debited to the profit and loss account but his observation regarding the nature of expenses is misplaced due to the fact that the issue relating to the option money and capitalization of interest and other expenses in earlier years has attained finality wherein the Tribunal/High Court held that option price is a capital receipt and basically an advance against sale of shares. Hence, in such circumstances the very observation of the Assessing Officer are premature for the assessment year under consi....