Tax on option price received against a right to purchase shares

Dabur Invest Corp Vs JCIT (ITAT Delhi)

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 about the quantification or refund of such sum. Further as mentioned in para number 4.4 of the decision where the relevant provisions of that agreement were considered. Agreement clause number 7.3 before the coordinate bench considered the affirmative vote of a foreign party in the board resolution as well as in general meeting. Therefore, there was a veto available only to one shareholder i.e. foreign party in that agreement. In the agreement before us, both the parties are required to pass resolution unanimously. Further in that agreement Mahindra (assessee wherein) agreed to vote all its shares in conformity with foreign parties votes on all matters presented to the shareholders by the board. Further as per clause number 9 of agreement before the coordinate bench, with respect to the buyback of shares, the buyback of Mahindra shares shall be equal to the option price. That means whatever is the option price already received by the assessee in that case was final sale consideration of the shares. Sale of such shares was never linked with the market value of shares. There is no mechanism for deriving any market value at the time of transfer of those shares. In case before us, the price 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 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.

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 during the course of assessment proceedings the queries relating to the joint-venture agreement were raised. Along with the return, the copies of the annual accounts were also available wherein the notes on account also appear. In the notes on accounts, the appellant had duly disclosed about the joint-venture agreement and had disclosed that the interest paid on borrowed funds for acquisition of shares had been capitalized and included in the cost of investment. In the notes on account the disclosure was also made about the receipt of option money from CUIH and its adjustment would be made at the time of reduction of shareholding in Aviva life insurance Co Ltd by Dabur in favour of CUIH and the adjustment would be made and accounted for in the year of the transfer of shares. The learned assessing officer for all those years, after verifying the terms and conditions of the agreement as well as notes on accounts, have never taxed the option money so received as income of the assessee. Thus, revenue has accepted stand of assessee about considering option price to be taxed under the head capital gains at the time of transfer of Dabur shares. Such assessment orders are placed before us at page number 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 assessee, therefore revenue‟s stand is changed stating that there is no heroism in perpetuating an error, there is no quarrel with that principle but the revenue must point out what is the error in the consistently adopted methodology acceptable to revenue and the assessee for such a long time. In the present case the only pillar on which changed stand of revenue stands is the decision of the coordinate bench in case of Mahindra Telecommunications Investment Private Limited (2016) 69 taxmann.com 431 (Mum) which we have already held to be on different facts and different issue. In view of principle of consistency, also appeal of the assessee deserves to succeed.

In view of this, ground number 1 and 2 of the appeal of the assessee is allowed holding 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.

FULL TEXT OF THE ITAT JUDGEMENT

1. This appeal is filed by the Dabur invest Corporation, [ The appellant/ Assessee ] against the order of The Commissioner Of Income Tax (Appeals) – 16, New Delhi [ The Ld CIT (A) ] dated 30 November 2018 for assessment year 2015 – 16. The Ld. CIT (A) dismissed Assessee ‟s appeal filed against the assessment order passed on 31st of December 2017 u/s 143 (3) of The Income Tax Act 1961 [ The Act] by The Joint Commissioner Of Income Tax, Range 46, New Delhi [ The Ld AO]. Therefore, Assessee has preferred this appeal.

2. Assessee has raised following grounds of appeal:-

1) That the option price received from CUIH against to sell the shares of the joint-venture company is a capital receipt and consequently 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 CIT (Appeals) both have erred on facts and under the law to treat the option price received from CUIH, in the absence of any clause prohibiting the use of option price received by the appellant, as a revenue receipt, is arbitrary, unjust, illegal and is based on surmises and conjectures.

5) That the observations of CIT (Appeals) that the option price payment by CUIH and Dabur is distinct and separate and governed by a different set of clauses of the joint-venture agreement resulted in treatment of option price as non-refundable, is contrary to the terms of the joint-venture agreement read as a whole as well as the conduct of the parties and consequently the addition of option price received on account of granting of right to purchase shares in the hands of the appellant as a revenue receipt is arbitrary, unjust and bad in law

6) That the investment made by the appellant in terms of the joint-venture agreement to co promote a company was in the form of capital contribution to acquire controlling stakes to the extent of 74% in the co promoted company and consequently the option price so received by the appellant from CUIH on account of granting of right to purchase shares of the appellant in the Co promoted company is a capital receipt and consequently the taxation of the option price received by the appellant as a business income, is arbitrary, unjust and bad in law.

7) That the assessing officer and CIT (Appeals) both have failed to appreciate that the investment to acquire controlling stakes in a company is a capital investment and has no characteristics of business, the option money received from CUIH , is only against the capital investment made by the appellant and has no characteristics of income is contemplated u/s 4 of The Income Tax Act, 1961 (The Act) and consequently the taxation of option price received by the appellant from CUIH as made by the assessing officer and sustained by CIT (Appeals) are based on the whims and fancies of the authorities below and is arbitrary, unjust and bad in law.

8) That the assessing officer and CIT appeals both failed to appreciate that option money is received under the terms of agreement is only appropriate and adjustable at the time of divestment of stakes by the appellant, accordingly accrued, and as contained under the law in the year in which divestment takes place. Consequently, 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 contract, it has to be read as a whole and the tax Institute has to be applied in accordance with legal rights of the parties to the agreement and not to change its meaning according to the purpose of the statute and accordingly the inference of the assessing officer and CIT (appeals) that the joint-venture is a financial agreement and option price is the annual return on investment is in the nature of business income, is arbitrary, unjust and bad in law.

11) That in the absence of any new facts brought on record other than the joint-venture agreement itself, which was duly examined in earlier years wherein the claim of the appellant was accepted and same position remained continued for several years, the assessing officer of the subsequent year cannot change the basis of taxation of option price on account of the rule of consistency and consequently the taxation of option price received by the appellant from CUIH is arbitrary, unjust and bad in law.

12) That the above grounds of appeal are independent and without prejudice to one another.

3. The facts of the case show that assessee is a partnership firm. It filed its return of income on 28 August 2015 showing total income of ₹ 5,451,114/–. During the year under consideration the assessee has shown total income from business of ₹ 5,451,114 which included profit on current investments at ₹ 4,111,774, interest received of ₹ 1,339,339/– , and dividend received of Rs 9,603,292 which was claimed as exempt u/s 10 (34) of the act.

4. Assessee entered in to a Joint Venture Agreement with Commercial Union International Holdings Ltd, [CUIH] a company incorporated in England and Wales on 7 August 2001. Assessee and CUIH [ an internationally established player in Insurance business] agreed to subscribe to and invest in shares of a company namely Dabur- CUG Life Insurance Co Private Limited which was later on named as Aviva Life Insurance Co Private Limited [ AVIVA] for the provisions of life insurance, pension and long-term savings business in India. The government of India then allowed Foreign Direct Investment [FDI] participation up to 26% in insurance sector and accordingly, CUIH and Dabur agreed to hold 26% and 74% shares of the new company respectively.

5. According to one of the terms of the Joint-Venture Agreement, it conferred a right to, CUIH to require assessee to sell only 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

6. 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.

7. 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 ₹ 2070.04 cores (including ₹ 246.84 cores received during the year) from commercial union International Holdings Ltd as option money. The option money is to be adjusted against further reduction of shareholding in M/s Aviva life insurance Co, Pvt Ltd by Dabur invest corp. in favour of commercial union International Holdings Ltd, UK at a price to be determined at the time of transfer of shares. The revenue if any will be accounted for in the year of transfer of shares.”

8. Based on above, ld AO per letter dated 15 December 2017 asked assessee to explain how the above amount of ₹ 246.85 cores is not taxable in the hands of the assessee in the year under consideration.

9. The assessee submitted on 22 December 2017 that the amount of option money received by the assessee is a refundable security deposit and the same is received in Standard Chartered bank escrow account. The copy of the bank statement and bank ledgers in the books of account of the assessee company were submitted. Assessee stated that the option money received as a refundable security deposit, so it cannot be considered as income of the assessee for the period under consideration. Assessee also supported this by submitting copy of the agreement between the assessee and CUIH wherein in clause NO. 16 of the agreement, nature of option money received and receivable by the assessee was discussed. Thus, the claim of the assessee was that, option money received by it is not an income of the assessee but a capital receipt. It is to be adjusted at the time of sale of shares by assessee in favour of CUIH.

10. The learned assessing officer perused the joint-venture agreement dated 7 August 2001 between CUIH and appellant and assessee was once again asked to explain on 28th of December 2017 stating that the advanced option money have the nature of return on investments in view of granting power of controlling Company’s affairs to CUIH . Alternatively, in terms of assessee’s interpretation of advance option money is receipt of advance money for diluting/holding on Aviva life insurance Co private limited and transfer of the same to CUIH at a future date, the same is not tenable as even one rupee advance cannot be taken from CUIH till the government policy changes to increase the foreign direct investment holding in insurance sector from 26% and such government policy did not change from 2001 – 2016. Therefore, 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 totality and it is submitted to the Foreign Investment Promotion Board [FIPB], Reserve Bank of India [RBI] for their information in accordance with the prevailing law. Assessee also contended that joint-venture agreement approved by the respective regulatory authorities allows the assessee to receive the option money from commercial union International Holdings Ltd. Therefore, the action of the assessing officer of ascertaining different meaning from the joint-venture agreement is altogether incorrect. Assessee further stated that the option price received by it is not an income in the year of receipt as this money was by way of an option price, which has to be refunded back to Commercial Union International Holding in terms of the joint-venture agreement. It was further informed that 48% of the option price pertaining to 23 % stake was refunded back to Aviva on 4 May 2016. Therefore, it is a refundable amount therefore cannot be treated, as an income in the year of receipt and it cannot be accepted as income during the year when the matter of refund of option price can only be known at a future date. Assessee further referred to clause number 16.6.2 read with schedule 3 and schedule 9 stating that assessee refunded back the appropriate option money in assessment year 2017 – 18 (financial year 2016 – 17). Therefore, it was stated that the option price is certainly not a return on investment and the receipt of option price is not income. Therefore, it was submitted that there is no question of making any addition u/s 68 of the income tax act.

11. The assessing officer once again not satisfied with the reply of the assessee. He asked assessee on 29th of December 2017 that joint-venture agreement is required to be examined, had change in government policy to increase in foreign direct investment participation would not have taken place, assessee would have refunded the above sum and why option money received should not be taxed as income in this year in view of the decision of the coordinate bench in 159 ITD 600 (Mum).

12. Assessee submitted on 29th of December 2017 stating that the decisions cited by the learned assessing officer in case of Mahindra Telecommunications Investment Private Limited Versus Income Tax Officer – [2016] 180 TTJ 434 (159 ITD 600 (Mum) is completely on different case and easily distinguishable on the facts of the above case. 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 ₹ 461 cores and assessee did not get any return on investment to meet even its indexed cost of capital.

v. Return was fixed in the case before the coordinate bench @ 11% compounded annual growth of return and 5.5% of annual income, whereas in the case of the assessee the option price is required to be determined by determining the valuation of the shares as exit price based on the formula and various regulatory concerns.

vi. Assessee did not have any right of appropriation of the above sum received as an option price except at the time of exit, wherein assessee refunded 48% of the option price back to commercial union International Holdings Ltd.

vii. With respect to the management rights also, assessee explained that assessee is having 74% stake where as in case of Mahindra it was just a 24% stake, therefore it was case of a minority shareholder, whereas in case of Dabur, majority shareholder has full rights of management as out of 11 directors, 5 were from the assessee and three were independent directors, whereas in the case of Mahindra there were no management rights in the joint-venture telecom business.

viii. Assessee also tried to distinguish that decision by stating that assessee paid ₹ 37 cores to a bank for promotion of its insurance business as business promotion expenditure and assessee was an active promoter of the business and not a passive one, whereas in the case before the coordinate bench Mahindra was just looking for a fixed return and nothing more in the joint-venture telecom venture.

ix. With respect to the refund of option price stating that assessee refunded to the extent of 48% of the option price when 23% stake was transferred. It was further stated that the uncertainty of the refund of option price, it could not have been 100 % and when something can be refunded to the extent of total option price received, there cannot be a situation where income can be said to accrue or received by the assessee with certainty, thus accrual principle fails.

x. In the case before the coordinate bench the right to accrue income present from the day one i.e. 16.5% irrespective of the final share Page 10 of 155

price on the exit and there was no question of any refund as the final exit price was predetermined. Therefore, coordinate bench held that assessee acted almost like a fixed return investment which is not the case in the issue before the AO in this case.

13. However, the learned 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 “option money 1‟ and “option money 2” showing intent of both parties to ultimately pass on all shareholding of assessee in AVIVA life insurance Co Ltd to CUIH. He further noted that there is no clause to refund the option money in case the government policy does not change and there was no prohibition on the assessee to use the money received as an option price. He further noted that the assessee has claimed to suffer a loss of ₹ 1.55 crore on sale of 23% stake in Aviva to CUIH in assessment year 2017 – 2018 and not in the year under consideration. Therefore, he noted that it is not to be decided in the present assessment year, but to be examined the matter for assessment year 2017 – 18. He further noted that the sale of 23% shares of the assessee‟s stake in Aviva is pursuant to the change of government policy in assessment year 2017 – 18, which is an independent issue of capital gain on sale of stake. Hence, the consideration received on sale of shares is not at all linked to the receipt of advance option money as claimed by the assessee and therefore, it proves that the receipt of option money was never an advance but was always an income in the hands of the assessee in each year. He further noted that out of the option money received of ₹ 2017.03 cores up to 31st of March 2015, which has further increased substantially up to 31/3/2017, and receipt of another ₹ 940 cores against sale of 23% stake by the assessee from CUIH, the only amount refunded is ₹ 478 crore. According to him, nature of such refund in reference to the joint-venture agreement is different. Therefore, no part of option money was refunded. He noted that the total share sale consideration of 23% stake was ₹ 940 crore out of which ₹ 461.12 cores was subscription price and ₹ 478 crore was refunded which is well within ₹ 940 cores. He further noted that the assessee has received an option price of 20% of total subscription value of 74% of its stake of 81.4 million shares at the rate of ₹ 10 each year. In each year, per share receipt of Rs 2/– which comes to ₹ 32/– per share on 74% stake in 2016, when 23% stake was diluted. Share price at the time of purchase of shares was ₹ 10 per share and the market value of share in 2016 was ₹ 20.35 per share. He noted that the market value was more than ₹ 10 and was well within the hedged amount of ₹ 32 per share; hence, 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 ₹ 20.35 per share the assessee received an amount of ₹ 940 crore as foreign direct investment inflows first and thereafter was liable to pay the excess amount of ₹ 10.35 per share which is difference between the market price of ₹ 20.35 per share and purchase price of ₹ 10 per share, to be refunded as per the option which came to ₹ 478 cores i.e. 46,11,27,000 shares at the rate of ₹ 10.35 per share. He thereafter discussed the schedule 9 of the joint-venture agreement and noted that the option price received is therefore non­refundable 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 Ltd at market price and in return assessee continued to obtain the option price annually resulting in continuous growth in option price over a period of time. Therefore, he held that the receipt of the Option price was revenue in nature and was taxable in the year of receipt because it was received against granting of unequal right to commercial union International holding Ltd to purchase assessee shareholding in Aviva. He further noted that such income was neither contingent and not at all linked to the capital receipt arising on sale of shares of a Aviva as it is evident from the fact that option price was received on entire 74% holding and not a 23% stake alone which was sold and no part of advance option money received from commercial union International holding was adjusted against the receipt on sale of stake and CUIH paid a separate sum of ₹ 940 crore to acquire 23% stake in option money was never refunded to that party. Thereafter, coming to the nature of receipt, he held that option price receipt of the right to purchase shares granted to a foreign investor is a right separate and distinct from the right to an increase in the value of the shares. Hence, such a recurring income which is payable is chargeable to tax in the year of receipt.

14. Learned AO held that the coordinate bench decision of Mahindra Telecommunications Private Limited Versus Income Tax Officer [69 taxmann.com 431] applies to the facts of the present case completely. Page 13 of 155

He therefore held that as the business of the assessee in the present case is investment in shares and mutual funds and the income from the same is offered by the assessee is business income, therefore, the income received by the assessee in the name of option price is held to be business income. He held that the assessee has received option price every year and it is not in any way linked to the sale of stake by the assessee, therefore, it is chargeable to tax as business income. Accordingly he made an addition of ₹ 2,468,462,400 to the total income of the assessee of ₹ 5,451,114 determining the total income of ₹ 2,473,913,510 as per order passed u/s 143 (3) of The Income Tax Act 1961 on 31 December 2017.

Appeal before CIT (A)

15. Aggrieved with the order of the learned AO, assessee preferred an appeal before the learned Commissioner of Income Tax (Appeals) – 16, New Delhi. On consideration 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 with the payment of option price by assessee to commercial union International holding. She further held that the option price payments by commercial union International holding and assessee are distinct and separate and governed by different sets of clauses of the JV agreement. She further held that there are no clauses in the JV agreement that emanates refund of option price. She further held that as the option price money received was invested by assessee in income generating funds, the same option price could not also be used to refund the payment of option price to commercial union International holding. Therefore, the amount of ₹ 478 cores paid in assessment year 2017 – 18 by assessee to commercial union International holding was not a refund of option money received by assessee in the earlier years. Therefore, she rejected the claim of the assessee that it is a refundable security or refundable option price and hence a liability is completely inaccurate. She also rejected the argument of the assessee that the receipt of option price will crystallized only in the event of sale of shares by assessee to commercial union International holding. She referred to clause 16.2 of the JV agreement and interpreted it that commercial union International holding will pay option price to assessee in perpetuity or till all the shares held by assessee are transferred to that company. Meaning thereby, that commercial union International holding becomes the sole owner consequent upon government of India allowing 100 % percent foreign direct investment. She therefore held that it did not mean that the receipt of option price are contingent upon such an event or that the said receipts will crystallized on the dates on such transfer of shares from Dabur to commercial union International holding. Therefore, she upheld the finding of the learned assessing officer that option price received at the rate of 20% of the subscription price annually, is in fact in the nature of receipt in the hands of the appellant and not a liability as shown by the appellant. She, therefore, rejected the contention of the appellant that receipt is in the nature of capital receipt, hence not taxable. She also noted that the option price money received is not intact as a corpus but is being used by the assessee for generating income during the year concerned. She referred to a particular chart 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 appellant. As the interest income is part of the business of the assessee of investment in shares and mutual funds, the interest income received will partake the character of the business income. She therefore holds that the assessing officer was correct in treating the return on investment in the form of option price money as business income. She further noted the contention of the assessee that the assessing officer was incorrect in overturning the consistency of tax treatment of the assessee. Assessee submitted that since assessment year 2003 – 04 till assessment year 2014 – 15, assessee has received option money each year and such option money has been accepted by the learned assessing officer as a capital receipt to be adjusted against the sale of the shares, however in the current year only , after 10 years, the revenue has changed its stand, now, holding that, the above option price receipt of the assessee is a revenue receipt and is chargeable to tax, in the year in which it is received. She held that there is no valour in perpetuating an error. However, she noted that in some of such years, the learned Principal Commissioner Of Income Tax has invoked the provisions of Section 263 of The Act, holding that the order is erroneous and prejudicial to the interest of the revenue, as the orders have been passed by the learned AO for all those years without making enquiries or verification, which should have been made. Therefore, claim of the assessee of the consistency has no legs to stand. In the end, she held that the claim of the option price as a liability in the books of accounts is in the nature of subterfuge to hoodwink the income tax authorities by using a device, which is seemingly valid but is a feigned or counterfeit transaction entered into for ulterior motive where the apparent is not real. Thereafter, she referred to the celebrated decision of the honorable Supreme Court in case of Durga Prasad More [82 ITR 540], Sumati Dayal [214 ITR 801] and McDowell & Co [154 ITR 148] and held that the option price is not a liability and has been wrongly treated so by the appellant in its books. Such a treatment is obviously a colorable device to escape tax liability and hoodwink the tax authorities. According to her, the option price is in fact, in the nature of recurring income that melds with the business of the appellant and has therefore rightly been 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 ₹ 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 ₹ 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 aforesaid ground also does not require any elaboration of new fact other than the facts already available on record. Thereafter, learned authorized representative addressing the application for additional evidence referred to the facts of the case and stated that despite the similar transaction in the earlier years for more than 10 years, the revenue has changed its stand this year for the first time, while framing assessment for the year in appeal and therefore the assessing Officer was of the view that the business of the appellant is of investment and the option price received by the assessee year after year from commercial union International holding Ltd is a business income and accordingly taxed the same. Therefore, if the contention of the revenue is accepted and option money is received against the investment so made, then the interest amount of ₹ 732,205,896/– paid on the borrowed fund should be allowed as revenue expenditure. He relied on the decision of the honorable Supreme Court in case of National Thermal Power Corporation Ltd reported in 229 ITR 383. He submitted that requisite facts are on record. He stated that the above ground of appeal could be raised at any time during the pendency of appeal. Therefore, it should be admitted.

18. Shri G C Srivastava, Ld. Special Counsel for the revenue [Learned Departmental Representative, DR] vehemently opposed the admission of the additional ground and submitted that the interest expenditure claimed by the assessee now by this additional ground requires to be adjudicated by investigation of the fact that whether the interest accrued during the year or not. In view of this, such additional ground cannot be admitted, as it is factual, requires examination and the basic facts are not available on record. Therefore should not be admitted.

19. We have carefully considered the rival contentions and perused the application of the assessee wherein the claim of the assessee is that if the business income of the assessee is computed by treating the option price received as “income”, corresponding deduction of the interest expenditure capitalized in the books of accounts of the assessee should be granted to the assessee as deductible expenditure incurred for earning the above option price. Naturally on principle, the claim of the assessee for raising such an additional ground is required to be admitted For 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 the assessee in the additional grounds raised. Hence, the additional grounds are admitted.

Arguments of assessee on merits of the case

20. Coming on the merits of the case the learned authorized representative first took us through the facts of the present case in detail. He also referred to the various clauses of the joint-venture agreement. He also made lengthy arguments on the merits of the case referring to the plethora of judicial precedents. His arguments can be summarized as under :-

i. That 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. He further referred to the order of the learned CIT – A wherein it is stated that the action u/s 263 of the income tax act has been taken in some of the years where the option price received has been accepted by the learned assessing officer as a capital receipt. The learned CIT – A in her order has stated that the action of The Principal Commissioner Of Income Tax is with respect to enquiries of the learned assessing officer “which should have been made”. He submitted that such 263 orders were subject to challenge before the coordinate bench. He stated that in the order passed u/s 263 of the act by the coordinate bench clearly clinches the issue in favour of the assessee. He submitted that in that particular order the coordinate bench has held that the treatment given by the assessee of the option price is correct and therefore the issue involved in this appeal is squarely covered in favour of the assessee.

ii. He submitted for all earlier years the issue has been tested and accepted in the assessment orders passed by the ld AO u/s Page 20 of 155 143(3) of the act. Therefore, the issue has been decided by the ld AO, which is neither subject to Reassessment or revision, thus the issues on the principles of consistency is covered in favour of the assessee.

iii. He submitted that in the instant case, the contribution of capital by way of investment in shares for acquiring a controlling stake of 74% in the Aviva life insurance Co Ltd is a “capital asset” of the appellant and the appellant does not deal in the shares of Aviva life insurance Co Ltd and still holding the stakes. Hence, the receipt of option price from commercial union International holding Ltd for granting the right 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 26% and the rest of the 74% was offered to the appellant and both them had made their capital contribution in the form of shares of the co-promoted company in the ratio of their respective shareholding. In the Board of Directors, the Directors would also be appointed in the ratio of shareholding by the respective parties. As per the agreement on behalf of the appellant, number of directors would be six, and for CUIH, the number of directors would be four. However, because the said CUIH was interested to acquire more stakes in the company co-promoted, hence it was agreed amongst both the parties that initially for ten years the appellant would not sell its share to third person except CUIH, which resulted into sterilization of the appellant’s assets. Under the joint venture agreement, a right was also granted by the appellant to CUIH to purchase its shares as and when the Government increases the limit of shareholdings in insurance sector for a joint venture party subject to the condition, on account of sterilization of appellant’s holding, to pay option price to the appellant against the investment so made. The option price described under the joint venture agreement was refundable/ adjustable at the time of transfer of shares by the appellant to CUIH and the manner and mode as well as the quantum of refundable option price has been described in Article 16A read with Schedule 9 of the joint venture agreement. He further stated that this joint venture agreement, containing the terms of refundable option price, has been approved not only by IRDA but also by RBI who is the authorized supervising authority to control the incoming and outgoing of foreign exchange. The RBI had granted the approval of joint venture agreement on 15 April 2002 read with letter dated 17 April 2002. The payment of the option price by CUIH to the appellant was linked with the investment made by the appellant as capital contribution in the form of shares and was paid not only on account of the sterilization of the investment made by the appellant but also for the acquisition of the appellant’s stakes in the joint venture company at a later date as and when the FIPB increases the limit of investment for foreign persons. In fact in Assessment Year 2017-18, when the FIPB had increased the limit of investment for foreign persons to 49%, the said CUIH had acquired 23% stakes of the appellant 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., and whatever the option price was received by the appellant, the same was in relation to the transfer of stakes at a later date in Aviva Life Insurance Co. (P) Ltd. It may be appreciated that the shares of Aviva Life Insurance Co. (P) Ltd. are not a tradable item.

v. Therefore, he submitted that, merely because the appellant, a partnership firm, has been formed to make investment in equity of Aviva Life Insurance Co. (P) Ltd. does not mean that the appellant Page 23 of 155 is in the business of investment, but in fact, it is the investment on capital account. By making a capital contribution in the form of shares in Aviva, the appellant acquires controlling stakes in Aviva and makes eligible to appoint number of directors in majority. Similarly, the nature of option price cannot be assigned as recurring in nature merely on the ground that CUIH has paid it annually. The CUIH had paid the amount to the appellant – firstly to acquire appellant‟s stake at a later date as and when the permissible limit increases by FIPB and is to be considered at the time of working of selling price of the stakes as per the formula assigned in clause 16 of the joint venture agreement and the excess amount would be refunded to CUIH and has been actually refunded to CUIH in Assessment Year 2017-18, when CUIH had purchased 23% stakes; and secondly on account of sterilization of the appellant asset not to sell its share in a given period to third person except CUIH.

vi. He further submitted that the investment by way of contribution of capital in the form of shares in Aviva Life Insurance Co. Pvt. Ltd. to acquire a controlling stake to the extent of 74% is a capital asset in the hands of the appellant and not a trading asset. On account of the terms of clause No. 15, it was agreed amongst the joint venture partners that the appellant will not sell its shareholding in Aviva Life Insurance Co. Pvt. Ltd. to third party and thereafter a right to purchase the shares of the appellant was granted to CUIH at a later date as and when the FIPB increases the permissible limit of investment for foreign partners in joint venture. On account of these terms, the capital assets of the appellant, which were in the form of capital contribution in Aviva Life Insurance Co. (P) Ltd. by way of shares, have become sterilized and, therefore, whatever the option price has been received by the appellant 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 offshoot of any business transaction with CUIH but is linked towards the capital asset and is a capital receipts.

viii. On account of the sterilization of the appellant’s shareholding not to sell shares to third person in the given period, the option price was payable to the appellant. Had the appellant’s shares not sterilized, no option money would have been payable to the appellant. As per the terms of the JV agreement, the amount of option price, which was to be retained by the appellant, had to be determined at the time of sale of shares to CUIH and depends upon the market value of shares at the time of exit, which too depends upon the increase of controlling stakes by CUIH as per the permissible limit approved by FIPB and formed part of the selling price of stakes made by the appellant. It has to be appreciated that whosoever is interested to acquire controlling stakes in a company or increase of stakes in a company, the said person has to cough out the price more than the market value on the stipulated date, but the quantum of price of such controlling stakes cannot be separated from the price of share on which transaction takes place because it is incidental to the holding of investment.

ix. He further submitted that the right to purchase shares granted by the appellant to CUIH under the joint venture agreement is not a separate right or limb of the transaction, but it is an incidence arising out of holding of shares by the appellant in Aviva Life Insurance Co. (P) Ltd., which cannot be segregated from shares as presumed by the Pr. CIT. Similarly, as far as the accretion to shares is concerned, the investment in Aviva Life Insurance Co. Pvt. Ltd. was as a capital contribution in the form of shares for acquiring controlling interest to the extent of 74% in the company and is a capital asset in the hands of the appellant. It was not the object of the appellant to deal in shares of Aviva Life Insurance Co. Pvt. Ltd. and cannot be because the shares of Aviva Life Insurance are also not tradable. It is not a listed company. The period of holding of investment in Aviva Life Insurance itself indicates that it is a capital investment and accordingly the accretion thereto is also in the capital field as held by the Punjab & Haryana High Court in the case of CIT vs. Sonia Uppal, 367 ITR 70. After acquiring the shares in Aviva Life Insurance Co. Pvt. 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 market value as determined at the time of exit formed the selling price of stakes of 23% and had offered the same for the purpose of computation of capital gain. Therefore, the receipt of option price and accretion to the capital by no stretch of imagination can be held to be a business. As per the terms of the joint venture agreement, there is no guaranteed return to the appellant. Under the joint venture agreement, at the time of exit, a formula has been prescribed to work out the minimum and maximum selling price and that too depends on the market value of shares at the time of exit. More the market value requires, more refund of option money.

x. With respect to Ld AO‟s observation that no part of the advance option money received from CUIH was adjusted against receipt due on sale of shares and refunded to CUIH even when there was divestment of the stake of 23% in 2016, he submitted that such observation of the AO is contrary to the facts available on record. It is stated that in India the joint ventures between a resident of India and foreign concern requiring foreign investment, the same is controlled by FIPB, established by Government of India. In subsequent year, when the FIPB increased the permissible limit by a foreign party in India from 26% to 49%, the joint venture partners applied to FIPB for the approval of transfer of 23% stakes from appellant to CUIH. The FIPB in turn vide letter dated 18th March 2016 allowed CUIH to increase its shareholding in Aviva Life Insurance from 26% to 49% by way of transfer of 23% shareholding currently held by Dabur for a consideration of Rs. 940 crore being the market value of shares subject to the condition that the investment will be made out of the remittance of foreign exchange received through normal banking channels as per RBI Notification No. FEMA 20/2000-RB (Transfer or Issue of Security by a Person Resident outside India) dated 3rd May 2000, this approval was also subject to compliance with IRDA Rules, and Regulations as mentioned by FIPB letter itself. Thereafter, the company got approval from IRDA with regard to increase in shareholding from 26% to 49% vide letter dated 1 April 2016. This condition as made by FIPB was also in consonance of clause 16A of the agreement, which deals with the repayment of option price by Dabur to CUIH. As per clause 16A, it is clearly stated that 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 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 difference whether the amount of option money is refunded out of the receipt of market value or from other sources, but the fact remains that the same has been actually refunded. Therefore, in view of above facts, from observation of the AO that none of the amount received by the assessee as option price has been refunded is wrong. It may be mentioned here that the ascertainment of quantum of refundable option money depends upon the market value of the shares on the date of transfer of shares in terms of the formula given in Schedule 3 of the joint venture agreement. More the market value of shares more is the amount of refund of option money. The quantum of refund of option money cannot be determined in any of the circumstances on the date of its receipt , because the final determination of the option money forms part of the exit price of the shares transferred, the appellant also offered the same in Assessment Year 2017-18 when the stake of 23% held by the appellant was transferred to CUIH under the head “Capital Gain”.

xi. It has been contended by the AO that there is no restraint in joint venture agreement on use of option money. It was not put in any escrow account, but it was used by the appellant as per its own free will because none of it was to be refunded. It is settled proposition of law as held by Supreme Court in the case of Kishan Chand Chela Ram vs. CIT in 46 ITR 640 at page 645, that the nature and quality of the receipts has to be examined at the time of its receipt. Such quality cannot be affected or altered by subsequent act or conduct. There is no prohibition under the law that in every case where the amount has been received in advance and the transaction has taken place later, the amount so received would be kept in escrow account. It depends upon the terms of the contract and faith of the parties thereto. However, by not putting the amount in escrow account, there is no prejudice caused to the Revenue because whatever income has been earned by the appellant on account of the utilization of the option money received, the appellant has offered the same in its return and paid the tax thereon. Had the amount been put in escrow account, no income would have been earned by the assessee and no tax would have been paid on the amount earned by the appellant. Hence, by not putting the option money in escrow account, no adverse inference can be 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 Page 30 of 155 be applied in accordance with legal rights of the parties to the transaction. As per the agreement, the option money is paid by CUIH not on account of the finance provided by the appellant but it has been paid – firstly on account of sterilization of right to sell the shares in a given period except to CUIH and on account of such sterilization of right, the option money was paid by CUIH to the appellant and its accrual to the appellant and quantification depends upon the ascertainment of the exit price of shares in terms of the joint venture agreement as per clause 16 read with Schedule 9 of the joint venture agreement. Therefore, the option money cannot be considered as interest because it is paid annually. The payment of option money annually may be convenient to CUIH. However, it is settled proposition of law as held by the Privy Council in the case of Bank of Chettinad Ltd. vs. CIT in 8 ITR 522, as referred by the Supreme Court in the case of Motors & General Stores (supra) that if action seeking to recover the tax cannot bring the subject within the letters of law, the subject is free, however apparently within the spirit of the law the case might otherwise appears to be. Hence, the very inference of the Pr. CIT that option money received @ 20% is akin to interest is wrong and based on his own assumption not permissible under the law. On the contrary, the quality of receipt has to be seen with reference to the terms and conditions of the joint venture agreement under which the option money received.

xiv. Rebutting the presumption that ld 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, is taxable as a revenue receipt and accrued year after year. He submitted that 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. 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 predetermined price. The predetermined price, for the purpose of the said purchase and sale, was prescribed as the equity contribution plus return at 11% per annum compounded annually on the said contribution over the period of holding. Besides this predetermined price, Mahindra Telecom was also entitled to a call option fee on each anniversary of the investment date at 5.5% of its equity contribution. On such facts, the ITAT inferred that this predetermined price is independent of the actual value of the shares or the performance of the company during the holding period. The future price would depend not on the performance of the company but is predetermined and would be calculated on annual yield and this is the essence of agreement, which lands it with a character of a financial instrument towards earning income at a defined (agreed) rate rather than a promoter investing for acquiring a stake in a particular business. In paragraph 4.8, the ITAT further observed as under:

“…. In this regard, we may also add that we are conscious that the agreement has not been doubted by the Revenue and the same shall, accordingly, have to be given its legal effect. As also explained earlier, notwithstanding the investment being admittedly in shares, i.e., called risk capital as it entails risk, the assessee company is, by the terms of the arrangement, insulated from the consequence of holding such capital, i.e., does not bear any risk. Its return is contractually defined and, accordingly, the shareholding sans the attributes of risk capital or of such an investment. Irrespective 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?”

xv. In the case of the assessee, such is not the 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.

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 investment. The exit price at the time of exit/sale of shares was not fixed on the basis of annual yield as in the case of Mahindra Telecommunications, but exit price was fixed in terms of market value of the shares which would be worked out by an independent valuer at the time of the transaction though minimum price based on the market value has also been given. It was also stipulated in the agreement that in case of option money received is more than the selling price determined as per the terms and formula given in the agreement, the same would be refunded to CUIH and in fact in Assessment Year 2017-18 the appellant had refunded the excess option money proportionate to 23% stakes amounting to Rs. 478 crore to CUIH. In the case of Mahindra Telecommunications (supra), nothing out of option money was to be refunded but in the case of appellant, the option money is refundable and its quantum depends upon the market value of shares, which would be worked out by independent valuers. However, there was no occasion before the Mumbai Bench of the ITAT to consider the various judgments cited by the appellant in earlier paragraphs. He submitted that 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 predetermined price. The predetermined price, for the purpose of the said purchase and sale, was prescribed as the equity contribution plus return at 11% per annum compounded annually on the said contribution over the period of holding. Besides this predetermined price, Mahindra Telecom was also entitled to a call option fee on each anniversary of the investment date at 5.5% of its equity contribution. On such facts, the ITAT inferred that this predetermined price is independent of the actual value of the shares or the performance of the company during the holding period. The future price would depend not on the performance of the company but is predetermined and would be calculated on annual yield and this is the essence of agreement, which lands it with a character of a financial instrument towards earning income at a defined (agreed) rate rather than a promoter investing for acquiring a stake in a particular business. In the case of the assessee, such is not the 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 capitalized.

xix. In the instant case, the shares equivalent to 23% of the stakes held by the appellant have been transferred in the Assessment Year 2017-18 when the FIPB granted approval to CUIH for increase in stakes in the joint venture company M/s Aviva Life Insurance from 26% to 49% and at the time of transfer, the assessee delivered duly completed transfer deeds along with the share certificates. The appellant-assessee has disclosed the capital gains on sale of 23% stakes in Aviva Life Insurance and has offered the market value of the shares plus the proportionate option price, which was to be retained by the appellant-assessee, has been ascertained and accrued on the date of exit as per the formula given in the joint venture agreement. Under the law, the amount can be said to have accrued to an assessee only when the assessee acquires a right to receive that income and a debt has become due to the assessee. In the instant case, right to retain the option money accrued to the assessee only on the date of exit and accordingly has been declared by the assessee in Assessment Year 2017-18.

xx. Apart from above, there is one another aspect of the matter is that the joint venture agreement was made in the year 2001 and after incorporation of the joint venture company; the appellant-assessee was in receipt of option price in terms of the joint venture agreement from CUIH. The same has been disclosed by the assessee year after year in the notes forming part of the annual profit & loss account and balance sheet enclosed with the return. In earlier years, the Assessing Officer, after examining the terms of the joint venture agreement as well as the nature of receipts and the Notes of Accounts appended to the balance sheet, had made no addition and accepted the appellant-assessee ‘s contention that it would be considered at the time of exit. Since then, there is neither any change in the facts of the case or the circumstances in relation thereto, and once it has been accepted by the Assessing Officer in the earlier years, then on the principle of consistency in subsequent years the Assessing Officer cannot change the stand.

xxi. It has been observed by the Assessing Officer that there is no clause to refund the option money in case the Govt. policy regarding participation of FDI insurance business does not change in such situation, 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 time of sale of shares by assessee to CUIH.

ii. The Decision of Mumbai ITAT In case of Mahindra Telecommunications does not apply to the facts of the case, distinguishable.

iii. On the principles of consistency, which is accepted since 2001 no year but disturbed only in this year, is acceptable in absence of any change in facts of the case.

Arguments on behalf of Revenue

22. Learned departmental representative submitted that the contention of the appellant that the merits of the issue raised in the appeal for assessment year 2015 – 16 are covered by the decision of this honourable bench for assessment year 2012 – 13 and 2013 – 14 is wholly devoid of merit. It was submitted that that the decision in assessment year 2012 – 13 and 13 – 14 is with respect to the validity of the invocation of jurisdiction u/s 263 of the act and the bench had taken a conscious and open decision to not to go into the merits of the addition. He submitted that, as the bench has not taken any view on the merits of the addition. Had the addition been deleted or the views of the CIT on merits had been rejected then only the issue would have been covered on merits. However, it was submitted that learned CIT had only taken the stand that the learned that AO had completed the assessment without conducting necessary enquiries regarding option money and accordingly he directed the learned assessing officer to pass a fresh order of assessment after conducting such enquiry. He further stated that the revenue is in appeal before the honourable High Court against the aforesaid decision of the coordinate bench. In nutshell, he stated that findings given against the revenue with regard to the invocation of jurisdiction u/s 263 of the income tax act cannot act as a bar against the merit of the addition made in a different year by the learned assessing officer. He further stated that the principle of Estopple and Resjudicata do not apply to the income tax proceedings and the issue is required to be tested on its own merit. Therefore he submitted that the issue raised in the present appeal are not covered by the decision of the coordinate bench in the matter needs to be examined on the merits of the addition. To support his contentions, he relied upon the decision of the honourable Supreme Court in case of RameswaraLal Sanwarmal versus Commissioner of income 122 ITR 1, state 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 first day even before start of any business of Aviva life insurance Co Ltd and it is therefore in the nature of interest.

ii. Return on share investment cannot be decided on the first day even before start of business of the company. It is therefore, not a return on share investment per se.

iii. Option price is a recurring annual return. Assessee is getting recurring annual income at a fixed rate of 20% per annum on its investment. That is clearly revenue in nature.

iv. Shares never give annual recurring income and that also at a fixed rate.

v. Minimum guaranteed return as per the joint-venture agreement even in was case when market value of shares are zero, assessee will get same minimum guaranteed return of option price plus subscription price as per clause number 16.6.1. Hence assessee will retain option price of ₹ 2480.48 crore and will further receive ₹ 4 761.12 cores.

vi. When market value of share is zero, assessee will get zero return on shares. Joint-venture agreement ensures a fixed minimum guaranteed return, thus converts its nature from share transaction to a financial transaction.

vii. Market value of share does not change amount of return. Whether market value of share is zero, or ₹ 26.72 ₹ 20.38 (as in case of the assessee) return remain same i.e. equal to option price + subscription price. For this, he referred to table A page number 12 of his submission. He referred to the chart wherein he has stated the calculation of the total amount received by the assessee for different market value is of Aviva life insurance Corporation says as per different clauses of the joint-venture agreement read with schedule 3 and schedule 9 of the joint-venture agreement. Therefore he draw a conclusion that whatever may be the market value of the shares, entire option price is retained because amount retained by the assessee is always higher or equal to option price. He further stated that ₹ 2941.60 crore is minimum guaranteed return on assessee’s investment even when market value of the share is zero.

viii. For different market value of shares return will be different in real share deal. This proves that the market value of the share has no relevance and return on such investment is not governed by market forces or by performance of company but received at a predetermined rate, 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 ₹ 26.72 or ₹ 20 ₹ 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 ₹ 2480.48 cores, first receives from foreign partner sale consideration of 23% stake i.e. ₹ 940 crore before giving a refund of ₹ 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. Option price guarantee, it is submitted that assessee holds ₹ 237 crore option price guarantee provided by CUIH which can be invoked if CUIH fails to pay option price before 31st January of any year and he referred to clause number 3.1.6 B of the joint-venture agreement.

xiv. In a real and genuine share deal, holding the share certificate is the only guarantee. A real share deal does not involve any such bank guarantee.

xv. Option price payment or user not restrained by any clause in joint-venture agreement. He submitted that the payment and use of option price is not restrained by any clause in joint-venture agreement. In fact option price is invested by assessee in unsecured loans to sister concerns and mutual funds.

xvi. Recurring annual income is not restrained and not put in any escrow account.

24. With respect to the issue whether option price is pure interest or it consist of some part of capital also, he submitted that option price is pure interest income received at the rate of 20% on investment – but chart submitted by him, the capital or investment party separately received a subscription price in the year of the investment. Hence he submitted that the entire receipt of option price is taxable as a revenue receipt as interest. He submitted that no part of option price consist of capital or investment portion. It is also not a real share deal but a financial transaction is joint-venture agreement override share transaction and despite holding controlling stake, assessee has no control. He submitted that assessee receives option price in three different eventualities referring clause number 16.1, 17.1.11 and clause 20.2 of the joint-venture agreement accordingly, he stated that the payment of option price by CUIH to assessee in all eventualities is an essence of JV agreement.

25. He submitted that in case of clause number 16.1 the assessee will sale its stake, but still that is not capital for various reasons as stated above. In case of clause number 17.1.11, CUIH when sale its stake in yet assessee will be entitled to retain option price. Hence, it has no relation to the sale of stake by the assessee. Even in case of winding up as per clause number 20.2 assessee is bound to receive option price, which established that it is not a share transaction.

26. He submitted that out of ₹ 246.84 crore option price received by the assessee in assessment year 2015 – 16 no amount is offered as income in assessment year 2015 – 16 and only ₹ 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 ₹ 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 tax act, option price income has accrued and received in assessment year 2015 – 16, how it can be taken to another year i.e. assessment year 2017 – 18. He submitted that assessee has also claimed to explain as to how even in assessment year 2017 – 18 only a part of such income i.e. only ₹ 76.72 crore is taken in by it is another part i.e. ₹ 170.12 crore was not offered as an income. He stated that assessee is also claimed to explain how income relates to assessment year 2017 – 18 when it has no relation with divest by, it is already ascertained being 20% of investment and it is same minimum guaranteed return irrespective of the share value.

28. He further submitted that option price accrues and is being received on time basis of the fixed rate of 20% on investment. It is the income, which is already accrued or arisen to the assessee that is taxable as held in case of state bank of Travancore 1986 AIR 757. Further interest is defined in AS -9 as a charge for the use of cash resources or the amount due to the enterprise and is a well settled to accrue on a day-to-day basis i.e. irrespective of when it is due for payment as held in Rama Bai V CIT 181 ITR 400 (SC) it was further stated that the call option fee is for option price received by the assessee for giving CUIH first to purchase its 74% stake would qualify as interest u/s 2 (28A) of the income tax act as held in the case of Mahindra telecommunications investment private limited 159 ITD 600. He further against has that it is a fixed annual return at the rate of 20% rate hence it is in nature of interest only, which can never be capital.

29. He further referred to the question that what is the business of the assessee and stated that the business of the assessee as per memorandum and articles of association is making of investment being an investment company. Hence, investment in shares of only the life insurance Corporation represents an opportunity for the assessee to on income on such investments made in the course of business returning the income by way of option price, as business income. He further placed reliance on the decision of honourable Supreme Court in case of Sardar Indersingh & Sons Ltd versus CIT 24 ITR 415.

30. With respect to the intention to sale shares he stated that assessee has expressed its intention in the joint-venture agreement to sale its 74% Page 44 of 155 stakes to CUIH on first 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 submitted that income and 74% shareholding of assessee share in Aviva life insurance Co Ltd has resulted into 20% fixed income annually on subscription price as per schedule 1 of the joint-venture agreement which comes to ₹ 2480.48 cores from assessment year 2003 – zero for two assessment year 2017 – 18. He stated that fixed returns never occur in share deal and make it a financial deal. He submitted that assessee is entitled to get only dividend income, which is Rs Nil over the years if it is a real share deal.

2) With respect to any surety of getting return in share transaction on the date of investment in shares, he submitted that on the day of signing of the joint-venture agreement on 7/8/2001 return on 74% stake of assessee is determined at a minimum guaranteed amount of option price plus subscription price. Not only that the payment of such option price is guaranteed to assessee and has a guarantee of ₹ 237 crore as per clause number 3.1.6 and clause 16.2 and clause 40.1 of the joint-venture agreement. Such income is guaranteed even before start of the company’s business irrespective of the company’s performance. In case of a real share, deal there is no guarantee of any return on investment in shares as it depends on the performance of the company and the performance of in for insurance sector.

3) With respect to the minimum guaranteed return, he submitted that in the real purchase of shares there is no guaranteed return. However in the case of the assessee according to clause number 16.6.1 and schedule 3 provide that even when a market value of share is lower than the subscription price, CUIH shall pay to assessee difference between subscription price and market value Simon tenuously with the sale of assessee’s shares and assessee shall be entitled to retain the option price received on its shares. That means even when market value of the share is zero assessee will get Rs 10 per share of subscription price from CU and will retain option price received of Rs 2048.48 cores that is the total amount received by assessee will be Rs 2941.60 crore same is received by the assessee in real case of assessee when market value is only ₹ 20.38 per share. Therefore, assessee is entitled to receive even when share prices zero minimum guaranteed return, which makes it a financing deal as in real share deal assessee will help to refund entire option price.

4) He further submitted that assessee has received ₹ 26.72 per share, not on sale but much prior to it. In the real share transaction, the assessee will get market value of ₹ 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 share also purchases share held by the assessee.

7) With respect to the obligation it is submitted that as per clause number 7.2.7 of the joint-venture agreement assessee has no obligation or liability in terms of giving any representation/warranties regarding any matter whereas in the real sale deal of shares a majority shareholder assessee should have responsibility to give representation and warranties for the company if such situation arises.

8) In case of winding up of a company , he submitted that as per clause number 20.7 of the joint-venture agreement assessee shall have no obligation towards the creditors of the company in case of winding up and assessee will get option price on subscription price as per clause 20.2 even in case of winding up. He submitted that if assessee is a real investor both the shareholders would be responsible to settle outstanding obligation of the third parties and shareholders will get any return on shares only after first being debts and liabilities of the company.

33. Thus he stated that the above joint-venture agreement clearly establishes CUIH as the real holder of the company Aviva life insurance Corporation and assessee is only a dummy shareholder and name lenders and the entire arrangement is done to circumvent the foreign direct investment restriction of 26% and give control in the hands of foreign investor despite being a minority stakeholder. He therefore submitted that the joint-venture agreement thus override sale transaction and makes it a pure financial transaction where company is being controlled and run by a minority stakeholder while assessee receives a fixed hefty annual return of 20% on sum invested in subscription price of its 74% stake in such annual return is decided on the very day of entering into the joint-venture agreement when company has not even started his business.

34. He submitted that substance that is to prevail over the form. The Joint venture Agreement is accordingly found to be a manner of investment akin to a financial arrangement yielding return of income as a function of time and therefore the issue is squarely covered against the assessee by the decision of the coordinate bench in case of Mahindra telecommunications investment private limited (2016) 69 taxmann.com 431 (MUM)

i. The undisputed facts of both the cases (the case of the appellant and that of 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 the present case depict the picture that CUIH (“the foreign company”) shall hold the shares in the Indian company keeping regard to the permissible FDI percentage and in the event of relaxation of such FDI percentage, the foreign company shall be obliged to increase its shareholding in the paid up capital of the Indian company to the revised applicable percentage by purchasing the required number of shares. These vitals remain the same. In the present case, even the powers of management vested with the directors appointed by the foreign company.

iii. The appellants in both cases were subject to a clause in the agreement relating to the sale of their equity shares as per which the Indian company was first required to offer its shares for sale to the foreign company along with having the right to first refusal and of option price, according to which the Indian investee company granted to the foreign company an irrevocable option to purchase its shareholding keeping in view the applicable FDI policy. It needs, therefore, to be appreciated that object, mode and manner of investment by the Indian company both in the case of the appellant and in the case of Mahindra were the same. The vital factual matrix remaining the same, the decision of the coordinate Bench applies with all force in this case.

iv. The issue that crops up in the case of the appellant and also in the case of Mahindra is whether any income has accrued to the Page 49 of 155 appellants in the given facts and circumstances. The Hon’ble Bench’s decision in the Mahindra’s case goes in depth of this issue to resolve it having due regard to the existing principles and jurisprudence. The appellants were subject to an agreement in both the cases whereby they had an irrevocable option to sell their respective shareholdings to the foreign investee company at the agreed terms and conditions of the option price. In the case of Mahindra, the option price was pre-determined at 11% p.a. whereas in Dabur, the option price money is linked to the market and fair value of the shares as agreed upon by the contracting parties. However, it would be pertinent to note that in both the cases, income began to accrue to the Indian entities from day one, which would be realizable only on the sale of shares as they are subject to their respective agreements.

v. Pursuant to the agreements, the appellants were required 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 relevance of Accounting Standards issued by the ICAI including the decision in the case of J.K. Industries v. UOI 2008/ 297 ITR 176 (SC). These standards too place heavy reliance on the principle of substance over form as major consideration for the selection of accounting policies. Both the set of Accounting Standards are legally binding and are in complete harmony regarding the concept of‟ accrual‟ in preparation and presentation of financial statements. The coordinate bench has reached this finding after a very detailed examination of the issue.

vii. The Coordinate Bench has further stressed on the very nature of the agreement, which provides that the consideration to the Indian company is getting paid on transfer of shares along with the return on capital. It does not impact the substance of the agreement, which was to secure investment for a specified period. It only represents the form in which the return is being paid.

viii. In the present case of the appellant as well, a right to the Assessee arises on the basis of the agreement entered into with the foreign company. The right to call or put in the event of exercise of the option is a separate and distinct right representing increase in the value of the shareholding, which is the subject matter of the option. These were construed as two rights, i.e. enhancement in value of shares and the right to option, subject to the satisfaction of the terms of the agreement. It is both the right in conjunction that results in the earning of income or the accrual of the right to receive, leading to a receivable. It was held that even though the amount stands received as per the agreement on a future date, the right to receive inures instantly. The two are only modes through which the appellants earn a return on investment, accruing on the basis of time. The option price being paid only on the difference on the time of divesture was held to be of no significance.

ix. Both the cases are similar in the view that the return on investment in shares would be received only as a part of the sale price and cannot be received independent of it or even be notionally received due to the terms of the agreement being as such. It is to be noted that the fair price is independent of the actual value of shares or the performance of the company. Where one predetermines the same along with a guaranteed rate of 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 enure only on the sale of shares and not at any earlier period of time. The coordinate Bench duly noted that the investment in shares is called risk capital and the appellant, by the terms of the agreement, does not bear any such risk. Such investment can in substance, be regarded as an investment held in the form of shares for a definite period at a particular return, which would be the cost to the transferee of shares, towards the time value of funds. The sale of shares is only to be construed as the form in which the income manifests.

xii. The other argument of the appellant was also duly addressed by the coordinate Bench. The argument that the sale of shares was a non-definite event as the agreement only gives a right to the parties to purchase or sell the shares. This is a fact that the agreement provides for a minimum holding period which is subject to the applicable FDI rates. It is to be noted that once FDI percentages are relaxed, the irrevocable option is binding on the other party. The nature of the income accruing was also adjudicated by the coordinate Bench keeping in view the wide amplitude of Section 2(24) of the Act and considering the findings of the Hon’ble Supreme Court in Emil Webber v. CIT 1993 200 ITR 483.

xiii. Keeping in view the factual matrix of the two cases and in depth analysis of all the issues raised, the inevitable inference is that the decision in the case of Mahindra applies with all force in the case of Dabur as well. A decision based on sound principles cannot be brushed aside by pointing minor differences here and there, the difference not being important enough to change the course of the decision.

xiv. Ld. AR submitted that in the case of the appellant that there was no fixed return on investment in the Assessee ‘s case as was the case in Mahindra. This is not correct. The calculation of total amount received by assessee for different market values of ALIC shares is computed in the table below, as per different clauses of JV Agreement read with schedule 3 and schedule 9: –

MV = Market Value

OP = Option Price = 2480.48 cr. On 1,48,36,26,000 share

SP = Subscription Price =10