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

S. N0.	Clause of JV Agreement	OP	SP	MV	Formula	OP received [Col. 7]	Amount to be received first from CUIH	Amount to be refunded to CUIH in 1 month of receipt of market value	Net amount retainer by ‘A’ [Col. 10]
1.	16.8.3.4	16.72	10	0	MV<SP	2480.48 crore	461.12 crore	NIL	2941.60 crore (OP+SP)
2.	16.8.3.3	16.72	10	26.72	MV=SP +OP	2480.48 crore	2941.60 crore	2480.48 crore	2941.60 crore (OP+SP)
3.	16.8.3.2 (Assessee’ s case)	16.72	10	20.38 (Actual Case)	MV<OP +SP	2480.48 crore	940 crore (20.38 X 46,11,27,000)	478.7 crore (MV-SP)	2941.60 crore (OP+SP)
4.	16.8.3.1	16.72	10	100	MV>OP +SP	2480.48 crore	4611.27 crore	2480.48 crore	4611.27 crore

xv. From this table it is amply clear that whatever may be the market value of shares, the entire option price is retained as the amount in Col. 10 in all scenarios higher or equal to the amount in Col. 7. This is even further clarified when we see that INR 2941.60 cores are the minimum guaranteed return on the Assessee ‘s investment even when the market value of the shares is zero. This shows that there is no refund in the case of Assessee as well.

xvi. Therefore, in light of these submissions, it is prayed that the decision in the case of Mahindra Telecommunications be followed.

35. Thus, he defended the order passed by the learned lower authorities. Rejoinder of Appellant 36. In rejoinder the learned authorised representative payment to contested that the issue is covered in favour of the assessee by the order of the coordinate bench for assessment year 2013 – 14 in 2014 – 15 while deciding the appeal of the assessee against the order passed by the learned and CIT u/s 263 of the act. He submitted that:-

Rejoinder of Appellant

36. In rejoinder the learned authorised representative payment to contested that the issue is covered in favour of the assessee by the order of the coordinate bench for assessment year 2013 – 14 in 2014 – 15 while deciding the appeal of the assessee against the order  passed by the learned and CIT u/s 263 of the act. He submitted that:-

“ISSUE ‘A’

1. In paragraphs 1 to 6, it has been contended by the Revenue that the reliance by the assessee on ITAT order for Assessment Years 2013-14 and 2014-15 (wrongly mentioned 2012-13) is devoid of merit as the ITAT has not dealt the issue on merits because the learned CIT in his order u/s 263 of the Income-tax Act, 1961 (the Act) had not dealt the issue on merits. It was stated by the Revenue that in the orders u/s 263 the learned CIT had also taken the stand that the AO has completed the assessment without conducting enquiries regarding option money and that he had directed the AO to pass fresh assessment orders after conducting such enquiries.

1.1 It is submitted that for the purpose of ascertaining whether the AO had taken a plausible view at the time of completion of regular assessment proceeding, the Tribunal specifically considered the merits of the matter and has returned a categorical finding on the issue. In the order u/s 263 of the Act, the learned CIT first had reproduced the notice u/s 263 of the Act, then thereafter had reproduced the various replies as submitted by the assessee in response to queries made by the CIT from time to time about the terms and conditions of the joint venture agreement and then thereafter at page 31 of the order, the learned CIT again reproduced the fresh query letter and then reproduced the various replies filed by the assessee .

1.2 At page 35 of the order, the reproduction of assessee ‟s reply to the query of learned CIT that as to why the additions be not made in view of the judgment of the Mumbai Bench of the Tribunal in the case of Mahindra Telecommunications Investment Pvt. Ltd. vs. CIT in 180 TTJ 434 (hereinafter referred as Mahindra Telecom), was made.

1.3 At page 44 of the order, the learned CIT has further reproduced another notice dated 16th January 2018 wherein one of the queries of the learned CIT was that as to why the option money and sale of such shares be not considered as business income. Thereafter, the learned CIT has reproduced various submissions on merits as well as the law made by the assessee .

1.4 At page 53 of the order, the learned CIT had reproduced the decision of the AO made in Assessment Year 2015-16 vide order dated 29th December 2017 wherein the AO, after following the judgment of the Mumbai Bench of the Tribunal in the case of Mahindra Telecom (supra) held that the option money as received is taxable and then made the addition of Rs.246.84 crore.

1.5 At page 57 of the order, in paragraph 18(1), the learned CIT has narrated and discussed the reason for proceeding u/s 263 of the Act and then held that the option money on granting of first right of stake pertains to CUIH and accretion in shares arising out of the joint venture agreement clearly falls under the head “Business Income” and this proves that the accounts of the assessee are false.

1.6 Thereafter at page 60, the learned CIT observed that on the nature of such receipt named as option money, the AO, while completing the assessment for Assessment Year 2015-16, had deliberated at length, and held that such income recurring annually and accordingly is a revenue/business income.

1.7 Thereafter, while considering the objection of the assessee, the Pr. CIT again observed that the option money as well as the appreciation will be assessable as business income and after pointing out the various case laws (which were primarily discussed and relied by ITAT Mumbai Bench in the case of Mahindra Telecom) again held that it is the business income and held that nature of income arising from sale of such shares squarely falls under the head “Business Income” and not capital gain and also held that Dabur is a dummy partner though in the last concluding paragraph the learned CIT had summarized the various issues arising out of joint venture agreement and after giving his opinion and comments upon this, held that because at this stage, the AO has not applied his mind on such issues, hence the order is set aside and then directed to make the enquiries.

1.8 In such situation, when the learned CIT has discussed the related issue on merits based on the judgment of Mumbai Bench of the Tribunal in the case of Mahindra Telecom (supra) as well as the conclusion arrived at by the succeeding AO in Assessment Year 2015-16 (who himself has relied upon the judgment of the Mumbai Bench of the Tribunal in the case of Mahindra Telecom) and then holding that the AO has not applied his mind to such issues and then directing the AO to make enquiries on this line, amounts to misleading the judicial process because once a senior officer makes certain observations, then practically it is impossible for the subordinate officers not to follow that and in this case also the AO in the proceedings undertaken in the furtherance of order u/s 263 of the Act has also confined himself to the findings and observations of the learned CIT and then made the addition accordingly, which is very much clear from the orders passed by the AO in furtherance of order u/s 263 of the Act.

1.9 However, having regard to such factual situation, when the assessee has challenged the order u/s 263 before the ITAT, the Hon’ble ITAT vide its order dated 11th March 2019 first discussed the factual aspects of the issue with reference to the joint venture agreement and then decided the issue on merits also and then held that the orders passed by the AO cannot be termed as erroneous.

1.10 The Hon’ble ITAT in paragraph 39 onwards has dealt with the issue:

(a) In paragraphs 39 to 42, the Hon’ble ITAT judicially noticed that earlier assessments are mostly completed as scrutiny assessment and the queries were also raised by the AO in relation to the joint venture agreement and option money. In paragraph 43, the Hon’ble ITAT has clearly held that the joint venture agreement right from the first year of scrutiny assessment have been scrutinized by the AO along with the balance sheet and notes to accounts and hence it cannot be said that right from Assessment Years 2005-06 to 2011-12, the AO continuously ignored the assessment of the option money.

(b) In paragraph 45, the Hon’ble ITAT held that because the constitution of the assessee , the joint venture agreement and the joint venture company was examined by various Government authorities, hence by no stretch of imagination the assessee can be termed as a dummy stakeholder. The ITAT further observed that the appointment of a CEO to run day-to-day functioning of the business is the prerogative of the Board of Directors wherein majority of the Directors is held by Dabur.

(c) In paragraph 46, the Hon’ble ITAT observed that the Pr. CIT has not understood the joint venture agreement and has been carried away by drawing adverse inference from certain clauses of the joint venture agreement. The Hon’ble ITAT further held that it is incorrect to hold that the assessee had purchased shares, as the same is business of the assessee . The investment in Aviva Life Insurance was a capital contribution in the form of shares for the purpose of acquiring controlling interest to the extent of 74% in the company and is definitely a capital asset in the hands of the company.

(d) In paragraph 47, the Hon’ble ITAT observed that in the case of shares, which are a movable property, the transfer completes when the duly completed transfer deeds along with share certificates are delivered to the transferee. Thus the transfer of shares giving rise to capital gain, if any, is completed in the year in which the shares are delivered to the transferee and this aspect was considered by the AO in the past assessment years. Therefore, no adverse view was taken, as there was no sale of shares in those years.

(e) In paragraph 48, the Hon’ble ITAT observed that the capitalization of interest has also been correctly made as the same has been incurred in acquiring the capital asset.

(f) In paragraph 49, the Hon’ble ITAT has dealt the basic issue of the case and observed that the bone of contention is as to whether the option price received by the assessee is income or capital receipt.

(g) In paragraph 50, the Hon’ble ITAT observed that both the parties agreed not to sell shares to the outside parties and the first right of refusal in the case of Dabur shares would be of CUIH and on account of such restrictions, resulted into sterilization of Dabur holding and CUIH agreed to pay option money as described in the joint venture agreement and would be refundable at the time of transfer of shares to CUIH and the manner and mode as well as quantum of refundable option has been described in article 16A of the joint venture agreement which has been duly approved by RBI also and because the transfer of 23% stakes by the assessee to CUIH took place in Assessment Year 2017-18, the allegations made by the learned CIT may be relevant for Assessment Year 2017­-18.

(h) In paragraph 53, the Hon’ble ITAT further observed that since the transfer of shares took place in Financial Year 2016-17 relevant to Assessment Year 2017-18, the AOs in the earlier assessment years rightly took a view that the capital gain, if any, would arise in Financial Year 2016-17 and therefore did not take any adverse view on the transactions done by the assessee since the option price received is totally linked with investment made by the assessee as a capital contribution in the company promoted by it and has a direct nexus/link with divestment of such holding in favour of CUIH which happened in Financial Year 2016-17.

(i) In paragraph 54, the Hon’ble ITAT held that the allegation of Pr. CIT that the investment in shares of Aviva Life Insurance is business of the assessee is ill-founded and contrary to the facts of the case.

(j) In paragraph 56, the Hon’ble ITAT reproduced the observation of Supreme Court made in the case of CIT vs. Maheshwari Devi Jute Mills Ltd. in 57 ITR 35 differentiating the income and capital.

(k) In paragraph 57, the Hon’ble ITAT, while considering the judgment of the Supreme Court in the case of P.H. Dwivecha vs. CIT in 48 ITR 222, observed that the amount involved is large or that is periodic in nature, has no decision bearing on the matter, whether it is capital or income. It depends upon the quality of the receipts in the hands of payee.

(l) In paragraph 59, the Hon’ble ITAT observed that the joint venture agreement was made not to carry any business transaction between Dabur and CUIH. It was made to co-promote the company which would carry on the insurance business, and the investment in the co-promoted company was not the business of Dabur but the investment as capital contribution. The option price received by Dabur on account of this investment has to be taken into account for working out the selling price of stake in Financial Year 2016-17.

(m) In paragraph 65, the Hon’ble ITAT considered the judgment of the Jurisdictional High Court in the case of Honda SIEL Power Products Ltd. in 333 ITR 547 wherein the Jurisdictional High Court had observed while considering the provision of Section 263 of the Act that generally the issue which are accepted by the AO do not find mention in the assessment order, but that does not mean that the AO has not applied his mind. It cannot also be said that the AO has failed to make any enquiries because no further enquiry was necessary, more particularly when all the facts were before AO.

From the above discussion and observations made by the Hon’ble ITAT in Assessment Years 2013-14 and 2014-15, it is clear that the Hon’ble ITAT, while holding that orders as passed by the AO in Assessment Years 2013-14 and 2014-15 were not erroneous, has considered the merits of the case also, and after considering each and every allegation made by the AO/Pr. CIT, the ITAT has returned a categorical finding in respect of:

(a) investment of the appellant in Aviva Life Insurance has been held to be a capital asset in the hands of the appellant;

(b) decision of the Mumbai Bench of the Tribunal in the case of Mahindra Telecommunications Investment Pvt. Ltd. vs. ITO, 180 TTJ 434 is held to be applicable only in Assessment Year 2017-18 when the shares were actually transferred by the appellant; and

(c) option price received is held to be totally linked with investment made by the appellant, having direct nexus/link with divestment of such holding in favour of CUIH and accordingly, such option money has been directed to be considered by the appellant at the time of working out of selling price of stake at a later date when the shares are actually transferred.

2. However, without prejudice to above, it is submitted that:

Principle of consistency and judicial propriety.

(i) In paragraphs 7 and 8, the Revenue has contended that the principle of estoppel or res judicata does not apply to the income-tax proceedings and the findings of the AO/CIT have got to be decided on its own merits.

The Hon’ble Supreme Court in the case of Radha Soami Satsang vs. CIT in 193 ITR 321, while considering the principal of res judicata, observed as under:

“We are aware of the fact that, strictly speaking, res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent case.”

The aforesaid conclusion was arrived at by the Hon’ble Supreme Court after following the observation made by the Supreme Court in earlier matter in the case of Parashuram Pottery Works Co. Ltd. vs. ITO in 106 ITR 1 at page 10 as under:

“At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity.”

The same principle has also been reiterated by the Supreme Court again in the case of CIT vs. Excel Industries in 358 ITR 295.

In the instant case, as judicially noticed by the ITAT in Assessment Years 2013-14 and 2014-15, that in earlier assessments from Assessment Year 2005-06 onwards, most of the assessments were completed as scrutiny assessments and during the course of scrutiny, the AO had examined the joint venture agreements as well as the notes on account attached with balance sheet and had accepted the contention of Dabur and then no additions were made. Such position remains continued year after year and was examined by different AOs and all of them accepted. Accordingly, the Revenue should not be allowed to change the stand when the facts remained the same. Such principle has also been accepted by the Jurisdictional High Court in the case of CIT vs. Neo Poly Pack (P) Ltd. in 245 ITR 492.

(ii) In paragraph 9 of the submissions, some observation of the Hon‟ble Supreme Court in the case of Rameshwar Lal Sanwar Mal vs. CITin 122 ITR 1 has been reproduced.

It is submitted that this observation has been made by the Hon’ble Supreme Court in the context of the issue before it. The issue before the Hon’ble Supreme Court was whether in the absence of a specific plea in an earlier case, can it be said that the issue has been decided impliedly. In such context, such observation was made by the Supreme Court.

However, in the instant case, in earlier years the issue of tax of the option money was examined by the various AOs and made no additions. Since then there is no change in the facts and terms of the joint venture agreement and such position attained finality. The assessment which were made scrutiny assessments u/s 143(3) of the Act, it cannot be said that the AO has not examined any issues nor has not applied his mind (See 256 ITR 1 [Del]) [FB], Kelvinator India Ltd. vs. CIT.

(iii) In paragraph 10, the Revenue had quoted certain observation from the judgment in the case of State of Orissa vs. SudhanshuShekhar Mishra, 1968 AIR 647 (SC). There is no dispute about such observation and such observation is rather beneficial to the assessee .

The assessee also states that without comparing a factual matrix, the judgment of the Mahindra Telecom case cannot be blindly followed.

(iv) In paragraph 11, the Revenue had again contended that in the proceedings u/s 263 of the Act, the CIT had not taken any view on merits and the arguments of Revenue were confined to the merit of CIT’s finding.

As already submitted above in earlier paragraph, the factual position is contrary to the stand of Revenue.

(v) In paragraphs 12 and 13, the Revenue contended that the issue raised in the present appeal is not covered by the decision of the Hon’ble ITAT and the matter has to be examined in the merit of the addition.

As already explained above, the basic issue forming part of the CIT’s order u/s 263 of the Act and the ITAT order remains the same. Hence, the ITAT order should not be ignored because the Pr. CIT as well as the ITAT has dealt the issue extensively.

(vi) In paragraph 14, the Revenue had quoted some observation of the Hon’ble Supreme Court in the case of Abdulbhai Faizullahbhai and others.

There is no dispute about the observation made by the Hon’ble Supreme Court and rather the same is beneficial to the assessee . According to the assessee , its case should not be decided blindly by following the judgment of the Mumbai Bench by ITAT in the case of Mahindra Telecom because the factual matrix of the Mahindra Telecom and as that of the assessee is totally distinct. In the case of Mahindra Telecom, the Hon’ble ITAT had no occasion to examine various issues and case laws, which have been raised by the assessee as, explained in assessee ‘s submissions filed on 4th November 2019 and hereinafter. So much so, even the purpose and nature of option money received in the case of the assessee and as that in Mahindra Telecom is totally different. Hence, it is submitted that the case of assessee be examined independently from that of Mahindra Telecom keeping into consideration the various terms and conditions of the joint venture agreement as entered between the assessee and CUIH.

(vii) In paragraph 15, the Revenue had quoted certain observations of the Hon’ble Supreme Court in the case of Union of India vs. Paras Laminates Pvt. Ltd. in [1991] AIR 696 = 186 ITR 722. The case of Paras Laminates relates to the Customs Act, 1962 and not to the Income-tax Act. However, in that case, the issue before the Hon’ble Supreme Court was whether in the absence of a specific provision, the Division Bench of the Tribunal consisted of two members can make reference to the President for constitution of a larger Bench because on identical facts, a larger Bench of the Tribunal in the case of another assessee M/s Bakelite Hylum had classified imported goods under a particular tariff item which the said Paras Laminates also claimed, but the members of the Division Bench did not appear to be satisfied with the order of the earlier larger Bench about the classification of the goods and in such facts the Hon’ble Supreme Court held that in the interest of justice the President has the power to constitute a larger Bench.

(viii) In paragraph 16, the Revenue had quoted some observations of the ITAT Bench, New Delhi in the case of Qualcomm Inc. Though the said observation is not relevant to the issue before this Hon’ble Court, the basic issue before the Hon’ble Bench of the ITAT in the case of Qualcomm Inc. was whether any case judgment of the Andhra Pradesh High Court has to be followed in comparison to the earlier judgment of the ITAT in assessee ‘s case itself. The judgment of the Andhra Pradesh High Court was announced subsequent to the earlier judgment of the ITAT in assessee ‘s case. On such facts, keeping into consideration the judicial hierarchy, the Hon’ble Bench had restored the issue on the file of AO to consider the issue in the light of the judgment of the Andhra Pradesh High Court and in such context, the above observation was made by the ITAT.

ISSUE „B’

3. Paragraph 18 is a general paragraph. However, in paragraphs 19 and 20, the Revenue has tried to justify its own inference (based on the lines of Mahindra Telecom) in a preconceived notion in order to tax the assessee on the basis of pick and choose of the words of the contract without looking into the terms and conditions of the joint venture agreement as a whole and the purpose of payment of option money by CUIH.

3.1 In the case of CIT vs. Dr. R.L. Bhargava in 256 ITR 42 (Del), as cited by the Revenue, the Hon‟ble Delhi High Court has not stated that merely on the basis of definition of a given expression in the joint venture agreement, the whole of the issue can be decided.

3.2 On the contrary, it has been held by the Hon‟ble Delhi High Court that rule of construction of a contract is to ascertain the intention of the parties to the agreement and for that purpose, the contract has to be read as a whole and if possible, the effect should be given to all parts thereof.

3.3 Similar principle has also been reiterated by the Calcutta High Court in the case of Narayan Prasad Vijaivargia vs. CIT in 102 ITR 748. Therefore, to construe the contract, one should not have confined oneself to the definition rather to read the contract as a whole and one should try to ascertain the intention of the parties to the agreement instead of trying to draw its own inference. Even while construing an agreement, one has to look the other definitions also which have the material impact to understand the intention of the parties. In Schedule 1, the definition of „net sale proceeds‟ has also been given and the same reads as under:

“Net Sale Proceeds” – shall mean the difference between the gross sale receipts per Dabur share and such option price which shall be calculated as per the formula set out in Schedule 3.”

3.4 Under the law, the definition clause of a contract or a statute defines only the meaning of expression thereof used in other parts of the contract or a statute, but does not define its purpose. Hence, in order to get the purpose, that part of the contract has to be read where such expression has been used.

3.5 In paragraph 20, the Revenue, instead of dealing with the issues and points raised by the assessee in its submissions filed on 4th November 2019, has reiterated the contention of the AO as jotted down in the assessment orders, which are based on assumptions and presumptions as made in the case of Mahindra Telecom.

3.6 It may not be out of place to mention here that in the case of Padmasundara Rao vs. State of Tamil Nadu in 255 ITR 147, the Hon‟ble Supreme Court has cautioned the courts, while following the judgment of a superior authority in following words:

“Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morris in Herrington Vs. British Railways Board (1972) 2 WLR 537. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases.”

In the case of Padmasundara Rao (supra), it was further observed by the Supreme Court “that court must avoid the danger of a prior determination of the meaning of a provision based on their own pre-conceived notions of ideological structure or scheme under which the provision to be interpreted is somewhat fitted. They are not entitled to usurp legislative function under the disguise of interpretation.

3.7 So relying upon the judgment of the Mumbai Bench of ITAT in the case of Mahindra Telecom, first of all it has to be found out whether the terms and conditions of the joint venture agreement as entered by Mahindra Telecom and AT&T, which was before the ITAT Mumbai, are same or samely worded as that of the joint venture agreement entered into by Dabur with CUIH and the purpose of payment of option price as considered by the ITAT Mumbai in Mahindra Telecom based on the terms and conditions of joint venture agreement between Mahindra Telecom and AT&T are the same as that given in the joint venture agreement between Dabur and CUIH for payment of option price. If the purpose in both the joint venture agreements is different, then the judgment of the Mumbai Bench of ITAT cannot be followed. As per Dabur, the terms and conditions of the joint venture agreement of Mahindra Telecom are totally different from the joint venture agreement as executed between Dabur and CUIH.

3.8 In the submissions filed on 4th November 2019, though the assessee has distinguished the judgment of Mahindra Telecom, but in spite of that, a separate distinction between the terms and conditions of the joint venture agreement from Mahindra Telecom are attached herewith as Annexure „A’.

The basic principle of construction of an agreement is that it has to be read as a whole and every part of the contract has to be given effect to ascertain the intention of the parties to the agreement.

256 ITR 47 (Del) CIT vs. Dr. R.L. Bhargava

102 ITR 748 (Cal) Narayan Prasad Vijayvargiya vs. CIT

3.9 In the case of Mahindra Telecom, the Hon’ble ITAT Mumbai, instead of construing the joint venture agreement in a literal way, has decided the issue keeping in mind that the substance of the transactions will prevail over the form and then drawn its own inference and presumptions. Such construction of a written agreement is not permissible under the law, more particularly in the fiscal laws. The Mumbai Bench of the ITAT had no occasion to consider the judgment of the Hon’ble Supreme Court in the case of CIT vs. Motors & General Stores Pvt. Ltd. in 66 ITR 692.

3.10 In the case of Motors & General Stores (supra), the Hon’ble Supreme Court held that under the fiscal world, when a transaction is embodied in a document, the liability to tax depends upon the meaning and the content of the language used in accordance with the ordinary rules of construction and the taxing statute has to be applied in accordance with the legal rights of the parties to the transactions. The Revenue authorities have no right to rewrite the terms and conditions of the agreement, but it has to be read as such. While holding so, the Hon’ble Supreme Court has approved the observation of Lord Russell of Killowen made in the case of Duke Westminster vs. Inland Revenue Commissioner in [1926] 100 Tax Cases 302, 336 (HL), wherein Lord Killowen had rejected the contention that the substance of transactions prevails over the form. Such approval has been made by the Hon’ble Supreme Court at page 699 of the Report in following words:

“We pass on to consider the argument of Mr. Narsaraju that in revenue matters it was the substance of the transaction which must be looked at and not the form in which the parties have chosen to clothe the transaction’. It was contended that, in the present case, there was in substance a sale of Sree Rama Talkies by the assessee -company for a money consideration of Rs.1,20,000/-, though the mode of payment was by transfer of shares and the resolution of the Board of Directors dated September 9, 1955 clearly indicated that the intention of the assessee company was to sell Sree Rama Talkies along with its equipment concerned for a consideration of Rs. 1,20,000/-. In the present case, however, there is no suggestion on behalf of the appellant of bad faith on the part of the assessee – company nor is it alleged that the particular form of the transaction was adopted as a cloak to conceal a different transaction. It is not disputed that the document in question was intended to be acted upon and there is no suggestion of mala fides or that the document was never intended to have any legal effect. In the absence of any suggestion of bad faith or fraud the true principle is that the taxing statute has to be applied in accordance with the legal rights of the parties to the transaction. When the transaction is embodied in a document the liability to tax depends upon the meaning and content of the language used in accordance with the ordinary rules of construction. In Bank of Chettinad Ltd. v. C.I.T. Madras(1), it was pointed out by the Judicial Committee that the doctrine that in revenue cases the ‘substance of the matter’ may be regarded as distinguished from the strict legal position, is erroneous. If a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown seeking to recover the tax cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to, be. In the Duke of’ Westminster’s case deeds of covenant had been executed by the Duke in favour of employees in such amounts that the covenantees, if remaining in the Duke’s service, would receive respectively sums equivalent to their wages and salaries. If they left the services of the Duke the payments would still have been due, but it was in nearly all instances explained to the employee that so long as the service continued, while the deed did not prevent his claiming ordinary wages in addition, it was expected that he would not do so. It was argued for the Crown that though in form a grant of an annuity, the transaction was in substance merely one where by the annuitant was to continue to serve the Duke at his existing salary, so that the annuity must be treated as salary. Neither the Court of Appeal nor the House of Lords agreed with this contention. To regard the payments under the deed as in effect payments of salary would be to treat a transaction of one legal character as if it were a transaction of a different legal character. With regard to the supposed contrast between the form and substance of the arrangement, Lord Russell of Killowen stated at page 524 as follows:

“If all that is meant by the doctrine is that having once ascertained the legal rights of the parties you may disregard mere nomenclature and decide the question of taxability or non-taxability in accordance with the legal rights, well and good. That is what this House did in the case of Secretary of State in Council of India v. Scoble, (1903) A.C. 299 (4 T.C. 618); that and no more. If, on the other hand, the doctrine means that you may brush aside deeds, disregard the legal rights and liabilities arising under a contract between parties, and decide the question of taxability or non-taxability upon the footing of the rights and liabilities of the parties being different from what in law they are, then I entirely dissent from such a doctrine.”

3.11 The principle enunciated by the Hon’ble Supreme Court in the case of Motors & General Stores (supra) later on has been endorsed by a larger Bench of the Hon’ble Supreme Court in the case of CIT vs. B.M. Kharwar in 72 ITR 603. In order to understand the principle as laid down by the Hon’ble Supreme Court in the case of Motors & General Stores, it is all the more necessary to look into the facts of that very case.

In the case of Motors & General Stores,on 9th September 1955, the board of directors of Motors & General Stores authorized its managing director to negotiate for the sale of its cinema house to the Zamindar and Zamindarini of Chikkavaram. An agreement was concluded to this effect and this was confirmed by the shareholders of the company at a meeting held on 4th October 1955. Subsequently, however, the parties to the transaction executed a deed styled “exchange deed” on 21st February 1956, whereby Motors & General Stores transferred to the Zamindar&Zamindarini all the assets of the cinema house for a consideration of Rs.1,20,000, in the shape of certain preference shares in a sugar company of the face value of Rs.1,20,000 and the Zamindar and Zamindarini, in consideration of the transfer of the assets of the cinema house, transferred the shares held by them in a sugar mill to Motors & General Stores.

For the Assessment Year 1956-57, the said company submitted a return of income showing a sum of Rs.9,823/- as profits derived from the transaction. The Income-tax Officer found that the value realized exceeded the written down value by Rs.43,568/- and accordingly computed the profits u/s 10(2)(vii) of the Income-tax Act, 1922, and included the amount in the taxable income of the company. The order of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner as well as by the Income-tax Appellate Tribunal.

The question arises whether the transaction, which actually took place, is sale or exchange. If it is sale, then it is liable to tax, and if it is exchange, then it is not liable to tax. The Hon‟ble Supreme, after considering such facts, held that no doubt the purpose of the transfer of the cinema house was for sale, but in fact when the deed was executed, it was not a sale deed but was a deed of exchange and under the law no tax can be levied on exchange.

3.12 In the instant case, the basic bone of contention is whether the option price as received by Dabur is a capital receipt or a revenue receipt as rightly pointed out by ITAT while dealing with the issue in Assessment Years 2013-14 and 2014-15 also. However, in order to determine the nature of receipts, one has to examine the very purpose of receipt of option money by Dabur from CUIH and for that very purpose, the terms and conditions of the joint venture agreement as executed between Dabur and CUIH has to be read as a whole and every part of the agreement has to be given effect and if the receipt of option price is on capital account and ultimately will form part of the sale proceeds of shares, then it would be taxable in the year of divestment of shares by Dabur in favour of CUIH and for that very purpose, the following clauses and the definition of net sale proceeds as given in the definition clauses forming part of Schedule 1 have to be seen:

16.1 In consideration of the terms of this Agreement and payment by CUIH of the Option Price, Dabur hereby grants to CUIH:

(a) the right during the Ten Year Period to require Dabur to sell only to CUIH such number of shares held by Dabur as would be required to take CUIH shareholding in the Company to the maximum Revised Applicable Law Percentage; and

(b) the right after the Ten Year Period to require Dabur to sell to CUIH or its nominee such number of Dabur shares as would be required to take CUIH shareholding in the Company to the maximum Revised Applicable Law Percentage.

The rights conferred by this Clause to CUIH shall be exercisable on each occasion (if more than once) when CUIH‟s shareholding in the Company is lower than the Revised Applicable Law Percentage.

In consideration of the terms of this Agreement, CUIH hereby grants to Dabur:

(a) the right during the Ten Year Period to require CUIH to purchase from Dabur such number of shares held by Dabur as may be required to take CUIH shareholding in the Company to the maximum Revised Applicable Law Percentage; and

(b) the right after the Ten Year Period to require CUIH by itself or through its nominee to purchase from Dabur such number of Dabur shares as would be required to take CUIH shareholding in the Company to the maximum Revised Applicable Law Percentage.

The rights conferred by this Clause to Dabur shall be exercisable on each occasion (if more than once) when CUIH‟s shareholding in the Company is lower than the Revised Applicable Law Percentage.

The rights available to CUIH and Dabur under this Clause shall be exercised in accordance with the procedures set out in Schedule 6.

16.6 The sale consideration received by Dabur pursuant to the exercise of the CUIH Option or the Dabur Option, shall always be the Market Value per each Share sold by Dabur provided that:

16.6.1 In the event that the Market Value is lower than the Subscription Price, CUIH shall also pay the difference between the Subscription Price and the Market Value to Dabur simultaneous with the sale of Dabur Shares. Dabur shall be entitled to retain the Option Price received on such Dabur Shares (See illustration A(1) in Schedule 9).

16.6.2 If the Market Value 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 thirty (30) days from the receipt of the Market Value. Provided however, if as a result of repayment of the Option Price, the Net Sale Proceeds (i.e. the difference between the gross sale receipt per Dabur Share and such Option Price which shall be calculated as per the formula set out in Schedule 3) become less than the Subscription Price, only such part of the Option Price shall be repaid so as to ensure that the Net Sale Proceeds per Dabur Share are not less than the Subscription Price (see illustrations A(2)(a), (b) & (c) in Schedule 9).

16.6.3 In the event that the Market Value is equal to the Subscription Price, Dabur shall retain the Option Price received on such Dabur Shares (see illustration A(3) in Schedule 9).”

The net sale proceeds have been defined in Schedule 1 in following words:

“Net sale proceeds” shall mean the difference between the gross sale receipts per Dabur share and such option price which shall be calculated as per the formula set out in Schedule 3.”

“16A. Repayment of Option Price by Dabur to CUIH

Dabur shall repay to CUIH the Option Price under the Agreement only under the following circumstances:

(a) If the Market Value received by Dabur for Dabur Shares sold pursuant to Clauses 16.6, 16.9.2.1 or 16.9.2.2 is higher than the Subscription Price, Dabur shall repay the Option Price (to be calculated in accordance with Schedule 3), pertaining to such Dabur Shares within thirty (30) days of receiving the Market Value. Provided however, if as a result of repayment of the Option Price, the Net Sale Proceeds per share received by Dabur pursuant to the aforesaid clauses becomes less than the Subscription Price, only such part of the Option Price shall be repaid so as to maintain the Net Sale Proceeds per share of Subscription Price.

(b) If the Market Value received by Dabur for Dabur Shares offered as a part of its divestment pursuant to Clauses 16.8.3 or 16.9.2.3 is higher than the Subscription Price. Dabur shall repay the Option Price pertaining to such shares within thirty (30) days of receiving the Market Value (to be calculated in accordance with Schedule 3). Provided however, if as a result of repayment of the Option Price, the Net Sale Proceeds per share received by Dabur pursuant to the aforesaid clause become less than the Subscription Price, only such part of the Option Price shall be repaid so as to maintain the Net Sale Proceeds per share at Subscription Price.

(c) If the shareholding of CUIH is divested in terms of Clause 17.2 after the Ten Year Period and Dabur, pursuant to the exercise of its tag-along right under Clause 17.2.5, sells its Shares, Dabur shall repay CUIH the Option Price received by it (to be calculated in accordance with Schedule 3). Such repayment shall be in accordance with Clause 17.2.5(b).

(d) Dabur shall repay the Option Price (to be calculated in accordance with Schedule 3) on Retained Shares in terms of Clause 16.9.6.”

4. On careful consideration of the terms and conditions of the joint venture agreement dated 7th August 2001 (copy placed at page 24 of the Paper Book No. 1), it is clear that:

(i) Dabur agreed to acquire 74% stakes in the proposed joint venture company for which a subscription guarantee has also been extended by Dabur which could be encashed if Dabur fails to subscribe the agreed stake.

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(ii) Dabur has agreed not to sell its shares to any third party and an option has been granted to CUIH to purchase the shares of Dabur in the given period subject to payment of the option price by CUIH to Dabur on granting of such rights.

(iii) The option price so received in terms of clause 16 of the joint venture agreement was a refundable option money which is clear from clause 16A of the joint venture agreement and the quantum of refund of option price would be ascertained in the year of divestment of shares. The quantum of refund of the option price so received depends upon the market value of shares which would be determined by an independent valuer. The amount of the option money, which was received in terms of clause 16 of the joint venture agreement and retained under clause 16A of the joint venture agreement, would form part of the Net sale proceeds as itself explained in clause 16A read with definition of Net Sale Proceed in the agreement. In fact, in the Assessment Year 2017-18 when Dabur has divested its 23% stake in the joint venture company, has actually refunded the option money to the extent of Rs.478 crore and this conduct of the parties to the agreement shows the intention that the option money received would be on capital field, firstly because Dabur has made the capital contribution in the joint venture company for acquiring its controlling stake of 74% and secondly the option money was received by Dabur not to sell its stakes to any third party but only to CUIH as and when the CUIH would be able to exercise this right in accordance with the revised applicable law percentage. The right of exit is attached with the subscription of shares is on capital account,

(iv) As per the terms of the agreement, in spite of the receipt of the option money from CUIH, Dabur would be entitled to retain only such option money which would be worked out at the time of divestment of shares in accordance with the formula given in Schedule 9 of the joint venture agreement. The quantum of refund of the option price depends upon the market value of shares at the time of divestment and accordingly the right of appropriation of the option money so received also accrued on the date of divestment.

Under the law, in the case of transfer, the liability to tax accrued on the date of transfer of title in the assets.

57 ITR 185 (SC) Appavoo Pillai vs. CIT

36 ITR 215 (SC) Howrah Trading Co. Ltd. vs. CIT

151 ITR 122 (Mad) CIT vs. M. Ramaswami

203 ITR 663-665 (Ker) Rajagiri Rubber Produce Co. Ltd. vs. CIT

Therefore, looking to the overall terms and conditions of the joint venture agreement, the purpose of payment of option money by CUIH to Dabur as well as the date of appropriation of the option money at the time of divestment of its stake by Dabur in favour of CUIH and the agreement in respect of refund of option money at a later date at the time of divestment of shares in accordance with the formula given in Schedule 9 of the agreement and the retained option money forming part of the net sale proceeds of the shares as described in the definition of net sale proceeds given in Schedule 1 read with clause 16A of the agreement, it is clear that the payment of option money was attached with the holding of controlling stakes by Dabur in joint venture company which is on capital account. The investment in joint venture company by Dabur was not made for trading purposes because the shares of Aviva Life Insurance are not a tradable item.

5. The date of receipt of the amount is not the criteria to determine its nature. All incomes are receipt, but all receipts are not income. It is only those very receipts, which have the characteristic of income, are taxable under the Income-tax Act (See ParimesettiSeetharamamma vs. CIT in 57 ITR 532 (SC).

6. There is a fundamental difference between capital receipts and income receipts. The income receipts are liable to tax u/s 4 of the Act, but capital receipts are not liable to tax except the capital gain. He relied up on 57 ITR 36 (SC) CIT vs. Maheshwari Devi Jute Mills Ltd., 249 ITR 265 (Bom) Caddle Weaving Mills Pvt. Ltd. vs. CIT, 273 ITR 1 (SC) CIT vs. D.P. Sandhu Brothers Pvt. Ltd. , 195 ITR 877 (SC) Padmaraje R. Kadambande vs. CIT, 57 ITR 36 (SC) CIT vs. Maheshwari Devi Jute Mills Ltd.

6.1 The nature and character of receipts is determined with reference to the purpose for which the payments are made. He relied up on 48 ITR 222 (SC) P.H. Dwivecha vs. CIT 53 ITR 261 (SC) Kettlewell Bullen& Co. Ltd. vs. CIT 275 CTR 532 (Ker) CIT vs. Sapthagiri Distilleries Ltd. 351 ITR 110 (Del) Khanna & Anandhanam vs. CIT 404 ITR 318 (Del) Pr. CIT vs. Aeren R. Infrastructure Ltd. 306 ITR 392 (SC) Ponni Sugar & Chemicals Ltd. , 400 ITR 279 (SC) CIT vs. Chaphalkar Brothers, 317 ITR 353 (Del) Dharam Pal Prem Chand, 88 ITD 273 (Mum) (Spl Bench), DCIT vs. Reliance Industries Ltd. 264 Tax 252 (Bom) Pr. CIT vs. Welspun Steels Ltd. 98 ITD 19 (Del Trib) Payal Kapur vs. ACIT

In the instant case, the option money was paid by CUIH to Dabur not to sell its stake in the co-promoted company, i.e. Aviva Life Insurance Co. to any third person except to CUIH in a given time.

6.2 The investment in shares to acquire controlling stakes is a capital investment. He relied up on 368 ITR 1 (Bom)

Vodafone India Services Pvt. Ltd. vs. UOI, 311 CTR 344 (Del)

Nestle SA vs. ACIT, CBDT Instruction No. 2 of 2015 dated

29.1.2015 in [2015] 274 CTR (St) 65 , 41 ITR 534 (SC) Ram Narain& Sons Pvt. Ltd. vs. CIT

6.3 Under the commercial world, the controlling stake in a company is always attached with the shareholding and if any shares enjoying controlling stakes are sold, the same would fetch more price over and above the market value. Selling of shares at a price more than the market value or the purchasing of shares at a price more than the market value shows that the investment in shares is on capital account: 41 ITR 534 (SC) Ram Narain & Sons Pvt. Ltd. vs. CIT 131 ITR 445 (MP) Smt. Maharani Usha Devi vs. CIT 354 ITR 316 (AP) Sanofi Pasteur Holding SA vs. Dept of Rev. 368 ITR 1 (Bom) Vodafone India Services Pvt. Ltd. vs. UOI 263 CTR 48 (Bom) Accra Investment Pvt. Ltd. vs. ITO

6.4 The contention of the Revenue that because option price being received annually is a revenue receipt is not correct. In fact, the periodicity of the payment is not a criteria to decide the nature of the receipt and on the contrary the receipts have to be examined in the hands of the payee depending upon the purpose for which such receipts have been received (See 48 ITR 222 (SC), P.H. Divecha vs. CIT).

In the instant case, the option price has been received not to sell controlling stakes by transfer of shares to third person except to CUIH in the given period.

6.5 The receipt of option money is not absolute on the date of receipt, but it carries obligation to refund the excess amount over and above the net sale proceeds as defined in the joint venture agreement and was duly approved by Reserve Bank of India also and accordingly remains an advance till the happening of the contingency, i.e. date of exit and keeping into such principles, the earlier Assessing Officer had not made any addition keeping into consideration the notes made in the books of account.

6.6 It is an admitted fact that in Assessment Year 2017-18 when Dabur has transferred its 23% stakes in favour of CUIH after the necessary permission from appropriate authorities, has actually refunded an amount of Rs.478 cores being the proportionate amount out of the option money. The receipt of market value of 23% stake from CUIH first, and then refund of option money was not only in accordance with the terms and conditions of the joint venture agreement but as per the policy of the Government also, where they allowed transfer of stakes, only if the market value is remitted from outside India and in order to complete such requirement first the CUIH had remitted the market value of the proportionate stakes and then thereafter Dabur had refunded the amount of Rs.470 crore. However, under the law, there is no statutory provision that the same coin received under the head of „Option Money‟ should be refunded.

6.7 The extent of option price guaranteed by CUIH in favour of Dabur does not determine the nature of receipts. It only creates confidence in Dabur not to sell its stake to third person except to CUIH.

6.8 Similarly the use of option money by Dabur is also not prohibited under the law. However, by use of option money by Dabur, whatever income has been generated, the same has been offered to tax year after year and there is no loss to the Revenue. Had the amount been kept in escrow account, then no income would accrue to Dabur.

6.9 The appointment of CEO from one of the directors of CUIH in spite of the majority of directors in the Board of Directors is not a criterion to decide the nature of option money received by Dabur, the purpose whereof has been given in the joint venture agreement itself. Under the joint venture agreement, the payment of option money was not to appoint the CEO of CUIH. The CEO‟s appointment from the directors of CUIH was on account of commercial expediency and in the interest of business of the company, which was to be co-promoted because of their experience in the insurance sector, but that does not mean that the CEO is an absolute authority and can do anything whatever he likes. Under the Company Law, the CEO is subject to the supervision of Board of Directors wherein Dabur enjoys the majority on account of these controlling stakes. Hence, no adverse inference should be drawn (See 263 CTR 48 (Bom), Accra Investment Pvt. Ltd. vs. ITO, Bombay High Court).

Whether option money is interest

7. Having regard to the purpose of payment of option money and its refund under certain circumstances in terms of the joint venture agreement does not partake its character as interest. Under the commercial laws, interest is always payable on the monies borrowed or debt incurred for which there would be a lender and borrower. In the instant case, the CUIH has never borrowed any amount from Dabur. Under the joint venture agreement, the option money was paid by CUIH to Dabur on account of sterilization of the right to exit the option granted in favour of CUIH by Dabur to purchase the shares of Aviva Life Insurance Co. at a future date and not to sell the same to any third person. Under the joint venture agreement, the investment was made by Dabur in the corporate company as a capital contribution in the form of shares and no money was advanced to CUIH.

Under the law, shareholders and company are separate entity as held by the Hon’ble Supreme Court in Bacha F. Guzdar vs. CIT in 271 ITR 1.

8. In the case of CIT vs. ArunaDua in 186 ITR 494, the Hon’ble Calcutta High Court held that if the parties to the agreement have understood the agreement in a certain way and have acted upon that agreement, it is not open to the AO to give another interpretation and tax the assessee on a hypothetical amount.

In the instant case, Dabur and CUIH have understood that the investment in co-promoted company Aviva Life Insurance Co. is on capital account and since the inception of the agreement have understood in that sense which is very much clear from the Notes on Account forming part of balance sheet and actually offered the option money for capital gain tax in Assessment Year 2017-18.

9. In the written submissions, the Revenue has relied upon the judgment of Himachal Pradesh High Court in the case of H.P. Mineral & Industrial Corporation vs. CIT, 302 ITR 120 and the Supreme Court judgment in the case of E.D. Susoon& Co. Ltd. vs. CIT in 26 ITR 27 and as that of CIT vs. AshokbhaiChimanbhai in 1965 AIR 1343 and State Bank of Travancore, 1986 AIR 757. In all these cases, the facts and issue were totally different from the facts and issue in the case of Dabur. In all these cases, the issue before the court was when the income can be said to have accrued under the law. In all those cases, there was no dispute whether the receipt is capital or income.

10. In the written submissions, the Revenue has relied upon the Supreme Court judgment in the case of Rama Bai vs. CIT in 181 ITR 400 to contend that in the case of interest, it accrued on day-to-day basis. The facts of the Rama Bai case were totally different. In the case of Rama Bai, the issue before the Hon’ble Supreme Court was that in case of enhanced compensation received under the Land Acquisition Act (LA Act) along with interest in terms of the provision of Section 28 of LA Act is accrued on day-to-day basis for the purpose of taxation thereof under the IT Act or the entire interest would be deemed to have accrued in the year of its receipts. On such facts, the Hon’ble Supreme Court, after considering the provision of Section 28 of LA Act, which allowed the payment of interest per annum from the date of acquisition of the land, held that for the purpose of taxation, entire interest does not accrue on the date of its receipt, but it accrued annually and has been paid on account of late payment of the award.

10.1 In the case of Rama Bai (supra), the Hon’ble Supreme Court was not examining the nature of interest, whether it is capital or revenue, because the issue was not before the Hon’ble Supreme Court.

However, subsequently the Hon’ble Supreme Court had examined the nature of interest awarded to a person in terms of Section 28 of the LA Act from taxation point of view whether it will form part of the enhanced compensation, i.e. capital receipt or it is a revenue receipt in the case of CIT vs. Ghanshyam (HUF), 315 ITR 1 (SC). Having regard to the purpose of Section 28 of the LA Act, the Hon’ble Supreme Court has held that the amount allowed u/s 28 of the LA Act under the name of interest is basically not an interest but it is part of the enhanced compensation and would be liable for capital gain tax.

10.2 In the written submissions, the Revenue has relied upon the judgment in the case of SardarInder Singh & Sons Ltd. vs. CIT, 24 ITR 415 (SC). The facts and circumstances of SardarInder Singh case are different from the facts of the present appeal. In the case of SardarInder Singh, the said company held a large number of shares in other incorporated companies and was realizing some of its holdings and acquiring large block of shares in other companies. In the Assessment Year 1938-39, the company showed a loss on account of sales of shares and securities and this was allowed as a business loss. However, in the Assessment Years 1939­40, 1940-41 and 1941-42, the company claimed that the surplus resulting from similar sales during the corresponding accounting year was not taxable income as it was a mere change of investment and was, therefore, a capital account. The Income Tax authorities rejected the claim of the said SardarInder Singh and taxed the surplus as profits and gains of business which was upheld by the ITAT and on a direct reference the Hon’ble Supreme Court also affirmed the order of ITAT by observing that because the sales have been affected during the course of business of purchase and sale of shares/securities, the profit is assessable as business profits.

10.2.1 In the case of Ram Narain& Sons Pvt. Ltd. vs. CIT, a larger Bench consisting of three judges held that the authorization in the memorandum to deal in shares is not an important criteria to decide the issue whether the purchase and sale of shares is on trading account and investment account and it depends upon the intention of the parties concerned. If the investment has been made to acquire a controlling stake, then it is a capital account.

In the instant case, Dabur had made the investment for acquisition of controlling stakes to the extent of 74% in the insurance company, i.e. Aviva Life Insurance Co.

10.2.2 In the case of Bengal & Assam Investors Ltd. vs. CIT in 59 ITR 547, the Hon’ble Supreme Court held that the mere fact that a company is incorporated to carry on investment does not show that it is carrying on business unless it deals in stock and shares.

In the instant case, the dealing in shares of Aviva Life Insurance Co. is not the business of Dabur because the shares of Aviva Life Insurance Co. are not tradable.

37. Coming to the issue where the revenue authorities have relied heavily on the decision of the coordinate bench in case of Mahindra telecommunication investment private limited in 180 TTJ 434, he submitted that there is no similarity between the two transactions. He submitted a detailed note as Under:-

1. In the absence of a complete copy of Joint Venture Agreement as entered between Mahindra Telecommunications Investment Pvt. Ltd. (Mahindra Telecom) and AT&T, it is practically not possible to make complete distinction. However, the various clauses of the agreement as noticed by the Mumbai Bench of the Tribunal, based on which the decision has been given by ITAT Mumbai on the given facts in favour of the Revenue, are completely different and absent and are not present in the joint venture agreement as executed between Dabur Invest Corp and CUIH. Hence, the decision of the ITAT Mumbai Bench in the case of Mahindra Telecom is distinguishable on facts.

2. In the case of Mahindra Telecom, as per the facts noted by the ITAT in paragraph 2 of the impugned order, the said Mahindra Telecom had entered into shareholders agreement dated 7th March 2006 with AT&T Global Network Holding LLC, USA (hereinafter called AT&T) and had become agreed to subscribe to invest in shares of AT&T Global Network Services (India) Pvt. Ltd., promoted by AT&T Global, up to 26% of the equity capital, and the balance 74% was to be held by AT&T Global being the limit prescribed by the Government of India under FDI Investment Policy. Under the agreement, AT&T Global had an irrevocable call option to increase its holding in AT&T India to the extent permissible by laws in India by requiring Mahindra Telecom to sell shares to it or its affiliate at the option price, to be exercised on or after three years of investment or the elimination of regulation on foreign equity holdings level, whichever is earlier. The option price for the purchase of the aforesaid purchase and sale is defined as the equity contribution plus return at 11% per annum compounded annually on the said contribution over the period of holding.

3. The issue arose before the Hon‟ble Mumbai Bench of the ITAT was whether the option price which had to be compounded on a yield of 11% per annum to make out a predetermined price for sale of shares is taxable either at the time of transfer of shares on a predetermined price or the joint venture agreement is only a financial instrument wherein the yield has been allowed to Mahindra Telecommunications at the rate of 11% per annum and required to be compounded in order to determine the predetermined price of the shares on which Mahindra is required to transfer the shares irrespective of the performance of the company and market value of the shares.

4. The ITAT Mumbai having regard to the various clauses of the terms of joint venture agreement with reference to the conduct of Mahindra as well as fixation option price for transfer of shares by Mahindra to AT&T on a fixed rate of return of 11% which was to be compounded annually irrespective of the performance of the company, i.e. whether bad or good, held that basically joint venture agreement is a financial instrument and the 11% return on investment is an income. While holding so, the ITAT Mumbai observed that:

(i) the substance of the transaction prevails over the form; and

(ii) the following clauses of the agreement show that Mahindra Telecom has no interest in the business of the joint venture company.

5. The major clauses as noticed by the Mumbai Bench of the ITAT based on which the ITAT Mumbai has arrived at a conclusion that the joint venture agreement is basically financial instrument are as under:

(i) Clause No. 2.6 as noticed by the Mumbai Bench of the ITAT in paragraph 4.3 of the order is as under:

“2.6 The Sponsors acknowledge that pursuant to the terms of the Agreement and based on the nature of global telecommunications services and the financial prospects of AT&T India, ML will realize in almost all cases an equity return equal to the Option Price and Call Option Fee and further acknowledge that the cost structure of AT&T India is dependent upon allocations of expenses across AT&T‟s global operations, which allocations shall be made by AT&T in a commercially reasonable manner without specific regard to the profitability or unprofitability of AT&T India. The Sponsors acknowledge that the Option Price plus the Call Option Fee represents a reasonable return on equity investment in the company.”

(ii) Clauses 6.13, 7.3, 7.4, 9, 17.2, 17.3, 17.4, 17.4.1, 17.4.2 as reproduced in paragraph 4.4 of the order are as under:

“6.13 Subject to the provisions of the Act, the Board of Directors shall determine all matters by simple majority vote, which majority shall include at least two (2) directors nominated by AT&T.

7.3 Subject to the provisions as contained in the Articles and the Act any resolution at a duly constituted General Meeting shall be adopted by a simple majority vote of the total votes validly cast at such General Meeting which majority shall include affirmative vote of AT&T.

7.4 At a General Meeting the Parties shall cause their votes in respect of their respective Shares to be cast on the matters before the meeting in a manner so to ensure that matters that have been specifically agreed to herein between the Parties get approved. ML agrees to vote all its shares in conformity with AT&Ts vote on all matters presented to the shareholders by the board , except as required by applicable law and except if reasonably seen to be detrimental to ML’s economic interests or reputation, provided however, that ML shall vote all its shares in conformity with AT&T’s vote in regard to actions relating to matters set forth in Sections 2, 4.3, 8 and 9 of this Agreement. Without limiting the generality of the forgoing, the actions specified in sub-sections 7.4(a) and (b) hereof may be undertaken by, or on behalf of, the Company only following a shareholder resolution thereon in which votes in respect of paid up equity capital of more than 75% are cast in favour of such resolution:

(a) Winding up of the Company; and

(b) If a matter is reasonably seen to be detrimental to ML’s economic interests or reputation, provided however, that ML shall vote all its shares in conformity with AT&T’s vote in regard to actions relating to matters set forth in Sections 2, 4.3, 8 and 9 of this Agreement.

It is hereby clarified that the failure of ML to support AT&T in the manner envisaged herein shall constitute a breach under this Agreement.

9. Buy Back of Shares

The company may, subject only to a majority vote of its Board of Directors, undertake a buy back of its shares to buy back ML’s shares or adopt such other measures to repurchase, withdraw, terminate or otherwise cancel such shares in accordance with the Laws of India (the “Buy Back”) and ML agrees to (and agrees to cause any representative it may have on the Board of Directors to) support the same. The price per share for the Buy Back shall be equal to the Option Price. If another price is required to be paid by the Laws of India then the Company may elect to cancel such Buy Back. Above purchases of shares shall be made in Indian Rupees.

17.2 In the following cases, AT&T shall have the right and option to terminate this Agreement by a written notice of thirty (30) days to ML:

(c) If AT&T is prohibited from holding some or all of the shares in the Company, as provided in this Agreement, due to any reason whatsoever, not directly attributable to the actions of AT&T.

17.3 In the following case, ML shall have the right and option to terminate this Agreement by a written notice of thirty (30) days to AT&T:

(c) If ML, subject to Section 9.1 of the Agreement, is prohibited from holding some or all of the shares in the Company due to any reason whatsoever, not directly attributable to the actions of ML.

17.4 On termination of this Agreement, as aforesaid, shall not relieve any Party of any obligations or liabilities accrued to it prior to the date of termination and the provisions of Sections 13, 16.1, 17.4 and 24 shall survive termination of this Agreement. Further notwithstanding anything contained in this Agreement:

17.4.1 On termination of this Agreement by AT&T:

(i) pursuant to Section 17.2(a) or (b) AT&T may elect to require ML to sell its entire shares at their par value, to a person resident in India or other eligible person identified by AT&T and in the event of such election the sale and purchase of shares shall be completed within a period of 120 (one hundred twenty) days from the date of the written notice for termination; or

(ii) pursuant to Section 17.2(c) AT&T shall offer to sell to ML such number of shares in the Company that it cannot hold at the Option Price and if ML does not exercise the said offer within 10 business days then AT&T may sell the offered shares to a person resident in India or other eligible person identified by AT&T.

17.4.2 On termination of this Agreement by ML:

(i) pursuant to Section 17.3(a) or (b) ML may elect to offer its shares in the Company to AT&T at the Option Price (subject to Sub-section 8.13) and the Call Option Fee pro-rated for the period between the prior anniversary of the Capitalization Date and the date of termination; or

(ii) pursuant to Section 17.3(c) ML may sell the excess holding to an eligible person identified by AT&T at the Option Price (subject to Sub-section 8.13) and the Call Option Fee pro-rated for the period between the prior anniversary of the Capitalization Date and the date of termination.”

6. Apart from the above, it was noticed by the ITAT Mumbai that the payment of interest as made by Mahindra Telecom has been claimed as revenue expenditure and accordingly on the basis of the matching principle, the return on investment has to be taken into account.

In clause No. 17.4.1(i) of the joint venture agreement, it was agreed that amongst AT&T and Mahindra Telecom that AT&T may elect to require ML to sell its entire shares at their par value to a person resident in India or other eligible identified by AT&T.

7. On the basis of the terms and conditions contained in various clauses of the shareholders agreement, the ITAT Mumbai arrived at the conclusion that the agreement was found to be unequivocally and unambiguously convey the right to receive the return on its investment (in shares) to Mahindra Telecom and further that income, therefore, accrued to Mahindra Telecom in the same manner and to the same extent as the increase in the value of its shareholding in the investee company at a defined rate of per unit at time over the holding period.

This is as the AT&T Global had an irrevocable right to acquire the shareholding in its Indian subsidiary from Mahindra Telecom either to itself or through its affiliates at a predetermined price called option price, which shall continue to increase with time @ 11% per annum to be compounded annually. The transfer of shares in this manner including the price determined thereunder is made the essence of the agreement and the contravention thereof constitutes a breach of the agreement. The Mahindra Telecom has no right to management and accordingly the Mahindra Telecom‟s investment in shares has to be considered in conjunction with the said agreement. The investment by Mahindra Telecom in joint venture is qualitatively very different from the shareholdings or, or the rights as a shareholder of, AT&T and it is the substance that is to prevail over from in this arrangement, and the manner of investment is akin to a financing arrangement yielding return (income) as a function of time.

8. In paragraph 4.8 of the order, the ITAT then 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?”

Comments by Dabur Invest Corp.

9. At the outset, it is brought to your kind notice that in the case of Padmasundara Rao vs. State of Tamil Nadu in 255 ITR 147, the Hon‟ble Supreme Court has cautioned while following a precedent in following words:

“Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morris in Herrington vs. British Railways Board, (1972) 2 WLR 537.

Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases.”

In the case of PadmasundaraRao (supra), it was further observed by the Supreme Court “that court must avoid the danger of a prior determination of the meaning of a provision based on their own pre­conceived notions of ideological structure or scheme under which the provision to be interpreted is somewhat fitted. They are not entitled to usurp legislative function under the disguise of interpretation.

Similar principle has also been reiterated by the Hon’ble Supreme Court in the case of CIT vs. Sun Engineering Works Pvt. Ltd. in 198 ITR 297. The Hon’ble Supreme Court further observed that any observation made in the judgment has to be understood in light of question before court and not to be divorced from the context.

10. In the case of Senai Ram Dungar Mal vs. CIT in 42 ITR 392, the Hon’ble Supreme Court has also cautioned about the approach of deciding a case based on the decision in another case at page 397 in following words:

“A case can only be decided on its own facts, and the desire to base ones decision on another case in which the facts appear to be near enough sometimes leads to error.”

In the case of Senai Ram Dungar Mal (supra), the Hon‟ble Supreme Court also observed that it is the quality of payment that is decisive of the character of payment and not the method of the payment or its measure, and makes it fall within capital or revenue.

In order to ascertain the intention of parties, the contract has to be read as a whole {See 256 ITR 42 (Del) CIT vs. Dr. R.L. Bhargava and 102 ITR 748 (Cal) Narayan Prasad Vijaivargiya vs. CIT}.

11. The facts of the case of Dabur Invest Corp as well as the terms of the joint venture agreement are totally different from the terms and conditions as agreed amongst the Mahindra Telecom and AT&T in their shareholders agreement. The following particularly are not there in the joint venture agreement executed by Dabur Invest Corp and CUIH:

(a) In the case of Mahindra Telecom, the option price as explained is different from the option price as explained in the case of Dabur. In the case of Mahindra Telecom, the option price represents a predetermined selling price to be worked out on a return of compounded rate of 11% per annum and it was not a refundable amount. On such predetermined price, i.e. the option price, the said Mahindra Telecom is under obligation to sell its shares to AT&T irrespective of the performance and market value of the company. Even in the case of good performance, when the market value of the shares would be high, the said Mahindra Telecom has to sell its shares to AT&T at a predetermined price and similarly even in the case of bad performance of the company, the said Mahindra Telecom would be entitled to receive the selling price of shares at such predetermined price even though the market value of shares would be low. Accordingly, the Mahindra Telecom did not bear any risk by way of investment in AT&T as it was eligible at a fixed rate of return which is also clear from clause 2.6 of the said agreement.

(b) As per clause 7.4 of the agreement, in a general meeting the said Mahindra Telecom had to cast its vote in conformity with the AT&T vote on all matters presented to the shareholders by the Board and failure of Mahindra Telecom to support AT&T in the manner envisaged in the agreement shall constitute a breach under the agreement.

(c) As per clause 17.4 of the agreement, on termination of the agreement by AT&T, the AT&T may elect to require Mahindra Telecom to sell its entire shares at their par value to a person resident in India or other eligible person identified AT&T.

12. In the case of Mahindra Telecom, the ITAT Mumbai was examining an agreement as mentioned by ITAT itself in paragraph 4.8 of its order, where the Mahindra Telecom had made the investment in a risk free investment expecting a fixed rate of return and is different from where one used to make investment in a risk bearing environment.

13. In the case of Dabur, the option money is different from the option price in Mahindra Telecom. In the case of Dabur, the option money was received by Dabur on account of the sterilization of its investment not to sell its shares to any other person except to CUIH, whereas in the case of Mahindra Telecom the option price represents a predetermined price on which the Mahindra Telecom had to sell its shares to AT&T and such predetermined price has to be worked out at the return of 11% per annum compounded annually.

Amount received on sterilization of an asset is always a capital receipt as held in 161 ITR 386 (SC) in CIT vs. Bombay Burma Trading Corp.

14. In the case of Mahindra Telecom, the option price represents the predetermined selling price on which the shares had to be sold by Mahindra Telecom to AT&T or its affiliates, whereas in the case of Dabur, it is not required to sell its shares on the amount of option money received.

15. In the case of Mahindra Telecom, such option price was not refundable at all, but in the case of Dabur such option money was a refundable amount and the quantum of refund has to be determined in terms of clause 16A of the joint venture agreement read with Schedule 3 of the joint venture agreement. The quantum of refund of the option money so received under the terms of the joint venture agreement depends upon the market value of the shares at the time of divestment. The market value of the shares at the time of divestment has to be determined by an independent financial expert. More the market value of the shares more would be the amount of refund of option price to CUIH (See Schedule 9 of joint venture agreement).

16. In the case of Dabur, whatever would be the amount of option money retained under the terms and conditions of the joint venture agreement would form part of the net selling price of shares as also explained in the definition clause of Schedule 1 of the joint venture agreement which reads as under:

“NET SALE PROCEEDS” shall mean the difference between the gross sale receipts per Dabur share and such option price which shall be calculated as per the formula set out in Schedule 3.”

17. Under the joint venture agreement, Dabur entails the risk also because the market value of shares at the time of divestment depends upon the performance of the company as well as the prevailing market condition. In case of good performance, the market value of shares would be high and in that situation, the quantum of refund of the option money would also be high, whereas in the case of bad performance, the market value of the shares would be low and in that situation the quantum of refund of the option money would also be low.

18. There is no clause in joint venture agreement as executed between Dabur and CUIH that Dabur will support CUIH in respect of all actions of CUIH, though in Mahindra Telecom such clause was there.

19. In the case of Dabur, the number of Directors in the Board of Directors of the investee company would be more than the CUIH which shows that Dabur is also involved in the overall management of the investee company and holding a controlling stake.

20. Dabur has not made the investment to enjoy a fixed rate of return, rather Dabur had made the investment in order to acquire a controlling stake in the joint venture company, whereas in Mahindra Telecom, the said assessee enjoyed a fixed rate of return.

21. In the case of Dabur, it is not dealing in the shares of joint venture company Aviva. In the case of Dabur, it is a case of acquisition of controlling stakes where Dabur enjoys the controlling stakes and willing to bear the fruits of performance of company.

22. In the case of Mahindra Telecom, the ITAT has not examined the difference between the income and capital as explained by the Hon’ble Supreme Court in the case of CIT vs. Maheshwari Devi Jute Mills Ltd. in 57 ITR 36. In fact, the ITAT Mumbai in the case of Mahindra Telecom had no occasion to consider the judgment of the Hon’ble Supreme Court in the case of Maheshwari Devi Jute Mills Ltd. (supra).

23. In the case of Cadell Weaving Mill Co. Ltd. vs. CIT in 249 ITR 265 at page 280, the Hon’ble Bombay High Court, while considering the difference between income and capital, observed:

“It is true that section 2(24) defines the word “income”. That definition is an inclusive definition. However, it is well settled that capital receipts do not come within the ambit of Income-tax Act except to the extent of any capital receipt being expressly sought to be covered by the Act of Parliament as in the case of section 2(24)(vi).”

The judgment of the Bombay High Court in the case of Caddle Weaving Mill has been affirmed and upheld by the Hon’ble Supreme Court in the case of CIT vs. D.P. Sandhu Bros.in 273 ITR 1.

Again in the case of Vodafone India Services Pvt. Ltd. vs. Union of India in 368 ITR 1, the Hon’ble Bombay High Court has again reiterated the same principle and observed that any amount received on capital account is a capital receipt not chargeable to tax.

In the case of Vodafone India, the Hon’ble Bombay High Court was examining the issue whether the amount received on account of subscription of the issue is a capital account or a transaction giving rise to revenue character in terms of Section 92B of the Act. The Hon’ble Bombay High Court held that the amount received towards the share subscription is a capital account and the premium thereon also remains to be on capital account. This judgment of the Bombay High Court has been accepted by Central Board of Direct Taxes in Instruction No. 2/2015 dated 29th January 2015 reported in [2015] 274 CTR [St] 65.

24. The Jurisdictional Delhi High Court in the case of Nestle SA vs. ACIT in 311 CTR 344, after following the judgment of Vodafone India (supra) held that the investment in shares of the subsidiary is a transaction on capital account not giving rise to any income.

25. In the case of Mahindra Telecom, the ITAT had no occasion to consider the effect of sterilization of an asset as has been done in the case of Dabur. In the case of CIT vs. Bombay Burma Trading Corporation in 161 ITR 386, the Hon‟ble Supreme Court held that in the case of sterilization of trading asset and capital asset both, the compensation received on account of such sterilization would be a capital receipt.

26. In the case of Mahindra Telecom, the said Mahindra Telecom had claimed the borrowing cost as the revenue expenditure over which there was no dispute and on the basis of such claim, the ITAT held, by applying the principle of matching, that once the borrowing cost is being claimed and allowed as revenue expenditure, then the corresponding return on the investment would also form part of the revenue income, whereas in the case of Dabur the said Dabur has not claimed the borrowing cost as revenue expenditure; rather the borrowing cost has been capitalized since inception which were duly examined by the respective Assessing Officers in earlier years and no additions were made and this shows the intention of Dabur that investment is on capital field.

27. In the case of Dabur, in earlier years, the respective Assessing Officers had examined the terms and conditions of the joint venture agreement as well as the receipt of option money and then had made no addition at all.

28. In the case of Mahindra Telecom, the terms and conditions of the joint venture agreement were different from the terms and conditions of the joint venture agreement as executed between Dabur and CUIH. So much so, even the context in which the option price is considered in Mahindra Telecom is different from the context of refundable option money received by Dabur under the terms of the joint venture agreement with CUIH. In the case of Mahindra Telecom, the option price represents the predetermined selling price on which the Mahindra is required to transfer its share to AT&T, whereas in the case of Dabur, the option money was received due to the sterilization of Dabur share not to transfer the same third party except to CUIH in given period.

29. In the case of Dabur, the option money no doubt was paid annually, but it was paid on account of the capital investment made by Dabur and the right of retention as well as ascertainment of the quantum of such option money was to be ascertained at the time of divestment of the controlling stakes by Dabur in favour of CUIH and form part of the net selling price of shares as explained in clauses 16 and 16A of the joint venture agreement read with definition of selling price defined in Schedule 9 of the joint venture agreement. In fact, in Assessment Year 2017-18, when first time Dabur had divested its stake of 23% in Aviva in favour of CUIH, Dabur had refunded the option money amount of Rs.478 crore to CUIH after ascertaining the quantum of refund as per the terms of the joint venture agreement read with its Schedule 3 of the joint venture agreement.

30. In the case of Mahindra Telecom, the Hon’ble Mumbai Bench of the ITAT was influenced with the concept that the substance of the transaction prevails over the form.

However, such principle is not known to the law. In the case of Mahindra Telecom, the Hon’ble Mumbai Bench had no occasion to consider the principles laid down by the Hon’ble Supreme Court in the case of CIT vs. Motors & General Stores Pvt. Ltd. in 66 ITR 692. In the case of Motor General Stores, it has been held by the Hon’ble Supreme Court, while following its earlier judgment in the case of Bank of Chettinad Ltd. vs. CIT in [1940] 8 ITR 522 (PC) that the doctrine that in revenue cases the “substance of the matter” may be regarded as distinguished from the strict legal position is erroneous. The same has been followed by the larger Bench of the Supreme Court in the case of CIT vs. B.M. Kharwar in 72 ITR 603.

In the case of Motors & General Stores, the Hon’ble Supreme Court further observed at page 699 of the Report that when a transaction is embodied in a document, the liability to tax depends upon the meaning and content of the language used in accordance with the ordinary rules of construction. At page 700 of the Report, the Hon’ble Supreme Court approved the observation made by Lord Russell of Killowen in Duke Westminster’s case as well as Viscount Simon in Inland Revenue vs. Wesleyan and General Assurance Society, which were as under:

“If all that is meant by the doctrine is that having once ascertained the legal rights of the parties you may disregard mere nomenclature and decide the question of taxability or non-taxability in accordance with the legal rights, well and good. That is what this House did in the case of Secretary of State in Council of India v. Scoble, (1903) A.C. 299 (4 T.C. 618); that and no more. If, on the other hand, the doctrine means that you may brush aside deeds, disregard the legal rights and liabilities arising under a contract between parties, and decide the question of taxability or non-taxability upon the footing of the rights and liabilities of the parties being different from what in law they are, then I entirely dissent from such a, doctrine.”

In a later case – Commissioner of Inland Revenue vs. Wesleyan and General Assurance Society – Viscount Simon expressed the principle as follows:

“It may be well to repeat two propositions which are well established in the application of the law relating to income tax. First, the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan if it is really an annuity does not assist the taxpayer, any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true nature. The question always is what is the real character of the payment, not what the parties call it. Secondly, a transaction, which on its true construction is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax.”

Thus, he submitted that there is no similarity between the two transactions and the decision cited by the learned revenue authorities to tax the option price as revenue receipt is devoid of any merit.

Analysis & Decision

38. We have carefully considered the rival contention, perused the judicial precedents cited before us by the rival parties, the order of the learned assessing officer and the learned and CIT – A.

39. The first contention raised by the learned authorised representative is that the issue involved in this appeal is squarely covered by the decision of the coordinate bench in case of the assessee for assessment year 2013 – 14 and 2014 – 15 in ITA number 1763 and 1764/del/2018 dated 11th of March 2019 where in coordinate bench quashed the order passed by the ld PCIT u/s 263 of the Act were quashed. . We have carefully considered the rival contentions on this issue. We find that both these appeals were preferred by the assessee against two separate orders of The Principal Commissioner of Income Tax – 16 New Delhi dated 6 February 2018 framed u/s 263 of the income tax act pertaining to those assessment years. On careful consideration of paragraph number 67 of that order wherein the coordinate bench held that assessing officer right from assessment year 2005 – 06 to 2011 – 12, after going through the joint-venture agreement and the balance sheet and notes on accounts filed by the assessee has taken a possible view. In paragraph number 74, the coordinate bench further held that considering the facts of the case in hand totality from all possible angles the bench was of the considered view that the assessment order framed u/s 143 (3) are neither erroneous nor prejudicial to the interest of the revenue and therefore the order passed by the learned Principal Commissioner Of Income Tax was set aside and the orders of the assessing officers were restored. Thus it was evident that the coordinate bench was only seized of the issue whether the orders passed by the learned assessing officer u/s 143 (3) of the income tax act were whether erroneous and prejudicial to the interest of the revenue or not. Therefore, it cannot be said that the coordinate bench has decided the issue on merits in favour of the assessee. Therefore, it would be far-fetched to agree with the contention of the learned authorised representative that the issue involved in the impugned appeal before us is squarely covered in favour of the assessee. Hence, we reject this contention of the assessee/ appellant.

40. Before coming to the merits of the dispute in the appeal, it is necessary to state certain facts of the case. As per partnership deed with effect from 26th of May 2001, four different persons entered into a partnership. Page 116 of 155 The partners decided to enter into a partnership for investing in equity capital of the joint-venture company proposed to be established in India for the purpose of setting up and carrying on the business of insurance, pension, and long-term savings. On 7/8/2001, a joint-venture agreement was entered into between Commercial Union International Holdings Ltd and Dabur invest Corp, the appellant. The, Commercial Union International holding Ltd is a company incorporated in England and wales and the name was changed to Aviva International Holdings Ltd. The joint-venture agreement was to co-promote a joint-venture company for the purpose of regulating the relationship inter se in respect of the company proposed to be floated. This was so agreed because up to the year 2000, insurance business was not allowed by the private parties and was meant only for government companies. However, in the year 2001, the government of India has opened of the field for private parties also and in order to control foreign direct investment in such business also allowed partnership of foreign entities with Indian stake. Therefore, in this background the joint-venture agreement was entered into.

41. The whole controversy in this appeal is solely based on the interpretation and understanding of Joint-Venture Agreement dated 7 August 2001 entered into between CUIH and the assessee. Therefore, it is important to cull out necessary ingredients, terms, and conditions between the two shareholders of a private limited company. The agreement, titled as a Joint-Venture Agreement, which was entered into on 7 August 2001 between the two shareholders i.e. commercial Union International Holdings Ltd (CUIH) and Dabur invest Corp (assessee). CUIH is a subsidiary of a company based out of England carrying on the business of life insurance and related business in United kingdom and other parts of the world whereas assessee is under the control of majority shareholders of Dabur India Ltd, which is engaged in manufacturing and marketing of healthcare, personal care, food products and related business in India and other parts of world. Both shareholders desires to co-promote and identified existing company in India which is Dabur – CGU Life Insurance Co Private Limited (company) for the provisions of life insurance, pension and long-term savings business in India. The company is also a party to this agreement at the time of initial subscription to the shares by both the shareholders. It has an authorised share capital of ₹ 120 crores divided into 120 million equity shares of ₹ 10 each. The shareholders to subscribe initially to 110 million shares by way of Dabur subscribing for 81.4 million shares at par equivalent to 74% of the total paid-up equity capital of the company and CUIH shall subscribe to 28.6 million shares at par equivalent to 26% of the total paid-up equity capital of the company. This agreement has been entered into by both the parties for regulating inter se relationship in respect of the company. According to clause 3.1.3, the Articles of Association of the company were also amended so as to incorporate the terms of this agreement to the extent permissible under the applicable law. As per clause number 2, the purpose of the joint venture stipulates that it is intended that CUIH and Dabur shall develop the company as a leading company in India, which shall provide a comprehensive range of life insurance, pension, and long-term savings products to the general public of India. According to clause 3.1.6 A and 3.1.6 B both, the shareholders have issued an irrevocable and revolving letter of credit to each other for their obligations to each other. The respective formats of such guarantees are prescribed in form number 10 A and 10 B respectively. CUIH has to issue the guarantee in favour of Dabur, which is called as CUIH Option Price Guarantee, and Dabur has to issue such guarantee in favour of CUIH titled as CUIH Subscription Price Guarantee. The Dabur has further issued an irrevocable and revolving letter of credit titled as Dabur guarantee in favour of the company in terms of schedule 11 of the agreement. At the point of time when both the parties have initially subscribed to the share capital of the company, there are certain actions to be taken by both the parties. According to clause 6 there were provisions for further financing in the company. Such financing was based on its five-year business plan and annual business plan presented to and approved by the Board of Directors. Such further financing is also governed by the solvency ratio of the company falling below 120% of the statutory minimum solvency ratio or such other level range as the board of directors agreed to i.e. desired solvency ratio. Such further financing is required to be contributed by both the shareholders in the company by way of subscription for further shares in proportion that the total amount of paid-up share capital bears to the amount of total of paid-up share capital of the company. However if annual business plan for a year requires capital contribution by Dabur in excess of the amount the amount is required to be contributed by Dabur in that year in terms of the five year business plan at the rate of 30% of the amount set out in such business plan. Further subscription by the shareholders shall be subject to approval of the aforesaid annual business plan by both the shareholders. However, the total financial commitment of Dabur towards the company shall not exceed Rs 237 crores, which constitutes 74% of ₹ 320 crores the proposed total paid-up equity share capital of the company. Further if the funds are still required by the company after Dabur has completely discharged its commitment, Dabur shall have the option to contribute towards such an additional funding in proportion to its then existing shareholding in the company. If Dabur chooses not to exercise its option, to contribute further, the company may arrange such additional funding but shall not dilute the existing shareholding of the Dabur and CUIH in the company. It is further provided that CUIH shall not be under an obligation to subscribe for additional shares to the extent that it is prevented by the applicable law from doing so. However, CUIH shall always hold a minimum of 26% of the total equity share capital of the company. It further provides that in the event of the applicable law percentage is changed to allow CUIH to hold more than 26% of the total equity share capital of the company and in the event that the company at that particular point of time requires further financing, CUIH shall be obliged first to increase its shareholding in the paid-up capital of the company to the revised applicable law percentage by purchasing the required number of shares from Dabur. After such subscription by CUIH, the shareholders shall provide any further financing in proportion to their new shareholding ratio in the company. The shareholders shall have the right of investigation into the affairs of the company to the extent of it being reasonable. It is the duty of both the shareholders to see that the relevant accounting and financial information and internal audit are also carried out by the company. Company has also a dividend policy set out in clause 10 of the agreement to distribute to the shareholders by way of dividend at an agreed percentage of the consolidated total distributable profits. The board of directors of the company shall be 10 out of which Dabur shall be entitled to nominate maximum six directors and CUIH shall nominate maximum of 4 directors. The chairman of the board shall be nominated by annual rotation between the shareholders i.e. Dabur and CUIH without any casting vote and the Dabur will nominate the first chairman of the company. The Chief executive officer of the company shall be nominated by CUIH being one of the four directors in consultation with Dabur and shall be appointed by the board. The quorum of the board meeting of the directors shall be 4 directors one of whom must be a Dabur nominee and one CUIH nominee. All the decisions are required to be reached on a simple majority of votes of the directors present. As per clause number 13 there are certain reserved matters between the shareholders, which are required to be pursued not without the prior unanimous approval in writing by both the shareholders. According to clause 15 there is a provision of transfer of shares by both the shareholders to its affiliated entities. The Dabur undertook that during the terms of this agreement it will not sell or transfer the Dabur shares to any company which is not an affiliate of Dabur and there will not be any new shareholding in any affiliate holding shares pursuant to the transfer Under this clause or in Dabur by any person other than Indian National if such transaction would prevent CUIH from maximizing its shareholding in the company. According to clause 16 CUIH agreed to pay the option price to Dabur for right granted to CUIH during the 10 year period to require Dabur to sell only to CUIH such number of shares as would be required to take CUIH shareholding in the company to the maximum revised applicable Law percentage (FDI norms) and after 10 year period to require Dabur to sell such Dabur shares to CUIH or its nominee to the maximum revised applicable Law percentage. Further, during the term of the agreement, on each option price payment date i.e. 31st of January, CUIH shall pay to Dabur the option price on the total number of shares held by Dabur. The sale consideration received by Dabur pursuant to the exercise of such option by CUIH shall always be the market value per share sold by Dabur. However if the market value is lower than the subscription Price (at the price at which the shares were subscribed i.e. ₹ 10 per share), CUIH shall also pay the difference between the subscription Price and market Value to Dabur and Dabur shall retain the option price received on such Dabur shares. If the market Value is higher than the subscription Price, Dabur shall repay the option price pertaining to such Dabur shares within 30 days from the receipt of the market value. Further if the market value is equivalent to the subscription Price Dabur shall retain the option price received on such Dabur shares. As per clause number 16.8 which is related to the divestments during the 10 year period, provides that if Dabur has to divest its shareholding, and if the value realized by Dabur is higher than the subscription Price plus the option price, the Dabur shall repay to CUIH the total option price received till then. If the market present price is higher than the subscription Price but lower than the subscription Price plus the option price, Dabur shall repay an amount equal to the difference between the market value and the subscription Price. Further, if the market Value is equal to the subscription Price plus the option price received then Dabur shall repay the total option price. If the market Value is lower than the subscription Price, CUIH shall pay to Dabur the difference between the market value and the subscription Price. Clause 16.9 deals with the divestment of the shares after the 10 year period, where also modalities of financial shares of parties is provided for Dabur shares where CUIH has also right to sale the Dabur shares to 3rd parties and at that point also three circumstances are visualized linked with the market price stating that what would be the receipt in the hands of Dabur at the time of sale. The CUIH shall also have a right to divest the shares of Dabur in public. CUIH may also offer the locked in shares of Dabur to Dabur itself with a condition that the option price received by it on the Dabur share specified in the retention shares be returned to CUIH.. If the Dabur retains those shares at the time of divestment after the 10-year period Dabur shall repay the option price it has received with respect to the retained shares. Further if the retained shares by the Dabur are required to be sold by the Dabur the right of first refusal rest with the CUIH. Further, if it is sold to other parties , then due diligence of the affairs of the company is to be allowed by CUIH. The option price received by the Dabur is required to be repaid to CUIH in certain circumstances as per clause number 16 A. Clause 16 B is with respect to the invocation of guarantee and clause number 16 C is placing the shares in escrow account in situation of the winding up of the company. Clause number 17 deals with the transfer of shares owned by CUIH within a 10-year period and after the 10-year period. According to that clause, if at any time during the 10 year period CUIH decides to sell its shares to any third party, the intention of such sale of shares is required to be given to the Dabur in the form of the notice and if Dabur wishes to acquire those shares it has to indicate its intention. Price shall be one, which has been given by an investment banker to CUIH as the indicative value.. If the Dabur does not wish to acquire those shares, it has also right of tag along and the buyer i.e. third party can also purchase the shares of Dabur along with the shares of other shareholder. After the 10-year period, the Dabur has also right to purchase the shares of the other shareholder and has also right of tag along. According to clause 17 A which deals with the issue of transfer of shares by Dabur , which provides that subject to the applicable law, Dabur shall not transfer its shares to any third party except in accordance with the clause 16 of the agreement. Clause number 18 deals with the material breach, consequences, and clause number 19 deals with the termination of the agreement. It provides that when any of the parties does not hold any share in the company, or when Dabur cease to hold any Dabur shares after the 10-year period or both the parties cumulatively hold less than 51% of the company’s equity or at the time of mutual agreement, the impugned agreement is terminated. Clause number 20 deals with the Winding up of proceedings wherein it is provided that in the event of winding up at any time CUIH shall pay Dabur an amount, which is equivalent to the subscription price of Dabur’s total shareholding in the company on the date and Dabur, shall retain the option price paid till date. It further provides that in the event, there is reserves balance of the surplus and it shall be distributed between the shareholders proportionate to their then existing shareholding. The clause 21 provides for the confidentiality, the clause 22 deals with the noncompete clause, clause 23 deals with the implementation of agreement. Clause 21 provides that if there is any conflict between the terms of the agreement and provisions of the Articles of Association of the company, then provisions of this agreement, with respect to the rights and duties of the shareholders, shall prevail. The clause 25 deals with the cost, clause 26 deals with the notices, and clause number 27 to clause 42 deals with the various regulatory issues between the parties.

42. Schedule 1 of the agreement provides certain definitions. One of the clause that is defined as OPTION PRICE and certain other relevant terms are as Under:-

“ OPTION PRICE” shall mean during the 10 year period sum payable by CUIH to Dabur annually in advance which is equivalent to 20% of the subscription price for each share held by Dabur and after the 10 year period a sum payable by CUIH to Dabur annually in advance which is equivalent to 20% of the subscription price for each Dabur share. In the event of further capital contribution by Dabur in terms of clause 6 during the year, the option price payable in relation to the such capital contribution in that year shall be proportionate to the remaining period in that year. All taxes, including withholding taxes, if any, payable by CUIH on the option price, shall be to the account of CUIH. All taxes payable by Dabur, if any, shall be to the account of Dabur.”

“Retained Shares” shall mean the shares held by Dabur immediately after the expiry of the 10 year period which constituted 26% of the companies then paid up equity share capital and those shares in relation to which Dabur has returned the option price in terms of clause 16.9.2.4

“subscription price” shall mean the par value of a share.

43. There are various other schedules attached to the agreement. Schedule 2 is a five year business plan which shall mean the ruling business plan prepared by CUIH and jointly agreed by the shareholders first of which is attached therein. Schedule 3 is a formula for calculating the payment by Dabur to CUIH of the option price. Schedule 4 is the activities to be undertaken by the company after the subscription rate. Schedule 5 is a format of the subscription request to be issued by the company and 6A is a procedure for exercise of the CUIH option/Dabur option in case of change in applicable law percentage. Schedule 6C is a procedure for determining the market value in the event the shareholders failed to agree of value per share. It also provides that in the event that when both the parties have different value however, the difference is within 20%, the average of the value by both the parties shall be the market value, and it shall be final and binding on both the shareholders. In the event if the difference between the valuations by both the parties exceeds 20%, another investment banker of international repute shall be appointed who will determine value, then the market value of the shares shall be average of the closest of the two values determined as the final value and which shall be binding. Schedule 9 also gives certain illustrations for the determination of value according to clause 16.6.1, 16.6.2 and 16.6.3. It further provides the value at the time of public offering before 10 year period and after 10 year period. This schedule also provide when there is a divest by way of a sale of shares to 3rd party and along right of Dabur after the 10 year period. Schedule 10 A, 10 B, 11 are the formats of various guarantees to be given by both the parties to the other party respectively. Schedule 12 is the format of the power of attorney.

44. Now the only issue in this appeal is that whether option price received by the assessee year to year @ 20 % of subscription amount is an income of the assessee or a capital receipt.

45. The facts shows that assessee has received this sum year to year as under :-

serial number	Financial Year	Assessme nt year	Year Wise Option money Received by assessee and shown as advance received in liabilities side (In Rs.)	Accumulated sum In Rs	Assessment status
1	2002 – 03	2003 – 04	22,91,04,000	22,91,04,000	Already assessed. The assessment for assessment year five – 06, 2006 – 07, 2008 – 09 were already completed as scrutiny assessment u/s 143 (3) of the act.
2	2003 – 04	2004 – 05	47,84,44,000	70,75,48,000
3	2004 – 05	2005 – 06	47,33,04,000	118,08,52,000
4	2005 – 06	2006 – 07	59,66,47,200	177,74,99,200
5	2006 – 07	2007 – 08	91,46,13,095	269,21,12,295
6	2007 – 08	2008 – 09	108,13,17,600	377,34,29,895
7	2008 – 09	2009 – 10	212,50,69,101	589,84,98,996
8	2009 – 10	2010 – 11	243,09,48,361	832,94,47,357
9	2010 – 11	2011 – 12	249,70,84,708	1,082,65,32,065	Reopened assessment by issue of notice u/s 147 of the income tax and appeals for which are pending before the learned and CIT – A
10	2011 – 12	2012 – 13	246,84,62,400	1,329,49,94,465
11	2012 – 13	2013 – 14	246,84,62,400	1,573,34,56,865	For these two years the learned CIT took action u/s 263 of the income tax act which has been quashed by the coordinate bench by order dated 11 March 2019
12	2013 – 14	2014 – 15	246,84,62,400	1,823,19,19,265
13	2014 – 15	2015-16	246,84,62,400	2,070,03,81,665	Impugned assessment year in appeal

46. It is also interesting to note the rival contentions. The assessee‟s contention is that option price money received is linked with the value of transfer of Dabur share to CUIH , the contingency may arise that option price received by the assessee may be refunded, further the option money so received is also advance for the sale of shares, therefore, such sum received by the assessee shall be adjusted against the sale consideration received or receivable by the assessee at the time of transfer of Dabur shares to CUIH. Therefore, the above sum is a capital receipt and would be treated under the head capital gain at the time of the sale of those shares to CUIH. Such Treatment is offered by the assessee is later on years when the 23 % stake of Dabur shares were transferred to CUIH.

47. Contention of the revenue is the option money so received by the assessee year to year does not bear the character of a capital receipt but it is a revenue receipt as it is received annually in terms of the agreement and therefore such a option money received by the assessee should be chargeable to tax on year to year basis at the time of receipt. It is in nature of Interest on subscription price. Thus, for this impugned year sum received of ₹ 2,468,462,400/– is income of the assessee.

48. Further, for assessment year 2011-12 and 2012-13, the case of the assessee has been reopened u/s 147 of the act. For assessment year 2013 – 14 and 2014 – 15, The Principal Commissioner of Income Tax took action u/s 263 of the income tax act, which challenged before the coordinate bench, and such action u/s 263 was quashed by coordinate bench by order dated 11/03/2019.

49. It is also evident that till assessment year 2010 – 11, assessee has received option price money of ₹ 8,329,447,357, which is not offered by the assessee as income for assessment year 2003 – 04 to AY 2010-11. It is interesting to note that this sum of ₹ 8,329,447,357/– is proportionately offered by the assessee in assessment year 2017 – 18 at the time of the sale of part shares from Dabur to CUIH. Therefore, assessee has offered/ considered proportionately the above sum of ₹ 8,329,447,357/– under the head of capital gain in assessment year 2017 – 18. If the option price money received by the assessee is held to be income chargeable to tax on year-to-year basis, naturally such amount received till assessment year 2010 – 11 of ₹ 832 crores would be untaxed, as the requisite time for taking any corrective measure by the revenue has already elapsed. However, that does not determine the issue before us that whether the sum received by the assessee as option money year to year is a capital receipt or any income chargeable to tax on year-to-year basis.

50. The judicial precedent gives a principle that while all revenue receipts are assessable under the Act, unless specifically exempt, a capital receipt may or may not be so chargeable to tax. A capital receipt would be chargeable to tax where it falls for consideration u/s 45 of the Act, subject to the provisions of the income tax act. To determine whether a particular receipt is a capital receipt or any income is always a vexed issue. The problem of discriminating between capital receipts and income receipts, and between capital disbursements and income disbursements, has very frequently engaged the attention of the Honourable courts. In general, the distinction is well recognized and easily applied, but from time to time cases arise where the item lies on the borderline and the task of assigning it to income or capital becomes one of much refinement. The Income tax Act does not define „income‟ except by way of adding artificial categories. There are innumerable decided cases where on a particular facts and issues are decided. While each case is found to turn upon its own facts and no infallible criterion emerges, nevertheless the decisions are useful as illustrations and as affording indications of the kind of considerations, which may relevantly be borne in mind in approaching the problem. In the final analysis, however, the controversy would have to be resolved in the light of the facts and circumstances of each individual case. Therefore, the vexed question before about the nature of option price received by the assessee is required to be decided only on the basis of the agreement entered into by the both the parties. We hastened to add that parties have drawn our attention to plethora of judicial precedents. We have looked in to each of them, applied our mind considering those decision to the facts of the present case.

51. Undoubtedly, option price as defined at page number 51 of the joint-venture agreement clearly shows that this is a sum payable by CUIH to Dabur annually in advance equivalent to 20% of the subscription Price for each shares held by Dabur. Option price payment date is also fixed. It means the date on which CUIH pays Dabur the option price which had the first instance the date of initial subscription by Dabur and thereafter on every 31st of January each year. However, what is this option price and what is the relevance of this option price in the whole agreement is required to be seen.

52. Clearly the joint-venture agreement between commercial Union International Holdings Ltd and Dabur invest Corp is a shareholder agreement between both the shareholders of Dabur CGU Life Insurance Co Private Limited (Aviva Life Insurance Co Private Limited). This agreement decides interse rights, duties, obligations, covenants between the parties to far as they hold the shares in the private limited company. The movement any one of the shareholder exits , the agreement comes to an end.

53. As the parties to the joint-venture agreement has agreed to develop an insurance business, assessee, Dabur invest Corp invested 74% in the equity capital of that company and commercial Union International Holdings Ltd subscribed to 26% of equity capital of that company because at that particular time the foreign direct investment rules provided for an investment in insurance business only up to 26%. Till , the FDI rules are relaxed, commercial Union International holding Ltd and Dabur agreed that foreign investor will pay 20% option price for transfer of those shares according to clause number 16 of the joint-venture agreement. The clause number 16 of the joint-venture agreement provides as Under:-

“16. Transfer of Dabur shares and share option

16.1 In consideration of the terms of this agreement and payment by CUIH of the option Price, Dabur hereby grants to CUIH:-

a) the right during the 10 year period to require Dabur to sell only to CUIH such number of shares held by Dabur as would be required to take CUIH shareholding in the company to the maximum revised applicable Law percentage, and

b) the right after the 10 year period to require Dabur to sell to CUIH or its nominee such number of Dabur shares as would be required to take CUIH shareholding in the company to the maximum revised applicable Law percentage.

The rights conferred by this clause to CUIH shall be exercisable on each occasion (if more than once) when CUIH shareholding in the company is lower than the revised applicable Law percentage.

In consideration of the terms of this agreement, CUIH hereby grants to Dabur:-

A) the right during the 10 year period to require CUIH to purchase from Dabur such number of shares held by Dabur as may be required to take CUIH shareholding in the company to the maximum revised applicable Law percentage, and

B) The right after the 10-year period to require CUIH by
itself or through its nominee to purchase from Dabur such number of Dabur shares as would be required to take CUIH shareholding in the company to the maximum revised applicable Law percentage.

The rights conferred by this clause to Dabur shall be exercisable on each occasion (if more than once) when CUIH shareholding in the company is lower than the revised applicable Law percentage.

The rights available to CUIH and Dabur Under this clause shall be exercised in accordance with the procedures set out in schedule 6.

16.2 During the terms of this agreement and on each option price payment date, CUIH will pay to Dabur the option price on the total number of shares held by Dabur and such option price payment date, failing which Dabur shall be entitled to invoke the CUIH option price guarantee to recover such amount. The above option Price shall be paid on each option price payment date Dabur until:-

a) all shares held by Dabur other than the retained shares are sold and Dabur has received sale proceeds for such sales in terms of this agreement, or

b) Dabur except the retention of made by CUIH as per clause 16.9.2.4 on all the Dabur shares

16.6 The sale consideration received by Dabur pursuant to the exercise of the CUIH option or the Dabur option shall always be the market value for each share sold by Dabur provided that:-

16.6.1 in the event that the market Value is lower than the subscription Price, CUIH shall also pay the difference between the subscription Price and the market Value to Dabur Simultaneously with the sale of Dabur shares. The Dabur shall be entitled to retain the option price received on such Dabur shares.

16.6.2 If the market Value 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 (30) days from the receipt of the market value. Provided however, if as a result of repayment of the option Price, the net sale proceeds (i.e. the difference between the gross sale receipts per Dabur share and such option price which shall be calculated as per the formula set out in schedule 3) become less than the subscription Price, only such part of the option Price shall be repaid so as to ensure that the net sale proceeds per Dabur shares are not less than the subscription Price.

16.6.3 In the even the market value is equivalent to the subscription Price, Dabur shall retain the option price received on such Dabur shares

16.8 divestments during the 10-year period

16.8.1 Subject to the applicable law on the terms of this agreement, neither shareholders and sale, transfer, alienate or otherwise dispose of any shares or any interest in any shares to any third party during the 10 year period.

16.8.3 If it any point during the 10 year period, the applicable law requires as a shareholder to engage in a process which requires divestments of any shares, then the shareholder will cooperate in such process notwithstanding anything to the contrary in this agreement. If such provisions of the applicable law requires such process to be undertaken by a specified time then the process shall be commenced within six months before the time but not earlier. In the event, Dabur has to divest its shareholding in the company:-

16.8.3.1 if the market value realized by Dabur is higher than the subscription Price plus the option price received on such shares, Dabur shall within 30 (30) days of receiving the market value, repay to CUIH the total option price (to be calculated in accordance with schedule 3), paid till date on such Dabur shares 16.8.3.2 if the market Value is higher than the subscription Price but lower than the subscription Price plus the option price (to be calculated in accordance with schedule 3), paid till date on such shares, Dabur shall repay CUIH, within 30 days of receiving the market value, an amount equal to the difference between the market value and the subscription Price.

16.8.3.3 if the market Value is equal to the subscription Price plus the option price received on such shares, then Dabur shall repay CUIH the total option price (to be calculated in accordance with schedule 3), paid till date on such Dabur shares within 30 days of receiving the market value

16.8.3.4 If the market Value is lower than the subscription Price, CUIH shall pay to Dabur the difference between the market value and the subscription Price simultaneously with Dabur offering its shares as a part of the divestment process. Dabur shall retain the option price received by it on such shares.

In the event, CUIH fails to pay the difference between the market value and the subscription price to Dabur as aforesaid, Dabur shall be entitled to invoke CUIH subscription price guarantee to the extent of the amount which is equal to such difference.

16.9 divestment after the 10-year period After the expiry of the 10-year period, the following provisions shall apply in relation to the Dabur shares:-

16.9.1 CUIH shall continue to pay the option price on the Dabur shares

16.9.2 The CUIH option shall continue in full force and effect and CUIH shall have the following rights:-

16.9.2.1 CUIH may give notice has proceeded 6A that it requires the sale of some or all Dabur shares to CUIH (subject to applicable law). If CUIH requires Dabur to sell the Dabur shares to CUIH, Dabur shall sell such shares at market value and the provisions of clause 16.6 shall apply to such sale/purchase transaction.

16.9.2.2 CUIH may give a sale notice that it requires the sale of some or all of the Dabur shares to a Third party identified by CUIH (subject to applicable law). Dabur shall be obliged to sell such number of Dabur shares as specified in the sale notice at market value provided that if:-

a) The market Value to be paid by the third parties lower than the subscription Price, CUIH shall pay the difference in the subscription Price and the market Value to Dabur Simon tenuously with the sale of Dabur shares. Dabur shall be entitled to retain the option price received on such Dabur shares

b) The market Value is higher than the subscription Price, Dabur shall repay to CUIH the option price (to be calculated in accordance with schedule 3), pertaining to such shares within 30 days of receiving the market value. Provided however, if as a result of repayment of the option Price, the net sale proceeds per share received by Dabur becomes less than the subscription Price, only such part of the option Price shall be repaid so as to maintain the net sale proceeds per Dabur shares at the subscription Price

c) The market Value is equal to the subscription Price, Dabur shall retain the option price received on such Dabur shares

The sale/purchase transaction is envisaged under this clause 16.9.2 point to sell be effected in accordance with the procedures set out in schedule 6B1.

16.9.2.3 Notwithstanding anything contained in clause 13.3, CUIH may give a sale notice that it requires Dabur to divest to public some or all the Dabur shares. The Dabur shall be obliged to sell the number of Dabur space basic filed in the sale notice. In the event of divestment by Dabur of the Dabur shares, if:-

a) the market value realised by Dabur is higher than the subscription Price plus the option price received on such shares, Dabur shall repay to CUIH within 30 days of receiving the market value, the total option price (to be concluded in accordance with schedule 3), paid till date on such Dabur shares.

b) if the market Value is higher than the subscription Price but lower than the subscription Price plus the option Price (to be calculating accordance with schedule 3), paid till date on such as, Dabur shall repay to CUIH within 30 days of receiving the market value, an amount equal to the difference between the market value and the subscription Price.

C) if the market Value is equal to the subscription Price plus the option price received on such shares, then Dabur shall repay to CUIH within 30 days of receiving the market value, the total option price paid till date on such Dabur shares

d) if the market Value is lower than the subscription Price, CUIH shall pay two Dabur the difference between the market value and the subsection Price Simon tenuously with the sale of Dabur shares offered as a part of the divestment process. Dabur shall be entitled to retain the option price received by it on such shares. In the event, CUIH fails to discharge its payment obligation Under this clause 16.9.2.3 (d), Dabur shall be entitled to invoke the CUIH subscription price guarantee for the amount which is equal to the difference between the subscription price paid for Dabur shares and the market Value received.

The divestment by Dabur envisaged Under this clause 16.9.2.3 shall be effected in accordance with the procedures set out in schedule 6B2.

16.9.2.4 CUIH may, at its discretion, offer (retention offer) Dabur for Dabur to return the option price received by it on some or all of the Dabur share specified in the retention offer. If Dabur accept the retention offer, Dabur shall indicate such acceptance by way of a notice to CUIH within 15 days of receipt of the retention offer. Further subject to approvals, Dabur shall within 30 days of its acceptance, repay the total option price received by Dabur till date on the Dabur shares indicated in the retention offer. The amount of option price to be repaid shall be computed in accordance with the formula set out in schedule 3. The shares on which the option price is retained by Dabu to CUIH in terms of this clause 16.9.2.4 shall thereafter be treated as retained shares for purpose of this agreement.

16.9.6.1 Dabur shall repay the option price it has received in respect of the retained shares within 30 days of expiry of the 10 year period. The amount to be repaid by Dabur to CUIH by way of option price shall be calculated in accordance with the formula set out in schedule 3.

16.9.7 if Dabur entrance to transfer the retained shares to any third party, it shall offer all such shares, in the first instance, to CUIH in the manner set out in schedule 8.

16A Repayment of option price by Dabur to CUIH Dabur shall repay to CUIH the option Price Under this agreement only Under the following circumstances:-

a) if the market Value received by Dabur for Dabur shares sold pursuant to clause 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. Provided however, if as a result of repayment of the option Price, the net sale proceeds per share received by Dabur pursuant to the aforesaid clauses becomes less than the subscription Price, only such part of option price shall be repaid so as to maintain the net sale proceeds per share at subscription Price.

b) If the market Value received by Dabur for Dabur shares offered as a part of this investment pursuant to clause 16.8.3 of 16.9.2.3 is higher than the subscription Price, Dabur shall repay the option price pertaining to such shares within 30 days of receiving the market Value (to be calculated in accordance with schedule 3). Provided however, if as a result of repayment of the option Price, the net sale proceeds per share received by Dabur pursuant to the aforesaid clause becomes less than the subscription Price, only such part of the option Price shall be repaid so as to maintain the net sale proceeds per share at subscription Price.

c) If the shareholding of CUIH is divested in terms of clause 17.2 after the 10 year period and Dabur, pursuant to the exercise of its tagalong right Under clause 17.2.5, sells its shares, Dabur shall repay CUIH the option price received by it (to be calculated in accordance with schedule 3). Such repayment shall be in accordance with clause 17.2.5 (b)

d) Dabur shall repay the option Price (to be calculated in accordance with schedule 3) on retained shares in terms of clause 16.9.6.

54. On careful consideration of above all clauses it is quite clear that option price received by Dabur from CUIH is subject to the determination of market value per share held by Dabur. This is evident from the reading of clause number 16 and 16 A of the agreement. Option price received by the assessee is directly linked with the transfer of Dabur shares. Dabur shares are to be transferred always at the market rate and if the Dabur incurs certain losses , then same shall be to an extent be recouped by CUIH. If there is upside in the market value of share , such defined gain on transfer of Dabur share is to be retained by Dabur. The learned CIT – A has dealt with this issue at page number 26 – 29 of her order. As we have already held that option price received by the assessee, though received on a regular basis and generating constant cash flow in the hands of the assessee, however, there is a liability on the assessee to repay such option price when such shares are sold in certain events. Therefore, though it is received on a regular basis and used to generate an income regularly in the hands of the assessee, it cannot be said that it is an income.

55. The shares held by Dabur is a capital asset of the assessee. The shares are locked in for the reason that the right of first refusal to buy the shares of Dabur rests with CUIH. In return, CUIH has paid Dabur option price, which is merely an advance against the purchase of the shares by CUIH at a later point of time. Thus option price, is required to be adjusted in all the transactions wherever the shares of Dabur would be transferred either to CUIH, or its nominee, or to a third party in all the events. Therefore, even otherwise the option price received by the assessee is merely a liability of repayment in the event the market value of the shares of the company is determined. It may happen that in certain circumstances the assessee may retain the option price and in certain circumstances the assessee may have to repay the option price back to CUIH. However, the triggering event would be the transfer of shares of Dabur in the company.

56. It is the contention of the revenue that joint-venture agreement is not about accessing shared resources pool or intellectual rights and it does not chalk out the business model for sharing of common pool of resources like intellectual rights, facilities, equipments et cetera and only a passing mention is made of new insurance entity. Looking at the agreement clause number [3] which is a conditions precedent to initial subscription specifically refers to the business plan for five years based on which the counter guarantees of the parties are to be worked out. The first such five year business plan is placed at page number 53 of the agreement which gives business plan for year 2001 to 2006. It also simulates premium income and investment income as well as the total expenditure of the company. Further the required solvency margins are also computed therein. The capital requirement of an Indian entity as well as foreign entity is also planned. Further on looking at clause number 6, wherein the provisions of further financing are incorporated. It is provided that in case the company requires further financing it would be in terms of the five year business plan and annual business plan presented to and approved by the board of directors. Further if the solvency ratio of the company falls below 120% of the statutory minimum solvency ratio, then also further financing is required. The board of the company may also decide on its own that further financing is required. All these are based on the business plan and annual business plan presented to the board. In the board of directors both the shareholders have a right to appoint the directors in proportion to their shareholdings. In the impugned year before us the Dabur was holding 74% of equity and thus was a majority partner.

57. It is also stated by the learned CIT – A that the joint-venture agreement is merely a financial agreement where Dabur confers exclusive rights upon CUIH for purchase of its shares. Thus it is only an agreement when CUIH guarantees payment of 20% as option price to Dabur by 31st January every year in return for exclusive right to purchase shares by CUIH in the event of change of foreign direct investment rules. On careful reading of the complete agreement, it is apparent that it is a shareholders‟ agreement for making investment in a company which is also incorporated in the articles of association of the company. There are Tag along and Drag along rights of both the shareholders enshrined therein. Further as per clause number 16 option price is to be refunded by the assessee in certain events to CUIH. In fact option price is refunded when FDI rules were relaxed and foreign party was entitled to hold 49% equity. At that moment 23% of Dabur shares were transferred in favour of CUIH in terms of provisions of clause 16 of the agreement and option price was refunded proportionately. Therefore, it cannot be said that the 20% return on subscription price has been paid by CUIH to the assessee as a return on its investment and hence it is income.

58. The revenue vehemently argued that assessee is receiving payments annually i.e. year to year, therefore it is an income of the assessee accruing year to year. On the basis of several judicial precedents, the principal emerges that the receipt of a periodic nature or a single receipt is immaterial for the purpose of determining its nature. There is no magic in the distinction between a lump sum and a periodical sum which determines the nature of receipt. Income receipt is not necessarily recurring and not a capital receipt single. A single occasional receipt may be an item of an income whereas an annual receipt recurring over a number of years also cannot be an income. Therefore the question always is what is the real character of payment not what the rival parties call it. Further the disclosure by assessee in its books of account as liabilities, also do not determine the character of that receipt as a capital receipt. The way in which receipt is dealt with in the accounts of the assessee is not always conclusively against or in favour of assessee, whether the receipt of money is taxable or not has to be decided according to the principles of Income tax Act and not in the manner in which a particular item is dealt with in its books. However the principle of accrual of income is not different in accounting theory and taxation principal. Therefore, on reading of the comprehensive agreement of joint-venture between the shareholders i.e. shareholders agreement, it is apparent that option price received by the assessee annually is merely an advance receipt of sale consideration of shares to be transferred by assessee in favour of CUIH, its nominee or to 3rd party.

59. Even such Option price received is always a liability of the assessee , as there are relevant clauses of the agreement where assess needs to refund the same to CUIH based on market value of shares. Undeniably, there are circumstances where the Option price is to be retained by the assessee , but all these depends on the triggering even of sale of Dabur shares , not before that. Further the option price is also to be adjusted in “full value of consideration of shares‟ as when those are transferred. Thus, Option price is capital receipt, received in advance by the assessee.

60. One more reason to say so is that when assessee has subscribed to the shares of the company, according to clause number 10 which describes Page 141 of 155 the dividend policy amongst the shareholders, any dividend received by the assessee if at all, is not adjustable against option price. Thus Dabur shares are also entitled to Dividend , If any.

61. It is also argued by the revenue that Dabur does not have any right of management of the business and the business will only grow because of AVIVA. The reference was specifically made to a provision in the agreement clause number 11.4 that the Chief Executive officer of the company shall be nominated by CUIH from one of the four directors nominated by it in consultation with Dabur and shall be appointed by the board. Looking at clause number 11 which provides for the composition of the board of directors, the total number of the directors of the company shall be 10 and Dabur shall be entitled to nominate maximum of 6 of the 10 directors and CUIH shall nominate maximum of 4 directors. The chairman shall be nominated by the annual rotation between the shareholders and shall not have a casting Vote. The Dabur will nominate the chairman in the first year. The Chief Executive Officer of the company is required to be nominated by CUIH out of its four directors. However such Chief Executive Officer would be appointed in consultation with Dabur. As the investment is made by the assessee in a private limited company, it will function as per the decision of the board of directors of that company. Even the appointment of chief executive officer of the company is also required to be nominated in consultation with Dabur. The agreement does not provide that Dabur will not have any say in the management and the day-to-day affairs of the company. In fact the Chief Executive officer shall also report to the board of directors and will act and function Under the direction of the board of directors and would be responsible to them. Further on looking at clause number 13 which provides certain reserved matters between shareholders. There are more than 24 items which are listed therein which cannot be carried out by the company otherwise without the prior unanimous approval in writing of both the shareholders. Therefore, it is apparent that Dabur has a veto right in all these 24 matters. Merely the appointment of chief executive officer of the company who is a nominee of CUIH, it cannot be said that the Dabur does not have any management rights in the company. Further, the argument that there is not a single instance, where Dabur has used its veto, is also devoid of any merit, because there was no such resolution placed is shown to us. In view of this, it cannot be said that Dabur does not have a right of management in the new entity.

62. It has been also held by revenue that the joint-venture agreement is an ironclad financial agreement where CUIH, holding guarantee of 20% of option price on the rights of CUIH for buying further stake of the assessee due to change in the foreign direct investment percentage and therefore the option price received by the assessee is income of the assessee. We have already stated that the joint-venture agreement is in the nature of a shareholders‟ agreement. It may be possible that one shareholder may put in investment in the company and other party may put in investment as well as expertise for the business of the company. But both are investors in the company. Even otherwise any acquisition of a stake in a company is always a financial arrangement. The right of first refusal to buy the stake of another party is always enshrined in case of closely held companies for smooth conduct and efficient running of the business. Whenever the shareholders enters into a shareholder agreement with respect to a particular company where both of them have invested and give a right of purchase of stake of one another, issues counter guarantees to each other for their obligations, it makes their investment in the company somewhat illiquid and nonmarketable. And for that if another shareholder pays some advance money to be adjusted later on, when actual transfer of stake happens, such advance money received is a capital receipt and required to be adjusted only against the sale consideration received. It is not the case of the revenue that at the time of investment Dabur has not looked into the viability of business of insurance, government policies of foreign direct investment in insurance sector and continuity of CUIH in the business of insurance. After considering all these facts the Dabur has invested into the insurance business by assuming the risk as a business man. Thus, the treatment of the joint-venture agreement by the revenue and its interpretation that option price received by Dabur is a revenue receipt and is chargeable to tax as income is devoid of any merit.

63. One more reason assigned by the revenue to treat the option price as income is that the option price so received by the Dabur has been invested in income earning securities and therefore it cannot be considered as a capital receipt. It is also argued that that option price payment or its user has not been restricted by any clause in the joint-venture agreement. In fact option price is invested by assessee in unsecured loan with sister concerns and mutual funds. Further, the revenue says that the recurring annual income is also not restrained and not put in any escrow account. We do not find any reason that utilization of the money received by the assessee can determine the character of the receipt in the hands of the assessee. There may also not be any requirement between the parties to put the above money in escrow account otherwise, why in first instance the money is paid to Dabur as an option price. In any way, whether Dabur utilizes the option money for its further investment elsewhere or it puts it into an escrow account, it is always the liability of the Dabur to pay back option price in certain event, which in fact it has done when 23% equity is transferred from Dabur to another shareholder. Therefore, we do not find any reason to hold that utilization of Dabur of option money by assessee makes any difference in determining the character of option price received whether capital receipt or income.

64. The learned lower authorities have also held that at the time of receipt of option price by the assessee there is no underlying asset transferred by the assessee and therefore it is an income in the hands of the assessee. Page 144 of 155 Naturally, the option price received by the assessee is an advance towards the sale price of the shares at a future date therefore the transfer of the underlying asset will happen at a future date on happening of the certain events. Thus it cannot be said that as there is no transfer of an asset at the time of receipt of option price and therefore, , the option price becomes an income of the assessee. If, this argument of the revenue is accepted then any advance received for the sale of a capital asset, where the sale will happen in the later time, Will become income of the assessee even if the transfer of such capital asset takes place in later years. This will tantamount to changing the character of a capital receipt (sale consideration for a capital asset) received in advance as income without there being any transfer of an asset. It is not the case of the revenue that ultimately the assessee did not transfer the assets and adjusted the option price against the sale consideration. Further whatever income is earned by the assessee in utilizing option money has already been offered to tax. In fact assessee has refunded the option price received in terms of the clauses of the agreement when subsequently the shares were transferred by the assessee to CUIH.

65. Another issue raised by the revenue is that the market value of the shares does not change the amount of return receivable by the assessee. It was stated that whether the market value of the share is zero or ₹ 26.72 per share or ₹ 20.38 per share the return remains the same i.e. it is equal to option price plus subscription price. The learned authorised representative submitted a table A along with his written submission placed at page number 12 of the submission. In that chart which has been reproduced by us earlier, the calculation is submitted according to clause number 16.8.3.4, 16.8.3.3, 16.8.3.2 and 16.8.3.1. of the agreement. The conclusion drawn by the revenue was that that whatever may be the market value of shares, entire option price is retained, because amount in column number 10 of that chart above is always higher or equal to amount in column number seven.. Further stated that a sum of ₹ 2941.60 crore is minimum guaranteed return on assessee‟s investment even when market value of shares is zero. We have carefully perused the above submission and find that clause number 16 of the agreement deals with the transfer of Dabur shares and share option. According to clause number 16.6 the sale consideration received by Dabur pursuant to the exercise of CUIH option, the consideration to be received by the Dabur is always the market value for each share sold by the Dabur. However the above transaction is further to be adjusted in terms of clause number 16.6.1, 16.6.2 and 16.6.3. Clause number 16.6.1 deals with the situation where the market Value is lower than the subscription Price, option number 6.6.3 deals with where the market value is equivalent to the subscription Price. However clause number 16.6.2 provides that if the market Value is higher than the subscription Price, the Dabur shall repay the option price to CUIH. However the repayment of option price shall be restricted to the amount if the net sale proceeds is less than the subscription Price. The net sale proceed is stated to be the difference between the gross sale receipts per Dabur share and option price received by the assessee. Thus it is clear that when the market Value is higher than the total of subscription Price plus option price received by Dabur, in that circumstances the Dabur is entitled to retained such excess price. Thus it is clear that if market value of the share is higher than the total of subscription price plus option price, such higher value is to be retained by Dabur and not to be refunded. In view of this the argument of the revenue that in all circumstances the assessee gets only the option price or the option price is always to be retained is a fallacy. It is true that in such circumstances of the option price received by the assessee is always to be retained however, the assessee is also getting much more than option price if the market Value is higher than the subscription Price plus option price. The option price is a minimum guarantee given by CUIH as the minimum exit value of the investment made by assessee. Which is in general is found in many of the investment made by private equity funds. In this case the only differences that assessee is periodically receiving the minimum guarantee over a period of time as advance against sale of shares till such shares are transferred. But that does not make the sale consideration received in advance in part for transfer of shares as revenue receipt and thus income of the assessee chargeable to tax in the year of receipt of such option price as advance sale consideration. Further the clause number 16.8 referred to by the revenue is related to the divestments during the 10 year period ignoring clause number 16.6 which is with respect to the transfer of Dabur shares to another shareholder of the company.

66. Next argument of the revenue is that the terms of the joint-venture agreement clearly shows that it is a pure financial transaction and therefore the option price received by the assessee is chargeable to tax as income and not a capital receipt. The first point of distinction drawn by the revenue is that in case of a share deal assessee is entitled to get only dividend income and in the case before the AO the assessee was provided a fixed 20% annual return on subscription price. On careful consideration of the above argument it is evident that assessee is also entitled to the dividend income and further the option price received in advance is required to be adjusted at the time of the transfer of Dabur shares. Thus, it cannot be said that assessee is not entitled to dividend, It is also over and above option Price. The further reason of the revenue is that there is no surety of getting any return if the transaction is for the sale of the shares and its investment whereas in case of the assessee it is on the date of signing of the agreement itself is assured of basic return. No doubt in certain share transaction the exit price by the investor may be determined at the time of entering into a shareholders‟ agreement, further the option price is merely an advance against such exit price. On careful analysis of the Value of consideration to be received by the assessee, the assessee is assured of not incurring any losses but also getting the full reward of the increase in the prices. Another argument is that the real owner of the share has right to sell shares whereas in case of the assessee it has no right to sale its shares except to the other shareholder. We do not find any abnormality in the above condition because at certain times according to the companies act in case of closely held companies the shareholders are not authorised to sell the shares to the third parties without giving an option first to the existing shareholders. Further in case of the winding up of the company the liability of the shareholders are only restricted to the extent of the subscription amount, none of the shareholders can be asked to pay to the creditors beyond the net worth of the company except in case where the individual shareholders have guaranteed such payment to the creditors separately.

67. The ld CIT (A) has held that the agreement is an eyewash and is to hoodwink the revenue. On careful reading of the orders, nowhere the lower authorities have doubted the content of the agreement. It is merely an issue of interpretation of an item of receipt, which is required to be determined whether it is capital receipt or revenue receipt. The Context of the agreement s stated is before several authorities such as IRDA, RBI, and FDI Committee and even before AO for eight long years without expressing any doubt by any of the authorities.

68. Lastly the revenue has relied heavily on the decision of coordinate bench in case of Mahindra Telecommunications Investment Private Limited (2016) 69 taxmann.com 431 stating that issue is squarely covered by the decision in favour of the revenue. Revenue says that facts in both the cases are similar wherein the foreign company agreed to certain consideration to be paid to the Indian Investor for extending the facility of holding the shares of an Indian Investor entity by an Indian party for subsequent sale to foreign party when there is a relaxation in foreign direct investment sectoral limits. It is also the contention that when the vital factual metrics of the issue decided by the coordinate bench and the issue before us remaining the same, the decision of the coordinate bench applies with all force in this case. In view of this argument, it is necessary to examine the facts and issue before the coordinate bench. In facts of case before that coordinate bench, assessee and Indian company entered into a shareholders‟ agreement with a foreign party to set up telecommunication business in India in terms of the foreign direct investment sectoral limits with respect to telecommunication industry. The Indian company invested 26% of the shares of an Indian company whereas the foreign investor invested 74% according to the sectoral caps. The foreign entity under an agreement had an irrevocable call option to increase its investment in the Indian entity as per the permissible limits of foreign direct investment requiring the Indian investor company to sell its shares to the foreign investor at an option price. The option price was defined as an equity contribution plus return at the rate of 11% per annum compounded annually on the said contribution over the period of holding and the Indian party was entitled to over and above the option price, a call option fee at the rate of 5.5% of its equity contribution. The issue before the coordinate bench was whether the income by way of return on equity accrued to the assessee from day-to-day i.e. on the basis of the holding period, for each previous year comprising the holding period or would accrue only at the time of sale of shares when Indian entity transfer its holding in Indian company to foreign investor. As per assessee, the income did not accrue till the transfer of shares by an Indian entity to foreign investor. The stand of the revenue was that such income being defined to arise on the basis of the time it accrues to the assessee on time basis and accordingly is taxable in the year of receipt. Para number [3] of that decision succinctly brings out the issue before the bench as Under:-

“The respective cases

3. The issue arising for determination is whether the income by way of return on ‘equity’ accrues to the assessee from day to day, i.e., on the basis of the holding period, for each previous year comprising the holding period, or shall accrue only on the sale of shares, i.e., on the exercise of the put option or, equivalently, call option by AT & T Global. As per the assessee, the income had not accrued in-as-much as the option had not been exercised, i.e., accrued and shall only be so on the (sale) transfer of shares. Reliance stands placed by it on E. D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 (SC) and CIT v. Canara Bank [1992] 195 ITR 66/61 Taxman 79 (Kar.). In view of the Revenue, the income being defined to arise on the basis of time, i.e., as a linear function of and by elapse of time, accrues to the assessee on time basis and, accordingly, working out that accrued for the current year, reflected by an increase in the option price during the year, brought it to tax. Reliance is placed by it on Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC); State Bank of Travancore v. CIT [1986] 158 ITR 102/24 Taxman 337 (SC); and CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC).”

[Underline supplied by us]

69. Therefore, only issue before the Coordinate bench in that case was in which year the income accrues. It was not the issue before the coordinate bench that whether the money received by the assessee as an option price is a revenue receipt or a capital receipt. In the facts of case relied up on before us, both the parties agreed that the option price received in that particular case is an income of the assessee and only dispute was about the year of taxability of such income. In the facts of that case, the coordinate bench decided that it is income of the assessee in the year in which it is received. The coordinate bench also considered the accounting standard issued u/s 145 (2) of The Income Tax Act as well as the Accounting Standard AS -9 issued by ICAI on Revenue Recognition. In that particular case, the income was received by the assessee without any uncertainty involved 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.

70. It is also interesting to note in the case before us is that assessee is receiving the option price since financial year 2002 – 03. The assessment for the assessment year 2005 – 06, 2006 – 07, 2008 – 09, 2011 – 12, 2013 – 14 and 2014 – 15 were completed as a scrutiny assessment u/s 143 (3) of The Act, wherein 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.

71. 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.

72. The ground numbers 3-11 are supportive to ground number 1 and 2 of the appeal and therefore those are allowed.

73. In view of our above finding in ground number 1 and 2 of the appeal of the assessee, the additional ground raised by the assessee for the deduction of interest paid on borrowed funds of Rs. 732,205,896/-become redundant and therefore it is dismissed.

In the result, appeal of the assessee is partly allowed.

Order pronounced in the open court on 11/02/2021.