2019 (3) TMI 1860 - AT - Income Tax

Revision u/s 263 - Option money received - whether the option price received by the assessee is income or it is capital receipt? - As per CIT JV agreement was never examined by the Assessing Officer - HELD THAT - The initial year of transaction was 2001 when the Government opened the field for private parties also in the Insurance business. This is not the first year of transaction. The assessee has been receiving option money after the year in which it entered into a JV agreement with CUIH to co-promote a JV company. The first year of scrutiny assessment was 2005-06 and the Assessing Officer raised specific query in relation to the option money received from CUIH. The Assessing Officer examined the balance sheet and notes of accounts and was convinced that the option money received is not taxable during the year. Once again, assessment order for assessment year 2006-07 was also completed u/s 143(3) of the Act and once again a query was raised in relation to the option money, which was duly replied by the assessee and explained the nature of transaction with notes of account, which also contains capitalisation on interest paid on borrowed funds. Assessment year 2008-09 was also taken up for scrutiny assessment. Once again queries were raised by the Assessing Officer in relation to the JV agreement and option money. Once again, the assessee explained the transaction in the light of details given in the balance sheet and notes to accounts. The order was framed u/s 143(3) of the Act. In assessment year 2011-12 also, the return of income was taken up for scrutiny assessment. The balance sheet and notes of account were examined wherein all the details about the capitalization of interest was properly disclosed and receipt of option money was explained to be adjusted against reduction in the share holding in the year of transfer of shares. It is incorrect to say that the JV agreement was never examined by the Assessing Officer. Right from the first year of scrutiny assessment, after the impugned transaction of option money, JV agreement has been scrutinised by the Assessing Officer alongwith the balance sheet and notes to accounts. It cannot be said that right from assessment years 2005-06 to 2011-12, the Assessing Officers continuously ignored the taxability of option money. A reading of the order of the PCIT framed u/s 263 of the Act clearly shows that the PCIT assumed jurisdiction on the strength of the assessment order for assessment year 2015-16, when the Assessing Officer took a different view on the same set of transactions which the assessee continued to follow since the year 2001. PCIT has not understood the JV agreement and has been carried away by drawing adverse inference from certain clauses of the JV agreement. It is incorrect to hold that the assessee has purchased shares as the same is business of the assessee. 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 assessee. There is a specific restriction in the JV agreement that neither of the parties i.e. the assessee and CUIH, will sell its shares to outsiders and right to purchase shares of the assessee was granted to CUIH at a later date as and when FIPB increases the permissible limit of investment for foreign partners in JV agreement. PCIT completely missed the point that in the case of shares of a company, which is 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. This aspect was considered and accepted by the Assessing Officers in the past assessment years and, therefore, no adverse view was taken as there was no sale of shares in those years. Capitalization of interest - It is a settled proposition of law that any expenditure incurred in acquiring a capital asset has to be capitalised. Whether the option price received by the assessee is income or it is capital receipt ? - As per the facts explained elsewhere, the assessee entered into a JV agreement with CUIH to co-promote a company in the field of insurance sector. Since CUIH is a prominent player in the European Market it was interested in holding major stake in the JV company but on account of restrictions imposed by FIPB meant for insurance sector CUIH was contended with a stake of 26% and rest of 74% was taken by the assessee. Both the parties agreed that as and when the government eases the norms, the first right of refusal shall be with CUIH and if it refuses to purchase shares of the assessee, the same can be sold to third parties. Same restriction applied to the assessee also. This resulted into sterilisation of the assessee s holding and CUIH agreed to pay option price as described in the JV agreement and it was further agreed that the said option price shall be refundable at the time of transfer of shares by the assessee to CUIH and the manner and mode as well as quantum of refundable option price has been described in Article 16A r.w.s Schedule IX of JV agreement. The sale/transfer of 23% stake by the assessee to CUIH took place in F.Y. 2016-17 relevant to assessment year 2017-18. All the allegations made by the PCIT may be relevant for assessment year 2017-18 when the actual transfer took place. We do not find any merit in applying those allegations in assessment year 2013-14 and 2014-15 to make the assessment orders framed u/s 143(3) of the Act as erroneous and prejudicial to the interest of the revenue. Since the transfer of shares took place in F.Y. 2016-17 relevant to assessment year 2017-18, the Assessing Officers in the earlier assessment years rightly took a view that capital gains, if any, would arise in F.Y. 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 direct nexus/link with divestment of such holding in favour of CUIH but this happened in F.Y. 2016-17. The allegation of the PCIT that the investment in shares of AVIVA life insurance India Ltd is business of the assessee is ill founded as this is only a presumption and surmise of the PCIT contrary to the facts of the case in hand. It cannot be said that the JV agreement was a colorable device to enter into a sham transaction for evading tax. The JV agreement has been accepted by various government authorities as discussed elsewhere. It is not the case of the PCIT that money invested by DABUR, i.e., the appellant, in AVIVA has come from CUIH. Therefore, the same cannot be held as sham transaction. Moreover, the option money paid by CUIH has come through banking channel with the approval of RBI as explained elsewhere. 23% stake sold by DABUR was in F.Y. 2016-17 relevant to assessment year 2017-18 when the actual transfer of shares took place. Therefore, in our considered opinion, liability towards I.T., if any, would arise in F.Y. 2016-17 relevant to A.Y 2017-18. Assessing Officers, right from A.Ys 2005-06 to 2011-12, after going through the JV agreement and balance sheet and notes of accounts, filed by the assessee has taken a possible view. It has been held in various decisions that where the A.O has taken a possible view, the assessment order cannot be held as erroneous and prejudicial to the interest of revenue.. We find the Hon'ble Delhi High Court in the case of CIT Vs. Anil Kumar 2010 (2) TMI 75 - DELHI HIGH COURT has held that where it was discernible from record that the A.O has applied his mind to the issue in question, the ld. CIT cannot invoke section 263 of the Act merely because he has different opinion. It cannot be said that the JV agreement was a colorable device to enter into a sham transaction for evading tax. The JV agreement has been accepted by various government authorities as discussed elsewhere. It is not the case of the PCIT that money invested by DABUR, i.e., the appellant, in AVIVA has come from CUIH. Therefore, the same cannot be held as sham transaction Considering the facts of the case in hand in totality, from all possible angles, we are of the considered view that the assessment orders framed u/s 143(3) are neither erroneous nor prejudicial to the interest of the Revenue. The orders of the PCIT are, accordingly, set aside and that of the Assessing Officer are restored. - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of Option Money.
2. Nature of Business and Classification of Income.
3. Capitalization of Interest and Professional Charges.
4. Validity of the Assessment Orders under Section 263.

Detailed Analysis:

1. Taxability of Option Money:
The core issue revolved around whether the option money received by the assessee should be treated as taxable income or a capital receipt. The assessee had received option money from its joint venture partner, CUIH, which was to be adjusted against the reduction of shareholding in Aviva Life Insurance Company. The Principal Commissioner of Income Tax (PCIT) argued that the option money was a recurring annual receipt and should be taxed as business income. However, the assessee contended that the option money was a capital receipt, linked to the divestment of shares, and should only be considered in the year of actual transfer of shares, which occurred in FY 2016-17.

2. Nature of Business and Classification of Income:
The PCIT considered the assessee as a financer and a dummy stakeholder, arguing that the option money and accretion in shares should be classified under 'business income'. The PCIT believed that the assessee's activities were akin to financial transactions rather than investments. However, the ITAT found that the investment in Aviva Life Insurance was a capital contribution for acquiring a controlling interest and not a business transaction. The ITAT emphasized that the JV agreement was not for carrying out business transactions but for co-promoting a company in the insurance sector.

3. Capitalization of Interest and Professional Charges:
The PCIT questioned the capitalization of interest and professional charges by the assessee. The assessee had capitalized interest paid on borrowed funds used for acquiring shares in Aviva Life Insurance and professional charges paid to IndusInd Bank. The ITAT upheld the assessee's treatment, stating that any expenditure incurred in acquiring a capital asset should be capitalized. The ITAT found that the capitalization was in line with the accounting policies and legal opinions obtained by the assessee.

4. Validity of the Assessment Orders under Section 263:
The PCIT invoked Section 263, claiming that the assessment orders for AYs 2013-14 and 2014-15 were erroneous and prejudicial to the interest of the revenue due to the lack of proper inquiry into the option money. The ITAT, however, found that the Assessing Officers (AOs) had consistently examined the JV agreement and the nature of the option money in previous assessments (AYs 2005-06, 2006-07, 2008-09, and 2011-12). The ITAT noted that the AOs had taken a possible view based on the facts and explanations provided by the assessee, and thus, the orders were neither erroneous nor prejudicial to the interest of the revenue.

Conclusion:
The ITAT set aside the orders of the PCIT and restored the assessment orders framed by the AOs for AYs 2013-14 and 2014-15. The ITAT concluded that the option money was a capital receipt linked to the divestment of shares, the capitalization of interest and professional charges was appropriate, and the AOs had conducted adequate inquiries, making the invocation of Section 263 unwarranted.