2021 (2) TMI 717 - AT - Income Tax

Nature of receipt - option price received against to sell the shares of the joint-venture company - revenue or capital receipt - Whether 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? - Whether option price received by the assessee year to year @ 20 % of subscription amount is an income of the assessee or a capital receipt - 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 - HELD 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. 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. 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. Dabur was holding 74% of equity and thus was a majority partner - 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. Principle of accrual of income is not different in accounting theory and taxation principal. Therefore, on reading of the comprehensive agreement of jointventure 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. 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. One more reason to say so is that when assessee has subscribed to the shares of the company, according to clause number 10 which describes the dividend policy amongst the shareholders, any dividend received by the assessee if at all, is not adjustable against option price. Thus Dabur shares are also entitled to Dividend , If any. 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. Market value of the shares does not change the amount of return receivable by the assessee - Sale of such shares was never linked with the market value of 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. 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 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. 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 (6) TMI 99 - ITAT MUMBAI 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. 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.

Summary

Issues Involved:
1. Whether the option price received by the assessee is a capital receipt or revenue receipt.
2. Whether the option price is taxable in the year of receipt.
3. Whether the joint-venture agreement is a financial agreement or a shareholder agreement.
4. Whether the principle of consistency applies to the treatment of option price received by the assessee.
5. Whether the decision in the case of Mahindra Telecommunications Investment Private Limited applies to the present case.

Analysis of Judgment:

1. Nature of Option Price: Capital Receipt vs. Revenue Receipt
The primary contention is whether the option price received by the assessee from CUIH is a capital receipt or a revenue receipt. The assessee argued that the option price is a capital receipt to be adjusted against the sale consideration of shares at the time of transfer, while the revenue contended that it is a revenue receipt taxable in the year of receipt.

The Tribunal analyzed the joint-venture agreement, which provided that the option price is an advance payment for the shares to be transferred by Dabur to CUIH or its nominee. The agreement stipulated that the option price is subject to adjustment based on the market value of the shares at the time of transfer. The Tribunal concluded that the option price is a capital receipt, as it is an advance against the sale consideration of shares and is to be adjusted at the time of transfer. The Tribunal emphasized that the option price is linked to the transfer of shares and is not a return on investment or interest income.

2. Taxability in the Year of Receipt
The revenue argued that the option price should be taxed in the year of receipt as it is received annually. The Tribunal rejected this contention, stating that the option price is an advance payment for the sale of shares and is to be adjusted at the time of transfer. The Tribunal held that the option price does not accrue as income in the year of receipt but is to be considered at the time of the actual transfer of shares.

3. Nature of Joint-Venture Agreement
The revenue contended that the joint-venture agreement is a financial agreement, masquerading as a shareholder agreement, and that the option price is a return on investment. The Tribunal disagreed, stating that the agreement is a shareholder agreement regulating the relationship between the shareholders in respect of the company. The Tribunal noted that the agreement includes provisions for the transfer of shares, payment of option price, and adjustment based on market value, indicating that it is a shareholder agreement and not merely a financial arrangement.

4. Principle of Consistency
The assessee argued that the revenue's consistent treatment of the option price as a capital receipt in the past should be maintained. The Tribunal agreed, stating that the principle of consistency applies, and the revenue cannot change its stand without any new facts or change in law. The Tribunal noted that the revenue had accepted the assessee's treatment of the option price as a capital receipt in earlier years, and there was no justification for deviating from this position.

5. Applicability of Mahindra Telecommunications Case
The revenue relied on the decision in the case of Mahindra Telecommunications Investment Private Limited, where the option price was held to be taxable as revenue receipt. The Tribunal distinguished the present case from Mahindra Telecommunications, noting that in the latter, the option price was a predetermined return on investment, whereas in the present case, the option price is an advance payment for the sale of shares, subject to adjustment based on market value. The Tribunal concluded that the decision in Mahindra Telecommunications does not apply to the present case.

Conclusion:
The Tribunal held that the option price received by the assessee is a capital receipt to be adjusted at the time of transfer of shares and not taxable in the year of receipt. The joint-venture agreement is a shareholder agreement, and the principle of consistency applies, maintaining the treatment of option price as a capital receipt. The decision in Mahindra Telecommunications was found to be inapplicable to the present case. The appeal of the assessee was partly allowed.