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TMI Blog2013 (6) TMI 722X X X X Extracts X X X X X X X X Extracts X X X X ..... t was noticed by the A.O. that the assessee has credited an amount of ₹ 2,10,75,000/- directly to the capital reserve claiming the same to be a capital receipt. He, therefore, required the assessee to explain as to how the same amount credited to the capital reserve account did not constitute its income chargeable to tax. In reply, the following explanation was offered by the assessee:- The assessee had entered into a Joint Venture Agreement with Land Instrument International Ltd. on 27-05-2005. As per clause 8.6 of the agreement in the event of UniDel Group or Land Group is amalgamated with or being taken over by a third party, the other group shall have the option of purchasing all the shares in JVCO of the Group, amalgamating not being taken over or of selling all its shares in JVCO to the group being amalgamated or taken over. Due to the takeover of Land Instruments International Ltd. UK by a USA based company, Digital Electricals Ltd. exercised its option to sell all the shares of the JV company to other JV partner and has received ₹ 210.75 lacs as compensation for waiving and giving up all the its rights and entitlement to sell the shares of JV Company. While ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... option to sell all the shares held in the Joint Venture Company to the other Joint Venture partner i.e. M/s Land Instrument International Ltd. It was submitted that the assessee company and M/s Land Instrument International Ltd., however, reached an agreement after due discussion and deliberation on 15th June, 2006 whereby the assessee agreed to waive and give up all its rights and entitlement under Article 8.6 and 8.7 of the Joint Venture Agreement in consideration of M/s Land Instrument International Ltd. paying a sum of ₹ 2,10,75,000/- to the assessee. It was contended that the assessee company thus had received a sum of ₹ 2,10,75,000/- as compensation for waiving and giving up of rights and entitlement under Article 8.6 and 8.7 of the Joint Venture Agreement and since the assessee even after the receipt of such compensation continued to hold the investment in the shares of Joint Venture Company, the amount of compensation did not constitute any income but the same in the nature of capital receipt not chargeable to tax. In support of this contention, reliance was placed on behalf of the assessee on the following judicial pronouncements:- - CIT vs. Vazir Sultan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... joint venture or distribution arrangement. ROFR is a contractual right, the holder s remedies for breach are typically limited to recovery of damages. In other words, if the owner sells the asset to a third party without offering the holder the opportunity to purchase it first, the holder can then sue the owner for damages. 4.3.3 In finance, an option is a derivative financial instrument that establishes a contract between two parties concerning the buying or selling of an asset at a reference price during a specified time frame. During this time frame, the buyer of the option gains the right, but not the obligation, to engage in some specific transaction on the asset, while the seller incurs the obligation to fulfill the transaction if so requested by the buyer. The price of an option is derived from the value of an underlying asset (commonly a stock, a bond, a currency or a futures contract) plus a premium based on the time remaining until the expiration of the option. Other types of options exist, and options can in principle be created for any type of valuable asset. 4.3.4 An option which conveys the right to buy something is called a call ; an option which convey ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... btained an important right when it enters into a joint venture agreement with its joint venture partners on 27th May 2005, Article 8.6 of the Joint Venture as extracted above clearly provides that in the event UniDeI Group or Land Group is amalgamating with or being taken over by a third party, the other group shall have the option of purchasing all the shares in the JV CO of the group, amalgamating or being taken over or of selling all its share in the JV CO to the group being amalgamated or taken over. The undisputed fact is that the appellant exercised its option and had received an amount of ₹ 210.57 laths as compensation for varying and giving its right and entitlement to sell the shares of JC Co. The said right emerges from JV agreement and is a valuable right which has been waived off. The cost of acquisition of this right is in pursuance to JV agreement and sub section 2 of sec. 55 provides as under: (a) in relation to a capital asset, being goodwill of a business [or a trade mark of brand name associated with a business] [or a right in manufacture, produce or process any article or thing] [or right to carry on any business] tenancy rights, stage carriage permi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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