In a deal scenario, any business arrangement is entered into with various considerations such as sector of business, funding required for business, government approvals, etc. Where any such arrangement is made with a future contemplations, that are based on the proposed change in the regulatory regime, same may need further deliberation from tax and regulatory perspective. In one such instance in case of Dabur Invest Corp (‘the Assessee’) [1], under a joint venture arrangement, pursuant to the relaxation of FDI norms in the insurance sector, the Assessee received option price as a minimum guarantee for mandatory first sale of shares. The issue of determining character of receipt of money is questioned by revenue authorities for tax considerations, details of which is discussed hereinbelow:
Facts of the Case:
The Assessee, Dabur Invest Corp. entered into a Joint Venture Agreement (‘JV Agreement’) with Commercial Union International Holdings Limited (‘CUIH’), a company incorporated in England and Wales on August 7, 2001. Assessee and CUIH agreed to subscribe to and invest in shares of a company viz. 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, with 74:26 shareholding.
The JV Agreement provided for annual payment of option price at 20% of the subscription price by CUIH to Assessee against the right of first refusal at the time of sale of shares by the Assessee in the wake of relaxation in FDI policy in the insurance sector.
The assessee treated the option money as capital receipt and did not offer to tax capital gains in the return of income.
Assessment Proceedings:
The Assessing Officer (‘AO’) treated the subscription money as revenue receipt and bought to tax the same as capital gains, placing reliance on the ruling made by Income Tax Appellate Tribunal, Mumbai Bench in case of Mahindra Telecommunications Investment Private Limited [2]. As the Assessee filed appeal to first appellate authority (‘CIT(A)’), CIT (A) upheld the order of AO.
Aggrieved by the order of CIT(A), Assessee preferred further appeal to Income Tax Appellate Tribunal, Delhi Bench (‘Delhi ITAT’) against the order of CIT(A).
Issue under consideration before Delhi ITAT:
Whether the option money received by the assessee is in the nature of capital receipt or revenue reciept?
Order of Delhi ITAT:
The Delhi ITAT held 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 the Assessee to CUIH. Observations made by Delhi ITAT are as under:
- The Tribunal extensively distinguished the Mumbai ITAT ruling and held that neither the frequency of receipt, the manner in which it is dealt with in the books of account, nor how the money is utilized is determinative of its character of tax purpose and classified the option price as advance capital receipt, supplements by referring to JV’s dividend policy which prohibits adjustment of dividend received by the Assessee against option price.
- Further, Delhi ITAT applied the principle of consistency and held that income tax authorities, for eight assessment years, have never taxed the option money so received as revenue income and it cannot change its stand on the same transaction in different assessment years.
- Therefore, the Tribunal held that “option money received by the Assessee is capital receipt which requires an adjustment only at the time of transfer of the shares by Assessee to CUIH while working out resultant capital gain.
- For detailed discussion on the above case study, please feel free to connect at Contact@devadhaantu.in
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[1] Dabur Invest Corp [TS-63-ITAT-2021(DEL)]
[2] Mahindra Telecommunications Investment Private Limited [TS-296-ITAT-2016(Mum)]