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Mahindra Telecommunications Investment Private Limited Versus Income Tax officer, 2 (2) (3) , Mumbai

2016 (6) TMI 99 - ITAT MUMBAI

Accrual of income - nature of income - whether right to receive the return (or income) on the shares had accrued to the assessee during the relevant year? - irrevocable option to sell these shares at the option price to AT & T Global (or its affiliates), which had the right to first refusal. The option by either could be exercised on or after three years of investment or the elimination of the Indian Government regulation on foreign equity holding levels, whichever is earlier. The option price f .....

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he 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

Held that:- The transfer of shares in the manner including the price determined there-under, is made the essence of the agreement, so that any contravention thereof constitutes a breach thereof, which may result in its termination.

The assessee-company, which has no right .....

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a shareholder of, AT&T. The provision of ‘call option fee’ and ‘compounding’ in the Agreement are considered inconsistent with investment in shares proper.

It is the substance that is to prevail over form. The arrangement is accordingly found to be the only a manner of investment, akin to a financing arrangement, yielding return (income) as a function of time. No doubt or uncertainty with regard to the realization or the ultimate collection of the income – by way of option price on tr .....

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ng thereby was further examined from the stand point of and in the light of a provision of the compound rate of return (on annualized basis – so that the same increases in geometric progression with time); discounting for net present value, only to find further endorsement of the said view and, further, of not impacting the valuation (of the right to receive) or the accrual of the income in any manner. Even de hors the character of the arrangement as a financing arrangement or any other, the nat .....

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the investment, as only representing the form in which the income, imbedded in the increased share value, is realized. The same is only a manner of realization of the income, since accrued, as is the case (in other common day examples of) with interest on (cum) debentures or Bank FDR, etc. and, thus, by itself of little moment. Could it be material, one may ask, if the interest of Debenture or FDR stands to be received, over the tenure of the investment, separately, or along with redemption of t .....

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but for the arrangement, in pursuance to which only in fact the investment in shares stands made. That is, considerable uncertainty would otherwise exist as to the realizability of the income.

The income being also in agreement with the matching principle of accountancy, also judicially approved, is thus found to accrue from year to year, i.e., on time basis and, thus, for the relevant year. The same, further, is only by way of business income, i.e., as assessed, on which we again ob .....

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underlying transaction from which it arises (CIT vs. Govinda Choudhury [1992 (4) TMI 8 - SUPREME Court ]. The case law cited stands also considered, only to find the same to be in agreement with the view expressed herein, confirming the stand of the Revenue, being essentially a question of fact, to be determined on an appreciation of the facts of the case, with the law being well settled. Finally, we observe the income arising has not been worked out by the A.O. in the manner provided for in th .....

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jay Arora, A. M. This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-5, Mumbai ( CIT(A) for short) dated 18.1.2012, dismissing the assessee s appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ( the Act hereinafter) for the assessment year (A.Y.) 2008-09 vide order dated 30.12.2010. 2. The background facts The facts of the case are simple and undisputed. The assessee-company, incorporated under the Companies Act, 1956, pur .....

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e extent of the cap on the foreign direct investment (FDI) under the extant policy regime of the Government of India (GOI) for the telecommunication sector. The date/s of investment is termed as a capitalization date/s. AT & T Global had under the agreement an irrevocable call option to increase its holding in AT & T India to the extent permissible by laws in India by requiring appellant company to sell shares to it or to its affiliates at the option price. Similarly, the appellant compa .....

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e said contribution over the period of holding. The assessee-company is also entitled to, besides option price, so determined, what is termed as call option fee , on each anniversary of the capitalization date @ 5.5% of its equity contribution. For the period of holding beyond the anniversary date, proportionate fees calculated at the said rate is to be allowed. That is, for the broken period since the last anniversary, the assessee is entitled to a fee on a proportionate basis, calculated at th .....

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-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 and Co. Ltd. vs. CIT [1954] 26 ITR 27 (SC) and CIT vs. Canara Bank [1992] 195 ITR 66 (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 .....

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ed to the assessee or not? Admittedly, there has been no exercise of put option by the assessee or, equivalently, call option by AT & T Global (AT & T). In fact, it could not possibly be, with this being the second year of the acquisition of the shares and, rather, the first year in respect of some shares (refer para 3.4 of the assessment order), with there being understandably no relaxation in the policy guidelines by the GOI prescribing a cap on the Foreign Direct Investment (FDI) in t .....

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.2 It is, to begin with, important to understand the meaning and connotation of the term accrual , the scope of which is the bone of contention between the parties. Section 5 of the Act, which defines the scope of total income of a resident, provides for it to include income that accrues or arises to the assessee during the year. As a legal concept, the same stands defined per a series of decisions by the Apex Court, as a right to receive. The Hon ble Court in Gajapathy Naidu (supra) succinctly .....

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ticular accounting year, he shall include the said income in the assessment of the succeeding assessment year. No power is conferred on the Income-tax Officer under the Act to relate back an income that accrued or arose in a subsequent year to another earlier year, on the ground that that income arose out of an earlier transaction. Nor is the question of reopening of accounts relevant in the matter of ascertaining when a particular income accrued or arose. The meaning of the word "accrue&qu .....

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ontra-distinguish the word "receive". Income is said to be received when it reaches the assessee; when the right to receive the income becomes vested in the assessee, it is said to accrue or arise. Income becomes taxable on the footing of accrual only after the right of the taxpayer to the income accrues or arises, and in the case of an agreement which makes profits receivable at or on the happening of a contingency, the fact that the profits are the result of transactions spread over .....

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income Profits and gains of business or profession (PGBP) or Income from other sources (IFOS) shall, subject to the provision of sub section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Sub-section (2) thereof further provides that the Central Government may notify from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. The assessee is ad .....

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AS-I reads as under: ACCOUNTING STANDARDS NOTIFIED UNDER SECTION 145(2) A. Accounting Standard I relating to disclosure of accounting policies: 1. All significant accounting policies adopted in the preparation and presentation of financial statements shall be disclosed. 2….. 3….. 4. Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and .....

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tements, specific disclosure in respect of such assumptions is not required. If a fundamental accounting assumption is not followed, such fact shall be disclosed. 6. For the purposes of paragraphs (1) to (5), the expressions,- (b) "Accrual" refers to the assumption that revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the period to which they relate; (e) "Going conc .....

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tands earned or, as the case may be, incurred , can be said to be accrued. This, as shall be seen, is consistent with words accrues or arises as judicially explained and understood. As we see it, it explains the concept further in-as-much as earning or, equivalently, incurring itself is regarded as the basis of accrual. Surely, the parenthood or the ownership of the income is to be of the assessee, and exclusively at that, else how could it be regarded as its income. Equally, there has to be a c .....

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lso relevant. These Accounting Standards are binding on companies in view of the Companies Act, 1956, so that they again have the force of law (s.209). Rather, as explained by the Apex Court, they represent the crystallized accounting principles as recognized by the accounting policies and, further, those issued by ICAI are required to be followed [J.K. Industries Ltd. vs. Union of India [2008] 297 ITR 176 (SC)]. They provide discipline and harmonization of concepts and accounting principles; th .....

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The same, in it s relevant part, reads as under: Definitions 4. The following terms are used in this Standard with the meanings specified: 4.1 Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Revenue is measured by the charges made to customers or clients for .....

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, royalties and dividends should only be recognised when no significant uncertainty as to measurability or collectability exists. These revenues are recognised on the following bases: i) Interest on a time proportion basis taking into account the amount outstanding and the rate applicable. ii) Royalties on an accrual basis in accordance with the terms of the relevant agreement. iii) Dividends from investments in shares when the owner s right to receive payment is established [emphasis, ours] The .....

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od. And further, that substance over form should govern the accounting policies to be followed for the same. The third aspect we observe is that both sets of Accounting Standards (i.e., as notified by the Board and as issued by ICAI) also indicate the manner in which the relevant income is to be recognized, i.e., as it is earned (AS-I), and on time basis, i.e., as it accrues (per AS-9). Equally importantly, accrual as an accounting concept is in agreement with that as judicially explained, i.e., .....

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a FDR of ₹ 1000/- at 10% p.a., compounded annually), as: (Amt in Rs.) 1) Interest accrued but not due A/c Dr. 100/110/121 To Interest accrued A/c Cr. 100/110/121 (being the amount of interest accrued on FDR No. …….. dated …….. maturing on …….. at …… % p.a. compounded annually). 2) Now considering that the FDR is for 42 months (say), the entire interest accrued for the first three years (Rs.331/-) shall, along with principal amount (R .....

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e maturity of the FDR, i.e., on completion of its tenure of 42 months). 4) Bank Dr. 1464 To FDR Cr. 1000 To interest accrued and due Cr. 464 (on realization of the maturity proceeds on FDR No. …… dated ………) There is in fact a specific stipulation to depict interest accrued but not due as a current asset in the final accounts (balance-sheet), while the interest accrued and due is to be included as a part of the investment . The difference in either case, surely .....

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resenting the maturity of the right, i.e., indicating its culmination into a receipt, discharging the obligation to the depositor-payee. Another common example could be, where sales (or, equivalently, purchases) are made on credit. Goods are sold on credit for (say) 60 days, which (credit) period could well be higher, as (say) 90/120/180/360, etc. days, though by itself of little consequence. Income is recognized the moment goods are sold and the property therein passes by delivery to the purcha .....

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ustomer A/c Cr. 1000 (on receipt of payment vide cheque no….. dated….. against bill no……. dated………). In fact, if this basic difference (between debt in praesenti and debt in futuro) is ignored, there would be no difference between cash and accrual method of accounting, or determination of income, i.e., speaking in the context of tax laws, or section 145 of the Act. In particular, which in fact only endorses and subscribes the accounting principles .....

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that the same have the force of law. 4.3 As the right to the assessee arises on the basis of the Agreement, we next examine the nature of this right, i.e., on facts. The right to call or put, in exercise of the option, is a right separate and distinct from the right to an increase in the value of the shares - the subject matter of call and put option, over time. In fact, it is the two rights, the right to an enhancement in the value of the shares, in which the assessee company is invested, and .....

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any consequence. The amount stands to be received as per the agreement on a future date, yet the right to receive the same has inured. There is no mistake or uncertainty about it. In fact, as we see it, there is no difference between the call option fee, which falls due for payment on each anniversary (of the capitalization date), with an interim divesture entitling the assessee to a pro-rata return (fee) at the prescribed rate for the holding period, i.e., in proportion to the holding period, .....

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compounded, i.e., liable to fetch return at the prescribed rate (11% p.a.), for each subsequent period. That is, the two - the call option fee and the option price are, in terms of the agreement, pari materia, with one getting paid, and the other taken into account for computing the price calculated to yield a return at the prescribed rate for each future period/s, with the holding period in either case being determined likewise, i.e., the date of investment (capitalization date) to the date of .....

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n 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 un-profitability of AT&T India. The Sponsors acknowledge that the Option Price plus the Call Option Fee represents a reasonable return on equ .....

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, the assessee object to the Revenue regarding the two together as constituting its revenue model, considering them as two streams, as it were, in which the return, forming part of revenue of the business, gets manifested. Compound rate of return 4.4 Implicit in the concept of a compound rate of return is the notion of the income (return) for the prior period getting received and reinvested (or ploughed back); we having rather termed the two returns as pari materia. We may discuss this aspect of .....

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say) is reinvested along with the principal (price) at the same rate. Since the return on investment in shares (capital) is to be received only as a part of the sale price, so that it cannot be received independent of it, i.e., cannot even be notionally received, providing for it in the share holders agreement is conceptually untenable if it were to be viewed only in the terms of investment in shares which stand to be transferred, i.e., solely as an instrument for investment in shares to be rede .....

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(refer clauses 2.6, 8.13 of the Agreement), and the picture is complete. The future price would depend not on the performance of the company, and predetermining the same, which is of essence (to the agreement) lends it with a character of a financial instrument toward earning income at a defined (agreed) rate, rather than a promoter investing in an enterprise in a defined business, i.e., acquiring a stake in a particular business. Shares, thus, represent only a medium and manner in which the in .....

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bject 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 th .....

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ever, 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 Subsections 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 u .....

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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 .....

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se, 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 .....

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e 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 can not 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 .....

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ion Date and the date of termination. Discount 4.5 The compounding aspect of the rate of return has another dimension to it. It is open to be contended that in-as-much as the amount is to be admittedly received only in future, only its discounted value could be, even where so, brought to tax as the income for the year. That is, though the amount stands accrued during the year, the very fact that the right to receive is itself only for a future date, the present value of the right is not equal to .....

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ted rate, as we may seek to demonstrate per a table, giving rise to secondary, tertiary, etc. income streams, i.e., the income for the intervening period, as: [Givens - Principal Amount: ₹ 1000/-, Rate: 10% p.a.] Investment/Yr. 1 2 3 TR(@) GA(@) Rs.1000 (100) (100) 100 100 1100 Rs.100 - (10) 10 10 110 Rs.110 - 11 11 121 Total 100 110 121 - 1331 [@: at the end of third year; TR =} total return (exclusive of the amount considered as reinvested and, therefore, not forming part of the principa .....

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ept of merger of principal and return thereon, i.e., capital and income, at defined intervals of time. Clearly, the return for the first and the second year gets included in the principal amount (notionally) for the second and the third year respectively, obliterating the conceptual difference between the principal (capital) and return (of income). The income for each of the three years comprising the gross amount receivable after the end of the third year, i.e., ₹ 1,331/-, is only that re .....

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the same. Reference in this regard may be made to Madras Industrial Investment Corporation Ltd. (supra). Right to receive 4.6 We may next address the issue of the right to receive as not leading to crystallisation of any debt in favour of any assessee-company, a contention raised by the assessee while arguing non-accrual. Firstly, the said question should arise no longer in view of our findings arrived at up till now, which we may enlist as under: a) The shareholder s agreement, though for subsc .....

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n the value of the holding, i.e., as a function of time, so that it increases (in geometric progression) with the period of holding. The same could have an implication qua the valuation (of the right). So, however, the consideration (for investment) has a built-in component for the delayed receipt of the income for the earlier period, so that the right, as also emphasized earlier, is not dormant. No adjustment in the value is accordingly called for, i.e., in the right to receive. c) The increase .....

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is due for payment, often referred to as the due date . The debt accruing is a debt realizable at a later, subsequent date. We have already, per the accounting entries pertaining to transactions of interest on deposit and sale of goods, sought to emphasize and explain the difference between accrual and due (for payment). Rather, how can, it may be asked, an amount which is itself periodically, i.e., at intervals of time, reinvested, or regarded as so, fetching returns, be due for payment in the .....

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ed for a future date, the same would stand to be legally enforced only upon the debt becoming liable to be redeemed/discharged. We see no contradiction between the two aspects of the matter, i.e., the character of the debt as a legally enforceable right, which is relatable to the contract whereby and in pursuance to which it arises or accrues and, thus, to the period of the accrual thereof under the said agreement, on one hand, and the legal enforcement of its realizability, where disputed. Wher .....

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e and, accordingly, income accrued, the corresponding liability has not accrued. Reference with profit may in this regard be made to the decision in Madras Industrial Investment Corporation Ltd. (supra), wherein the Hon ble Court explaining the concept of accrual of expenditure, held as under: The expression Profits or gains has to be understood in its commercial sense; and there could be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning .....

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e considered as expenditure. Further, accrual cannot be in vacuum. Just as in the case of income, the expenditure has to be incurred or sustained by a person . We have already explained the issue with reference to and by taking some common day examples of interest on deposit (say, with a bank) or sale of goods. Though the reference point thereat was the depositor or the seller, the said entries or, rather, the mirror image of those entries, would be equally valid for the corresponding party, i.e .....

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f ₹ 1000 - for year 1/2/3) 2) Interest accrued and due Dr. 331 To interest accrued but not due Cr. 331 (being amount of interest accrued on FDR, transferred to due account on maturity of the FDR) 3) FDR A/c Dr. 1000 Interest accrued and due A/c Dr. 331 To bank account Cr. 1331 (to the maturity proceeds of FDR transferred to the saving bank account of the depositor on its maturity) 4) Purchase A/c Dr. 1000 To Bills/Trade payable A/c Cr. 1000 (to amount of Bill No…….. dated &he .....

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ce or, as the case may be, seller of goods. 4.8 We may also address the assessee s objection that the right to receive would enure only on the sale (transfer) of shares and not at any time earlier. The argument is only a rephrasing of what stands stated earlier, i.e., that the right to receive shall arise only on the exercise of the option by either party, resulting in transfer of shares. The argument, thus, does not amount to a new or a different plea. Why, the right to receive either enures to .....

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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 tr .....

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he value of shares at the time of divesture, on the basis of intrinsic value, is higher, the assessee would be entitled only to pre-determined price, which in that case - due to legal restrictions, be purchased by a Qualified Investor (QI) specified by AT & T (clause 8.13). The investment thus can only be regarded or euphemistically termed as in equity shares, and for all intents and purposes, or in substance, is an investment held in the form of shares for a definite period at a particular .....

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as such. But only that, nevertheless, the right to receive the income, which stands to be embedded in the increased value of shares, liable to be sold (transferred) after a maximum holding period of three years, the income on the said investment accrues to the assessee with time, i.e., to the same extent and in the same proportion as the value of the shareholding is stipulated to increase with time. That is, only represents the form in which the income manifests itself. The investment in shares, .....

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of the GOI stand relaxed, allowing a higher FDI, the option to purchase/sell shares, which is irrevocable and binding on the other party, can be made by either party. Once the threshold (lock-in) period of three years is over, and the assessee can, at its option, realize its investment along with the accrued return thereon, the question of no definite (read maximum) time limit for exercise of the option being prescribed is rendered as of no consequence. The agreement, in our view, evenly balance .....

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me is, under the circumstances, only at the assessee s option and, therefore, it is only where it is so chooses that it shall stand not to be realized (during a particular period). The question, in the given facts of the case, of non realization of right by definite date does not arise. Rather, the correct way to interpret this is to say that the right to receive can be fructified, realizing the income on every single day after the completion of three years of the holding period. That is, each d .....

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his context be made to Emil Webber vs. CIT [1993] 200 ITR 483 (SC). The nature of income which falls to arise to the assessee is to be in the facts and circumstances of the case, including the fact that the investment under reference only represents an opportunity to the assessee to earn income from an investment, made in the course of its business as an investment company, returning the income by way of call option fee as business income, only business income. There is, in fact, no question of .....

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time. Interest is defined in AS-9 (supra) as a charge for the use of cash resources or the amount due to the enterprise, and is well settled to accrue on a day-to-day basis, i.e., irrespective of when it is due for payment (refer, Smt. Rama Bai vs. CIT [1990] 181 ITR 400 (SC)). This is precisely the case here, calling it interest or dividend or by any other name would be of little moment, as long as it is understood that it inures by lapse of time, as in the case of interest, which is commonly u .....

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ly relevant and applicable in-as-much as in that case too the return (called interest ) is, as in the instant case, contracted to be received along with the return of capital, i.e., on the redemption/maturity of the FDR. Matching Principle 4.11 In our view of the income, which can also be called interest , accruing to the assessee in the present case over time, in fact, in geometric progression, is also in agreement with the concept of the matching principle. The concept is an accounting concept .....

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ied under section 145(2) of the Act. When both the income and the corresponding expenditure are accounted for on accrual basis, it automatically gives rise to the matching principle, so that it is nothing but an accounting expression for both revenues and costs, being accounted for on accrual basis. In the facts of the case, the assessee has incurred borrowing cost ranging from 10% to 14% per annum, which in fact led the AO to ascertain the assessee s revenue model and the corresponding income s .....

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every case of accrual of income and the corresponding expenditure (or vice versa), the same would lead to a matching. But only that, firstly, the said accounting concept stands statutorily accepted, being only being only an expression of a recognized principle of the commercial accounting, as well as judicially recognized (refer: Calcutta Co. Ltd. vs. CIT [1959] 37 ITR 1 (SC) and Madras Industrial Investment Corporation Ltd. (supra)) and, two, that in the facts and circumstances case, the nature .....

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se. In the facts of each of the case relied upon, which we shall discuss separately. The Hon ble Court has clarified the inclusion of the income in which the right to receive accrues or arises to the assessee . In A. Gajapathy Naidu (supra), the Government, acceding to the representation of the assessee to compensate him for the loss sustained in the supply of bread to a Government Hospital during f.y. 1948-49, made after the close of the said year, directed payment of sum of ₹ 12,447/- by .....

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question of it relating it back to the year in which the loss arose. We may also here add that this decision, though apparently so, does not violate the matching principle. The compensation though for the loss sustained, represent two separate and distinct events. What the matching principle, on the other hand, postulates is that both the income and expenditure relating to a particular period are taken into account so as not to reflect a distorted picture - the benefit of the expenditure arisin .....

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ssessee for the loss, if any, arising to it on the relevant supplies. In State Bank of Travancore (supra) another three member constitution decision, the Apex Court, in ratio, clarified that whether the income had really accrued or arisen to the assessee must be judged in the light of the reality of the situation, including the conduct of the parties. Further, the concept of real income, which is certainly applicable, cannot be extended to negate accrual, particularly where it has already accrue .....

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to enure to the assessee as a function of time over the holding period, at any time after the stipulated holding period of a maximum of three years. The income by way of return on its investments accrues, and the exercise of option, and the transfer of shares which follows in consequence, are only incidental to realizing its right, since accrued, by the assessee-company. In E. D. Sassoon and Co. Ltd. (supra) relied upon by the assessee, the question that arose was whether income by way of remune .....

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ee-company. The Apex Court explained that the profits would only accrue to the U company at the end of the calendar year, which was the terminus a quo for making up the accounts and the net profits earned by the company ascertained. The amount of commission received by assignee-company was not liable to be apportioned between the period of service prior to and subsequent to the date of assignment during the calendar year (i.e., between the assignor (assessee-company) and the assignee company (S) .....

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fits of the business during the year. This is precisely what was reiterated and elaborated by the Hon ble Court in Ashokbhai Chimanbhai (supra). The commission at a defined rate (7 ½ %) of the annual net profit of the U company, thus, arose only to the assignee-company on the conclusion of the calendar year 1943; the calendar year being the accounting year. The moment it is realized that the managing agency agreement, where-under the income by way of agency commission accrues on the rende .....

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mber 31, 1981, as interest relatable to the relevant period. The interest was, however, payable only after December 31, 1981. The same was held as not accrued for the relevant year, following Vijaya Bank Ltd. vs. CIT [1991] 187 ITR 541 (SC), in which case the appellant bank purchased securities, the price of which was contended as determined with reference to their actual value as well as the interest that had accrued on the securities till the date of purchase. The Apex Court found that the pri .....

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id not yield any income during the broken period of the year. Without doubt, the purchase of the securities by the bank is only a capital outlay, so that considering any part of it as liable to be set off against interest income on securities, defined to accrue u/s. 18 of the Act, since omitted - nay, the relevant Chapter, prescribing a head of income, itself no longer part of the Act, does not arise. The question that arose for consideration for and stood answered by the Hon ble Court was with .....

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. Rama Bai (supra) and Madras Industrial Investment Corporation Ltd. (supra), referred to earlier. It is again trite law that a precedent is an authority only for what it actually decides and not what may remotely or even logically follow from it (refer: Goodyear India Ltd. vs. State of Haryana and Another [1991] 188 ITR 402 (SC) and Blue Star Ltd. v. CIT (1996) 217 ITR 514 (Bom). In sum 5. The assessee following the accrual method of accounting for finalizing its accounts as well as reporting i .....

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hold in the absence of anything to the contrary under the statute. The question to examine is if the right to receive the return (or income) on the shares had accrued to the assessee during the relevant year. The same flowing from the shareholder s agreement entered into by it with a parent (foreign) company of the investee-company, a resident, the said agreement stands examined in detail, even as no dispute or doubt with regard to the scope or meaning of its provisions is available on record, i .....

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s further fixed at a minimum of three years (or such lower time) as occasioned by the elimination of the Indian Government regulation on foreign equity holding levels. This is as the assessee had an irrevocable right to transfer, and the parent company (AT&T) an irrevocable right to acquire the assessee s shareholding in its Indian subsidiary (AT&T India) either to itself or through its affiliates (which have right to first refusal), at a predetermined price, called option price, which s .....

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, cannot sell, assign, transfer or otherwise dispose of its shares (or interest therein) in any manner, or otherwise encumber the same in any manner. The assessee s investment in shares, has to be considered in conjunction with the said agreement, being in fact itself only pursuant thereto, i.e., having regard to the reality and the entirety of the facts and circumstances of the case. The same, as evident, is qualitatively very different from the shareholding of, or the rights as a shareholder o .....

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g (i.e., reckoned in a realistic manner), the income (by way of return on investments in shares) is found to have accrued by way of inflow of or giving rise to a receivable. The arrangement is in fact - AT & T not requiring any financer, but entering the arrangement all the same only to comply with the GOI policy as to a cap on the foreign equity participation in the telecom sector for the time being, not even a financing arrangement. The agreement and the rights accruing thereby was further .....

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would not be of much consequence as long as there is accrual of income in the facts and circumstances of the case, i.e., by way of right to receive - a receivable, resulting in a debt, realizable even if in future. The right to receive, if construed as a right to receive in praesenti, it may be appreciated, would obliterate the difference between the right to receive and due for payment . Or, in fact, between accrual and receipt , used in contradistinction, even as explained in Ashokbhai Chimanb .....

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say that the right (to receive) that vests in the assessee with a passage of time is not a legally enforceable right. It is, further, only when the said right to receive culminates under the terms of the agreement into a realizable right, i.e., which is by a defined date and for a definite sum, that it can be said to mature for payment in favour of the recipient of income. It is only upon this that, where not (being) received, despite the compliances with the stipulations made in its respect by .....

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onsidered on a realistic assessment and consideration of the entirety of the facts and circumstances of the case, with we observing no dispute as regards facts. The fact that the income is realizable as a part of the sale price of shares, i.e., an investment by the assessee, a investment company, as a part of and in regular course of its business, to fetch return, i.e., along with redemption or liquidation of the investment, as only representing the form in which the income, imbedded in the incr .....

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espective of the performance of the company during the holding period or its intrinsic value (net worth) at the time of transfer of shares. Would it therefore matter even if (say) some management rights were also attached to the shareholding - which we observe as not. In our view - not. The investment is in a private company, shares in which are severely restricted for transfer, making it highly illiquid, i.e., but for the arrangement, in pursuance to which only in fact the investment in shares .....

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