TMI Blog2019 (3) TMI 1860X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 taxabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant, 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. - ITA No. 1763/DEL/2018, ITA No. 1764/DEL/2018 - - - Dated:- 11-3-2019 - SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND MS. SUCHITRA KAMBLE, JUDICIAL MEMBER For the Assessee : Shri M.P. Rastogi, Adv., Shri Chandan Aggarwal, CA For the Department : Shri G.C. Srivastava, Sr Adv [Special Counsel], Shri Keshav Saxena, PCIT-DR, Shri S.R. Senapati, Addl. CIT, Shri Suvinay K. Dash, Adv. ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, These two appeals by the assessee are preferred against two separate orders of the PCIT-16, New Delhi dated 06.02.2018 framed u/s 263 of the Income-tax Act, 1961 [hereinafter referred to as 'the Act'] pertaining to A.Ys 2013-14 and 2014-15. Since the underlying facts in issues are ident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Regulation 3(1) of the IRDA [Registration of Indian Insurance Companies] Regulations, 2000. 8. As per clause 6.9 of the agreement CUIH shall not be under any obligation to subscribe for additional shares to the extent that is prevented by applicable laws whch was at that time 26% for foreign investors. 9. The relevant clauses of the Joint venture agreement read as under: 6.1 If at any time : 6.1.1 the company requires further financing in terms of its Five Year Business Plan and Annual Business Plan presented to and approved by the Board. 6.1.2 The solvency ratio of the Company falls below 120 % of the statutory minimum solvency ratio ( or such other level or range as the Board may agree) (the Desired solvency Ratio ). 6.1.3 the Board of the Company resolves that further financing is required. 6.1.4 the Appointed Actuary notifies the Board that, in his opinion the Company s financial resources are insufficient to satisfy its working capital requirements; or 6.1.5 the Company is required by Applicable Law to increase its issues share capital; the Company shall, prior to raising finance through any source to meet such requirement including that by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h additional funding in the manner to be determined by it. It is however expressly agreed that the manner to be determined by it. It is however expressly agreed that such raising of funds shall not issue any fresh equity shares (or any instrument potentially convertible into equity) to CUIH. Dabur and to any Third Party in contravention of this provision. It is further agreed that such raising of funds by the Company shall not require either of the shareholders to assume any financial obligations in respect of such funds. 6.4 Whenever the Company requests the shareholders to subscribe for shares in accordance with clause 6.1, the following procedure shall be applicable :- (a) the Company shall issue a subscription request ( Subscription Request ) in the form and substance set out in Schedule 5 and copy it to each of the Shareholders; (b) the Subscription Request for any year shall be issued by the Company between November 1-15; (c) the Shareholders shall be obliged to subscribe to the requisite number of Shares set out in the Subscription Request in accordance with Clause 6.5 below, no later than January 15 of the subsequent year ( Payment Date ). (d) the Company sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompleted; and 6.7.3 Issue a letter signed by its Chief Executive Officer to the bank that has furnished the Dabur Guarantee with a copy to Dabur confirming that ; (a) Dabur has discharged its payment obligation in terms of clause 6.5; and (b) Dabur Guarantee can be replaced with a fresh irrecoverable and revolving letter of credit for an amount which is the difference of the amount secured by the existing Dabur Guarantee and the amount contributed by the Dabur to the 6.8 Notwithstanding the terms of Clause 6.1 but subject to Clause 6.9, the shareholders shall not be required to subscribe for shares unless both shareholders are obliged to subscribe for and are issued with the appropriate number of shares as specified in the Subscription Request at the same time. 6.9 CUIH shall not be under an obligation to subscribe for additional shares to the extent that it is prevented by the Applicable Law from doing so. For the avoidance of doubt, CUIH shall always hold a minimum of 26% of the total equity share capital of the company, subject to Applicable Law. 6.10 In the event the Applicable Law Percentage is changed to allow CUIH to hold more than 26% of the total equity s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the Board, the Shareholder who has appointed such director shall nominate a new director within thirty (30) days of such resignation 11.7 The removal of any director from the Board shall be in accordance with Clause 13.24. 11.8 As and when CUlH s shareholding in the Company goes up pursuant to a change in the Applicable Law Percentage. CUIH shaft be entitled to nominate such additional number of directors on the Board as IROA shall approve. 12. Transfer of shares is government by clause 15 and the same read as under: 15. Transfer of Affiliated Companies. 15.1 A Shareholder (the Transferring Party35} may at any lime transfer any of its Shares to one or more of its Affiliates provided: 15.1.1 subject to Clause 15.1.5 below, the Transferring Party shall remain jointly and severally liable with the transferee for the obligations of the Transferring Party and shall also be able to exercise the rights under this Agreement in respect of each Share transferred and the Transferring Party shall be constituted as the sole Power of Attorney holder on behalf of the transferee party to deal with the Company without interference from the transferee party ; 15.1.2 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur to sell to CUIH or its nominee such number of Dabur Shares as would be required to take CUIH shareholding in the Company to the maximum Revised Applicable Law Percentage. The rights conferred by this Clause to CUIH shall be exercisable on each occasion (if more than once) when CUIH s shareholding in the Company is lower than the Revised Applicable Law Percentage. In consideration of the terms of this Agreement CUIH hereby grants to Dabur- (a) the right during the Ten Year Period to require CUIH to purchase from Dabur such number of Shares held by Dabur as maybe required to take CU(H Shareholding in the Company to the maximum Revised Applicable Law Percentage; and (b) the right after the Ten Year Period to require CUIH by itself for through its nominee to purchase from Dabur such number of Dabur Shares as would be required to take CUIH shareholding in the Company to the maximum Revised Applicable Law Percentage. The rights conferred by this Clause to Dabur shall be exercisable on each occasion (if more than once) when CUIH s shareholding in the Company is lower than the Revised Applicable Law/ Percentage. The rights available to CUIH and Dabur under this Clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der shall sell, transfer, alienate or otherwise dispose of any Share or any interest in any Share to any third party during the Ten Year Period. 16.8.2 (Not Used] 16.8.3 If at any point during the Ten Year Period, the Applicable Law requires either Shareholder to engage in a process which. Requires divestment of any Shares, then the Shareholders will cooperate in such process notwithstanding anything to the contrary in this Agreement, if such provision of the Applicable Law requires such a process to be undertaken by a specified time then the process shall be commenced within six months before that time but not earlier In the event, Dabur has to divest its shareholding in the Company 16.8.3.1 If the Market Value realised by Dabur is higher than She Subscription Price plus the Option Price received on such Shares. Dabur shall within thirty (30) days of receiving the Market Value, repay to CUSH the total Option Price (to be calculated in accordance with Schedule 3), paid till date on such Dabur Shares (see illustration 8(1) in Schedule 9) ; 16.8.3.2 If the Market Value is higher than the Subscription Price but lower than the Subscription Price plus the Option Price (to be ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sale of Dabur Shares. Dabur shall be entitled to retain the Option Price received on such Dabur Shares (see illustration D(1) in Schedule 9); (b) the Market Value is higher than the Subscription Price, Dabur shall repay to CUIH the Option Price (to be calculated in accordance with Schedule 3). pertaining to such shares within thirty (30) days of receiving the Market Value . Provided however, if as a result of repayment of the Option Price, the Net Sale Proceeds per share received by Dabur become less than the Subscription Price, only such part of the Option Price shall be repaid so as to maintain the Net Sale Proceeds per Dabur Share at Subscription Price (see illustration D(2)(a) (b) in Schedule9); (c) If the Market Value is equal to the Subscription Price, Dabur shall repay the Option Price received on such Dabur Shares (see illustration D(3)in Schedule 9) The sale/ purchase transaction envisaged under this Clause 16.9.2.2 shall be effect in accordance with the procedures set out in Schedule 6B1. 16.9.2.3. Notwithstanding anything contained in Clause 13.3, CUIH may give a Sale Notice that it requires Dabur to divest to public some or all the Dabur Shares. Dabur shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Further, subject to Approvals, Dabur shall, within thirty (30) days of its acceptance, repay the total Option Price received by Dabur till date on the Dabur Shares indicated in the Retention Offer The amount of Option Price to be repaid shall be computed in accordance with the formula set out in Schedule 3. The Shares on which the Option Price is repaid by Dabur to CUIH so terms of this Clause 16.9,2.4 shall thereafter be treated as Retained Shares for purposes of this Agreement. 16.9.3 For the avoidance of doubt, CUIH shall have the right to exercise any and all of the rights enumerated above in Clause individually or concurrently, from time to time. 16.9.4 If the Sale Notice requires Dabur to effect a divestment of the Dabur Shares to public in terms of Clause 16.9.2.3, the Company shall use its best endeavors to effect such an offering within six months of issue of the Sale Notice and the Shareholders shall cooperate with the Company in this regard. 16.9.5 [Not Used] 16.9.6 Provisions applicable to Retained Shares The following provisions shall apply in relation to the Retained Shares and Shares which are treated as Retained Shares pursuant to Clause 16.9.2.4: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) If the Market Value received by Dabur for Dabur Shares offered as a part of its divestment pursuant to Clauses 16.8.3 or 16.S.2.3 is higher than the Subscription Price, Dabur shall repay the Option Price pertaining to such shares within thirty (30) days of receiving the Market Value (to be calculated in accordance with Schedule 3). Provided however, if as a result of repayment of the Option Price, the Net Sale Proceeds per share received by Dabur pursuant to the aforesaid clause become less than the Subscription Price, only such part of the Option Price shall be repaid so as to maintain the Net Sale Proceeds per share at Subscription Price. (c) If the shareholding of CUIH is divested in terms of Clause 17.2 after the Ten Year Period and Dabur, pursuant to the exercise of its tag- along right under Clause 17.2.5, sells its Shares, Dabur shall repay CUIH the Option Price received by it (to be calculated in accordance with Schedule 3). Such repayment shall be in accordance with Clause 17.2.5 (b) Dabur shall repay the Option Price (to be calculated in accordance with Schedule 3) on Retained Shares in terms of Clause 16.9.6. 15. Transfer of CUIH shares is governed by clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d both Dabur and CUIH undertake to each other that in the event that the sale of the other Shareholder's (i.e., CUIH/Dabur, as the case maybe) Shares does not proceed to completion for whatever reason, neither of them shall sell, transfer, alienate or otherwise dispose of any of their respective Shares. 17.1,5 In the event Dabur fails to issue a notice in terms of Clause 17.1.2 within 30 days of receipt of CUIH Offer Notice, it shall be deemed that Dabur has expressed its intention in terms of Clause 17.1 2(c), and CUIH shall be free to sell its shareholding to any third party 17.1.6 lf:- (a) Dabur has expressed its intention in terms of Clause 17.1.2(c), but CUIH is unable to divest its entire shareholding in the Company within one (1) year of the CUIH Offer Notice; or (b) Dabur has expressed its intention in terms of Clause 17.1.2(b), but CUIH is unable to complete the sale of the Shares held by Dabur within one (1) year of the CUIH Offer Notice. Then, within one (1) year of the date of the notice issued by Dabur under Clause 17.1.2, or such extended period of time as agreed by the Shareholders mutually, the Shareholders shali cooperate with each other to wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of each CUIH Share; 17.2.1.3 The other terms and conditions on which CUIH proposes to sell the CUIH Shares; and 17.2.1.4 The identity of the proposed purchaser. If no purchaser is identified, the Offer Notice shall clearly indicate the said fact. 17.2,2 Dabur shall have the right to accept an offer made pursuant to Clause 17.2.1 by giving a written acceptance to the Offer Notice which shall be given within thirty (30) days of receipt of the Offer Notice by Dabur. If Dabur accepts the offer, it shall complete the transfer by paying for such Shares, within thirty (30) days of the date of its acceptance, against delivery by CUIH of the relevant share certificates/title documents and duly executed transfer documents Thetime limits set out in this Clause shall be extended by a period equal to the time taken for obtaining any approvals pursuant to Clause 17.2.3 17.2.3 Should the approval of any Government or regulatory authority be required by Dabur or the Third Party nominated by it for acquiring the CUIH Shares, Dabur shall make or procure an application to be made therefore within thirty (30) days of the date of notification of acceptance and pay or procure the payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Price (to be calculated in accordance with Schedule 3), within thirty (30} days of the receipt of the sale proceeds. Provided however, if as a result of repayment of the Option Price, the Net Sale Proceeds per share received by Dabur become less than the Subscription Price, only such part of the Option Price shall be repaid so as to maintain the Net Sale Proceeds per Dabur Share at Subscription Price; (see illustration E{2)(a) (b) in Schedule 9) (c) equal to the Subscription Price, Dabur strati retain the Option Price received on such Gabur Shares (see illustration E{3) in Schedules). The sale of the CUIH Shares and the sale of the Dabur Shares shall take place simultaneously and both Dabur and CUIH undertake to each other that in the event that the sale of the other Shareholder s (i.e., CUIH/Dabur, as the case maybe) Shares does not proceed to completion for whatever reason, neither of them shall sell, transfer, alienate or otherwise dispose of any of their respective Shares. If Dabur exercises its option in accordance with Clause 17.2.5 above, it shall within fifteen (15) days of exercising such option, provide CUIH with a power of attorney which shall be substantially ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DEPARTMENT CENTRAL OFFICE BUILDING MUMBAI-400001. M/s. Dabur Invest Corporation Off Punjabi Bhawan, 10, Rouse Avenue New Delhi -110002 Dear Sirs, Acceptance of Option price from M/s. Commercial Union International Holdings Ltd. (CUIH) Please refer to the correspondence resting with your letter dated 2nd April 2002 on the captioned subject. We hereby permit Dabur-GGU to receive refundable Option price and to refund the amounts so received in terms of the JV Agreement dated 7th August 20uf. Yours faithfully, (M.R.Rangachari) Deputy General Manager 20. On 07.04.2002, the RBI amended the above mentioned letter as below: RESERVE BANK OF INDIA EXCHANGE CONTROL DEPARTMENT CENTRAL OFFICE BUILDING MUMBAI-400001. Ref. No. EC. 6030/1001-02.01.01/2001-02 17th April 2002 M/s. Dabur invest Corporation, Off Punjabi Bhawan, 10, Rouse Avenue, New Deihi 110 002. Dear Sirs, Acceptance of Option price from M/s. Commercial Union International Holdings Ltd. (CUIH) Please refer to the correspondence resting with our letter dated 15th April 2002 on the captioned subject. We hereby amend para 2 of our above letter da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The company is engaged in Insurance services 3. Location/ Proposed Location Mumbai Maharashtra. 4. Foreign Equity Participation 49% by M/s Aviva International Holdings Limited, UK The proposed transaction involves FDI/FII inflow of ₹ 94 crore The approval is to increase the foreign shareholding in M/s. Aviva Life Insurance Company India Limited from 26% to 49% by Aviva International Holdings Limited, UK by way of transfer of 23% shareholding currently held by Dabur Investment Corp. All remittances by the foreign collaboration shall be made as per the exchange rates prevailing on the day of remittance. The transfer / issue /pricing of the shares be as per RBI / SEBI guidelines as applicable. The approval is subject to the following conditions :- a. Compliance with the provisions of the Insurance Act, 1938 and the condition that Companies bringing in FDI shall obtain necessary license undertaking Insurance activities. b. Compliance with para 6.2.18.7.2 of the FDI Policy 2015 c. Compliance with the Indian Insurance Companies (Foreign Investment) d. The taxation of dividend, futu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity to obtain such clearance as may be required under the said Acts. 13. The location of the industrial project, in any, will be subject to Central or State Environmental laws or regulations including local zoning and land use laws and regulations. 14. the investee company/ project shall comply with all applicable environmental laws and regulations (including effluent and emission standards as may be prescribed by the State Government in which the investee company/ project is located. 15. You shall ensure that your proposed investment approved vide this letter is in compliance with Prevention of Money Laundering Act, 2002 as amended from time to time. 16. You may now proceed, if needed to finalise the foreign collaboration agreement. This approval letter be made part of the said agreement to be executed between the investee company and the foreign collaborator and only those provisions of the agreement which are covered by this letter or which are not in variance with the provisions of this letter shall be binding on the Government of India or Reserve Bank of India. 17. The Administrative Ministries/ Departments is Department of Financial Services. 18. You shall f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Golf Course, OLE Phase V, Sector - 43, Gurgaon -122003 Dear Sir, Re: Application for approval for transfer of shares to increase the foreign investment from 26% to 49% in Aviva Life Insurance Co. Ltd. Please refer to your application dated 23rd November, 2015 and the correspondence resting with the Authority on the captioned subject. 1. We are pleased to inform you that the Authority hereby grants approval under Section 6A of the Insurance Act, 1938 for the following:- i) Increase in foreign equity participation by Aviva International Holding Ltd. (AIHL) in Aviva Life Insurance Co. Ltd from the existing 26% to 49% through transfer of 461127000 shares from Dabur Invest Corp. to AIHL for a total consideration of ₹ 940 crores. 2. The approval is subject to the conditions as indicated below:- i) Your company shall file the amended Articles of Association to bring them in line with the amended JV agreement between promoters/ shareholders within a period of 30 days from the date of approval of the Authority. ii) Your company shall comply with the pricing guidelines issued by the RBI as applicable to the transaction of transfer of shares; iii) Your compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the option money, a query was raised and in compliance thereof, once again joint venture agreement was filed. Similar disclosures were made in the Notes of Accounts in the Annual Report as mentioned in A.Y 2005-06. A.Y 2008-09 27. Assessment was framed u/s 143(3) of the Act vide order dated 23.12.2010. During the course of scrutiny assessment proceedings, once again a query was raised about the joint venture agreement and receipt of option money and the said query was duly complied with once again by filing copy of joint venture agreement and the treatment of option money in the Annual Account was explained by way of Notes to Account as in A.Y 2005-06 adn2006-07. Assessment was accordingly completed. A.Y 2011-12. 28. Assessment was framed u/s 143(3) of the Act vide order dated 06.09.2013. Vide questionnaire dated 10.07.2013, the Assessing Officer sought certain details which were duly complied with. Vide submissions dated 03.09.2013 alongwith relevant documents which are exhibited at pages 221 to 243 of the paper book. Accounting policies and notes to the financial accounts are exhibited at pages 343 and 344 of the paper book and relevant notes to the account rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of Payment, Date of deposit along with copy of challan explain why TDS has not been deducted on interest paid to some persons as is evident from confirmation. 5. Justify increase/ decrease in unsecured loans. Furnish list of unsecured loan in the year, squared up during the year, amount and % of interest, TDS and closing balance. 6. Furnish of deduction inadmissible in terms of section 14 A r.w.s. 8D as the assessee has exempt income. 7. Statement of Barclays Bank and J. M. Financial Products Ltd. 8. Details of Option Price and TDS deducted. You are hereby required to attend my office either in person or by a authorized representative in writing on 03.12.2015. (VINOD KUMAR) INCOME TAX OFFICER WARD 46 (5), NEW DELHI 30. After being satisfied with the reply of the assessee, assessment was framed u/s 143(3) of the Act vide order dated 09.02.2016. A.Y 2014-15 [year under consideration ] 31. Assessment was framed u/s 143(3) of the Act vide order dated 28.07.2016. The relevant notes to the accounts read as under: II NOTES TO THE ACCOUNTS 1. The firm has entered in to Join Venture (M/s. Aviva Insurance Co. Pvt. Ltd.) with Commercial Union ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... you have received ₹ 1581.81 crores which includes ₹ 246.84 crores during the year from Commercial Union International Holdings Ltd. as option money. The option money has to be adjusted against further reduction of share holding in M/s Aviva Life Insurance Co. Pvt. Ltd. by your firm in. favour of Commercial Union International Holdings Ltd. U.K. at a price to be determined at the time of transfer of shares. As per point No. 1 to the notes on accounts you have entered into a joint venture with Commercial Union International Holdings Ltd. in the name of is M/s Aviva Life Insurance Co. Pvt. Ltd. The AO examined the taxability of the option money received by you. In this regard, you are requested to furnish the following information:- 1. A copy of the joint venture agreement with Commercial Union International Holdings Ltd. for carrying out the business of M/s Aviva Life Insurance Co. Pvt. Ltd. 2. A copy of the balance sheet and the annual accounts of M/s Aviva Life Insurance Co. Pvt. Ltd. for A.Y. 2013-14, reflecting the share holding pattern. 3. A copy of the agreement vide which option money has been received you from Commercial Union International Holdings Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sked the assessee to clarify and furnish details on various aspects of the transaction. All the clarifications and details sought by the ld. PCIT were duly replied by the assessee by filing related documents/ evidences. 34. After considering the detailed submissions, the ld. PCIT was of the opinion that the assessment orders for assessment years 2013-14 and 2014-15 are both erroneous and prejudicial to the interest of the revenue and the Assessing Officer was directed to complete such assessments afresh and examine the issues for assessment years 2013-14 and 2014-15 by gathering such details as may be necessary and conducting such enquiries as may be needed. 35. The observations of the PCIT can be summarised as under: (i) The PCIT held the assessee as a financer and a dummy stake holder, vying to get maximum guaranteed return on money applied. According to him, the option money on granting of first rights of stake purchase to CUIH and accretion in shares as composite income arising out of JV agreement, clearly fall under the head business income . (ii) The ld. PCIT was of the opinion that he Assessing Officer has not raised any query related to the nature of business c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thetical) Situation B (Assessee's case) Situation C (Hypothetical) Situation D (Hypothetical 1 Subscription price (SP) (Total 1483626000 shares) 10 10 10 10 2 Option Price (OP) received per share by assessee from AY 2003-04 to AY 17-18 (2480.48 crore 1,48,36,26,000) 16.71 16.71 16.71 16.71 3 Market value (MV) of 23% stake sale (46,11,27,000 shares) 100 20.38 10 0 4 Situation MV SP + OP MV SP + OP MV = SP MV SP 5 How much assessee (DIC) has received from CUIH ₹ 16.71 per share on 74% stake + ₹ 100 per share on 23% stake ₹ 16.71 per share on 74% stake (i.e. ₹ 2480.48 cr.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on price is never refunded. (5) This means there is guaranteed minimum return of ₹ 2914.60 crore to PIC from CUIH on such money applied, irrespective of market value of shares, even when market value is zero. This fix return on share investment is not per say return on shares but more like fix interest return on money applied, thus making its nature akin to financial transaction. (6) Since it is a financial transaction, income arising therefrom is business income for which a detailed note is separately enclosed. Both Option Price received every year at 20% rate and amount received on divestment are business receipts and refund given from share consideration received or interest expenses towards borrowed capital which are used for purchase of such shares are business expenses, but assessee has wrongly capitalized them and wrongly claimed indexation on them. (7) Assessee has also claimed some unrelated expenses paid as non-compete fees to Indusind Bank for not competing with Aviva in insurance business. This does not fall in business purposes of assessee and not allowable u/s 37. (8) Assessee has thus not paid taxes on Option Price Money received of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - so that the accounts cannot be considered as reflecting a true and fair state of affairs until the same is adopted, was examined in light of the judicial precedents and Accounting Standards, since legally mandated. Only to find a complete harmony between the two, i.e., as judicially explained and as defined in accountancy, the commercial principles of which would even otherwise 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.e., only with a view to ascertain the nature of the rights accruing to or vesting in the assessee per the same. The Agreement was found to unequivocally and unambiguously convey the right to receive the return on its investment (in shares) to ITA No28 3 2/ Mum/2 012 (A.Y . 2 008 -09 ) Mahindra Telecommunication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in shares) is found to have accrued by way of inflow of or giving rise to a receivable. The arrangement is in fact ITA No28 3 2/ Mum/ 2012 (A.Y. 2008 -09 ) Mahindra Telecommunications Investment Private Limited vs. ITO. 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 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 nature of the investment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esenting 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, et. al. 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 fne tenure of the investment, separately, or along with redemption of the investment? The increase in the share price to the defined extent would arise irrespective 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 stands made. That is. considerable uncertainty would otherwise exist as to the realizability of the income. The income being also in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f trade as held by Hon ble Apex Court in the case of Dalhousie Investment Trust vs. CIT (SC) 1968 AIR 791. 8. Long holding of shares is not assesee s choice:- As per assesee s JV agreement clause 16.6.1, shares of Aviva held by assessee, will be sold to CUIH as when Govt policy on FDI changes. Had it changed in A.Y. 2003-04 itself, assessee was duty bound to sale the same in that year. So long holding of shares was not assesee s choice but due to dependence on change in Govt policy of FDI. Case where issue involved was either not examined or not properly examined A table is given below which shows that the issue of option price money received every year was ~c~. at all examined or not properly examined. It may be mentioned that in most of the years from AY 1003-04 to AY 2017-18, issue was not scrutinized, but where ever it was scrutinized, either no queries ere raised or no relevant queries or insufficient queries were raised. 'able is given below:- Name of Case- M/s Dabur Invest Corp. S. N 0. Year of Scrutiny Assessm ent u/s Query Raised on the issue of option price Reply of Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regarding option money, it is to mention that Option Money is the annual premium received in lieu of giving them, capital or Corporation, the option of buying as and when law permits, our stake in that company at the then prevailing market price and then this option money amount received by us will be refunded back to them. Copy of agreement for option money and copy of bank statements of the assessee company wherein the option money has been deposited and its Insufficient Query- Nature of receipt not examined whether capital or note to accounts not examined for correctness. Malabar Industrial Co. Ltd v. CIT [2000] 109 Taxman 66/243 ITR 83 (Supreme Court) 2. Adi. CIT v. Gee Vee Enterprises [1975] 99 ITR 375 (Del) Jeevan Investment and Finance Pvt Ltd Vs CIT City 1 Mumbai [2017] 88 Taxmann.com 552 (Bombay) DIT Vs Jyoti Foundation [2013] 38 Taxman.com 180 (Delhi) ITO Vs DG Housing Projects Ltd [2012] 343 ITR 329/20 taxmann.com 587/[2013] 212 Taxman 132 (Del) CIT \/s. Maithan International (High Court of Calcutta) Shankar Tradex Pvt Ltd Vs PCIT (ITA No. 2999/Del/2017) 5 2005- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Addl. CIT v. Gee Vee Enterprises [1975] 99 ITR 375 (Del), relying on two celebrated decisions by the apex court [reported at 67 ITR 84 and 88 ITR 323], explained that an assessing authority is both an adjudicator and investigator. That is, he is, besides adjudication, also charged with the responsibility of probing the matter and unearthing facts. As such, where he fails to make proper enquiry, i.e., as warranted by the facts and circumstances of the case, his order is rendered erroneous in-so-far as it is prejudicial to the interest of the Revenue. What, then, is required is an examination of the facts of the case to arrive at a finding of fact as to an application or otherwise of mind by the assessing authority in the matter, making inquiry as warranted, while framing the assessment. Merely asking a question which goes to the root of the matter and not carrying it further is a case of non-enquiry, if the query is not otherwise satisfied while responding to another query...Assessing officer after having asked a pertinent question of the method of valuing unlisted shares didn't pursue that line of enquiry. This was a case of non-enquiry and not inadequate enquiry. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Firm (1965) 56 ITR 67 (SC) and also in CWT vs Meattles (P) Ltd (1984) 156 ITR 569 (Del). 38. The ld. DR concluded by stating as under: Apparent is not real : - As per clause 11.4 of JV Agreement, CEO of the company Aviva will always be from CUIH and never from Dabur. Assessee was asked to explain why they have up their right for ever and why day-to-day control of Aviva was given in hands of CUIH, despite holding majority stake of 74%. Assessee could not give a plausible reply to this query. They simply said that they are duly represented in Management by their directors. Than they were asked whether management ever reversed decision of CEO and to submit copy of Board Meeting. They failed to submit any such Minutes of Board Meeting . CUIH is running and controlling the company Aviva despite holding minority stake, which is against Government Policy on FDI and against larger public interest. Govt, did not allow 100% FDI in insurance sector because huge premiums are collected in insurance policies and their control in FDI may lead to misuse/diversion of funds outside India. Therefore, apparent is not real. Reliance is placed on decisions i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 44. As mentioned elsewhere, the JV agreement was filed with other Government authorities like IRDA and Department of Economic Affairs in 2001-2002 and after receiving approval from RBI/IRDA/FIPB, the transaction took place. In fact, after approval from FIPB for increase in share holding by Aviva Life Insurance Pvt. Ltd., the assessee also got approval from IRDA authorities with regard to increase in share holding from 26% to 49% by way of transfer of shares from Dabur, though the transaction for sale of shares took place in subsequent assessment year. 45. The constitution of the assessee, JV agreement, JV company was examined by various government authorities as mentioned elsewhere, therefore, by no stretch of imagination the assessee can be termed as a Dummy Stake Holder . According to the PCIT, when the composition of Board of Directors is dominated by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urance sector CUIH was contended with a stake of 26% and rest of 74% was taken by the assessee. 50. 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. 51. It is imperative to mention here that this JV agreement containing terms of refundable option price has been approved not only by IRDA, but also by RBI who is the authorised supervisory authority to control incoming and outgoing of foreign exchange. Needless to mention that approval has been granted by the RBI as mentioned elsewhere. 52. It is pertinent to mention here that the sale/transfer of 23% stake by the assessee to CUI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f trading results in a trading receipt, sale of assets uses as fixed capital enable him to carry on his business results in capital receipt. 57. Further, in the case of P.H. Divecha Vs. CIT in 48 ITR 222, while considering the nature of receipts, whether it is income or capital, the Hon ble Supreme Court held that to constitute income, profit or gains, there must be a source from which the particular receipt has arisen and a connection must exist between the quality and the receipt of the source. It is not the motive of the person who paid that is relevant. More relevance attaches to the nature of the receipts in the hands of the person though in trying to find out the quality of the receipt, one may have to examine the motive out of which payment was made. The fact that the amount involved is large or that it is periodic in nature, has no decision bearing upon the matter whether it is a capital or income. 58. The Hon'ble Supreme Court at page 231 of the Report observed as under: In determining whether this payment amounts to a return for loss of a capital asset or is income, profits or gains liable to income-tax, one must have regard to the nature and quality of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see on account of this investment which has to be taken into account for working out the selling price of stake at a later date i.e. F.Y. 2016-17. 60. As mentioned elsewhere, the PCIT was heavily influenced by the findings of the Assessing Officer made in A.Y 2015-16. In our considered opinion, as far as invoking of provisions of section 263 of the Act for A.Y 2013-14 and 2014-15 is concerned, the same cannot be held as erroneous and prejudicial to the interest of the Revenue merely on the basis of finding that the succeeding officer in subsequent year, i.e. 2015-16, has taken a different view from the earlier officers. In our considered opinion, for the purpose of section 263 of the Act, the PCIT has to independently examine and prove that the orders passed by the Assessing Officer for A.Ys 2013-14 and 2014-15 are erroneous and prejudicial to the interest of the Revenue. 61. In the case of CIT vs. Escorts Ltd. in 338 ITR 435, the Hon ble Jurisdictional Delhi High Court had the occasion to deal with the validity of order passed by CIT u/s 263 of the Act, wherein the CIT had prompted to take action on account of different view taken by the AO in subsequent year. The Hon ble Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 2013-14 and 2014-15 are completely silent on the issues raised by the PCIT in his order framed u/s 263 of the Act. 65. The Hon'ble Jurisdictional High Court of Delhi in the case Honda Siel Power Products Ltd. in 333 ITR 547 has observed that while considering the provision of Section 263 of the Act, that generally the issues which are accepted by AO, do not find mention in the assessment order but it cannot be said that the AO has not applied his mind. It cannot also be said that the AO had failed to make any enquiry because no further enquiry was necessary, more particularly when all the facts were before Assessing Officer. 66. In the case of CIT vs. Nirav Modi in 390 ITR 292, the Hon ble Bombay High Court held that if a query is raised during the course of assessment proceedings and if the assessee responds to the said query merely because the said aspect has not been dealt in the assessment order, would not lead to a conclusion that the AO had not applied his mind. 67. The facts of the present case clearly reveal that the 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -s. (1). The consideration of the CIT as to whether an order is erroneous insofar as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the CIT acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The CIT cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induces repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. [see Parashuram Pottery Works Co. Ltd. vs. ITO 1977 CTR (SC) 32 : (1977) 106 ITR 1 (SC) at p. 10]. ............... From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT himself in para 3 of his order dt. 3rd Nov., 2004. This order also reproduces the reply of the respondent in para 3 of the order in the following manner: The tools and dyes have a very short life and can produce upto maximum 1 lakh permissible shorts and have to be replaced thereafter to retain the accuracy. Most of the parts manufactured are for the automobile industries which have to work on complete accuracy at high speed for a longer period. Since it is an ongoing procedure, a company had produced 10,75,000 sets whose selling rates is inclusive of the reimbursement of the dyes cost. The purchase orders indicating the costing include the reimbursement of dyes cost are being produced before your Honour. Since the sale rate includes the reimbursement of dye cost and to have the matching effect, the cost of the dyes has been claimed as a revenue expenditure. 14. This clearly shows that the AO had undertaken the exercise of examining as to whether the expenditure incurred by the assessee in the replacement of dyes and tools is to be treated as revenue expenditure or not. It appears that since the AO was satisfied with the aforesaid explanation, he accepted the same. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act, when read as a composite whole make it incumbent upon the CIT before exercising revisional powers to : (i) call for and examine the record, and (ii) give the assessee an opportunity of being heard and thereafter to make or cause to be made such enquiry as he deems necessary. It is only on fulfilment of these twin conditions that the CIT may pass an order exercising his power of revision. Minutely examined, the provisions of the section envisage that the CIT may call for the records and if he prima facie considers that any order passed therein by the AO is erroneous insofar as it is prejudicial to the interest of the Revenue, he may after giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify. The twin requirements of the section are manifestly for a purpose. Merely because the CIT considers on examination of the record that the order has been erroneously passed so as to prejudice the interest of the Revenue will not suffice. The assessee must be called, his explanation sought for and examined by the CIT and thereafter if the CIT still fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notes attached therewith are the basic documents which is supposed to be seen by the AO and if notes are very clear and explain the basis of claim of assesseee to the satisfaction of AO and no addition has been made, then it must necessarily be inferred that the AO has applied his mind at the time of passing the order. 72. In the light of the aforesaid judicial discussion, 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. 73. For the sake of repetition, we would like to mention once again that 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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