Option Money to be treated as “Capital Receipt”: ITAT Directs AO to Recompute Capital Gains on Dabur’s Sale of 23% Stake in Aviva JV [Read Order]

All appeals are filed by the Revenue and Dabur Invest Corp, the Assessee against different orders of the Commissioner ofIncome Tax (Appeals), NFAC, Delhi dated 04.08.2022 for the assessment years 2017-18 & 2018-19.

The first common issue in both the Revenue appeals for the assessment years 2017-18 and 2018-19 is relating to taxation of option price received by the assessee as per terms of the joint venture agreement with M/s Commercial Union International Holding Ltd. (CUIH) as capital receipt or revenue receipt.

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Counsel for the assessee, at the outset, submitted that the issue in appeal is decided by the Tribunal for the assessment years 2013-14, 2014-15 and 2015-16, wherein the Tribunal held that the option money received by the assessee is capital receipt which requires an adjustment only at the time of transfer of shares by the assessee to CUIH while working out resultant capital gain thereon.

The Counsel further submitted that against the order of the Tribunal for the assessment years 2013-14 & 2014-15 the Revenue had preferred appeals before the Delhi High Court and the Delhi High Court vide its order dated 10.03.2025 dismissed the Revenue’s appeals on the principle of consistency because in various years right from assessment years 2002-03 to 2023-24 the issue attained finality.

At the time of incorporation, as per the FIPB guidelines for insurance sector, the foreign entity cannot hold more than 26% in the company but because Aviva was interested to acquire the shareholding at a higher percentage, hence agreement has been arrived at in between the assessee and CUIH that Dabur will not sell the shares to third party subject to the payment of option price by CUIH on the rates prescribed in JV agreement.

The option price so received by Dabur will be appropriated at the time when the shares would be transferred in favour of CUIH on account of change in policy by FIPB allowing the holding of shares by foreign entity at a higher percentage. The quantum of option price which was to be appropriated by Dabur was to be determined on the date of transfer of shares depending upon the market value of the shares so transferred. In case the option price received by the assessee was more than the formula given in the JV agreement, then the excess amount of the option price in relation to the shares transferred would be refunded by the assessee. As per the definition of net sale proceeds given in Schedule 1 of JV agreement, it consists of gross sale proceeds per Dabur share and option price retained as per formula.

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During the year under consideration, i.e. Assessment Year 2017-18, the assessee had transferred 23% of its shareholding in favour of CUIH on account of change in policy by FIPB allowing the holding by a foreign entity at a higher percentage. For this purpose, necessary permission was sought for not only from FIPB but also from IRDA as well as RBI - copy of FIPB approval dated 18th March 2016 placed at page 200 of the paper book and IRDA approval dated 28th March 2016 at page 205 of paper book.

As per permission granted by FIPB, the market value of the shares was determined by competent commercial valuers at Rs.940 crore and as per FIPB guidelines it has to be received from foreign remittances and accordingly CUIH, in order to acquire 23% shareholding in the joint venture company had remitted the same from foreign sources.

However, the proportionate option money of 23% shareholding which was cumulatively received by the assessee in various years was at Rs. 1003.16 crore, out of which as per the formula given in the JV agreement, only an amount of Rs.524.29 crore was appropriated and retained by Dabur and the proportionate excess amount of option money Rs.478 crore was refunded to CUIH as per JV agreement which was approved by RBI and over which there is no dispute.

Accordingly, the assessee offered the capital gain on sale of such shares, i.e. 23% shareholding in Assessment Year 2017-18 and sale consideration was disclosed at Rs. 1464.29 crore (Rs.940 crore received through foreign remittances plus Rs. 524.29 crore being the amount appropriated and retained out of option money).

When the assessee had disclosed the capital gain on sale of shares after taking into consideration the actual sale price received as per FIPB plus the eligible amount of option money appropriated as per the formula given in JV agreement and claimed the deduction in respect of the cost which includes the capitalization of expenses, but has been disregarded by the Assessing Officer due to the stand taken by him in Assessment Years 2013-14, 2014-15 and 2015-16 and proceeded accordingly. Now the issue has attained finality in relation to the option money and capitalization of interest and expenses claimed in earlier years.

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Counsel for the assessee further inviting our attention to the assessment order passed for the AY 2022-23 u/s 143(3) r.w.s. 144B of the Act dated 23.03.2024 which is placed at pages 159 to 165, submitted that the Assessing Officer while completing the assessment following the order of the Tribunal dated 11.02.2021 for the AY 2015-16 accepted the stand of the assessee that the option money received by it is a capital receipt and accordingly no addition/disallowance was made.

Counsel submitted that in the circumstances the Assessing Officer be directed to compute the capital gain on sale of 23% stake in accordance with law thereby considering the net sale consideration and allow the deduction permissible in law more particularly the interest and other expenses which have been allowed to have been capitalized in earlier years.

On the other hand, the DR fairly submitted that for the AY 2015-16 the Tribunal decided that the option money received by the assessee is capital receipt. The Assessee during the AY 2017-18 sold its 23% of stake through the joint venture agreement and disclosed capital gains. The DR submitted that in view of the decision of the Tribunal for AY 2015-16 holding that the option money is capital receipt the issue may be sent back to the AO for computing the capital gains on sale of 23% stake.

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The Tribunal held that the option price received by the assessee against its own investment in joint venture company from CUIH is capital in nature being advance against sale of shares as per the terms of the joint venture agreement and as approved by RBI, the quantum of such option money has to be ascertained in terms of joint venture agreement on date of sale of shares and the excess amount would be refunded to CUIH.

Considering the fact that the nature of option money has now attained finality by treating the same as capital in nature, the two member bench of Shri Challa Nagendra Prasad, Judicial Member and Shri Avdhesh Kumar Mishra, Accountant Member held that AO has to now proceed with the computation of capital gain on sale of its 23% stakes as disclosed by the assessee in its return.

The court dismissed the appeals of the Revenue and appeal of the assessee for the AY 2017-18 is partly allowed.

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