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Income Tax Appellate Tribunal, MUMBAI BENCHES “D”, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
Appellant by : Shri Nitesh Joshi,AR Respondent By : Shri B. S. Bist, Sr. DR Date of Hearing : 25.08.2016 & 02.12.2016 Date of pronouncement : 16.12.2016 ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2007-08. The appeal is directed against the order of the Commissioner (Appeals)-16, Mumbai and arises out of the assessment u/s 143(3) of the Income Tax Act 1961 (The Act).
The grounds raised by the assessee in this appeal are that the ld. CIT(A) erred in sustaining the order of the AO by treating compensation of Rs.2,10,75,000/- received as per ‘Waiver Agreement’ dated 5.6.2006, for not exercising the option under article 8.6 of the Joint Venture Agreement (“JVA”) dated 27.05.2005 in respect of Joint Venture Company viz. Land Del Infrared Private Limited (‘Land DEL’), as income chargeable under the head ‘Short Term Capital Gain’ (STGC). Without prejudice to the above, it is stated that the ld. CIT(A) erred on the facts and in law in treating the option available under Article 8.6 of the JVA as a capital asset. Also it is raised that the ld. CIT(A) erred in holding that, not exercising option under JVA was a relinquishment of a right and hence transfer within the meaning of section 2(47) of the Income-tax Act, 1961. Further it is stated that the ld. CIT(A) erred in holding that the appellant had incurred cost for acquiring the option in Article 8.6 of the JVA . Finally it is stated that the ld. CIT(A) erred in relying on the decision of ITAT Hyderabad in the case of Deputy Commissioner of Income tax, Circle 16(1) Hyderabad vs. Natco Pharma Limited which is distinguishable on facts.
The Assessing Officer (AO) observed during the course of assessment proceedings that as per the balance sheet, the assessee had credited Rs.2,10,75,000/- being capital receipt under ‘Capital Reserve Account’. On being asked to explain why income was credited to the ‘Capital Reserve Account’ instead of offering the same to tax, the assessee filed a written submission dated 26.10.2009 which has been extracted by the AO at para 5.1 of the assessment order dated 1.12.2009. The AO found that the assessee had entered into a JVA dated 27.05.2005 with M/s Land Instrument International Ltd (“LAND”). As per this, both the parties will hold 50% share in the Joint Venture Company (JVCo.) and each will subscribe and take up 1,25,000/- equity shares of the J V Co. As per the terms of 8.6 and 8.7.1 of the said agreement, in case any of the J V partner is amalgamated or taken over by a third party, the other J V partner has the option either purchasing all the shares of the partner getting amalgamated or taken over, or to sell one’s own shares to the partner being amalgamated or taken over. The AO further found that “LAND” was taken over by a company incorporated in USA during F.Y. 2006-07. Subsequent to take over, the assessee exercised the option stated in para 8.6 of the JVA and sold its 50% shares in the J V Co. to M/s Land Instrument International Ltd., UK for Rs. 2,10,75,000/-. The AO came to a finding that the above amount of Rs. 2,10,75,000/- received against the sale of 50% shares of J V Co. would be taxed under the head STCG because of provisions in sections 2(14); 2(45); 45 and 48 of the Act. As per him, the relinquishment right to acquire the share capital is a valuable right and so is the right to be involved in the affairs of joint venture under the JVA. Such right is a capital asset within the meaning of section 2(14) of the Act. The AO observed that in the case of the assessee, the cost of acquisition is Nil and the sale consideration is the amount which has been received after exercising its option to sale its right. As the assessee had exercised its option to sale its rights on 8.5.2006 i.e. within twelve months of the JVA, the AO added Rs. 2,10,75,000/- to the total income under the head STCG.
The proceedings before the ld. CIT(A) were in compliance to the order of ITAT, “D” Bench, Mumbai vide their order in dated 21.06.2013. The ld. CIT(A) found that in a decision dated 29.02.2012, in cross appeals DCIT v. M/s Natco Pharma Ltd, for A.Y. 2007-08, (ITA No. 765/Hyd/2011 & ITA No. 319/Hyd/2011), the ITAT, Hyderabad, had occasion to consider the same issue, albeit from a slightly different angle. The ITAT, Hyderabad held that compensation received for foregoing right to acquire equity shares was taxable as capital gain, and that a right acquired by the tax payer to convert advance given into equity shares falls under the definition of “Capital Asset” as per section 2(14) of the Act. After considering the facts and circumstances of the case, the ITAT held that the entire amount of of Rs. 10,00,00,000/-received by the assessee-company towards compensation for waiver of rights to receive the shares of KPCL is to be brought to tax as capital gains. The contentions of the assessee before the ld. CIT(A) were that it had not sold its shares and had merely waived its rights under articles 8.6 and 8.7 of the JV agreement ; that the receipt was a capital receipt and not subject to tax; that there was no capital transfer and secondly even if it was assumed that such waiver constituted transfer of a right (capital asset), there was no cost of acquisition and relying on the decision of the Hon’ble Supreme Court in CIT v. B.C.Srinivasa Setty (1981) 128 ITR 294(SC), no capital gains could be computed and hence the amount received was not taxable. The ld CIT(A) noted that the decisions of the Hon’ble Supreme Court in the case of Oberoi Hotel Pvt. Ltd. vs. CIT (1999) 236 ITR 903 (SC) and B.C.Srinivasa Setty (supra) ( relied on by the present appellant) were also considered by the ITAT, Hyderabad while passing the order. The ld. CIT(A) thus comes to a finding that the decision in the case of M/s Natco Pharma Ltd. (supra) applies to the present case as the assessee gave up its rights and entitlements to purchase shares and the relinquishment of an asset is a transfer u/s 2(47). An agreement for waiver / relinquishment of right to purchase shares is capable of specific performance and therefore, enforceable. The ld. CIT(A) also did not agree with the contentions of the assessee that there was no cost incurred by it for acquiring the right as it was not as if the J V partner “LAND” had unilaterally bestowed on the assessee, the right to purchase shares in its favour (which right was relinquished ), the right was bestowed to guard against the change in business environment with a change in the controlling interest / amalgamation with a third party. At the time of acquisition of JVA, the assessee put in 50% financial stake in J V Co. and was also actively involved in the business activity of the J V Co. The right was bestowed, in lieu of, or on the consideration of such financial and managerial and HRD investment by the assessee in the J V Co. In view of the above, the ld. CIT(A) upheld the order of the AO treating the entire amount of Rs.2,10,75,000/- received by the assessee-company towards compensation for waiver of rights and entitlements as STCG.
Before us, the ld. counsel of the assessee refers to the JVA between Digital Electronics Ltd.(‘DEL’) and Land Instruments International Ltd. (‘LAND’) which were filed before the AO and the ld. CIT(A) (p. 1-13 of the paperbook). Specific reference is made by him to clause 8.6; 8.7.1 of the above agreement ( p. 7-8 of paperbook). Also he refers to the letter of “Change in controlling interest in Land Group” UK from ‘DEL’ to ‘LAND’ which were filed before the AO as well as the ld. CIT(A) (p. 14 of paperbook). Reference is made by him to the letter dated 8.5.2006 from ‘DEL’ to ‘LAND’ (p. 15 of the paperbook). Also he refers to the waiver agreement between ‘LAND’. and ‘DEL’ which were also filed before the AO and the ld. CIT(A)(p.16-22 of the paperbook). Reliance is placed by him on the decision in the case of Ms. Payal Kapur vs. ACIT (2006) 98 ITD 19 (Delhi); DCIT vs. Sak Industries (P) Ltd. (2005) 1 SOT 798 (Delhi) and Oberoi Hotel Pvt. Ltd.(supra). The ld. counsel of the assessee states that the case of M/s Natco Pharma Ltd. (supra) relied on by the ld. CIT(A) is distinguishable from the facts in the present case.
5.1 In the written submission filed on 30th August 2016, the ld. counsel reiterates the same facts. He relies on the decisions mentioned here-in- above. It is further submitted by him that Natco Pharma Ltd. is concerned with an assessee who had advanced funds by way of loan to a company by name KPCL. It had the right to convert the said loan into shares of KPCL. It received an amount of Rs. 10,00,00,000/-for waiving its right of conversion. The Tribunal has held that the principle as a laid down by the Hon’ble Supreme Court in B.C. Srinivasa Setty would not apply to that case, as according to them, the fund advanced was the consideration for the grant of the said right. Notwithstanding the correctness of the view taken by the Tribunal in that case, the applicant submits that, in that case a monetary value could be placed on the cost of acquisition being the amount advanced.
In the present case, the consideration according to the Revenue, is the financial, managerial and HRD investment made by the appellant. Cost of such investment cannot be ascertained in monetary terms. In view thereof, the said decision is distinguishable and cannot be applied in the present case. Assuming without admitting that the view is taken that the cost was incurred to obtain rights conferred by Articles 8.6 and 8.7 of the JVA, the cost in the form of financial, managerial and HRD investment made by the appellant much after the company was formed on 27th June 2005, i.e. much after the right was obtained under JVA dated 27th May 2005. Surely, the investment made after the right already obtained under the JVA cannot be taken as cost for obtaining right under the JVA.
The ld. counsel of the assessee submits that the computation machinery as provided in section 48 of the act breaks down in the absence of an ascertainable cost of acquisition of the capital asset. Reliance was placed by him on B.C. Srinivasa Setty (supra) , CIT v. D.P.Sandu Bros 273 ITR 1(SC) and PNB Finance Ltd. v. CIT 307 ITR 75 (SC). In the present case also , there is no cost of acquisition of rights conferred by Article 8.6 and 8.7 of the JVA. The ld. CIT (A) in the appellate order has held that the said right has been bestowed on the appellant in lieu of financial, managerial and HRD investment by the appellant in the JV Co. The appellant submits that the said investment cannot be regarded as a consideration for grant of rights as per Articles 8.6 and 8.7 of the JV agreement. In any event, cost of such investment cannot be determined in monetary terms, and therefore, the alleged cost of acquisition is not ascertainable. In view thereof, the appellant submits that no capital gains could be charged to tax in its hands.
Before us, the ld. DR refers to clause 3.1 and 8.6 of the JVA dated 27.05.2005. He supports the order passed by the ld. CIT(A) in the present case. He also relies on the order of the ITAT in the case of M/s Natco Pharma Ltd. (supra). The ld. DR relies on the provision of section 55 (2) (a) of the Act. According to him, in the circumstances enumerated in the said section, the cost of acquisition has to be taken as nil for the purpose of computation of capital gains.
We have heard the rival submission and perused the relevant material on record. We begin with the decisions relied on by the ld. counsel for the assessee.
7.1 In the case of Ms. Payal Kapoor (supra), the assessee, along with other members of “J” group, entered into an agreement (JVA) with “G” company of USA to jointly pool their resources to carry on the business of manufacturing and marketing of writing instruments and stationary products in India. The JVA provided that Joint Venture Company (JVC) would be the exclusive vehicle through which the said business was to be carried on in India and parties agreed not to sell or transfer their respective interest in any of the shares of JVC for the first seven years of the said JVA without the prior consent of the other party. Subsequently, it came to knowledge of “J” Group that “G” intended to sell its worldwide business including its share holdings in JVC to another company of USA, without their consent. “J” brought the same to the G’s notice and sought to resolve the dispute through mutual conciliation. Thereafter, they negotiated the issue and vide the consent and waiver agreement, “J” allowed “G” to sell its interest in said JVC to a third party, in lieu of which “G” remitted certain amount “J”. The assessee claimed that amount so received was capital receipt not liable to tax. The AO held that “J” entered into the JVA in course of and for the purpose of carrying on business or profession and since receipt arose from the material breach of JVA, it was a revenue receipt accessible to tax u/s 28(i) of the Act. On appeal, the CIT(A) upheld the impugned assessment. On further appeal by the assessee, the Tribunal held that as per the terms and conditions of the JVA, it was a structure or foundation on which joint business was to be built and carried on and, thus, it was capital assets invested in business and not business itself and further held that the compensation received for breach of JVA was a capital receipt not liable to a tax.
In the instant appeal, it has not come to the notice of one party that the other party intended to sell its shareholding in JVCo to another company, without his consent. There is no question of dispute being resolved through mutual conciliation in the instant case. Lastly, the compensation has not been received in the present appeal for breach of JVA. Breach of contract means an actual failure by a party to a contract to perform his obligations under that contract or an indication of his intention not to do so. This is not so in the present case. Therefore, the case of the assessee in the instant appeal is distinguishable from the case of Ms. Payal Kapoor (supra).
7.2 In Sak Industries (P) Ltd. (supra), the assessee-company entered into an agreement with a German company, in terms of which a company, Widia (India) Ltd. was floated and a restriction was placed on transfer of shares held by promoters therein in as much as in case of sale by either party, shares were required to be offered to other party as first option to purchase. Foreign promoters being holding company of German Company’s holding company decided to dispose of its shares. Assessee-company conveyed its opposition. Eventually, a settlement was agreed upon and assessee was paid a certain sums on condition that assessee would have no right or claim whatsoever against foreign promoters. The Tribunal held that the assessee had succeeded to exercise its supposed right to purchase shareholding of German Company in Widia (India), in itself did not have given rise to any income in the hands of the assessee but only created an income earning source in the hands of the assessee and, therefore, compensation received by the assessee for surrender of its rights could not be viewed as anything other than compensation received in lieu of a profit making source. It was further held that since the first right to purchase was acquired by the assessee by way of promotion agreement and article of association of Widia (India) Ltd., even for commencement of business of Widia (India) Ltd., by no stretch of logic receipt in question could be viewed as receipt of business carried on by the assessee and it could only constitute a capital receipt in assessee’s hands. In the above case, the settlement was of the dispute between the assessee-company and Fried Krupp Essen because the assessee-company had alleged that Fried Krupp had breached the promotion agreement by the proposed sale by Fried Krupp of all quotas of Krupp Widia. The assessee-company gave up its rights of first purchase of shares held by Meturit AG in Widia (India) Ltd. on account of perceived/ alleged violation of promotion agreement.
In the instant appeal, the issue of settlement of dispute is not there. Also there is no breach of promotion agreement. The assessee-company, in the instant appeal has not given up its rights of first purchase of shares on account of perceived/ alleged violation of promotion agreement. Therefore, the case of the assessee in the instant appeal is distinguishable from the case of Sak Industries (P) Ltd. (supra).
7.3 In the case of Oberoi Hotels (P.) Ltd. (supra), the assessee company was engaged in the business of operating, managing and administering various hotels belonging to the others for a fee. The assessee company had entered into an agreement with the Singapore company in 1970 through which assessee company agreed to operate the hotel known as Hotel Oberoi Imperial for which certain fee called ‘management fee’ which was to be calculated on the basis of gross operating profit was to be received. The agreement was to run for a period of 10 years which could be renewed for further two terms of ten years. There was also a clause in the said agreement by which assessee had a right to exercise an option of purchasing the hotel in case its owners desired to transfer the same during the currency of the agreement. In 1975 a ‘Supplementary Agreement’ was executed by which the assessee company agreed with the receiver who had been appointed for the property by which the assessee company waived its right of purchasing the hotel. For this, the assessee company received some compensation. A question arose whether this compensation was taxable or not. The Hon’ble High Court held that it was a revenue receipt assessable to tax. The Hon’ble Supreme Court reversed the decision of the High Court and held that the receipt in the hands of the assessee was a capital receipt. In the instant appeal, the assess-company is not receiving any ‘management fee’ which is calculated on the basis of gross operating profit. Further, in the instant case, the assessee had entered into a JVA dated 27.05.2005 with “LAND”. As per this agreement, both the parties will hold 50% share in the Joint Venture Company (JVCo.) and each will subscribe and take up 1,25,000/- equity shares of the J V Co. As per the terms of 8.6 and 8.7.1 of the said agreement, in case any of the J V partners is amalgamated or taken over by a third party, the other J V partner has the option either purchasing all the shares of the partner getting amalgamated or taken over, or to sell one’s own shares to the partner being amalgamated or taken over. “LAND” was taken over by company incorporated in USA during F.Y. 2006-07. Pursuant to subsequent negotiation, the assessee and “LAND” reached an agreement whereby, the assessee-company waived and gave up all its rights and entitlement under articles 8.6 and 8.7 of the JVA in consideration of “LAND” paying Rs. 2,10,75,000/- to the assessee. In the instant case the amount received by the assessee was not for consideration for giving up its right to purchase and/or to operate the property or for getting it on lease before it was transferred or let out to other persons. Therefore, the case of the assessee in the instant appeal is distinguishable from the case of Oberoi Hotels (P.) Ltd. (supra).
7.4 Now we shall discuss the decision relied on by the ld. CIT(A) and DR. The case is M/s Natco Pharma Ltd(supra). In this case the facts are that the assesee was engaged in the business of manufacturing and sale of bulk drugs. The assessee promoted Krishnapatnam Port Co Ltd. (KPCL) for establishing and developing a minor deep seaport and entered into an agreement in 1997 with KPCL in order to implement the project. The assessee financed capital expenditure and also day to day revenue expenditure of KPCL. Further, in consideration the assessee had a right to convert its advances into equity shares of KPCL at a rate to be mutually agreed between the parties. The assessee entered into a tripartite agreement with KPCL and Shri V.C Nannapaneni by which the assessee agreed to waive its right to convert the advances to KPCL into equity shares of KPCL subject to receiving suitable compensation. The assessee through this tripartite agreement had received the reimbursement of entire advance and also received interest on money advanced to KPCL which was paid by Shri V. C. Nannapaneni on behalf of KPCL. The AO held that payment of of Rs. 10,00,00,000/-received as compensation for foregoing right to acquire shares of KPCL as short-term capital gains . The ld. CIT(A) held that the payment for right to acquire equity shares has to be taxable as income from other sources.
The issue before the Tribunal was whether compensation received for foregoing right to acquire equity shares is a transfer of ‘Capital Assets’ within the definition of Section 2(47) of the Act? The Tribunal held that : (a) The funding by the assessee is primarily to acquire the shares in respect of funds advanced. Therefore, the total amount advanced is to be treated as a consideration for acquiring the shares in KPCL. Accordingly, advances given to KPCL falls within the definition of transfer of capital assets under Section 2(47) of the Act as the assesse agreed to receive back its advances with interest in addition to compensation for waiving its right to convert advance into shares. (b) The word ‘property’ used in the definition of ‘Capital Assets’ under Section 2(14) of the Act is a word of the widest amplitude and the definition has re-emphasised this by the use of the words ‘of any kind’. Any right which can be called property will be included within the definition of ‘Capital Assets’. An agreement for allotment of sale is capable of specific performance and it is also enforceable. Therefore, a right acquired by the assessee to convert the advance given to KPCL into allotment of shares is clearly a ‘property’ as contemplated by Section 2(14) of the Act. (c ) The assessee gave up its right to get allotment of shares of KPCL and such relinquishment of an asset is a ‘transfer’ within the meaning of Section 2(47) of the Act. (d) The Tribunal did not agree that there was no cost incurred for acquiring the right to get the allotment of shares in favour of the assessee. At the time execution of the agreements and even thereafter, the assessee advanced money to KPCL. It was by paying this sum that the assessee acquired the right to get allotment of shares in its favour. Accordingly, the Tribunal held that the entire amount received by the assessee towards compensation for waiver of rights to receive the shares of KPCL is taxable as capital gain. However, this capital gain is to be computed as long term or short term as the case be on prorate basis depending upon the investments/advances as made by assessee. We find that the above order of the Tribunal in M/s Natco Pharma Ltd(supra) has direct relevance to the facts in the instant appeal.
7.5 We shall now turn to the facts in the instant case.
7.5.1 JVA was signed on 27.05.2005 between “DEL” and “LAND”. We feel it expedient to refer to the relevant clauses of it. Clause 2.2 states:
“ The joint venture activity will be carried on by the parties hereto by cooperating in the promotion, incorporation, management and operation of a company to be incorporated in India (hereinafter referred to as “JVCO”). The JVCO shall be incorporated with the name Land DEL Infrared Private Limited.”
7.5.2 As per clause 2.3, the main business of JVCo shall be as follows: “2.3.1 The manufacture, sales and service of the Products
2.3.2 Supporting sale of integrated process automation solutions (with significant LAND component} through other UniDEL Group companies. 2.3.3 Export of engineering services, software services and mechanical components for LAND and LAND Group Companies worldwide (outsourcing support). 2.3.4 Development of software programs/products/system to complement/enhance the Products, for worldwide sale.” 7.5.3 Clause 3.1 reads as under: “LAND, under this Agreement, shall be obliged to provide training to the employees of JVCO, support JVCO with customer visits, provide latest products, make available new technologies and ensure timely supply of Products on mutually agreed Factory Transfer Price (FTP) (as defined in Supply Agreement) and on mutually agreed credit terms. DEL on its part, under this Agreement, shall be obliged to provide day-to-day management and complete marketing, technical and servicing support to the JVCO.” 7.5.4 Clause 4.1states : “The authorized share capital of JVCO shall be Rs.5,000,000 ( Rupees fifty lacs only) divided into 5,00,000/- (five hundred thousand) equity shares of Rupees Ten (Rs.10) each. The issued, subscribed and paid up capital of the JVCO shall be Rs.2,500,000 (Rupees twenty five lacs only) divided into 250,000/- (two hundred and fifty thousand) equity shares of Rupees ten (Rs.10) each, out of which, DEL shall subscribe for and take up 125,000/- ( one hundred and twenty five thousand) equity shares in JVCO, constituting 50 (fifty) % of the paid-up capital of JVCO and LAND will subscribe and take up the balance 125,000 (one hundred and twenty five thousand) equity shares of JVCO, constituting 50 (fifty) % of the paid up capital of JVCO, both at par.”
7.5.5 Clause 8.6 and 8.7.1 relied on by both the ld. counsels read as under : “8.6 In the event UniDEL Group or LAND Group is amalgamating with or being taken over by a Third Party, the other Group shall have the option of purchasing all the shares in JVCO of the group, amalgamating or being taken over or of selling all its shares in JVCO to the Group being amalgamated or taken over. The term ‘take over’ shall include change in controlling interest in UniDEL or LAND Group, as the case may be. The procedure for determining the value for the purpose of this Article shall be as provided in Article 8.7 below. 8.7.1 An independent valuer shall be appointed by consent of both the Groups within thirty days of demand. In the event of the two Groups not agreeing to a common valuer, each Group shall appoint a valuer and the two valuers so appointed, shall, before commencing valuation, appoint a third valuer to whom their valuation shall be referred and the valuation finalised by the third valuer, after considering the valuations of the valuers appointed by each Group shall be be binding on both the Groups. The valuers shall apply generally accepted international standards and principles and sound valuation practices.” 7.5.6 The waiver agreement dated 15.06.2006 between “LAND” and “Digital” contains the following clauses:
“(B) There are ongoing negotiations between all the shareholders of Land and Amtek Inc., a company incorporated in the State of Delaware, USA, whose principal office is at 37 North Valley Road, Building 4, PO Box 1764, Paoli,PA 19301, USA (“Ametek”) for takeover of Land by Ametek by sale of the entire issued and paid-up share capital of and in Land to Ametek;
(C) In view of these ongoing negotiations, on or about 31st January, 2006 Digital invoked the provisions of Articles 8.6 and 8.7 of the JVA by addressing a letter dated 31st January, 2006 to Ms. Jasmine Harfoot, the managing director of Land;
(D) Thereafter, by a letter dated 8th May, 2006, Digital exercised its option to sell its shareholding in the company to Land in accordance with Articles 8.6 and 8.7 of the JVA.
(E) Pursuant to subsequent discussions and negotiations, Land and Digital have reached an agreement pursuant to which Digital has agreed to waive and give up all its rights and entitlements under Articles 8.6 and 8.7 of the JVA in consideration of and upon Land making or causing the Payment to be made to Digital and upon the other terms and conditions hereinafter recorded.
“Payment” the sum of Pounds Sterling 250,000,00 (Pounds Sterling Two hundred and fifty thousand only) to be paid or caused to be paid by Land to Digital on or before Completion occurring;
2.1 In consideration of and upon Land making or causing the Payment to be made to Digital, Digital waives and gives up all its rights and entitlements under Articles 8.6 and 8.7 of the JVA.”
7.6 Succinctly stated, the facts are that the assessee had entered into a JVA dated 27.05.2005 with “LAND” to form a JVCo named as “Land DEL” Infrared Pvt. Ltd. The authorised share capital of the JVCo has been mentioned at 7.5.4 here-in-above. Due to the take over of “LAND” by a USA based company, the assessee exercised its option to sell all the shares of the JVCo to other JV partner. Section 2(14) defines that “capital asset” means property of any kind held by an assessee, whether or not connected with his business or profession. The property of any kind used in section 2(14) are of widest amplitude and include not only tangible assets but also intangible rights. It may be either corporeal or incorporeal. In Cooper (RC) v. Union of India AIR 1970 SC 564, the Hon’ble Supreme court observed that in its normal connotation property means the highest right a man can have to anything, being that right which one has to lands or tenements, goods or chattels which does not depend on another’s courtesy; it includes ownership, estates and interests in corporeal things, and also rights personem capable of transfer or transmission, such as debts; and signifies a beneficial right to or a thing considered as having money value, especially with reference to transfer or succession, and to their capacity of being insured.
7.7 Shares constitute capital assets within the meaning of clause (14) of section 2. Shares are recognized as assets and a transfer of shares is recognized in clause (42A) of section 2. Clause (47) of section 2 defines the expression "transfer" in relation to a capital asset to include a sale of the asset. Capital gain arises only when there is a transfer of capital asset. As per section 2(47) transfer in relation to a capital asset, includes “the sale, exchange or relinquishment of the asset”. Relinquishment means withdrawn from, abandoning or giving up anything. By relinquishment a person ceases to own the asset concerned through some act on his part. In other words, the owner withdraws himself from the property and abandons his rights hereto. The property , however, continues to exist and will become the property of some one else. We may go back to the waiver agreement dated 15.06.2006 between “LAND” and “Digital” narrated at para 7.5.6 her-in-above. As per it , (D) Thereafter, by a letter dated 8th May, 2006, Digital exercised its option to sell its shareholding in the company to Land in accordance with Articles 8.6 and 8.7 of the JVA.
Therefore, it is crystal clear that transfer has taken place in the above case. We are fortified by the order of the ITAT, Hyderabad in the case of M/s Natco Pharma Ltd. (supra).
7.8 Now we turn to the decisions relied on by the ld. counsel of the assessee. In B.C. Srinivasa Setty (supra), it has been held that "Goodwill" generated in a newly commenced business can not be described as an "Asset" under section 45 and transfer of such goodwill is not subject to capital gains tax. In D.P. Sandu Bros. Chembur (P.) Ltd.(supra), in A.Y. 1987-88, the assessee surrendered its tenancy right to lessor prematurely in consideration of which it received a sum of Rs. 35 lakhs. Assessing Officer held that amount in question was taxable as ‘income from other sources’ under section 56 read with section 10(3). On appeal, Commissioner (Appeals) held that assessee was liable to pay capital gains on amount received after deducting certain amount as cost of acquisition. On cross appeals, Tribunal, however, came to a conclusion that cost incurred by assessee to acquire leasehold rights was incapable of being ascertained and, therefore, capital gains could not be computed as envisaged in section 48, and, consequently, capital gains earned by assessee, if any, was not exigible to tax . The High Court affirmed Tribunal’s order. The Hon’ble Supreme Court held that since stand taken by department before High Court was that cost of acquisition of tenancy was incapable of being ascertained, High Court was correct in affirming order passed by Tribunal and in view of finding that section 45 could not be applied, it was not open to department to impose tax on capital receipt under any other section. In PNB Finance Ltd.(supra), assessee, a banking company, was nationalized by Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and it received certain amount as compensation . Admittedly, banking undertaking included intangible assets like, goodwill, tenancy rights, manpower and value of banking licence and compensation received by assessee was not allocable item-wise. On facts, it was held that it was impossible to determine capital gains and cost of acquisition and, therefore, compensation received by assessee was not taxable under section 45. In respect of sec. 55 of the Act, it was held that for A.Y. 1970-71, under section 55(2) (as it stood at relevant time), fair market value as on 1- 1-1954 could be substituted for figure of cost of acquisition, provided figures of both, ‘cost of acquisition’ and ‘fair market value as on 1-1-1954’ were ascertainable.
7.9 Let us now turn to Section 55(2) of the Act. It defines for the purposes of sections 48 and 49, "cost of acquisition"— (a) in relation to a capital asset, being goodwill of a business or a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business, tenancy rights, stage carriage permits or loom hours,— (i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price ; and (ii) in any other case [not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49 , shall be taken to be nil ;
What is a joint venture? It is a commercial undertaking entered into jointly by two or more entities. Joint ventures will have a profit or loss sharing ratio for the purpose of the joint venture only. In its financial statements each reporting entity accounts for its own share of the assets, liabilities, and cash flows of the venture. Joint ventures have become increasingly common as companies cooperate with each other in international markets, in order to share costs, exploit new technologies, or gain access to new markets.
At the time of acquisition of JV A, the assessee in the instant appeal put in 50% financial stake in J V Co. and was also actively involved in the business activity of the J V Co. The right was bestowed, in lieu of, or on the consideration of such financial and managerial and HRD investment by the assessee in the J V Co. The same has been narrated at para 7.5.3 here-in- above. The assessee has acquired this right of first refusal the day it entered the JVA. Thus, the assessee has not acquired this right from any previous owner. All the more, it is an important right which enables the assessee as well as the other JV partner to carry on the business. Therefore, the cost of acquisition of such a right shall be nil as per the provisions of section 55(2)(a) of the Act. As the cost of acquisition falls in the ambit of section 55(2)(a) of the Act, the instant case is distinguishable from the decisions relied on by the ld. counsel mentioned here-in-above at para 7.8 here-in-above. 7.10 In the instant case, the capital gain is chargeable to tax as short term capital gain as the assessee has exercised its option to sale its rights on 8.5.2006 i.e. within twelve months of the JVA dated 27.5.2005.
7.11 The Hon’ble Supreme Court in Vimal Chand Ghevarchand Jain & ors. vs. Ramakant Eknath Jajoo, 2009 (5) SCALE 59 has observed while dealing with the construction of a commercial contract as under : "A document, as is well known, must be construed in its entirety". 7.12 In assessing the true nature and character of a transaction, the label which parties may ascribe to the transaction is not determinative of its character. The nature of the transaction has to be ascertained from the covenants of the contract and from the surrounding circumstances. In National Cement Mines Industries Ltd. v. CIT [1961] 42 ITR 69 , Justice J.C. Shah (as His Lordship then was) speaking for the Hon’ble Supreme Court emphasized the principles of interpretation to be adopted by the Court in construing a commercial transaction :
"But in assessing the true character of the receipt for the purpose of the Income- tax Act, inability to ascribe to the transaction a definite category is of little consequence. It is not the nature of the receipt under the general law but in commerce that is material. It is often difficult to distinguish whether an agreement is for payment of a debt by instalments or for making annual payments in the nature of income. The court has, on an appraisal of all the facts, to assess whether a transaction is commercial in character yielding income or is one in consideration of parting with property for repayment of capital in instalments. No single test of universal application can be discovered for solution of the problem. The name which the parties may give to the transaction which is the source of the receipt and the characterization of the receipt by them are of little moment, and the true nature and character of the transaction have to be ascertained from the covenants of the contract in the light of the surrounding circumstances."
7.13 In view of the foregoing reasons, we uphold the order of the ld CIT(A) confirming the action of the AO in bringing to tax Rs. 2,10,75,000/- as short term capital gain.
In the result, the appeal is dismissed.
Order pronounced in the open court on 16/12/2016.