Zaheer Mauritius Vs. Director of Income Tax


A debenture indisputably creates and recognizes the existence of a debt and till it is discharged, either by payment or by conversion, the debenture would essentially represent a debt. A Compulsorily Convertible Debenture is a debt which is compulsorily liable to be discharged by conversion into equity. Any amount payable by the issuer of debentures to its holder would usually be interest in the hands of the holder.

Zaheer Mauritius Vs. Director of Income Tax

W.P. (C) 1648/2013

Delhi High Court

Decided on 30.07.2014


The petitioner (“P“) was a company incorporated under the laws of Mauritius and was a tax resident of Mauritius, engaged in the business of investment into Indian companies. P entered into a Securities Subscription Agreement (“SSA“) and a Shareholder’s Agreement (“SHA“) with Vatika (an Indian company) and SH Tech Park Developers Pvt. Ltd. (100% subsidiary of Vatika) (“JV“). As per SSA, P agreed to acquire 35% ownership interest in the JV by making a total investment of Rs.100 Crores in five tranches. P thus agreed to subscribe to 46,307 equity shares having a par value of Rs.10/- each and 88,25,85,590 zero percent CCDs having a par value of Rs. 1/- each in a planned and phased manner. SHA recorded the terms of this relationship and rights and obligations of the parties inter se including matters relating to transfer of equity shares and the management and operation of the JV. SHA also provided for call and put options to Vatika by P. Vatika partly exercised the call option and purchased 22,924 equity shares and 43,69,24,490 CCDs from P for a total consideration of Rs. 80 crores. Subsequently, P transferred further equity shares and CCDs to Vatika.

AAR noted that the balance sheet of Vatika for the FY 2010-11 indicated that Vatika had acquired the entire CCDs subscribed to by P during the FY 2010-11, and P was left with only 23,383 equity shares of JV. Thereafter, P filed an application u/s 197 of the IT Act before the Income Tax Officer requesting for a ‘nil’ withholding tax certificate to receive the total consideration from Vatika for transfer of equity shares and CCDs without deduction of tax.

Income Tax Officer:  The entire gain on the transfer of equity shares and CCDs would be treated as interest and tax at the rate of 20% should be withheld on the same.

Petitioner filed an application before AAR.

AAR: The entire gains on the sale of equity shares and Compulsorily Convertible Debentures (CCDs) held by the petitioner are not exempt from income tax in India by virtue of the Double Taxation Avoidance Convention (“DTAA”) with Mauritius and that the gains arising on the sale of CCDs are ‘interest’ within the meaning of Section 2(28A) of the Income Tax Act, 1961 (“IT Act”) and Article 11 of the DTAC and are taxable as such.


  1. Whether the gains arising in the hands of P from transfer of its investments in the JV is ‘interest’ or ‘capital gains’.
  2. Whether the corporate veil ought to be lifted and that the JV and Vatika were essentially the same entity.



  • Amount of gains received/receivable by P resulting from transfer of the investments held by P in the JV, was NOT ‘interest’ under Section 2(28A) of the IT Act.
  • There was no debtor and borrower relation between Vatika and P and therefore transaction entered into between P, Vatika and JV was NOT a loan transaction.
  • The CCDs were held as a capital assets by P and the transfer of the investment was a transfer of a capital asset and any gains arising therefrom were liable to be treated as capital gains. Therefore, such gains could not be subjected to income tax in India in terms of the DTAA between India and Mauritius.


  • The transaction was essentially in the nature of an External Commercial Borrowing (ECB) and P was entitled to receive a fixed rate of return and that the duration of the investment would determine the quantum of return receivable by P. Thus, the transaction was a loan transaction and the returns on the investment were simply interest, liable to be taxed in India.
  • The corporate veil ought to be lifted and in proceeding on the basis that Vatika and the JV were, essentially, a single entity. Therefore, debt owed by JV was in reality Vatika’s debt and the amount received by P in excess of the investment made by P would amount to ‘interest’ paid/payable by Vatika for borrowing funds from P.


On Issue 1:

  • Gains arising from sale of capital assets would not be in the nature of interest. The expression ‘interest’ as defined under Section 2(28A) of the IT Act cannot apply to all gains that are received by a debenture holder (lender) irrespective of the transaction resulting in such gains.
  • Whether a Compulsorily Convertible Debenture is a loan simpliciter or whether it is in the nature of equity, is not material in determining whether the gain on the sale of the debentures by its holder is a capital gain or not. This depends entirely on whether the debentures are capital assets in the hands of its holder.
  • Call and Put Options in the SHA cannot be read to mean that P was only entitled to a fixed return on the investments made by it in the equity and CCDs issued by JV. The Call option also contemplated that if the option is exercised after the expiry of three years from the First Closing Date, the price to be computed would also include a component of “equity payment” (10% of the project value).
  • SHA only provided for options either to Vatika to buy out the stake of P in JV, or to P, to exit the JV by calling upon Vatika to buy its shares. It was not necessary that either Vatika or P exercise the options as available to them. By the very definition, call & put options were only options that were available to the contracting parties. In the event none of the options were exercised, the CCDs held by P would mandatorily be convertible into equity shares and P would be entitled to the benefits that would accrue to an equity shareholder in respect of the equity shares issued by the JV on conversion of the CCDs.
  • The SHA was essentially a joint venture agreement and it is common in any joint venture agreement for the co-venturers to include covenants for buying each-others’ stakes.
  • Although, the SHA enabled P to exit the investment by receiving a reasonable return on it, and in that sense it assured a minimum return, the same cannot be construed to mean that the CCDs were fixed return instruments, as P also had the option to continue with its investment as an equity shareholder of JV. Merely because an investment agreement provides for exit options to an investor, would not change the nature of the investment made.
  • The rights with regard to options as well as additional rights under the SHA were the mutual rights and obligations between Vatika and P and not the JV.
  • Assuming that the gains were payment of interest by Vatika, the same would also mean that the quantum of interest is a deductible expenditure in the hands of Vatika and viewed from this perspective, it would be erroneous to conclude that the whole transaction had been structured to ensure avoidance of tax on income.

Issue 2:

Although JV was to be managed as a joint venture between P and Vatika, the affairs of JV were to be managed separately and distinctly from that of Vatika and therefore JV was not an alter ego of Vatika alone. There were clean and sufficient indication in the agreements that all transactions with related parties were to be conducted on a Arm’s Length Basis. All decisions that could be considered important, required the consent of both P as well as Vatika. In certain matters where there could have been possibility of a conflict of interest between Vatika and JV, the nominee directors of Vatika were obliged to refrain from participating or influencing the decision of JV. P was entitled to participate in the management and affairs of JV, not only by appointing its nominee directors but also by ensuing independent auditors and an independent Asset Manager. Since Vatika was also involved in the project, the SHA ensured that no payments could be made by JV to Vatika under the relevant contract without the authority of an independent Asset Manager.


  • Writ petition was allowed and the impugned ruling was set aside.
  • Transfer of the investment was a transfer of capital asset and gains arising therefrom were capital gains.
  • Vatika and JV were NOT essentially one and the same entity.


Author: Vivek Verma. 

You can direct your queries to the author at


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