TaxTMI 
TaxTMI 
2012 (12) TMI 1127
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....tered into a strategic alliance with one of the Netherlands based company called Vedior NV. Through an agreement entered with M/s Vedior NV on 30.4.2004, assessees sold 82.48% of the total equity shareholding of M/s Ma Foi Management Consultants Ltd. to the said M/s Vedior. The agreement was a comprehensive one and Shri Pandiarajan was to continue as Chief Executive Officer of M/s Ma Foi Management Consultants Ltd. Though shareholding of the assessees were reduced to less than 20% through the sale, the agreement with M/s Vedior NV also contained a provision for special voting rights for the assessees with regard to operational issues concerning M/s Ma Foi India and also a right for nomination to its Board of Directors. It seems there was also a clause which granted pre-emptive rights to the assessees to re-acquire the shares of Ma Foi if and when M/s Vedior NV wished to sell out the shares of M/s Ma Foi to a third party. Assessees were to be offered such shares at the prices at which a third party had shown readiness to purchase. Only if the assessees were unable to purchase the shares at the value stated therein, within a period of thirty days from the date of offer, M/s Vedior NV....
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....h of contract. Such payment was made by M/s Randstad to avoid legal consequences which could jeopardize the take over of M/s Vedior by M/s Randstad. Therefore, as per the assessees, what was received by them was nothing but compensation for giving up or foregoing the right to sue for breach of contract. This was only a capital receipt. Relying on the decision of Hon'ble Hon'ble Apex Court in the case of Oberoi Hotel Pvt. Ltd. v. CIT (236 ITR 903) and that of Delhi Bench of this Tribunal in the case of Shyam Telelink Ltd. v. ITO (99 ITD 576), assessees submitted that such amount received was not taxable under Income-tax Act, 1961. 6. However, the Assessing Officer was not impressed. According to her, relinquishing a right to sue for damages could not be considered as transfer of capital asset. Right to sue was not a property which could be transferred. It was only a personal right. A.O. noted that Hon'ble Apex Court in the case of Oberoi Hotel Pvt. Ltd. (supra) relied on by the assessee had specifically upheld the view that there was no single test for determining the nature of a receipt. A.O. also noted that even after the arrangement with M/s Randstad, assessees continued....
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....bonus. (iv) There was no compensation received by the assessee for not suing on M/s Vedior, since the payments were not made by M/s Vedior. If M/s Vedior had breached the terms of agreement only they would have been liable and not M/s Randstand. (v) There was no co-relation between 1 Million Euro paid by M/s Randstad to the assessee and legal option available to the assessee for suing M/s Vedior, for breaching the condition of pre-emptive share purchase right. (vi) M/s Ma Foi Management Consultants Ltd. was a public limited company incorporated in India and by virtue of Section 111 of Companies Act, 1956, there could not be any restriction on the share transfer of a public company. (vii) There was no transfer of any shares of M/s Ma Foi Management Consultants Ltd. by M/s Vedior to M/s Randstad. Merger of M/s Vedior with M/s Randstand will not be a breach of agreement, the assessee had entered with M/s Vedior. (viii) In all the cases relied on by the assessee, there was loss of source of income and it was for such reason that the transfer was held to be resulting in capital inflow, whereas here there was no loss of source of income. In this view of the matter, the CIT(App....
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....re nothing but income. The question was only regarding classification of income. If it was not income from business, then it had to be considered as income from other sources. Argument of the assessee that it was a capital asset could not be accepted, since the receipts were purely for breach of contract for pre-emptive purchase of shares and did not result in any loss of source of income for the assessees. Assessees were still continuing as directors of M/s Ma Foi Management Consultants Ltd. Profit or income acquiring capacity of assessees were not impaired. In any case, according to him, even if it was considered to be in the capital field, it was not correct to argue that cost could not be ascertained. Learned D.R. submitted that the amounts received by the assessee were taxable under Income-tax Act either as income from business or as income from other sources or as income from capital gains. 11. We have perused the orders and heard the rival submissions. In the first place, what we have to see is share purchase agreement dated 30.4.2004 by virtue of which assessees got pre-emptive right for purchasing back the shares of M/s Ma Foi Management Consultants Ltd. from M/s Vedior w....
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....er the shares of M/s Ma Foi Management Consultants Ltd. to the assessees, even when M/s Vedior itself was being taken over by a third party. The transfer of shares of M/s Vedior to M/s Randstad is entirely different from transfer of shares of M/s Ma Foi by M/s Vedior to M/s Randstad, In other words, shares in M/s Ma Foi were never transferred to M/s Vedior. M/s Vedior never attempted to transfer the shares of M/s Ma Foi to M/s Randstad. Argument of the assessee that by virtue of merger of M/s Vedior with M/s Randstand effectively, the shares of M/s Ma Foi stood transferred to M/s Randstand, is in our opinion, not correct. First reason is that all these three entities were separate corporate legal persons. They were having their own separate existence. If A, B, C are three different incorporated companies, transfer of shares of C to B and transfer of shares of B to A are entirely different transactions. May be effectively the ownership over M/s Ma Foi would get transferred. But we cannot say that by virtue of the take over of M/s Vedior, shares of M/s Ma Foi stood transferred to M/s Randstad. The power available to assessees to make a pre-emptive purchase could be exercised only whe....
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....alents for convenience, it is intended that all amounts due under this bonus structure will be payable in Rupees at the rate of 65 Rupees per Euro. - 3.4 and 5 are subject to DSO remaining below 60 days and EBITA remaining above 3.5%." 14. What was paid by M/s Randstad was only a special success sharing bonus. The total sum was 3 Million Euro, of which, 1 Million Euro was paid to assessees on signing of the agreement. We cannot say that the payment was made as consideration for withdrawal of the legal notice. No doubt, there is one particular para in the said letter, which says that the money was being paid in connection with breach of agreement. The said para is also reproduced hereunder:- "Your commitment not to challenge the current shareholder structure In exchange for the above concessions by Randstad - which improve your share in the anticipated value creation - you will formally confirm that you will no longer and not again challenge Randstad's shareholder rights based on article 7.1 of the Shareholders Agreement dated 30th April 2004 and you will instruct Iyer & Thomas to withdraw their letter dated 14th June 2008." The above clause clearly says that the concession ....
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....diligence, assessees had acquired further shares of M/s Ma Foi from various other shareholders so that they could transfer the controlling interest to M/s Vedior. It is not a case that assessees were holding all the shares of M/s Ma Foi Management Consultants Ltd. Thus, assessees had taken measures to ensure that the value of their holdings in M/s Ma Foi had increased, so as to get a better bargain from M/s Vedior. 16. When we take the entire conspectus of the case as mentioned above, we cannot say that 1 Million Euro received by assessees was for relinquishment of any personal right to sue with regard to their preemptive right of purchasing back the shares of M/s Ma Foi. The money was not in the first place received from M/s Vedior, with which only assessee was having privity. It was not for any relinquishment of right which could have given rise to a capital inflow. Assessees had got other shareholders to transfer their holding in M/s Ma Foi to M/s Vedior, through them, and thereby ensured controlling interest passed to M/s Vedior. Such activities and the agreements entered which ensured that effective management of M/s Ma Foi remained with them would show that these were part o....