2016 (1) TMI 793 - AAR - Income Tax

Taxability of Settlement amount received - trading business or capital receipts - Settlement Amount to be received by Aberdeen US as trustee for the Claims trusts from Satyam - Held that - The nature of settlement amount is of capital receipt and it cannot be categorized as income. Further this amount has been received against surrender of right to sue which cannot be considered for the purpose of capital gains under section 45 of the Income-tax Act. In this case the object of the investment is not to have business profit because the shares of Satyam were not being purchased and sold at regular interval. In the light of this even CBDT Circular No.4 of 2007 does not support the stand of Revenue that Aberdeen investors were engaged in trading business. There is no doubt that the settlement amount is relatable to Satyam shares, i.e., if shares would not have been purchased the question of class action or right to sue would not have arisen. However, this does not mean that the settlement arrived with the approval of the US Court is to compensate business receipt of Aberdeen investors. The fact remains that the Aberdeen investors entered into a settlement agreement with Satyam considering the time, effort and costs involved in litigation and the agreement provided for a full, final and complete resolution of all claims asserted or which could have been asserted with respect to the released claims. The Aberdeen investors fully, finally and forever waived, released, discharged and dismissed each and every of their legal claims against Satyam and PwC. This was also agreed vice versa. It is clear, therefore, that the settlement amounts have been received not as part of business profit or to compensate the future income but as a result of surrender of the claim against Satyam and PwC. Surely, even in accordance with the principle of surrogatum such amount is not assessable as income because it does not replace any business income.In the light of above it is concluded that the settlement amount received by Aberdeen investors is not taxable under the provisions of the Income-tax Act and question No.1 of all three applications is answered accordingly

Issues Involved:
1. Taxability of the settlement amount received by Aberdeen US from Satyam.
2. Taxability of the settlement amount received by Aberdeen US from PwC.
3. Taxability of the settlement amount received by Aberdeen UK from Satyam.

Issue-wise Detailed Analysis:

1. Taxability of the Settlement Amount Received by Aberdeen US from Satyam:

The primary issue was whether the settlement amount received by Aberdeen US as a trustee from Satyam is taxable under the Income-tax Act, 1961. The applicants argued that the settlement amounts are not "income" as defined under the ITA since they are not received in the ordinary course of business and do not accrue or arise in India. They claimed that these amounts are capital receipts, received on account of the destruction of a capital asset (the right to sue), which is not taxable under Section 45 of the ITA. They also argued that the right to sue is inherently non-transferable and thus cannot be considered capital gains.

The Revenue countered that the settlement amounts should be treated as business receipts since the Aberdeen Funds are in the business of trading in securities. They argued that the loss was incurred in the course of business activities and the settlement amounts are compensation for the loss of potential income.

The Authority for Advance Rulings (AAR) concluded that the settlement amount is a capital receipt and not income. It was received against the surrender of the right to sue, which cannot be considered for capital gains under Section 45 of the ITA. The AAR reiterated its views from a similar previous case, emphasizing that the right to sue is a capital asset but not transferable, and its cost of acquisition cannot be determined, thus failing the computation provisions under Section 48 of the ITA.

2. Taxability of the Settlement Amount Received by Aberdeen US from PwC:

The second issue was whether the settlement amount received by Aberdeen US from PwC is taxable. The applicants maintained the same arguments as in the first issue, asserting that the settlement amounts are capital receipts and not taxable under the ITA.

The Revenue's response was consistent with their stance on the first issue, arguing that the settlement amounts are business receipts and should be taxed accordingly.

The AAR's ruling mirrored its decision on the first issue, determining that the settlement amount from PwC is also a capital receipt and not taxable as income. The AAR emphasized that the settlement amounts were received due to the surrender of the right to sue, which is not subject to capital gains tax under Section 45 of the ITA.

3. Taxability of the Settlement Amount Received by Aberdeen UK from Satyam:

The third issue concerned whether the settlement amount received by Aberdeen UK from Satyam is taxable. The applicants argued similarly that the settlement amounts are capital receipts, received due to the destruction of a capital asset (the right to sue), and thus not taxable under the ITA.

The Revenue maintained their position that the settlement amounts are business receipts and should be taxed as such.

The AAR concluded that the settlement amount received by Aberdeen UK is a capital receipt and not taxable as income. The AAR reiterated that the right to sue is a capital asset but not transferable, and its cost of acquisition cannot be determined, thus failing the computation provisions under Section 48 of the ITA.

Conclusion:

The AAR ruled that the settlement amounts received by Aberdeen US and Aberdeen UK from Satyam and PwC are capital receipts and not taxable under the provisions of the Income-tax Act, 1961. The ruling emphasized that the right to sue is a capital asset but not transferable, and its cost of acquisition cannot be determined, thus failing the computation provisions under Section 48 of the ITA. Consequently, the settlement amounts cannot be considered for capital gains tax under Section 45 of the ITA.

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