2018 (6) TMI 1548 - HC - Income Tax

Nature of receipt - Payment received by the assessee for exercising its voting rights in a company - capital receipt or revenue receipt - whether income had to be treated as a capital receipt since it was one-time in nature and not a recurring source of income? - Held that - The assessee a non-banking financial company holds 50% of the paid up capital in RPG Raychem Limited Upon the relaxation of rules for foreign entities conducting business in India Tyco USA licensed the right to manufacture and sell the relevant industrial products in India to two its subsidiaries. These subsidiaries sought the assistance of the assessee in this case to ensure that RPG Raychem Limited did not continue rival business in the same industrial products in India. Accordingly an agreement was entered into by the relevant subsidiaries of Tyco USA under which the assessee was to vote in a particular manner at a general meeting of RPG Raychem Limited such that Tyco s specialised business was no longer carried on in India by RPG Raychem Limited. In consideration for voting in the manner agreed Tyco Dubai paid certain sums to the assessee and the treatment of such sums fell for consideration before the Assessing Officer and subsequently before the Commissioner (Appeals). Though the Commissioner (Appeals) did not accept the assessee s contention that this was a one-off payment it could not be said that the assessee was in the business of voting in a particular manner at shareholders meetings for this to be treated as Income from other sources. The Tribunal noticed the Bombay High Court judgment in the Old Spice case and found it to be applicable in the facts and circumstances of the assessee s matter. The income obtained by the assessee from exercising its voting rights in a particular manner was a consequence of the investment of the assessee in RPG Raychem Limited. Even by such logic the income could have been regarded as a capital receipt Appellate Tribunal s treatment of the matter particularly in the light of the judgment of the Bombay High Court does not call for any reconsideration. Tribunal appropriately held that since the income was one-off in nature and arose in the context of the appellant through a company in which the appellant had substantial control relinquishing a right it ought to be treated as a capital receipt and not a revenue receipt. - Decided in favour of the assessee

Summary

Issues:
1. Classification of payment received for exercising voting rights as capital or revenue receipt.

Analysis:
The primary legal question in this case revolved around the nature of the payment received by the assessee for exercising its voting rights in a company. The Commissioner (Appeals) contended that the income should be treated as a revenue receipt, contrary to the assessee's argument that it was a capital receipt due to its one-time nature. The Appellate Tribunal, citing a judgment of the Bombay High Court, held that the income should indeed be classified as a capital receipt.

In the referenced Bombay case, the issue involved the relinquishment of the right to use the brand 'Old Spice.' The Bombay High Court determined that such income, arising from relinquishing a right in a particular company, should be treated as a capital receipt rather than a revenue receipt. The court reasoned that this income was not typical business income but rather a one-off or accidental income related to the shareholding of the assessee in the company.

In the present case, the assessee, a non-banking financial company, held a significant stake in RPG Raychem Limited, a joint venture with Tyco, USA. Upon changes in foreign business regulations in India, Tyco, USA licensed the right to manufacture and sell products to its subsidiaries, requiring the assessee to vote in a specific manner at a general meeting of RPG Raychem Limited. In return for this action, Tyco, Dubai made payments to the assessee, leading to a dispute over the nature of this income.

The Tribunal, after evaluating the facts and the Bombay High Court judgment, concluded that the income derived from exercising voting rights was a consequence of the assessee's investment in RPG Raychem Limited, thus classifying it as a capital receipt. The Tribunal emphasized the one-off nature of the income and its connection to the appellant's substantial control in the company, affirming that it should be treated as a capital receipt rather than a revenue receipt.

Ultimately, the Appellate Tribunal's decision was upheld, and the appeals were disposed of in favor of the assessee. The judgment highlighted the importance of considering the circumstances and context in determining the classification of income as capital or revenue receipt, especially in cases involving unique or one-time transactions.