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TMI Blog2012 (12) TMI 1127X X X X Extracts X X X X X X X X Extracts X X X X ..... .T.A. No. 1777/Mds/2012 - - - Dated:- 20-12-2012 - Abraham P. George (Accountant Member) And Challa Nagendra Prasad (Judicial Member) For the Appellants : R. Vijayaraghavan, Advocate For the Respondent : Jayanthi Krishnan, CIT (DR) ORDER Abraham P. George (Accountant Member) These are appeals filed by two assessees, directed against orders dated 31.7.2012 of Commissioner of Income Tax (Appeals)-V, Chennai. Since the grounds are similar, the appeals are disposed of through this consolidated order. 2. Facts apropos are that assessees were promoter shareholders of one M/s Ma Foi Management Consultants Ltd. (in short Ma Foi). Shri K. Pandiarajan was the Managing Director and Smt. R. Hemalatha was a promotor Director. The said company was providing human resource services. Over a period of time, activities of the company increased multifold and it seems the company got worldwide recognition. As per the assessees, they had as a part of expansion strategy, entered 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 sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if they withdrew the legal notice issued to M/s Vedior. The Indian promoters accepted the settlement offered by M/s Randstad and a settlement agreement on these lines was entered with M/s Randstad on 20.8.2008. 5. However, in the returns filed for the impugned assessment year, assessees did not show the receipt of one Million Euro from M/s Randstad, as part of their income. Assessing Officer required the assessees to explain as to why the above amount should not be included as a part of their income. Reply of the assessees was that the compensation received from M/s Randstad was on account of withdrawal of legal notice issued to M/s Vedior for breach of contract and also for agreeing not to proceed further seeking redressal for the breach. As per the assessees, they were having a right to buy the shares by virtue of shareholders agreement entered with M/s Vedior on 30.4.2004. M/s Randstand had paid one Million Euro to assessees when it recognized that M/s Vedior had committed a breach 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract, were nothing but capital receipt. Reliance was placed on the decision of Hon'ble Apex Court in the case of CIT v. Saurashtra Cement Ltd. (325 ITR 422) and that of Special Bench of this Tribunal in the case of Narang Overseas Pvt. Ltd. v. ACIT [300 ITR (AT) 1]. 8. CIT(Appeals), after going through the submissions of the assessees, came to following conclusion:- (i) The question whether a receipt was capital or revenue was to be determined based on the facts of a given case and not based on a single test. (ii) M/s Randstad in their letter dated 20th August, 2008, had mentioned that the payments were made as a part of success sharing bonus to the assessees. The letter written by M/s Randstad clearly showed that the proposal was made to purchase peace from the assessee. (iii) The total agreed amount was 3 Million Euro, out of which, first payment made was 1 Million Euro on the date of signing the agreement and this was nothing but one of the milestones, for the success sharing 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 agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Kettlewell Bullen Co v. CIT (53 ITR 261). According to him, the receipts were similar to damages received on breach of contract, when the contract was for acquiring a capital asset. Even if it is considered as compensation for nonperformance of contract, it will still be considered as capital receipt. Reliance was placed on the decision of Hon ble Bombay High Court in the case of B.G. Shah v. CIT (162 ITR 23) and that of Hon ble Madhya Pradesh High Court in the case of CIT v. Smt. Laxmidevi Natani (232 ITR 198). For his contention that when there is no cost of acquisition, a transfer of capital asset would not be exigible to capital gains tax, reliance was placed on the decision of Hon'ble jurisdictional High Court in the case of Beardsell v. JCIT (298 ITR 87) and that of Hon'ble Apex Court in the case of CIT v. D.S. Sandhu Bros Chembur P. Ltd. (273 ITR 1). 10. Per contra, learned D.R., strongly supporting the orders of authorities below, submitted that what was received by the assessees were 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. Arg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y or any other body corporate, however at a price not less than the price at which it was offered to the Promoters; and (ii) if Vedior does transfer the said Shares to such third party or any other body corporate then Vedior shall procure that such third party or other body corporate shall offer to acquire the Minority Shares from the Minority Shareholders at such price and on the same terms and conditions. It shall be noted that such pre-emptory rights do not apply if Vedior is transferring its shareholding to any other company in the Vedior N.V. group of companies. The above terms consider a contingency where M/s Vedior contemplated a transfer of their shareholding in M/s Ma Foi Management Consultants Ltd. to a third party. It was duty bound, in such a case, to make an offer of sale to the assessees. In the given case, as already noted by us, M/s Vedior did not transfer the share to M/s Ma Foi Management Consultants Ltd. Nothing has been brought on record to show that M/s Vedior was under any obligation to offer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and withdrawal of the Iyer Thomas letter referred to below. 2. 0,5M as guaranteed performance bonus payable in January 2009 with no performance conditions other than that Ma Foi will work diligently to combine Team4u, and the deputee businesses of EmmayHR and Ma Foi (staffing) into a joint Mass Customized Staffing business under the name Randstad. 3. 0, 5M for achieving a 7.5% (compared to 6% currently) market share threshold or showing consistent organic growth of 40% (defined as Compound Annual Growth Rate over 4 quarters starting 1/7/2008). 4. 0,5M for achieving a 10% market share threshold or showing consistent organic growth of 40% for an additional year ending 30/6/2010 (same definition). 5. 0,5M for achieving a 12.5% market share threshold or showing consistent organic growth of 40% for an additional year ending 30/6/2011 (same definition). 6. General condition for all the above points: - Any tax implications are the responsibility of the bonus recipients. - While we have stated Euro equivalents 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r clients were apprehensive that any arrangement with a huge corporation like yourselves would dilute our clients image and possibly even lead to a situation where our clients could loose their identity. Based on this very important commitment from your side, our clients started negotiations and discussions that led to the signing of a Term Sheet sometime in November 2003. You carried out a thorough due diligence of Ma Foi and its business and thereafter our clients caused the purchase of shares from the various shareholders of Ma Foi so that you can get majority control of 76% in Ma Foi. Our clients retained their shareholding of 19% in Ma Foi and continued as Managing Director and Whole Time Director of Ma Foi. The above more or explains lucidly the reason why M/s Randstad entered into a success sharing agreement with assessee. There were commitments both by the assessee as well as M/s Vedior. What can be further discerned from the above is that M/s Vedior had carried out a due diligence of M/s Ma Foi before purchasing the shares of M/s Ma Foi. It is clear that after such due diligence, assessees had acquired further shares of M/s Ma Foi from various other shareholders s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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