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Receipts for Exercising Voting Rights in a Company is not Taxable: Calcutta HC [Read Order]

Voting Rights - Calcutta High Court - Taxscan

A division bench of the Calcutta High Court has held that the receipts for exercising the voting rights in a Company is not taxable under the Income Tax Act as the same amounts to capital receipt.

The assessee is a non-banking financial company. Tyco, USA had a tie-up with the RPG group of companies for the manufacture and sale of certain industrial products in India. As per the agreement, the Indian company responsible for manufacturing and selling the products was by the name of RPG Raychem Limited, which was a joint venture between the RPG group in India and Tyco, USA. The assessee 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.

The Assessing Officer held that the payment received by the assessee for exercising its voting rights in a company in a particular manner would constitute revenue receipt and thus, is taxable.

On appeal, the assessee contended that the income had to be treated as a capital receipt since it was one-time in nature and not a recurring source of income.

The Appellate Tribunal relied on a judgment of the Bombay High Court in Old Spice case and held that the income had to be treated as a capital receipt.

and found it to be applicable in the facts and circumstances of the assessee’s matter.

Upholding the order of the Tribunal, the bench comprising Justices Sanjib Banerjee and Abhijit Gangopadhyay has held that “the 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. The 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.”

To Read the full text of the Order CLICK HERE
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