Casual receipts on exercising voting rights in a company to support resolution - not revenue receipt and is not taxable- Bombay High Court.

[C.A. DEV KUMAR KOTHARI]

Also discussion about weakness or lacking in case of  assessee and revenue both.

Relevant links and references:

CIT Versus Late David Lopes Menezes Patto Plaza [2010 -TMI - 78191 - BOMBAY HIGH COURT (GOA)]

Dr. K. George Thomas vs. Commissioner of Income-tax, Ernakulam, [1986 -TMI - 5927 - SUPREME Court]

Commissioner of Income Tax vs. Diners Club India Ltd., [2000 -TMI - 14555 - BOMBAY High Court] and  

Commissioner of Income Tax, Bombay City v. Bombay Burmah Trading Corporation, [1986 -TMI - 5941 - SUPREME Court]

Sections 2(24) , 28  45 and S. 56 of Income-tax Act, 1961.

Section 28 of Income Tax Act, 1961.

Voting rights in a company:

Voting rights in a company refers to voting rights which a security holder have in respect of  security  held by him. Voting rights may be exercisable on different matters depending on the security held and meeting in which votes are to be cast. In context of this write-up we are concerned with voting rights which  generally any equity share holder can exercise at a general meeting of shareholders of company.

Nature of voting rights and their importance:

A shareholder can exercise his voting rights either to support a proposed resolution or to oppose the same. The importance of voting rights become more vital when there are two or more group of shareholders taking different views about any resolution and votes are divided. In such circumstances even voting rights of a minor shareholder can be important to decide the fate of proposed resolution. 

Importance of voting rights is more significant when a shareholder or a group of shareholder hold significant shares which can have a decisive effect on the result.

In case of a resolution which is required to be passed by way of a special resolution (75% majority), the importance is even greater even for minority shareholders voting rights.

Supporting Resolutions by casting votes or remaining absent or neutral etc.:

A voter whether he is a shareholder or member of anybody like member of the Parliament or member of Legislative Assembly can support any Resolution or Business to be transacted in a meeting of members or meeting of house in different ways depending on circumstances and the applicable law and procedure of voting and counting of votes. Some of the ways are:

a.       Casting vote in favor of proposed resolution or business.

b.      Remaining absent thus reducing number of total votes cast on the resolution or business thus increasing the proportion of votes cast be persons / party seeking support.

c.       Attending but not casting votes either in favour or against the resolution or business- if so permitted.

CIT Versus Late David Lopes Menezes Patto Plaza [2010 -TMI - 78191 - BOMBAY HIGH COURT (GOA)]

In this case the respondents (assessees) were family members of Menezes family. The family had shares which carried 58.88% of voting rights in a company  known as the capital Colfax Laboratories India Limited (Colfax).

40%  stake in Colfax  was held by Shulton (GB) Ltd, UK.

Balance voting rights were vested in three other individuals.

Shulton (GB) Ltd., U.K., was a 100% subsidiary of Shulton Inc. USA which is owner and    registered proprietor in India of a trade mark "Old Spice". In 1967 Shulton (GB) granted to Colfax right to use and market products under the brand name "Old Spice". In the year 1990-91, Procter and Gamble, Cincinatti, USA took over and acquired Shulton Inc. USA  this led to  Procter and Gamble USA becoming the holding company of Shulton (GB) Ltd., UK and consequently  Procter and Gamble (India) Ltd., (for short "PGI") through Procter and Gamble USA became the owner of the trade mark "Old Spice" in India.

PGI also appointed a director on the board of Colfax. On acquisition of Shulton Inc., the Procter and Gamble USA became interested in using the trade mark Old Spice by itself or through its Indian subsidiary the PGI. Therefore,  it was not interested in renewing the agreement with Colfax permitting it the use of the trade mark Old Spice. The arrangement/agreement was last renewed on 1st January, 1991 upto 31st December, 1993. After 1st January, 1994, PGI intended to market the products by itself under the brand name "Old Spice".

In order to avoid any dispute about use of the trade mark "Old Spice", PGI wanted confirmation from Colfax about its right to exclusively use the trade mark "Old Spice". It, therefore, started negotiations with Menezes family who were holding majority of equity in Colfax and majority of directors on its board. It requested them to get a resolution passed in the General Meeting of Colfax giving up the right of marketing, selling and distribution of Old Spice range of products in favour of PGI. For this it offered to pay to the Menezes family a sum of Rs.3.5 crores in consideration of their casting affirmative vote in favour of the resolution of the transfer of business of marketing the products under the trade name "Old Spice" in favour of PGI. In addition to the said consideration which was to be paid to the members of the Menezes family, PGI also offered that it would grant Colfax exclusive manufacturing right of its products for 10 years under the arrangement. Colfax was to manufacture and sell and PGI was to purchase from Colfax on principal to principal basis several products. PGI was then free to market these products under the brand name Old Spice.

In pursuance of the above, an agreement was entered into between PGI and Colfax on 21st October, 1993. An extraordinary general body meeting of Colfax was also convened on 11th February, 1994 wherein the resolution regarding giving up of the business of marketing of products under the trade mark "Old Spice" was passed. The members of Menezes family voted in favour of the resolution. As agreed, PGI paid Rs.3.5 crores to the members of Menezes family. The amount was distributed amongst the members of Menezes family in the proportion agreed between them. The proportion agreed was not proportionate to the number of shares held by them in Colfax.  

Dispute about taxation as income:

Tribunal held that the amount received as consideration for casting vote in favour of the Resolution was not a recurring matter, rather it was casual matter and the receipt was also casual receipt. The nature  of receipt was not of  revenue nature, therefore, the receipt not being a revenue receipt, was not taxable as income in spite of wider meaning prescribed in S. 2(24)  of the Income-tax Act.

Thus the revenue appealed before the High Court.

High Court on consideration of facts found by the Tribunal and provisions and decision of the Supreme Court in the case of Dr. K. George Thomas vs. Commissioner of Income-tax, Ernakulam, [1986 -TMI - 5927 - SUPREME Court] held as follows:

a.       The revenue was required to initially establish that the amount of Rs.3.5 crores received by the members of Menezes family was of a revenue character.

b.      Revenue have not discharged that burden of proving that the receipt was of revenue nature.

c.        The receipt was a casual receipt in the nature of windfall arising out of one time event of affirmative voting on a resolution.

d.      It was not of repetitive character and was not likely to happen again.

e.        Amount received by the assessee is not revenue income within the meaning of section 2(24) of the Income Tax Act, 1961.

Weakness in case of assessee:

In this case the assessee could have made its case even better by adopting practice of supporting from outside that is without participating in the general meeting and let the Resolution be passed by the members present in the meeting of shareholders.  In that case assessee could have also claimed that it did not indulge in activity of casting votes, it did not even exercise its voting  rights which were attached to its investment activity (holding of shares). When there was no activity at all and consideration is received merely for remaining absent from meeting and doing nothing, it cannot have any color of income arising from investment activity and rights attached to the capital assets.

Weakness in case of revenue:

It appears that the revenue has not made out a case that investment in shares is a part and parcel of adventure in nature of commerce of assessee -  (it is not necessary to be  adventure in nature of trade). Making investment in shares and securities  or any other capital assets is also a business within the inclusive and wider meaning of the term 'business' as defined in S. 2 (13). Therefore, income arising even from 'investment activity' is required to be assessed under different applicable heads. For example income arising from investment in house property is assessable as income from house property, rental income from investments in other assets and interest  income by investments in bonds, debentures, deposits  etc. will be  assessable as income from business or income from other sources depending on nature of  rent or interest earned and activities of assessee involved.  Income accruing on transfer of capital assets will be income falling under the head 'capital gains'.

It is unfortunate that investment activity as business in nature of commercial activity and investment assets as capital assets are still confused. While recurring income from investments is assessable as revenue falling under head business or other sources, income on transfer of capital assets falls under head 'capital gains'. Therefore, even in case of simple activity of investment a computation of business income is required. Various expenses incurred for carrying investment activities should be  allowed under head business and any benefits arising from such business should be considered as income from business under section 28.

Government -parliament and voting rights:

We are very well aware of value of voting rights in parliament. It is  relative strength of political parties in parliament that determine the leaders of major parties  who will form the government and leaders of minor parties who will share power by way of getting ministries.

It is continuing support of voting rights which determine continuity of Government. When any political party has no majority, we find alliances and coalition amongst political parties to form government. To save government, the leaders take support from members of Parliament or Legislative assembly as the case may be. The support may be sought and / or extended by casting votes in favor or by way of remaining absent from the house. Unfortunately the leaders are also  found to compromise with  values and ethics and they can take support even from persons who are charged with and even proven guilty of serious crimes like murders and rapes. Just for obtaining support, even such tainted members may be freed from jails also so that they can cast votes in favour of business proposed by the Governemtn or to oppose business proposed by the opposition parties.

An interesting question:

Whether, a MP or MLA can also claim that the receipt of consideration (if disclosed in terms of money or property)  to cast vote in particular manner or to remain absent or remain neutral is not a revenue receipt?   

In that case revenue can argue that politics is a profession of the MP or MLA, and the receipt is incidental to the profession and is a benefit arising from the profession by doing or not doing something and for that the price received is income arising from the exercise of profession and not arising due to holding of any capital asset as is case of holding of shares.

Readers are requested to send their views and opinion on these and incidental issues.