Shri K.Pandiarajan, CHENNAI V. ACIT, CHENNAI

ITA 1776/CHNY/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64681 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-12-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 05-12-2012
• Assessment Year: 2009-2010
• Appeal Filed On: 27-09-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: JAYANTHI KRISHNAN
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Capital asset; Business income; Share purchase agreement; Cost of acquisition; Capital receipt

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NO. 1776/MDS/2012 ASSESSMENT YEAR : 2009-10 SHRI K. PANDIARAJAN, AJ-25, OLD NO.AJ 54, SHANTHI COLONY, 4 TH STREET, 9 TH MAIN ROAD, ANNA NAGAR, CHENNAI - 600 040. PAN : AADPP4895M (APPELLANT) V. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE IV(1), CHENNAI - 600 034 . (RESPONDENT) I.T.A. NO. 1777/MDS/2012 ASSESSMENT YEAR : 2009-10 SMT. R. HEMALATHA, AJ-25, OLD NO.AJ 54, SHANTHI COLONY, 4 TH STREET, 9 TH MAIN ROAD, ANNA NAGAR, CHENNAI - 600 040. PAN : AATPH2012G (APPELLANT) V. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE IV(1), CHENNAI - 600 034 . (RESPONDENT) APPELLANTS BY :SHRI R. VIJAYARAGHAVAN, ADVOCATE RESPONDENT BY :SMT. JAYANTHI KRISHNAN, CI T (DR) DATE OF HEARING : 05.12.2012 DATE OF PRONOUNCEMENT : 20.12.2012 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THESE ARE APPEALS FILED BY TWO ASSESSEES, DIRECTED AGAINST ORDERS DATED 31.7.2012 OF COMMISSIONER OF INCOME TAX (APPE ALS)-V, CHENNAI. 2 I.T.A. NO. 1776 & 1777/MDS/12 SINCE THE GROUNDS ARE SIMILAR, THE APPEALS ARE DISP OSED OF THROUGH THIS CONSOLIDATED ORDER. 2. FACTS APROPOS ARE THAT ASSESSEES WERE PROMOTER S HAREHOLDERS OF ONE M/S MA FOI MANAGEMENT CONSULTANTS LTD. (IN SHOR T MA FOI). SHRI K. PANDIARAJAN WAS THE MANAGING DIRECTOR AND SMT. R. H EMALATHA 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 RE COGNITION. AS PER THE ASSESSEES, THEY HAD AS A PART OF EXPANSION STRA TEGY, ENTERED INTO A STRATEGIC ALLIANCE WITH ONE OF THE NETHERLANDS BASE D COMPANY CALLED VEDIOR NV. THROUGH AN AGREEMENT ENTERED WITH M/S V EDIOR NV ON 30.4.2004, ASSESSEES SOLD 82.48% OF THE TOTAL EQUIT Y SHAREHOLDING OF M/S MA FOI MANAGEMENT CONSULTANTS LTD. TO THE SAID M/S VEDIOR. THE AGREEMENT WAS A COMPREHENSIVE ONE AND SHRI PANDIARA JAN WAS TO CONTINUE AS CHIEF EXECUTIVE OFFICER OF M/S MA FOI M ANAGEMENT CONSULTANTS LTD. THOUGH SHAREHOLDING OF THE ASSESS EES WERE REDUCED TO LESS THAN 20% THROUGH THE SALE, THE AGREEMENT WI TH M/S VEDIOR NV ALSO CONTAINED A PROVISION FOR SPECIAL VOTING RIGHT S FOR THE ASSESSEES WITH REGARD TO OPERATIONAL ISSUES CONCERNING M/S MA FOI INDIA AND ALSO A RIGHT FOR NOMINATION TO ITS BOARD OF DIRECTORS. IT SEEMS THERE WAS ALSO A CLAUSE WHICH GRANTED PRE-EMPTIVE RIGHTS TO THE ASSE SSEES TO RE-ACQUIRE 3 I.T.A. NO. 1776 & 1777/MDS/12 THE SHARES OF MA FOI IF AND WHEN M/S VEDIOR NV WISH ED TO SELL OUT THE SHARES OF M/S MA FOI TO A THIRD PARTY. ASSESSEES W ERE TO BE OFFERED SUCH SHARES AT THE PRICES AT WHICH A THIRD PARTY HA D SHOWN READINESS TO PURCHASE. ONLY IF THE ASSESSEES WERE UNABLE TO PUR CHASE THE SHARES AT THE VALUE STATED THEREIN, WITHIN A PERIOD OF THIRTY DAYS FROM THE DATE OF OFFER, M/S VEDIOR NV COULD TRANSFER SUCH SHARES TO A THIRD PARTY. NEVERTHELESS, THIS PRE-EMPTIVE RIGHT WITH THE ASSES SEES FOR PURCHASING BACK THE SHARES OF M/S MA FOI DID NOT HAVE ANY APPL ICATION IF THE CONTEMPLATED TRANSFER OF SHARES BY M/S VEDIOR NV WA S TO ANY COMPANY COMING WITHIN VEDIOR B.V. GROUP. 3. IT SEEMS, M/S VEDIOR NV THEREAFTER ENTERED INTO A DEAL WITH ONE ANOTHER COMPANY CALLED M/S RANDSTAD WHEREBY M/S VED IOR NV AS SUCH WAS TAKEN OVER BY M/S RANDSTAD. THE ACQUISITION WA S NOT THAT OF THE SHARES OF MA FOI. M/S RANDSTAD WAS ACQUIRING M/S V EDIOR AS A WHOLE. IT SEEMS ASSESSEES BECAME AWARE OF THE INTENTION OF M/S VEDIOR TO SELL ITSELF TO M/S RANDSTAD IN DECEMBER, 2007. EVENTUAL LY M/S RANDSTAD ACQUIRED M/S VEDIOR. AGGRIEVED BY THE ACTION OF M/ S VEDIOR, ASSESSEES ISSUED LEGAL NOTICES ON 14 TH JUNE, 2008 TO M/S VEDIOR. CONTENTION IN SUCH LEGAL NOTICE WAS THAT ON ACCOUNT OF TAKING OVE R OF M/S VEDIOR BY M/S RANDSTAD, THE SHARES HELD BY M/S VEDIOR IN M/S MA FOI STOOD TRANSFERRED TO M/S RANDSTAD. IN OTHER WORDS, ACCOR DING TO ASSESSEES, 4 I.T.A. NO. 1776 & 1777/MDS/12 THEIR RIGHT FOR PRE-EMPTIVE PURCHASE OF SHARES OF M /S MA FOI INDIA WAS BREACHED BY M/S VEDIOR, WHEN THE LATTER WAS TAKEN O VER BY M/S RANDSTAD. 4. DURING THE RELEVANT PREVIOUS YEAR, THERE WAS A S ETTLEMENT BETWEEN ASSESSEES AND M/S RANDSTAD. AS PER THE A.O., IN SU CH SETTLEMENT, M/S RANDSTAD OFFERED TO MONETARILY COMPENSATE THE ASSES SEES BY A SUM OF ONE MILLION EURO, IF THEY WITHDREW THE LEGAL NOTICE ISSUED TO M/S VEDIOR. THE INDIAN PROMOTERS ACCEPTED THE SETTLEMENT OFFERE D BY M/S RANDSTAD AND A SETTLEMENT AGREEMENT ON THESE LINES WAS ENTER ED WITH M/S RANDSTAD ON 20.8.2008. 5. HOWEVER, IN THE RETURNS FILED FOR THE IMPUGNED A SSESSMENT YEAR, ASSESSEES DID NOT SHOW THE RECEIPT OF ONE MILLION E URO FROM M/S RANDSTAD, AS PART OF THEIR INCOME. ASSESSING OFFIC ER REQUIRED THE ASSESSEES TO EXPLAIN AS TO WHY THE ABOVE AMOUNT SHO ULD NOT BE INCLUDED AS A PART OF THEIR INCOME. REPLY OF THE A SSESSEES WAS THAT THE COMPENSATION RECEIVED FROM M/S RANDSTAD WAS ON ACCO UNT OF WITHDRAWAL OF LEGAL NOTICE ISSUED TO M/S VEDIOR FOR BREACH OF CONTRACT AND ALSO FOR AGREEING NOT TO PROCEED FURTHER SEEKING RE DRESSAL FOR THE BREACH. AS PER THE ASSESSEES, THEY WERE HAVING A RIGHT TO B UY THE SHARES BY VIRTUE OF SHAREHOLDERS AGREEMENT ENTERED WITH M/S V EDIOR ON 30.4.2004. M/S RANDSTAND HAD PAID ONE MILLION EURO TO ASSESSEE S WHEN IT 5 I.T.A. NO. 1776 & 1777/MDS/12 RECOGNIZED THAT M/S VEDIOR HAD COMMITTED A BREACH O F CONTRACT. SUCH PAYMENT WAS MADE BY M/S RANDSTAD TO AVOID LEGAL CON SEQUENCES WHICH COULD JEOPARDIZE THE TAKE OVER OF M/S VEDIOR BY M/S RANDSTAD. THEREFORE, AS PER THE ASSESSEES, WHAT WAS RECEIVED BY THEM WAS NOTHING BUT COMPENSATION FOR GIVING UP OR FOREGOING THE RIGHT TO SUE FOR BREACH OF CONTRACT. THIS WAS ONLY A CAPITAL RECEIP T. RELYING ON THE DECISION OF HONBLE HON'BLE APEX COURT IN THE CASE OF OBEROI HOTEL PVT. LTD. V. CIT (236 ITR 903) AND THAT OF DELHI BENCH O F THIS TRIBUNAL IN THE CASE OF SHYAM TELELINK LTD. V. ITO (99 ITD 576), A SSESSEES SUBMITTED THAT SUCH AMOUNT RECEIVED WAS NOT TAXABLE UNDER INC OME-TAX ACT, 1961. 6. HOWEVER, THE ASSESSING OFFICER WAS NOT IMPRESSED . ACCORDING TO HER, RELINQUISHING A RIGHT TO SUE FOR DAMAGES COULD NOT BE CONSIDERED AS TRANSFER OF CAPITAL ASSET. RIGHT TO SUE WAS NOT A PROPERTY WHICH COULD BE TRANSFERRED. IT WAS ONLY A PERSONAL RIGHT. A.O. N OTED THAT HON'BLE APEX COURT IN THE CASE OF OBEROI HOTEL PVT. LTD. (SUPRA) RELIED ON BY THE ASSESSEE HAD SPECIFICALLY UPHELD THE VIEW THAT THER E WAS NO SINGLE TEST FOR DETERMINING THE NATURE OF A RECEIPT. A.O. ALSO NOTED THAT EVEN AFTER THE ARRANGEMENT WITH M/S RANDSTAD, ASSESSEES CONTIN UED TO HAVE THE MANAGEMENT OF M/S MA FOI. THE CONSIDERATION RECEIV ED, AS PER A.O., WAS NOTHING BUT COMPENSATION FOR CANCELLATION OF CO NTRACT, WHICH DID NOT DEPRIVE THE ASSESSEES OF A TRADING STRUCTURE OR A B USINESS SOURCE, NOR 6 I.T.A. NO. 1776 & 1777/MDS/12 DID DEPRIVE THEM THEIR SOURCE OF INCOME. HENCE, AC CORDING TO HER, THE RECEIPT WAS OF REVENUE NATURE. AS PER A.O., BY VIR TUE OF SECTION 28(VA) OF INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT'), THE A MOUNT HAD TO BE CONSIDERED UNDER THE HEAD INCOME FROM BUSINESS. ACCORDING TO HER, IT WAS NOTHING BUT A SUM RECEIVED FOR AGREEING NOT TO CARRY OUT AN ACTIVITY IN RELATION TO BUSINESS OF THE ASSESSEES. SHE THER EFORE, CONSIDERED THE AMOUNT OF ONE MILLION EURO RECEIVED BY THE ASSESSEE S AS REVENUE RECEIPT UNDER THE HEAD INCOME FROM BUSINESS AND C OMPLETED THE ASSESSMENTS ACCORDINGLY. 7. IN THEIR APPEALS BEFORE CIT(APPEALS), ARGUMENT O F THE ASSESSEES ONCE AGAIN WAS THAT WHAT WAS RECEIVED WAS IN THE CA PITAL FIELD AND NOT REVENUE FIELD. AS PER ASSESSEES, THE FIRST RIGHT O F REFUSAL TO PURCHASE THE SHARES WAS INITIALLY NEGOTIATED BY THEM WITH M/S VE DIOR AND OBTAINED FROM THEM THROUGH SUCH NEGOTIATION. THEREFORE, ACC ORDING TO ASSESSEES, RECEIPT ON ACCOUNT OF BREACH OF SUCH FIRST RIGHT OF PURCHASE WAS IN THE CAPITAL FIELD. ANY AMOUNT RECEIVED FOR SETTLEMENT BY WAY OF COMPENSATION FOR DENIAL OF EMPLOYMENT OR AMOUNTS RE CEIVED AS LIQUIDATED DAMAGES FOR BREACH OF CONTRACT, WERE NOT HING BUT CAPITAL RECEIPT. RELIANCE WAS PLACED ON THE DECISION OF HO N'BLE APEX COURT IN THE CASE OF CIT V. SAURASHTRA CEMENT LTD. (325 ITR 422) AND THAT OF 7 I.T.A. NO. 1776 & 1777/MDS/12 SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF NARAN G OVERSEAS PVT. LTD. V. ACIT [300 ITR (AT) 1]. 8. CIT(APPEALS), AFTER GOING THROUGH THE SUBMISSION S OF THE ASSESSEES, CAME TO FOLLOWING CONCLUSION:- (I) THE QUESTION WHETHER A RECEIPT WAS CAPITAL OR R EVENUE 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 20 TH 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 WA S MADE TO PURCHASE PEACE FROM THE ASSESSEE. (III) THE TOTAL AGREED AMOUNT WAS 3 MILLION EURO, O UT OF WHICH, FIRST PAYMENT MADE WAS 1 MILLION EURO ON THE DATE O F 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 ASSE SSEE FOR NOT SUING ON M/S VEDIOR, SINCE THE PAYMENTS WERE NO T MADE BY M/S VEDIOR. IF M/S VEDIOR HAD BREACHED THE TERM S OF AGREEMENT ONLY THEY WOULD HAVE BEEN LIABLE AND NOT M/S RANDSTAND. (V) THERE WAS NO CO-RELATION BETWEEN 1 MILLION EURO PAID BY M/S RANDSTAD TO THE ASSESSEE AND LEGAL OPTION AVAILABLE TO THE ASSESSEE FOR SUING M/S VEDIOR, FOR BREACHING THE CO NDITION OF PRE-EMPTIVE SHARE PURCHASE RIGHT. (VI) M/S MA FOI MANAGEMENT CONSULTANTS LTD. WAS A P UBLIC LIMITED COMPANY INCORPORATED IN INDIA AND BY VIRTUE OF SECTION 111 OF COMPANIES ACT, 1956, THERE COULD NOT BE ANY RESTRICTION ON THE SHARE TRANSFER OF A PUBLIC COMPA NY. (VII) THERE WAS NO TRANSFER OF ANY SHARES OF M/S MA FOI MANAGEMENT CONSULTANTS LTD. BY M/S VEDIOR TO M/S 8 I.T.A. NO. 1776 & 1777/MDS/12 RANDSTAD. MERGER OF M/S VEDIOR WITH M/S RANDSTAND WILL NOT BE A BREACH OF AGREEMENT, THE ASSESSEE HAD ENTERED WITH M/S VEDIOR. (VIII) IN ALL THE CASES RELIED ON BY THE ASSESSEE, THERE WAS LOSS OF SOURCE OF INCOME AND IT WAS FOR SUCH REASON THAT TH E TRANSFER WAS HELD TO BE RESULTING IN CAPITAL INFLOW, WHEREAS HERE THERE WAS NO LOSS OF SOURCE OF INCOME. IN THIS VIEW OF THE MATTER, THE CIT(APPEALS) HELD T HAT EVEN IF THE RECEIPTS DID NOT COME WITHIN THE PURVIEW OF SECTION 28(VA), IT INDEED WERE RECEIPTS WHICH COULD BE TAXED UNDER THE HEAD INCOM E FROM OTHER SOURCES. HE CONFIRMED THE ORDER OF A.O. ACCORDING LY. 9. NOW BEFORE US, LEARNED A.R., STRONGLY ASSAILING THE ORDERS OF AUTHORITIES BELOW, SUBMITTED THAT WHAT WAS RELINQUI SHED BY THE ASSESSEES WAS NOTHING BUT A PERSONAL RIGHT TO RE-AC QUIRE THE SHARES OF M/S MA FOI MANAGEMENT CONSULTANTS LTD. THE RECEIPT ON ACCOUNT OF SUCH RELINQUISHMENT WAS NOT AN INCOME IN THE REVENU E FIELD. THE RELINQUISHMENT WAS OF A RIGHT TO PURCHASE EQUITY SH ARES AND THEREFORE, IT WAS IN THE CAPITAL FIELD. THERE WAS NO COST OF ACQ UISITION AND HENCE CONSIDERATION RECEIVED COULD NOT BE TAXED UNDER THE HEAD CAPITAL GAINS ALSO. COMPENSATION FOR GIVING UP A PERSONAL RIGHT WAS IN CAPITAL FIELD. RELIANCE WAS PLACED ON THE DECISIONS OF HONBLE DEL HI HIGH COURT IN THE CASE OF CIT V. DALMIA (149 ITR 215) AND CIT V. RANI SHANKAR MISHRA (320 ITR 542), AS ALSO THE DECISION OF HON'BLE APEX COURT IN THE CASE OF GUFFIC CHEM P. LTD. V. CIT (332 ITR 602). ACCORDIN G TO HIM, IT WAS AKIN 9 I.T.A. NO. 1776 & 1777/MDS/12 TO A RIGHT TO PURCHASE AN IMMOVABLE PROPERTY. THE RIGHT FOR SUING M/S VEDIOR WAS A CAPITAL ASSET ONLY. COMPENSATION FOR LOSS OF CAPITAL ASSET WAS ONLY A CAPITAL RECEIPT. FOR THIS CONTENTION, H E RELIED ON THE DECISION OF HON'BLE APEX COURT IN THE CASE OF KETTLEWELL BUL LEN & CO V. CIT (53 ITR 261). ACCORDING TO HIM, THE RECEIPTS WERE SIMI LAR TO DAMAGES RECEIVED ON BREACH OF CONTRACT, WHEN THE CONTRACT W AS FOR ACQUIRING A CAPITAL ASSET. EVEN IF IT IS CONSIDERED AS COMPE NSATION FOR NON- PERFORMANCE OF CONTRACT, IT WILL STILL BE CONSIDERE D AS CAPITAL RECEIPT. RELIANCE WAS PLACED ON THE DECISION OF HONBLE BOMB AY HIGH COURT IN THE CASE OF B.G. SHAH V. CIT (162 ITR 23) AND THAT OF HONBLE MADHYA PRADESH HIGH COURT IN THE CASE OF CIT V. SMT. LAXMI DEVI 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 JURI SDICTIONAL HIGH COURT IN THE CASE OF BEARDSELL V. JCIT (298 ITR 87) AND T HAT OF HON'BLE APEX COURT IN THE CASE OF CIT V. D.S. SANDHU BROS CHEMBU R P. LTD. (273 ITR 1). 10. PER CONTRA, LEARNED D.R., STRONGLY SUPPORTING T HE ORDERS OF AUTHORITIES BELOW, SUBMITTED THAT WHAT WAS RECEIVED BY THE ASSESSEES WERE NOTHING BUT INCOME. THE QUESTION WAS ONLY REG ARDING CLASSIFICATION OF INCOME. IF IT WAS NOT INCOME FROM BUSINESS, THE N IT HAD TO BE 10 I.T.A. NO. 1776 & 1777/MDS/12 CONSIDERED AS INCOME FROM OTHER SOURCES. ARGUMENT OF THE ASSESSEE THAT IT WAS A CAPITAL ASSET COULD NOT BE ACCEPTED, SINCE THE RECEIPTS WERE PURELY FOR BREACH OF CONTRACT FOR PRE-EMPTIVE PURCH ASE OF SHARES AND DID NOT RESULT IN ANY LOSS OF SOURCE OF INCOME FOR THE ASSESSEES. ASSESSEES WERE STILL CONTINUING AS DIRECTORS OF M/S MA FOI MA NAGEMENT CONSULTANTS LTD. PROFIT OR INCOME ACQUIRING CAPACITY OF ASSESS EES WERE NOT IMPAIRED. IN ANY CASE, ACCORDING TO HIM, EVEN IF IT WAS CONSI DERED TO BE IN THE CAPITAL FIELD, IT WAS NOT CORRECT TO ARGUE THAT COS T COULD NOT BE ASCERTAINED. LEARNED D.R. SUBMITTED THAT THE AMOUN TS RECEIVED BY THE ASSESSEE WERE TAXABLE UNDER INCOME-TAX ACT EITHER A S INCOME FROM BUSINESS OR AS INCOME FROM OTHER SOURCES OR AS INCO ME FROM CAPITAL GAINS. 11. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. IN THE FIRST PLACE, WHAT WE HAVE TO SEE IS SHARE PURCH ASE AGREEMENT DATED 30.4.2004 BY VIRTUE OF WHICH ASSESSEES GOT PRE-EMPT IVE RIGHT FOR PURCHASING BACK THE SHARES OF M/S MA FOI MANAGEMENT CONSULTANTS LTD. FROM M/S VEDIOR WHEN THEY SOLD IT TO THEM. UNFORTU NATELY, THIS HAS NOT BEEN PLACED ON RECORD IN FULL EXCEPT FOR AN EXCERPT OF TWO PAGES THEREOF CONTAINING ARTICLE 7. THE RIGHT OF THE ASSESSEE FO R PRE-EMPTIVE PURCHASE OF SHARE OF M/S MA FOI MANAGEMENT CONSULTANTS LTD. HAD ENSUED TO THEM FROM THIS CLAUSE. THERE IS NO DISPUTE THAT M/ S VEDIOR DID NOT SELL 11 I.T.A. NO. 1776 & 1777/MDS/12 OUT SHARES OF M/S MA FOI MANAGEMENT CONSULTANTS LTD . TO M/S RANDSTAD. WHETHER M/S RANDSTAD ACQUIRED M/S VEDIOR BY ACQUIRING THE SHARES OF M/S VEDIOR OR BY MERGER WITH THAT COMPANY IS NOT CLEAR FROM THE RECORD. NEVERTHELESS, IT IS CLEAR THAT SHARES OF M/S MA FOI WERE NOT AS SUCH TRANSFERRED TO M/S RANDSTAD. 12. THE RIGHT, WHICH WAS VESTED ON THE ASSESSEES TH ROUGH ARTICLE 7 OF SHARE PURCHASE AGREEMENT, MENTIONED BY US ABOVE, AS APPEARING IN PAPER-BOOK PAGE 29, IS REPRODUCED HEREUNDER:- WITHOUT PREJUDICE TO THE TERMS CONTAINED IN THIS AG REEMENT, IN THE EVENT VEDIOR WISHES TO TRANSFER ITS SHARES HELD IN MA FOI TO ANY THIRD PARTY OR ANY OTHER BODY CORPORATE, IT SHALL F IRST OFFER THE SAME TO THE PROMOTERS AT THE SAME PRICE OFFERED BY SUCH THIRD PARTY OR ANY OTHER BODY CORPORATE AND ON THE SAME TERMS AND CONDITIONS. IF THE PROMOTERS ARE UNABLE OR UNWILLING TO PURCHASE T HE SAME AT THAT VALUE WITHIN A PERIOD OF 30 DAYS FROM THE DATE OF OFF ER, THEN: (I) VEDIOR HAS THE RIGHT TO TRANSFER THE SAID SHARES TO ANY OTHER THIRD PARTY OR ANY OTHER BODY CORPORATE, HOWEVER AT A PRI CE 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 O R 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-EMPTOR Y 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 VE DIOR CONTEMPLATED A TRANSFER OF THEIR SHAREHOLDING IN M/ S MA FOI MANAGEMENT CONSULTANTS LTD. TO A THIRD PARTY. IT W AS DUTY BOUND, IN SUCH A CASE, TO MAKE AN OFFER OF SALE TO THE ASSESS EES. IN THE GIVEN 12 I.T.A. NO. 1776 & 1777/MDS/12 CASE, AS ALREADY NOTED BY US, M/S VEDIOR DID NOT TR ANSFER 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 OBLIGA TION 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 M/S VEDIOR TO M/S RANDSTAD IS ENTIRELY DIFFERENT FROM TRANSFER OF SHARES OF M/S MA FOI BY M/S VEDIOR TO M /S RANDSTAD, IN OTHER WORDS, SHARES IN M/S MA FOI WERE NEVER TRANSF ERRED TO M/S VEDIOR. M/S VEDIOR NEVER ATTEMPTED TO TRANSFER THE SHARES O F M/S MA FOI TO M/S RANDSTAD. ARGUMENT OF THE ASSESSEE THAT BY VIRTUE OF MERGER OF M/S VEDIOR WITH M/S RANDSTAND EFFECTIVELY, THE SHARES O F M/S MA FOI STOOD TRANSFERRED TO M/S RANDSTAND, IS IN OUR OPINION, NO T CORRECT. FIRST REASON IS THAT ALL THESE THREE ENTITIES WERE SEPARATE CORP ORATE LEGAL PERSONS. THEY WERE HAVING THEIR OWN SEPARATE EXISTENCE. IF A, B, C ARE THREE DIFFERENT INCORPORATED COMPANIES, TRANSFER OF SHARE S OF C TO B AND TRANSFER OF SHARES OF B TO A ARE ENTIRELY DIFFERENT TRANSACTIONS. MAY BE EFFECTIVELY THE OWNERSHIP OVER M/S MA FOI WOULD GET TRANSFERRED. BUT WE CANNOT SAY THAT BY VIRTUE OF THE TAKE OVER OF M/S V EDIOR, SHARES OF M/S MA FOI STOOD TRANSFERRED TO M/S RANDSTAD. THE POWE R AVAILABLE TO ASSESSEES TO MAKE A PRE-EMPTIVE PURCHASE COULD BE E XERCISED ONLY WHERE M/S VEDIOR CONTEMPLATED A TRANSFER OF SHARE O F M/S MA FOI TO A THIRD PARTY. 13 I.T.A. NO. 1776 & 1777/MDS/12 13. IT IS TRUE THAT BY VIRTUE OF A LETTER DATED 20 TH AUGUST, 2008, COPY OF WHICH HAS BEEN PLACED AT PAPER-BOOK PAGES 1-4, M/S RANDSTAD HAD AGREED TO MAKE A PAYMENT OF 3 MILLION EURO TO THE A SSESSEES AS CONSIDERATION FOR A SUCCESS SHARING BONUS AGREEMENT , OF WHICH, 1 MILLION EURO WAS UNCONDITIONALLY PAID TO THE ASSESSEE ON SI GNING OF THE AGREEMENT. THIS AGREEMENT DOES SAY THAT THE AMOUNT OF 1 MILLION EURO WAS PAID UNCONDITIONALLY. UNDISPUTEDLY, SUCH PAYME NT TO ASSESSEE WAS TRIGGERED ON SIGNING OF SUCH AGREEMENT AND WITHDRAW AL OF THE NOTICE ISSUED BY THE ASSESSEE TO M/S RANDSTAD THROUGH THEI R ADVOCATES M/S IYER & THOMAS. IT WAS THROUGH THIS NOTICE ISSUED T O M/S VEDIOR, THAT ASSESSEE HAD WARNED M/S RANDSTAD THAT THE MERGER HA D VIOLATED ARTICLE 7 OF ASSESSEES AGREEMENT WITH M/S VEDIOR. TO ASS IMILATE THE SITUATION BETTER, A LOOK AT THE LETTER DATED 20.8.2008 ISSUED BY M/S RANDSTAD TO ASSESSEES, AND RELEVANT CLAUSE NAMED SUCCESS SHARI NG BONUS APPEARING THEREIN, IS VERY RELEVANT. THIS PART IS REPRODUCED HEREUNDER:- SUCCESS SHARING BONUS RANDSTAND WILL AGREE TO VEDIOR ASIA BV MAKING AVAIL ABLE TO A SPECIAL SUCCESS SHARING BONUS WITH A TOTAL VALUE TO 3M AND ALLOCATED TO THE FOLLOWING EVENTS: 1. 1,OM AS UNCONDITIONAL PAYMENT UPON SIGNING OF THIS AGREEMENT AND WITHDRAWAL OF THE IYER & THOMAS LETTER REFERRED TO BELOW. 2. 0,5M AS GUARANTEED PERFORMANCE BONUS PAYABLE IN JANU ARY 2009 WITH NO PERFORMANCE CONDITIONS OTHER THAN THAT MA FOI WILL WORK DILIGENTLY TO COMBINE TEAM4U, AND THE DEPU TEE 14 I.T.A. NO. 1776 & 1777/MDS/12 BUSINESSES OF EMMAYHR AND MA FOI (STAFFING) INTO A JOINT MASS CUSTOMIZED STAFFING BUSINESS UNDER THE NAME RANDSTA D. 3. 0, 5M FOR ACHIEVING A 7.5% (COMPARED TO 6% CURRENTLY) M ARKET SHARE THRESHOLD OR SHOWING CONSISTENT ORGANIC GROWT H OF 40% (DEFINED AS COMPOUND ANNUAL GROWTH RATE OVER 4 QUART ERS STARTING 1/7/2008). 4. 0,5M FOR ACHIEVING A 10% MARKET SHARE THRESHOLD OR SH OWING CONSISTENT ORGANIC GROWTH OF 40% FOR AN ADDITIONAL YE AR ENDING 30/6/2010 (SAME DEFINITION). 5. 0,5M FOR ACHIEVING A 12.5% MARKET SHARE THRESHOLD OR S HOWING CONSISTENT ORGANIC GROWTH OF 40% FOR AN ADDITIONAL YE AR ENDING 30/6/2011 (SAME DEFINITION). 6. GENERAL CONDITION FOR ALL THE ABOVE POINTS: - ANY TAX IMPLICATIONS ARE THE RESPONSIBILITY OF THE B ONUS RECIPIENTS. - WHILE WE HAVE STATED EURO EQUIVALENTS FOR CONVENIEN CE, IT IS INTENDED THAT ALL AMOUNTS DUE UNDER THIS BONUS STRU CTURE WILL BE PAYABLE IN RUPEES AT THE RATE OF 65 RUPEES PER EUR O. - 3.4 AND 5 ARE SUBJECT TO DSO REMAINING BELOW 60 DAYS AND EBITA REMAINING ABOVE 3.5%. 14. WHAT WAS PAID BY M/S RANDSTAD WAS ONLY A SPECIA L SUCCESS SHARING BONUS. THE TOTAL SUM WAS 3 MILLION EURO, O F WHICH, 1 MILLION EURO WAS PAID TO ASSESSEES ON SIGNING OF THE AGREEM ENT. WE CANNOT SAY THAT THE PAYMENT WAS MADE AS CONSIDERATION FOR WITHDRAWAL OF THE LEGAL NOTICE. NO DOUBT, THERE IS ONE PARTICULAR PA RA IN THE SAID LETTER, WHICH SAYS THAT THE MONEY WAS BEING PAID IN CONNECT ION WITH BREACH OF AGREEMENT. THE SAID PARA IS ALSO REPRODUCED HEREUN DER:- YOUR COMMITMENT NOT TO CHALLENGE THE CURRENT SHAREH OLDER STRUCTURE IN EXCHANGE FOR THE ABOVE CONCESSIONS BY RANDSTAD WHICH IMPROVE YOUR SHARE IN THE ANTICIPATED VALUE CREATION YOU WILL FORMALLY CONFIRM THAT YOU WILL NO LONGER AND NOT AGAIN CHALLENGE RANDSTADS S HAREHOLDER RIGHTS BASED ON ARTICLE 7.1 OF THE SHAREHOLDERS AGREEMENT DATED 30 TH APRIL 2004 AND 15 I.T.A. NO. 1776 & 1777/MDS/12 YOU WILL INSTRUCT IYER & THOMAS TO WITHDRAW THEIR L ETTER DATED 14 TH JUNE 2008 . THE ABOVE CLAUSE CLEARLY SAYS THAT THE CONCESSION G IVEN BY M/S RANDSTAD IMPROVED ASSESSEES SHARE IN ANTICIPATED V ALUE CREATION. M/S RANDSTAD, BY VIRTUE OF PAYMENT HAD GOT THE ASSESSEE TO RELINQUISH ITS RIGHT FOR PRE-EMPTIVE PURCHASE OF THE SHARES OF M/S MA FOI. BUT, THE AGREEMENT IN EFFECT WAS ONE FOR SUCCESS SHARING AND RELINQUISHMENT OF RIGHT AT BEST A BY-PRODUCT ONLY. THE AMOUNT OF 1 M ILLION EURO RECEIVED BY THE ASSESSEE WAS NOTHING BUT THE FIRST INSTALMENT O F THE SUCCESS SHARING BONUS. ASSESSEES CONTINUED TO BE IN THE MANAGEMENT OF M/S MA FOI. 15. COMING TO THE LEGAL NOTICE DATED 14 TH JUNE, 2008, ISSUED BY THE ASSESSEES TO M/S VEDIOR ASIA BV, PLACED AT PAPER-BO OK PAGES 5-9, IT CONTAINS ONE PARAGRAPH WHICH GAVE ENTREPRENEURIAL I NDEPENDENCE TO THE ASSESSEES WITH REGARD TO THE MANAGEMENT OF M/S MA F OI AND THIS IS REPRODUCED HEREUNDER:- THAT, IT WAS ONLY SOMETIME IN OR ABOUT AUGUST 2003 THAT OUR CLIENTS DECIDED TO PROCEED WITH THE SECOND OF YOU INSTEAD O F GOING AHEAD WITH AN ARRANGEMENT WITH EITHER MANPOWER OR ADECCO, AS THE SECOND OF YOU CONVINCED OUR CLIENTS THAT THEY VALUED OUR CLIENTS BRAND NAME AND BRAND IMAGE, AND INFORMED OUR CLIENT THAT THEY WOULD ALWA YS GIVE OUR CLIENTS ENTREPRENEURIAL INDEPENDENCE TO MANAGE THE BUSINESS WITHOUT INTERFERENCE FROM THEIR END. THIS WAS A VERY IMPOR TANT COMMITMENT FOR OUR CLIENTS AS OUR CLIENTS WERE APPREHENSIVE THAT A NY ARRANGEMENT WITH A HUGE CORPORATION LIKE YOURSELVES WOULD DILUTE OUR C LIENTS IMAGE AND POSSIBLY EVEN LEAD TO A SITUATION WHERE OUR CLIENTS COULD LOOSE THEIR IDENTITY. BASED ON THIS VERY IMPORTANT COMMITMENT F ROM YOUR SIDE, OUR CLIENTS STARTED NEGOTIATIONS AND DISCUSSIONS THAT L ED TO THE SIGNING OF A 16 I.T.A. NO. 1776 & 1777/MDS/12 TERM SHEET SOMETIME IN NOVEMBER 2003. YOU CARRIED OU T A THOROUGH DUE DILIGENCE OF MA FOI AND ITS BUSINESS AND THEREA FTER OUR CLIENTS CAUSED THE PURCHASE OF SHARES FROM THE VARIOUS SHAREHOLDER S OF MA FOI SO THAT YOU CAN GET MAJORITY CONTROL OF 76% IN MA FOI. OUR C LIENTS RETAINED THEIR SHAREHOLDING OF 19% IN MA FOI AND CONTINUED AS MANAG ING 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 ASSES SEE. THERE WERE COMMITMENTS BOTH BY THE ASSESSEE AS WELL AS M/S VED IOR. 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 SHARE S OF M/S MA FOI. IT IS CLEAR THAT AFTER SUCH DUE DILIGENCE, ASSESSEES H AD ACQUIRED FURTHER SHARES OF M/S MA FOI FROM VARIOUS OTHER SHAREHOLDER S SO THAT THEY COULD TRANSFER THE CONTROLLING INTEREST TO M/S VEDIOR. I T IS NOT A CASE THAT ASSESSEES WERE HOLDING ALL THE SHARES OF M/S MA FOI MANAGEMENT CONSULTANTS LTD. THUS, ASSESSEES HAD TAKEN MEASURE S TO ENSURE THAT THE VALUE OF THEIR HOLDINGS IN M/S MA FOI HAD INCRE ASED, SO AS TO GET A BETTER BARGAIN FROM M/S VEDIOR. 16. WHEN WE TAKE THE ENTIRE CONSPECTUS OF THE CASE AS MENTIONED ABOVE, WE CANNOT SAY THAT 1 MILLION EURO RECEIVED B Y ASSESSEES WAS FOR RELINQUISHMENT OF ANY PERSONAL RIGHT TO SUE WITH RE GARD TO THEIR PRE- EMPTIVE RIGHT OF PURCHASING BACK THE SHARES OF M/S MA FOI. THE MONEY WAS NOT IN THE FIRST PLACE RECEIVED FROM M/S VEDIOR , WITH WHICH ONLY ASSESSEE WAS HAVING PRIVITY. IT WAS NOT FOR ANY RE LINQUISHMENT OF RIGHT 17 I.T.A. NO. 1776 & 1777/MDS/12 WHICH COULD HAVE GIVEN RISE TO A CAPITAL INFLOW. ASSESSEES HAD GOT OTHER SHAREHOLDERS TO TRANSFER THEIR HOLDING IN M/S MA FOI TO M/S VEDIOR, THROUGH THEM, AND THEREBY ENSURED CONTROLLING INTER EST PASSED TO M/S VEDIOR. SUCH ACTIVITIES AND THE AGREEMENTS ENTERED WHICH ENSURED THAT EFFECTIVE MANAGEMENT OF M/S MA FOI REMAINED WITH TH EM WOULD SHOW THAT THESE WERE PART OF AN ORGANIZED AND WELL THOUG HT OUT PLAN TO GET MORE VALUE FOR THEIR INVESTMENTS. THERE WAS NO LOS S OF SOURCE OF INCOME FOR THE ASSESSEES BY VIRTUE OF 1 MILLION EURO RECEI VED FROM M/S RANDSTAD. IN SUCH A SITUATION, IN OUR OPINION, A.O . WAS JUSTIFIED IN CONSIDERING THE RECEIPT TO BE FROM AN ADVENTURE IN THE NATURE OF BUSINESS. VIEW TAKEN BY THE LD. CIT(A) THAT IF NOT BUSINESS INCOME IT WILL BE INCOME FROM OTHER SOURCES IS ALSO, IN OUR VIEW , JUSTIFIED. ONCE IT IS NOT A CAPITAL RECEIPT, THEN THE INCOME HAS TO BE TA XED UNDER ONE OR OTHER HEAD OF INCOME PROVIDED UNDER SECTION 14 OF THE ACT . 17. AS FOR THE VARIOUS DECISIONS RELIED ON BY THE A SSESSEES, THEY WERE ALL CONCERNED WITH LIQUIDATED DAMAGES RECEIVED ON B REACH OF AGREEMENT. AS ALREADY MENTIONED BY US, THE FACTS HERE SHOW THA T MONEY RECEIVED WAS NOT FOR ANY BREACH OF AGREEMENT. WE ARE, THERE FORE, OF THE OPINION THAT THE AMOUNT WAS RIGHTLY TAXED AS REVENUE RECEIP TS. NO INTERFERENCE WITH THE ORDERS OF THE LOWER AUTHORITIES ARE CALLED FOR. 18. IN THE RESULT, BOTH THE APPEALS FILED BY THE AS SESSEE ARE DISMISSED. 18 I.T.A. NO. 1776 & 1777/MDS/12 THE ORDER WAS PRONOUNCED IN THE COURT ON THURSDAY, THE 20 TH OF DECEMBER, 2012, AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 20 TH DECEMBER, 2012. KRI. COPY TO: (1) APPELLANTS (2) RESPONDENT (3) CIT(A)-V, CHENNAI-34 (4) CIT, CHENNAI-III, CHENNAI-34 (5) D.R. (6) GUARD FILE