K.Pandiarajan Vs ACIT (Madras High Court)
Madras HC: Compensation for Giving Up Right of First Purchase of Shares Is Capital Receipt -1 Million Received for Withdrawal of Legal Challenge Not Taxable as Revenue Income
In K. Pandiarajan & R. Hemalatha v. ACIT, the Madras High Court considered the taxability of Rs 1 million received by the founders/shareholders of Ma Foi Management Consultants Ltd. The assessees claimed the amount as a capital receipt, whereas the AO treated it as business income; the CIT(A) shifted the taxation to “Income from Other Sources” under section 56, which was upheld by the ITAT.
Under a 2004 shareholders’ agreement, Vedior held 76.33% of Ma Foi and the appellants jointly held 23.52%. Importantly, the agreement conferred upon the appellants a pre-emptive/right of first purchase if Vedior proposed to transfer its shares to a third party. When Vedior was proposed to be acquired by Randstad, the appellants asserted that their contractual rights were being breached and issued a legal notice threatening action.
To settle the dispute, Randstad agreed to a “success sharing bonus” of up to €3 million. The first €1 million was payable upon signing the agreement and withdrawal of the legal notice, while the subsequent €0.5 million instalments were linked to performance/business conditions. The appellants treated the first €1 million as capital receipt but offered the subsequent instalments to tax.
