Satyam‘s Settlement Payments To Aberdeen Not Income

Nangia & Co summarises an important AAR decision below•    AAR rules that settlement payments by Satyam & PwC to Aberdeen Funds US & UK (‘applicants’) in capacity of trustees for investors’ claims, a capital receipt, not taxable in India; Refers to the settlement agreement, notes that amount was received against surrender of ‘right to sue’ and waiving all legal claims against Satyam & PwC; •    Since  ‘right to sue’ not transferable as a matter of public policy, AAR holds that amount not chargeable to capital gains u/s 45 of the Income-tax Act, relies on co-ordinate bench AAR ruling rendered in context of settlement amount received from Satyam and PwC in similar circumstances; Rejects Revenue’s stand that settlement amount was received to compensate part of Aberdeen investors’ business receipt, hence it was ‘revenue’ in nature; •    Clarifies that settlement amount was relatable to Satyam shares, it cannot be said that “settlement arrived with the approval of the US Court is to compensate business receipt of Aberdeen investors.”;•     Further rejects Revenue’s stand that in view of principle of surrogatum, settlement amount was assessable as ‘income’ as it has been received for the future profits surrendered; •    AAR notes that according to surrogatum principle, “the character of receipt of an award of damages or of an amount received in settlement of a claim as capital or revenue depends on what such amount was intended to replace.”; However, AAR clarifies that “surrogatum principle does not apply to amounts received pursuant to a fraud.”;•     Further, takes note of two important facts that 1) at the time of investments in shares of Satyam, Aberdeen investors were registered as FIIs with SEBI and 2) in view of AAR in Fidelity Northstar fund, registered FIIs can only invest in securities as investor and not trader;•    Also takes note of CBDT circular no. 4 of 2007 to reject Revenue’s stand that Aberdeen investors were engaged in trading business;  Concludes that settlement amount was a result of surrender of claim against Satyam and PwC, “Surely, even in accordance with the principle of surrogatum such amount is not assessable as income because it does not replace any business income.”: AAR Please find attached the judgment copy for your perusal.

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