Cash for votes in board meetings

Proceedings in corporate board meetings rarely come out into the open. The public will have no chance to find out the views of individual members while discussing important matters in board meetings. Board meetings are confidential in nature. Decisions are arrived at generally by consensus and rarely by majority vote. Matters relating to market share, controlling interest, acquisitions, mergers and demergers etc are all decided first in the board rooms before being taken into the annual general body meeting of the company for ratification.

Conflicting interest of rival groups in the board are generally thrashed out by discussion. Will it be possible for one group to pay cash to a dissenting group to buy votes in favour of a particular resolution? If such payment is made, will it be Capital or Revenue in nature in the hands of the receiver for purposes of taxation?

Use of trademark

The question had to be decided by the Bombay High Court in the recent case involving Procter and Gamble, the American consumer products major. The matter concerned payments made for the acquisition and use of the familiar trademark and brand “ Old Spice ”.

Colfax Laboratories India Ltd was operating the trade mark Old Spice . Around 40 per cent of its shares were held by Shulton Ltd, UK. The members of Menezes family of Goa owned 58.8 per cent of equity shares in Colfax. Shulton of America happened to be the registered proprietor in India of the trademark Old Spice . Shulton had granted to Colfax the right to use and market products under the brand name Old Spice .

Procter and Gamble acquired Shulton of US and became its holding company. Through this acquisition, it became the owner of the trade mark Old Spice in India. It appointed a Director on the board of Colfax. It wanted to have ‘complete user of the trademark' for its Indian subsidiary, Procter and Gamble India Ltd. It wanted confirmation from Colfax about its right to exclusively use the trademark. The Menezes family owned the majority shares in Colfax and also had a majority of directors on the board.

P&G strategy

A Resolution was brought up under which Colfax will give up the right of marketing, selling and distribution of Old Spice range of products in favour of Procter and Gamble India Ltd. The Resolution required the affirmative vote of the Menezes family. Procter agreed to grant Coalfax exclusive manufacturing rights of its products for 10 years. How to secure the affirmative vote of the Menezes family? They did affirm the Resolution for a price.

Procter paid Rs 3.5 crore to the members of the Menezes family. The amount was not divided equally or proportionately among the members of the family. Some of them did not get cash, some others took the bulk of the cash. The question that arose concerned the treatment to be meted out to this sum of Rs 3.5 crore in the assessment of the members of the Menezes family. The High Court pointed out that the payment was not for diminution in the value of the shares. Some shareholders were not paid any amount whatsoever. Distribution of cash among the members of the family was at random. This showed that the payment cannot be related to any diminution in the value of the shares.

Windfall receipt?

There was the alternative argument that the amount was a windfall receipt for the members of the family for voting in favour of the resolution and did not amount to ‘income” within the meaning of Section 2(24) of the Income Tax Act. The members who voted in favour of the Resolution were not engaged in the business of charging fees for voting on Resolutions on the strength of the shareholdings. The receipt cannot be expected on a regular basis. It was a casual receipt.

“ Old Spice ” was a popular brand. If there had been litigation on the use of the brand name, Procter's market in India would have been affected. Any Court injunction against the use of the brand even for a short time would have meant immense loss. Consumer memory is short. People easily change brand loyalty. The payment of Rs.3.5 crore was not by way of charity, but as a condition to ensure their affirmative vote in the board meeting. It extinguishes the marketing rights of Colfax.

The money received was not a business receipt. Voting on Resolution in a particular manner was not the business of the family members. The sum of Rs.3.5 crore was a windfall and not income within the meaning of Section 2(24). It was not liable to tax. It was for Revenue to prove that the receipt was of an income character. This initial burden was not discharged by Revenue. It was a one-time event of affirmative voting on a Resolution. It was not of repetitive character and was not likely to happen again. The receipt was not taxable, held the Bombay High Court.

(The author is a former Chief Commissioner of Income-Tax.)

SMS your comments about Taxation page to 94449 07996

COMMENT NOW