Thursday, September 12, 2013

Payment for delay in completion of buy back process under open offer to be deemed as cap gains and not interest

Interest received by assessee for delay in completion of the process of buy-back of shares under open offer to be deemed as capital gain and not interest income

In the instant case the assessee, a company incorporated in Mauritius, had obtained registration with the SEBI as a registered FII. It was holding the shares of Castrol India Ltd. which was a subsidiary of Castrol Ltd. UK ('Castrol UK'). The Castrol UK announced open offer for acquisition of issue capital of Castrol India Ltd. The assessee tendered certain equity shares under open offer. It received compensation from Castrol UK for delay in payment of shares tendered under the open offer. The AO treated the said compensation as interest income and taxed the same. The CIT(A) upheld the action of the AO. Aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) It was clear that the payment of interest was directed by the SEBI and, therefore, it was not a penalty but the payment of interest on account of failure to make the payment by the acquirer as per the time schedule prescribed under the SEBI regulations;

2) However, in the instant case the interest received by the assessee was for the period prior to the tendering of shares and acceptance of the same, therefore, the interest related to the delay in completing the process of buy-back of shares under an open offer;

3) If the interest would have been paid for delay in making the payment then it couldn't be treated as part of consideration. In the instant case, the delay for which the interest had been received by the assessee was in the process of buy-back of shares in the open offer after announcement of the intention of acquiring of shares;

4) It was not a case of delay in making the payment of the determined consideration after the transaction of purchase of sale was over. Thus, this additional amount received by the assessee being interest was part of sale consideration and, accordingly, would be treated as part of capital gain and not the income from interest - Genesis Indian Investment Co. Ltd. v. CIT(A) [2013] 36 taxmann.com 300 (Mumbai - Trib.)

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