2011 (12) TMI 382 - AT - Income Tax

LTCG or other sources - Taxability of interest income - what the same is part of full value of consideration in computing long term capital gains or taxable as income from other sources - Buy back of share - held that - Supreme Court in the case of CIT v. Ghanshyam (HUF) (2009 -TMI - 34152 - SUPREME COURT) - has given a detailed finding on the issue of interest payable u/s 23, 28 as well as section 34 of the Land Acquisition Act. The Hon ble Supreme Court has analysed the issue whether the interest paid on enhanced compensation u/s 23,28 and interest u/s 34 would be treated as part of compensation u/s 45(5) of the I T Act 1961. Thus, when the amount is paid as a compensation for enhancement in the value of the asset transferred, the same will be part of full consideration; but when the interest is paid as compensation to loss of interest, then it cannot be treated part of sale consideration. Accordingly, the interest received by the assessee, as held by the Hon ble Supreme Court while deciding the dispute of rate of interest is only a compensation for loss of interest due to delay in public offer and payments and not the compensation for enhancement in the value of the asset. The interest received by the assessee as per the directions of the SEBI and in pursuance of the decision of the Hon ble Supreme Court (supra) cannot be treated as part of sale consideration of shares and accordingly, the lower authorities have rightly treated the income from other sources.

Summary

Issues Involved:
1. Whether the interest income of Rs. 1,00,57,681/- received by the assessee should be considered as part of the full value of consideration in computing long-term capital gains.
2. Whether the interest income assessed by the Assessing Officer is chargeable to tax under any provision of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Interest Income as Part of Sale Consideration in Long-Term Capital Gains:

The assessee contended that the interest income received on the buy-back of shares should be included in the full value of consideration for computing long-term capital gains. The assessee had sold 71,233 shares at Rs. 318 per share and received interest at Rs. 149.62 per share, which was included in the total consideration received. The Assessing Officer, however, treated the interest income as "Income from other sources" under section 56(2)(id) of the Income Tax Act, citing the Supreme Court's order which mandated the payment of interest to compensate shareholders for the delay in making the public offer. The CIT(A) upheld this view.

The assessee argued that the interest was compensatory in nature and not a separate income, relying on the Authority for Advance Rulings in the case of Burmah Castrol Plc. and the Supreme Court's decision in CIT v. Ghanshyam (HUF), which held that interest payable prior to possession taken over should be part of the compensation. However, the Tribunal noted that the Supreme Court had clarified that the interest was to compensate shareholders for the loss due to the delay in making the public offer, and not for enhancement in the value of the asset.

The Tribunal concluded that the interest received was not part of the sale consideration but compensation for the delay, and thus upheld the lower authorities' decision to treat it as "Income from other sources."

2. Taxability of Interest Income:

The assessee raised an additional ground challenging the taxability of the interest income, arguing that there was no statutory right or agreement to receive such interest, and hence it should not be taxed. The Tribunal referred to the Supreme Court's decision, which indicated that the interest was compensatory for the delay in the public offer and not a statutory right. The Tribunal also distinguished the case from other cited judgments, such as the Punjab and Haryana High Court's decision in CIT v. Chiranji Lal Multani Mal Rai Bahadur (P) Ltd, where interest was awarded for wrongful deprivation of a security deposit and was considered a casual receipt.

The Tribunal held that the interest received was taxable under "Income from other sources" as it was compensation for the delay in the public offer, and not part of the sale consideration of shares.

Conclusion:

The Tribunal dismissed the appeal, affirming that the interest income received by the assessee was correctly treated as "Income from other sources" and not part of the sale consideration for computing long-term capital gains. The decision was pronounced on December 28, 2011.