2013 (8) TMI 838 - AT - Income Tax

Penalty u/s 271(1)(c) - Compensation from Castrol UK for delay in payment of proceeds of shares - Held that - It is clear that the payment of interest was directed by the SEBI under regulations 22 and therefore it was held that this is 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 SEBI regulations. It is clear that this payment of interest @ 15% was not on account of any accretion in the value of the asset in question because the market price of the share is determine as per the rates prevailing on stock exchange. The consideration for acquiring the shares under open offer was determined at Rs. 350.02 which was the market price as on 14.3.2000 when the holding company made a public announcement of acquisition. However the case in hand the interest received by the assessee is for the period prior to the tendering of shares and acceptance of the same therefore the interest relates to the delay in completing the process of buy back of shares under open offer. There is a difference between the interest which can be treated at par of consideration and the interest which is different form compensations or consideration. If the interest is paid for delay in making the payment then it cannot be treated as part of consideration. In the case in hand the delay for which the interest has been received by the assessee is in the process of buy back of shares in the open offer after announcement of the intention of acquiring of shares. It is not a case of delay in making the payment of the determined consideration after the transaction of purchase of sale is over - amount of interest which relates to the period prior to tendering and acceptance of the shares falls within the ambit of consideration received by the assessee against the shares tendered in the open offer - interest is received in pursuance to the directions of the SEBI and due to delay in completion of the process of buy back of shares as prescribed under the SEBI regulations. The real acquisition of shares took place only in the month of November 2001 and prior to the said date it cannot be said that the interest was paid due to delay in the payment of consideration - additional amount received by the assessee being 15% interest from 8.8.2000 to 22.11.2001 is part of sale consideration and accordingly will be treated as part of capital gain and not the income from interest - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxation of compensation received as interest income versus capital gains.
2. Classification of compensation under section 115AD(1)(a) of the Income Tax Act.
3. Appropriate assessment year for taxing the compensation.
4. Deletion of penalty under section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Taxation of Compensation Received as Interest Income versus Capital Gains:
The primary issue addressed was whether the compensation received by the assessee from Castrol UK for the delay in payment of proceeds of shares tendered under an open offer should be taxed as interest income or as capital gains. The assessee, a company incorporated in Mauritius and registered with SEBI as a sub-account of a Foreign Institutional Investor (FII), received an additional amount of Rs. 7,07,76,547/- due to a delay in payment by Castrol UK. The Assessing Officer treated this as interest income and taxed it at 48%. The assessee contended that the amount should be considered as capital gains under Article 13(4) of the Indo-Mauritius Treaty, arguing that it was an additional consideration for the shares tendered. Alternatively, the assessee argued that the compensation was not interest under Article 11 of the Indo-Mauritius Treaty, as there was no debtor-creditor relationship. The CIT(A) upheld the AO's decision, but the Tribunal concluded that the compensation was part of the sale consideration and should be treated as capital gains, not interest income. The Tribunal reasoned that the interest received was due to the delay in the buyback process of shares and not due to a delay in payment post-transaction.

2. Classification of Compensation under Section 115AD(1)(a) of the Income Tax Act:
The assessee argued that if the compensation was not considered capital gains, it should be classified as "income received in respect of securities" under section 115AD(1)(a) of the Income Tax Act and taxed at 20%. However, since the primary issue was decided in favor of treating the compensation as capital gains, this ground became infructuous and academic in nature.

3. Appropriate Assessment Year for Taxing the Compensation:
The assessee also contended that if the compensation was to be taxed as interest income, it should be taxed in the assessment year 2003-04 on a receipt basis, rather than in the assessment year 2002-03. However, this issue was rendered moot as the Tribunal decided that the compensation should be treated as capital gains.

4. Deletion of Penalty under Section 271(1)(c) of the Income Tax Act:
The Revenue appealed against the CIT(A)'s order deleting the penalty of Rs. 3,39,72,743/- levied under section 271(1)(c) for alleged concealment or furnishing inaccurate particulars of income. Since the Tribunal decided the primary issue in favor of the assessee, it upheld the CIT(A)'s decision to delete the penalty, concluding that there was no concealment or furnishing of inaccurate particulars by the assessee.

Conclusion:
The Tribunal allowed the appeal of the assessee, treating the compensation received as part of the sale consideration and thus as capital gains. Consequently, the appeal of the Revenue was dismissed, and the penalty under section 271(1)(c) was deleted. The order was pronounced in the open court on August 14, 2013.