Mumbai ITAT rules that additional consideration received under an open offer agreement is taxable as capital gains and not interest

 

The Mumbai Income-tax Appellate Tribunal (ITAT) has in the case of Genesis Indian Investment Company Ltd (Taxpayer) pronounced a ruling on the issue of whether additional consideration received by the Taxpayer, in respect of delay in completion of the process of buy back of shares under an open offer arrangement, was in the nature of capital gains or in the nature of interest income.

The ITAT based on the facts of the case held that the amount of additional consideration received is taxable as capital gains as the same relates to the period prior to the tendering and acceptance of shares and hence is consideration received against the shares tendered under the open offer.

There are not many judicial precedents rendered in respect of treatment of additional consideration received under an open offer agreement.

In an earlier ruling in the case of Dai Ichi Karkaria Ltd, the Mumbai ITAT based on the facts held that interest received in respect of delay in payment of offer price cannot be treated as part of sale consideration of shares.

However, the current ruling pronounced by the Mumbai ITAT is based on facts which are different from those which existed in the case of Dai Ichi Karkaria Ltd.

Taxpayers may consider using the principle outlined in the current case based on their individual facts.