July 2019

Section 4 of ITA, 1961 Income Capital or revenue Sale of shares upon open offer letter Additional consideration paid in terms of letter of open offer due to delay in making offer and dispatch of letter of offer Additional consideration part of share price of original transaction not penal interest for delayed payment Additional consideration was capital receipt

K.B.Bhujle
Advocate

26 CIT vs. Morgan Stanley Mauritius Co. Ltd.; 41 ITR 332 (Bom) Date of order: 19th March, 2019

 

Section 4 of ITA, 1961 Income Capital or revenue Sale of shares upon open offer letter Additional consideration paid in terms of letter of open offer due to delay in making offer and dispatch of letter of offer Additional consideration part of share price of original transaction not penal interest for delayed payment Additional consideration was capital receipt

 

An open offer was made by Oracle to the shareholders of I-flex at the price of Rs. 1,475 per share. The letter of open offer stated that additional consideration per share would be paid due to delay in making the open offer and dispatch of the letter of offer based on the time-line prescribed by the Securities and Exchange Board of India. The consideration was revised to Rs. 2,084 per share and the additional consideration for delay was revised to Rs. 16 per share. In response to the open offer, the assessee tendered its holding of 13,97,879 shares in I-flex and received Rs. 2,89,77,45,900, which included additional consideration of Rs. 2.20 crores. The Department contended that the additional sum received was a revenue receipt and taxable in the hands of the assessee.

 

The Tribunal held that the additional consideration received was for delayed payment of principal and that it was part of the original consideration and hence not taxable.

 

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

 

i)   The additional amount received by the assessee was part of the offer from the sale of shares made by it. The reason to have increased the sum per share by the company Oracle to the shareholders of I-flex might be on account of delay of issuance of the shares, but it was part of the sale price of the share. The revised offer which the company announced for issuance of the shares included the additional component of the increased sum per share and was embedded in the share price. This component could not be treated as interest on delayed payment on price of the share.

 

ii)   The additional sum was part of the sale price and retained the same character as the original price of the share. The additional receipt of the assessee relatable to this component was a capital receipt.

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