Section 51 of income tax

[yash gupta]

A Company has paid Advance Money[Bid] of ₹ 20 Crore to Asset Reconstruction Company for the acquisition of a liquidating company, but due to higher bid from another company the assessee company has received after 4 years its Advance Money together with interest amounting to of ₹ 28 Crore.

Now, (i) whether the interest compensation it liable for capital gain and accordingly indexation done ??

OR (ii) It is treated as "Capital Receipts " u/s.51 as a result not liable for any Tax.

Kindly explain the Consequences.

[K.S.AIYAR & CO.]

Let me repeat the facts as I have understood them for clarity. A Ltd has paid an advance of 20Cr to B Ltd for acquisition of C Ltd. But A Ltd was out bid and C Ltd went to say D Ltd. Now B Ltd has returned to A Ltd 20 Cr + Interest of 8 Cr.

If my above understanding is correct, then my views are as under:

i) Interest will be liable for tax under Business Income or Other Sources in case of A Ltd and not as Capital Gains. So question of indexation does not arise.

(ii) Section 51 is not applicable to this case.

Just to further clarify what Section 51 states is if C Ltd had retained the advance without returning to A Ltd ( under whatever reason/condition) the same would have been deducted from cost of acquisition of it's fixed assets.

[Rakesh Chitkara]

There is no question of application of section 51 in your case. You are purchaser. In case your amount was forfeited by seller , then section 51 would have applied to him.

As regards taxability of additional income, it is be taxed.

[yash gupta]

Thankyou Mr. Sanjay and Mr. Rakesh.

But if the Interest was already capitalised year wise than whether indexation done.

AI Summary

Taxation of interest on refunded acquisition advance: treated as income, not capital gains, indexation not applicable.
Interest received on refund of an advance paid for an acquisition is characterised as income-taxable under business income or other sources-and not as a capital gain; indexation for capital gains is therefore not appropriate. Section 51 applies to a transferor who retains or forfeits an advance and operates by reducing cost of acquisition, but it does not apply to a purchaser who is refunded an advance.