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

Interest on Returned Advance: Taxed as Business Income, Not Capital Gains. Section 51 Inapplicable. Indexation Non-applicable. A company paid an advance of 20 crore to acquire a liquidating company but was outbid. Four years later, the company received its advance back with 8 crore in interest. The main query is whether this interest should be taxed as capital gains with indexation or treated as capital receipts under Section 51, which would make it non-taxable. Replies indicate that the interest should be taxed as business income or income from other sources, not as capital gains, and Section 51 is inapplicable since the advance was returned. If the interest was capitalized annually, indexation is not applicable.