2003 (8) TMI 37 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that interest amounting to Rs. 1,17,975 received on arrears of salary after grant of higher pay scale by the Punjab and Haryana High Court is not taxable ? - The present is not a case where the assessee might have been awarded interest under a statute sequent upon grant of arrears of salary on account of higher pay scale, but in fact paid interest in the discretion of this court vested in it under article , of the Constitution of India. The grant of interest was in the absolute discretion of the court and so would be the rate of interest in a case of this kind Thus, the question, as referred by the Tribunal and as extracted above is answered in favour of the assessee and against the Department

Summary

Issues involved:
1. Taxability of interest received on arrears of salary after grant of higher pay scale by the High Court.

Detailed analysis:
The judgment of the High Court of Punjab and Haryana involved the issue of whether interest amounting to Rs. 1,17,975 received on arrears of salary after the grant of a higher pay scale by the High Court is taxable under the Income-tax Act, 1961. The individual assessee, a District and Sessions Judge, had claimed a higher pay scale than what was initially allowed. The High Court, through a civil writ petition, granted the higher pay scale and ordered the payment of interest at the rate of 12% per annum from the accrual date till actual payment, totaling Rs. 1,17,975. The Deputy Commissioner of Income-tax assessed this amount as income, considering it as statutory interest under the Code of Civil Procedure. The Assessing Officer's decision was upheld by the Commissioner of Income-tax (Appeals) based on precedents from the Kerala High Court and the Supreme Court, stating that interest on arrears of salary is a taxable receipt.

However, the Tribunal reversed the decision, citing a Division Bench judgment of the High Court and a Supreme Court decision, asserting that the interest was a capital receipt in the hands of the assessee. The Tribunal reasoned that the interest was awarded for the loss of arrears of salary, which constituted property, and the compensation for such loss was determined through the interest payment. The High Court, upon hearing the parties and examining the case records, analyzed whether the Division Bench judgment and the Supreme Court precedent should be upheld in the present context.

The High Court compared the judgments in question with a previous Supreme Court decision and clarified that when interest is paid under a statute like section 34 of the Code of Civil Procedure, it is considered income for income tax purposes. However, in cases where the court has discretion in awarding interest, as in the present case, such payment does not amount to income for tax purposes. The High Court emphasized that the interest awarded in this case was at the absolute discretion of the court and not based on a statutory provision. Therefore, the Division Bench judgment and the Supreme Court precedent applied in this scenario, leading to the conclusion that the interest received on arrears of salary after the grant of a higher pay scale was not taxable. The judgment favored the assessee, ruling against the Department, with no costs awarded.