1997 (12) TMI 54 - HC - Income Tax

Summary

Issues:
Whether the interest received by the assessee under an arbitration award should be treated as a revenue receipt liable to tax.

Analysis:
The High Court of Allahabad was tasked with determining whether the interest received by the assessee under an arbitration award should be considered a revenue receipt liable to tax. The dispute arose during the assessment year 1977-78 when the assessee, a registered firm engaged in works contracts, received interest as part of an arbitration award related to a project for the Government of Orissa. The assessee claimed the interest should not be taxed as it was an ex gratia payment. The Income-tax Officer disagreed and assessed the income accordingly.

The appellate authority accepted the assessee's claim, citing a decision of the Orissa High Court that interest not under a statute or contract is not taxable. The Revenue then appealed to the Income-tax Appellate Tribunal, which upheld the previous decision, stating that the interest was not distinguishable from the Orissa High Court's ruling. The Tribunal also noted a similar case supporting the non-taxability of such interest.

The High Court analyzed various legal precedents and principles regarding the distinction between capital and revenue receipts. It referenced the Orissa High Court's decision that interest awarded on an ex gratia basis is not taxable, contrasting it with cases where interest is awarded under a statute or contract. The Court also cited Supreme Court decisions emphasizing the compensatory nature of interest awarded for delayed payments.

Ultimately, the High Court held that the interest received by the assessee was a revenue receipt attributable to its business activities and should be taxed accordingly. It concluded that the interest was not an ex gratia payment but an accretion to the assessee's business receipts, following the character of payments due under the contract. The Court disagreed with the Tribunal's view that the interest was not taxable, ruling in favor of the Revenue and against the assessee.

In light of the legal principles discussed and the precedents cited, the High Court answered the referred question in the negative, affirming that the interest received by the assessee was a revenue receipt subject to tax.