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Issues Involved: The judgment involves the following issues: (i) Whether the Income-tax Appellate Tribunal was justified in directing the Income-tax Officer to estimate profit at 12.5% of the principal amount of the award in case of extra expenditure incurred by the assessee; and (ii) Whether the pre-award interest component of the amount was taxable.
Judgment Details: Issue 1: Estimation of Profit The Income-tax Appellate Tribunal referred two questions to the court regarding the taxation of an award received by the assessee for civil contracts executed under the Government. The Tribunal directed the Income-tax Officer to estimate profit at 12.5% of the principal amount of the award, excluding the interest component. The Tribunal's decision was based on previous court rulings, including the case of Govinda Choudhury and Sons v. CIT, where it was held that interest awarded by the arbitrator is not taxable. The Supreme Court further clarified that interest awarded on delayed payments is part of the assessee's business receipts and is attributable to the contract business. The court upheld the Tribunal's decision on estimating profit at 12.5% of the principal amount, ruling in favor of the assessee. Issue 2: Taxability of Pre-award Interest The second question referred to the court was whether the pre-award interest component of the amount was taxable. The court disagreed with the Tribunal's decision and held that the pre-award interest was indeed taxable. The court cited a Constitution Bench decision emphasizing the arbitrator's power to award interest, even prior to the date of the award. The court concluded that the interest awarded by the arbitrator is an accretion to the assessee's receipts from the contract and is therefore taxable. The court ruled in favor of the department on this issue. Conclusion: In conclusion, the court answered the first question in favor of the assessee, upholding the Tribunal's decision on estimating profit at 12.5% of the principal amount. However, the court ruled against the assessee on the taxability of the pre-award interest component, siding with the department. Both judges, G. B. Patnaik and P. C. Naik, concurred with the judgment.
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