2007 (8) TMI 201 - HC - Income Tax

Amount assessable - The amount of interest awarded by the arbitrator on arbitration of business dispute assessable in the year when they accrue and not in the year when they received

Summary

Issues:
1. Characterization of interest received under Arbitration Award as compensation or revenue receipt.
2. Taxability of interest income received under the Arbitration Award for a specific period.

Issue 1:
The case involved determining whether the interest received under an Arbitration Award should be considered a measure of compensation or a revenue receipt. The appellant argued that the interest was part of the compensation and should not be treated as a revenue receipt. The court examined previous judgments, including the case of T.N.K. Govindaraju Chetty v. Commissioner of Income-tax, to establish principles regarding the taxability of interest on compensation. The court emphasized that if interest arises from a statute or agreement and is awarded as part of compensation, it is considered a revenue receipt and taxable. The court considered various tests and held that interest forming part of compensation, like mesne profits, is not taxable as income. Ultimately, the court ruled in favor of the Revenue on this issue.

Issue 2:
The second issue revolved around the taxability of interest income received under the Arbitration Award for a specific period. The court referred to the judgment in Rama Bai v. Commissioner of Income-tax to address this issue. The court analyzed a scenario where interest was awarded on enhanced compensation and clarified that interest should be considered to accrue year after year from the date of possession of the lands. Applying this principle to the case at hand, where interest was awarded from a specific date until payment or the date of the decree, the court held in favor of the assessee and against the revenue. Therefore, the interest pertaining to a specific period could be taxed in the relevant assessment year, not the entire amount received. Consequently, the court ruled in favor of the assessee on this issue.

In conclusion, the High Court of Bombay addressed the issues regarding the characterization and taxability of interest received under an Arbitration Award. The court provided a detailed analysis based on legal precedents and principles to determine that interest forming part of compensation is taxable as income if it arises from a statute or agreement. Additionally, the court clarified the tax treatment of interest income for a specific period, ruling in favor of the Revenue on the first issue and in favor of the assessee on the second issue.