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2016 (3) TMI 1457 - AT - Income TaxAttribution of income - receipt of arbitration award and interest thereon - allowability of expenses related to award - whether expenses incurred should have been allowed only net income ought to have been taxed? - HELD THAT - On verification of computation it is found that payment of (vi) running bills principal amount and thereon interest from 01/6/1993 to 31/5/1999 and balance payment (unmeasured work) principal amount and interest thereon from November 1993 to 31/5/1999 the Arbitrator has allowed principal amount of Rs. 1, 36, 983/- and thereafter interest at Rs. 1, 80, 818/- thus total amount has been worked by the Arbitrator at Rs. 3, 17, 801/- remaining amount pertained to refund of security deposit of Rs. 76, 210/- and interest thereon from November 1993 to 31/5/1999 Rs. 95, 025/- and litigation expenses of Rs. 30, 000/-. Since the identical issue decided by the Coordinate Bench for A.Y. 2006-07 has already been challenged before the Hon ble Jurisdictional High Court and the Hon ble High Court has also framed question of law in the case of assessee which is pending for disposal. Assessee s appeal is allowed for statistical purposes only.
Issues Involved:
1. Taxation of arbitration award and interest received thereon. 2. Taxability of contract works amount pertaining to previous assessment years. 3. Taxation of the entire interest component of the arbitration award. 4. Misinterpretation of the ITAT’s directions regarding the treatment of arbitration award receipts. 5. Justification of the observation that expenses related to the award were already debited in the P&L account for A.Y. 1993-94. Issue-wise Detailed Analysis: 1. Taxation of Arbitration Award and Interest Received Thereon: The primary issue revolves around whether the entire amount of the arbitration award and the interest received should be taxed as income in the year under consideration. The assessee argued that only the net income of Rs. 53,561/-, calculated at a profit rate of 8.57%, should be taxed, which was already offered for taxation. The Assessing Officer (AO) and the CIT(A) held that the entire amount of Rs. 465,212/- should be taxed. The ITAT remanded the matter to the AO to verify if the expenses related to the award were claimed in A.Y. 1993-94. The AO concluded that the assessee failed to provide evidence that the expenses were not claimed earlier, leading to the addition of Rs. 5,71,422/- to the income for A.Y. 2004-05. 2. Taxability of Contract Works Amount Pertaining to Previous Assessment Years: The assessee contested the addition of Rs. 136,983/- as taxable income for A.Y. 2004-05, arguing that it related to A.Y. 1993-94 or 2001-2002. The ITAT noted that the assessee follows the mercantile system of accounting, and thus, the income should be recognized in the year it accrues, not when it is received. The AO and CIT(A) maintained that the amount was rightly taxed in the year of receipt. 3. Taxation of the Entire Interest Component of the Arbitration Award: The assessee argued that only the interest accrued during the year amounting to Rs. 59,269/- should be taxed, not the entire interest component. The ITAT referred to the Supreme Court decision in Govind Chaudhary & Sons, which held that interest attributable to business is assessable as business income. The CIT(A) and AO taxed the entire interest component, considering it as income for the year under consideration. 4. Misinterpretation of the ITAT’s Directions Regarding the Treatment of Arbitration Award Receipts: The assessee contended that the lower authorities misinterpreted the ITAT’s directions by treating the entire receipt as income without allowing for expenses. The ITAT had directed the AO to verify if the expenses related to the award were claimed in A.Y. 1993-94, and if not, to delete the addition. The AO concluded that the assessee failed to provide evidence, leading to the addition being upheld. 5. Justification of the Observation that Expenses Related to the Award Were Already Debited in the P&L Account for A.Y. 1993-94: The AO observed that the assessee had already debited the entire expenses related to the arbitration award in the P&L account for A.Y. 1993-94. The assessee failed to produce separate accounts to prove otherwise. The CIT(A) and AO concluded that in the absence of evidence, the entire receipt should be treated as income. Conclusion: The ITAT set aside the order of the CIT(A) and directed the AO to decide the case based on the decision of the Hon’ble High Court on similar facts and circumstances. The appeal was allowed for statistical purposes, pending the High Court’s decision on whether the entire receipt from the arbitration award should be treated as income or only a certain percentage. The AO was instructed to provide a reasonable opportunity for the assessee to present evidence.
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