1977 (3) TMI 37 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 2,77,692 awarded to the assessee as interest was rightly held to be a revenue receipt.
2. If the answer to question No. 1 is in the affirmative, whether the aforesaid sum was rightly separated from the other amounts under the awards and taxed in full.

Summary of Judgment:

Issue 1: Revenue Receipt Classification
The High Court of Orissa examined whether the sum of Rs. 2,77,692 awarded to the assessee as interest was correctly classified as a revenue receipt. The assessee, a firm engaged in government contracts, had received this amount as part of an arbitration award for interest on delayed payments. The Income-tax Officer treated this interest as a revenue receipt and taxed it fully. The Tribunal upheld this view, relying on the Supreme Court's decision in Ramanathan Chettiar v. Commissioner of Income-tax [1967] 63 ITR 458 (SC), which stated that interest awarded to compensate for the loss of use of money is considered revenue in nature.

However, the High Court referred to the Supreme Court's ruling in T. N. K. Govindarajulu Chetty v. Commissioner of Income-tax [1967] 66 ITR 465 (SC), which distinguished between interest awarded under statute or contract (taxable as income) and interest awarded ex gratia (considered compensation). Since the interest in this case was not payable by statute or contract, it was deemed an ex gratia payment by way of compensation. Therefore, the court concluded that the amount should not be treated as income exigible to tax.

Issue 2: Separation and Taxation of Amounts
The second issue was contingent on the first. Since the court found that the amount was not a revenue receipt, the question of whether it was rightly separated and taxed in full did not arise. Consequently, the court declined to answer this question.

Conclusion:
The court held that the sum of Rs. 2,77,692 awarded as interest was wrongly classified as a revenue receipt and should not be taxed. The second question was rendered moot by this decision. Each party was directed to bear their respective costs of the reference.