1990 (12) TMI 129 - AT - Income Tax

Summary

Issues Involved:
1. Assessment of the entire award amount as income.
2. Deduction of arbitration expenses.
3. Taxability of pre-award interest.
4. Taxability of post-award interest.

Detailed Analysis:

1. Assessment of the Entire Award Amount as Income:
The primary issue was whether the entire arbitration award amount received by the assessee should be assessed as income. The assessee, a registered firm of civil contractors, received an arbitration award of Rs. 6,62,829 for work executed during the period from 10th April 1968 to 8th July 1968. The CIT(A) confirmed the ITO's decision to assess the entire award amount as income, stating there was no extra element of cost in respect of already executed contracts or spill-over of cost. The Tribunal, however, found that the award amount represented part of contract receipts for extra expenditure incurred by the assessee in executing extra items of work. The Tribunal concluded that the receipts were contract receipts and not capital receipts, and the assessee's estimation of profit at 12.5% on the principal amount of the award was in order.

2. Deduction of Arbitration Expenses:
The CIT(A) allowed Rs. 50,000 as arbitration expenses on an estimated basis, which was contested by both the assessee and the Revenue. The assessee argued that the entire expenses incurred on securing the award should have been allowed, while the Revenue contended that the arbitration expenses were not furnished and should not have been allowed on an estimate basis. The Tribunal upheld the CIT(A)'s decision to allow Rs. 50,000 as arbitration expenses, noting that such expenses would not have been entered into the books of account of either the assessee or the sub-contractors and had to be borne by the assessee. The Tribunal dismissed the ground taken by the assessee for the entire expenses due to non-prosecution.

3. Taxability of Pre-Award Interest:
The pre-award interest of Rs. 5,72,492 received by the assessee was excluded from taxation by the CIT(A) based on the ratio of the Hon'ble Orissa High Court decision in the case of Govinda Choudhary & Sons vs. CIT 1977 CTR (Ori) 190. The Revenue challenged this exclusion, arguing that the contract did not show a term for payment of interest. However, the Tribunal upheld the CIT(A)'s decision, respecting the binding judgment of the Hon'ble Orissa High Court, which treated pre-award interest as ex gratia payment and not taxable income.

4. Taxability of Post-Award Interest:
The post-award interest of Rs. 96,624 was offered by the assessee and assessed by the ITO. The assessee argued that the post-award interest should not be assessed as it was of the same nature as pre-award interest. The Tribunal, however, did not admit the additional ground raised by the assessee, citing the Supreme Court's observation that merely because the ITO brings an item to tax, it cannot be deemed to have considered its non-taxability if no such claim was made by the assessee. The Tribunal distinguished post-award interest from pre-award interest, stating that post-award interest is granted as compensation for delay in getting the award amount and thus is taxable.

Conclusion:
The Tribunal partly allowed the appeal by the assessee, upholding the CIT(A)'s decision to allow Rs. 50,000 as arbitration expenses and exclude pre-award interest from taxation. The Tribunal dismissed the Revenue's appeal, confirming the assessment of the entire award amount as income and the taxability of post-award interest.