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Appeal against deletion of addition of Rs. 7,71,560 by CIT(Appeals)-IV, New Delhi for assessment year 1982-83. Analysis: The case involves an appeal by the revenue against the deletion of an addition of Rs. 7,71,560 by the CIT(Appeals)-IV, New Delhi. The assessee, a registered firm engaged in executing contracts, had a dispute regarding payment of the Final Bill under a contract agreement. The Arbitrator awarded Rs. 23,12,104.77 to the assessee, including interest of Rs. 7,71,560. The assessee excluded this interest from its total income based on a High Court decision. The Income Tax Officer (ITO) accepted the exclusion of a security refund but disallowed the exclusion of interest, deeming it as a trading receipt assessable under business income. The CIT (Appeals) treated the interest as ex-gratia, excluding it from income. The key contention was whether the interest payment was a trading receipt or a capital receipt. The revenue argued that the interest was incidental to the business and should be taxable, relying on past judgments. The assessee contended that the interest was ex-gratia, not arising from a contractual or statutory obligation, and thus a capital receipt. The Tribunal analyzed the nature of interest payments, distinguishing between contractual/statutory interest (taxable) and ex-gratia interest (non-taxable). The Tribunal referred to legal precedents to determine the taxability of interest payments. It highlighted that interest awarded under a contract or statute is taxable, while ex-gratia interest takes the character of compensation and is not taxable. The Tribunal noted that the contract in this case did not provide for interest payment, and the Arbitrator's award was ex-gratia. It emphasized the absence of a contractual or statutory obligation to pay interest. The Tribunal further examined the specific interest awarded on the security deposit, finding it attributable to the contract and thus taxable. It cited a contractual provision obligating the Union of India to pay interest on the security deposit. Consequently, the Tribunal partly allowed the appeal, ruling that the interest on the security deposit was taxable while the rest was not. In conclusion, the Tribunal upheld the CIT (Appeals) decision to exclude the interest amount from the assessee's total income, except for the interest on the security deposit, which was deemed taxable.
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