1990 (2) TMI 119 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of Rs. 1,00,000 awarded for wage revision.
2. Taxability of interest awarded by the Arbitrator.
3. Taxability of Rs. 10,000 received as compensation for breach of contract.

Detailed Analysis:

1. Taxability of Rs. 1,00,000 Awarded for Wage Revision:
The first issue concerns whether the Rs. 1,00,000 awarded by the Arbitrator for wage revision should be treated as income by itself, part of the turnover for estimating profit, or outside the ambit of taxation. The ITO included it in the turnover, while the CIT(A) treated it as a separate income. The assessee contended that it should be outside the ambit of taxation as it was compensation for extra expenditure incurred due to statutory wage revisions.

The judgment noted that the Arbitrator awarded Rs. 1,00,000 as the claim was justified due to statutory amendments regarding wage revisions. The CIT(A)'s conclusion that the assessee had already been reimbursed for this expenditure in past assessments was not supported by evidence. The Tribunal held that this sum was earned in the course of business and should be treated as a trading receipt forming part of the turnover. The ITO's approach to include it in the turnover for estimating net profit was upheld, but the Tribunal directed the ITO to adopt 10% of this sum for estimation instead of 12.5%.

2. Taxability of Interest Awarded by the Arbitrator:
The second issue deals with the taxability of the interest awarded by the Arbitrator. The CIT(A) inferred an implied condition for payment of interest, which was contested by the assessee. The Tribunal examined the contract and found no provision for interest payment, either express or implied. The interest was awarded as an additional claim, not as an original claim, and was not based on any specific clause of the contract or statutory provision.

The Tribunal referred to the Orissa High Court's decision in Govinda Choudhury & Sons vs. CIT, which held that interest awarded ex gratia should be considered as compensation and not as income. The Tribunal concluded that the interest awarded in this case was ex gratia and thus outside the purview of taxation. Consequently, the sum of Rs. 75,205 was deleted from the assessee's income.

3. Taxability of Rs. 10,000 Received as Compensation for Breach of Contract:
The third issue pertains to the Rs. 10,000 received as compensation for breach of contract. The CIT(A) and the ITO treated this amount as a taxable revenue receipt. The assessee argued that it was a capital receipt. The Tribunal noted that it was not clear from the records or the Arbitrator's award about the nature of the breach of contract. The Tribunal held that unless it was shown that the breach caused physical injury to the profit-earning apparatus or resulted in the sterilization of the assessee's asset, it should be treated as a taxable revenue receipt. Therefore, the sum of Rs. 10,000 was upheld as income of the assessee.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the inclusion of Rs. 1,00,000 in the turnover for estimating net profit but directed the ITO to use 10% for estimation. The interest amount of Rs. 75,205 was excluded from taxation, while the Rs. 10,000 compensation for breach of contract was upheld as taxable income.