1985 (12) TMI 117 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of interest awarded by the arbitrator under the Requisitioning and Acquisition of Immovable Property Act, 1952.
2. Nature of interest received as income or capital receipt.
3. Accrual basis of interest for tax purposes.
4. Finality of the award and pending appeal's impact on taxability.

Issue-wise Detailed Analysis:

1. Taxability of Interest Awarded by the Arbitrator:
The primary issue was whether the interest awarded by the arbitrator under the Requisitioning and Acquisition of Immovable Property Act, 1952 ('the said Act') is taxable as income in the year the award is passed. The appellants argued that the interest received should be considered a capital receipt and not taxable. The Income Tax Officer (ITO) and the Assistant Commissioner of Income Tax (AAC) had previously held that the interest was taxable as revenue receipt.

2. Nature of Interest Received:
The appellants contended that the interest received on the compensation for acquired land should be treated as a capital receipt. They relied on the Orissa High Court decision in Govinda Choudhury & Sons v. CIT [1977] 109 ITR 497, which held that interest awarded on an ex gratia basis, not under statute or contract, is a capital receipt. The AAC distinguished this case by stating that the interest in the present case was awarded under the Interest Act, 1979, making it a revenue receipt. However, the Tribunal agreed with the appellants, noting that the said Act did not contain any provision for granting interest and that the arbitrator awarded interest ex gratia. Therefore, the interest should be considered part of the compensation and a capital receipt, not taxable.

3. Accrual Basis of Interest for Tax Purposes:
The appellants argued that even if the interest is taxable, it should be assessed on an accrual basis year by year. The AAC rejected this argument, following the decision in CIT v. Smt. Sankari Manickyamma [1976] 105 ITR 172 (AP), which held that interest accrues only when the award is passed. The Tribunal upheld this view, stating that the interest does not accrue until the award is passed, and therefore, it should not be spread over the years.

4. Finality of the Award and Pending Appeal's Impact on Taxability:
The appellants contended that the award was not final as an appeal was pending in the High Court. They argued that the interest should not be taxable until the High Court's decision. The AAC found that the award of interest was not contested in the appeal, making it final. The Tribunal agreed, noting that the interest on the original compensation had become final and accrued during the financial year 1980-81, making it assessable in the assessment year 1981-82. However, the Tribunal ultimately concluded that the interest awarded ex gratia should be considered a capital receipt and not taxable.

Conclusion:
The Tribunal allowed the appeals, setting aside the orders of the lower authorities. It held that the interest awarded by the arbitrator under the said Act, granted ex gratia, should be considered part of the compensation and a capital receipt, not taxable as income. The Tribunal's decision was based on the absence of statutory provisions for granting interest under the said Act and the principle that ex gratia interest payments are not revenue receipts.