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TMI Blog1990 (2) TMI 119X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure and also compensation, etc., to the extent of Rs. 1,09,800 and this sparked off a prolonged litigation with CPWD. Ultimately the matter was referred to an Arbitrator on various claims put forth by the assessee-/firm and the arbitration award was passed on 8th Sept., 1978 which was confirmed by the II Additional Judge, City Civil Court, Hyderabad, in O.S. No. 877 of 1978 dt. 21st March, 1979. As per the last para of the judgment, the assessee/firm was to get a sum of Rs. 1,88,420,90 towards full and final settlement of all claims and counter claims and the Court ordered that out of the sum of Rs. 1,88,421 a sum of Rs. 1,56,134 alone was eligible to interest at 9 per cent per annum from 1st Feb., 1974 till the date of payment. Accordingly, the assessee-firm received a total sum of Rs. 2,63,026 during the relevant accounting year including interest upto the date of payment. The assessee firm also claimed a loss of Rs. 54,600 on various counts and claimed the entire amount awarded by the Arbitrator including the interest amount as exempt for the reason that the compensation awarded and the interest were capital receipts. It also contended that the interest received under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same to the profit and loss account and accordingly claimed in assessment. She also drew support for this proposition from the fact that the ITO upon a representation made by the assessee estimated the net profit at 9 per cent of the gross receipts for the asst. yr. 1970-71 and for the asst. yr. 1971-72 when the net profit was estimated at 12-1/2 per cent the AAC reduced the same to 9 per cent. From these she inferred that the assessee had already derived the benefit in the respective assessments and, therefore, the compensation now received in a sum of Rs. 1,00,000 was an additional income pure and simple. 5. As for the objection of the assessment to the taxability of the interest awarded by the Arbitrator the CIT(A) held that though the contract did not specifically provide for payment of interest, the arbitrator had given the award in conclusive of interest in response to the assessees claim for interest at 17 per annum. Besides the Arbitrator had stated that the claimant was entitled to interest at 9 per cent. Therefore, she drew the inference that the payment of interest was an applied condition or stipulation in the contract and was earned in the course of business and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered only as having been awarded on ex gratia basis. At any rate, there was no condition or stipulation for payment or entitlement of interest express or implied. Hence, the interest received by the assessee under the award can be considered only as a capital receipt in the ratio of the decision of the Orissa High Court in Govinda Choudhary Sons vs. CIT, 1977 CTR (Ori) 190 : (1977) 109 (Ori). Sri Swamy submitted that the Orissa High Court had considered a catena of decisions of the Supreme Court and several High Courts on the assessability of interest amount arising out of arbitrator's award and had concluded that in the case of a Government contract, where there was no provision either under the statute or under the contract for payment of interest, such payment would partake of the nature of compensation and, therefore, it cannot be held as interest pure and simple. Such compensation receipts are capital receipts. The decision of the Kerala High Court in CIT vs. Periyar and Pareekanni Rubbers ltd., (1972) 87 ITR 666 (Ker) also lends support to this view. He also relied on the decision of the Hyderabad Bench of the Tribunal in Kolluru Rave vs. ITO (1986) 16 ITD 363 (Hyd), and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and it did not result from any destruction of the profit-earning apparatus of the assessee and, therefore, it was a trading receipt in the normal course of the assessee's business. 12. As for the amount of compensation for breach of contract, Shri Naidu submitted that it was a normal incident of business and, therefore, rightly taxed as such. 13. We have heard rival submissions and perused the records. The first issue for consideration is whether the sum of Rs. 1,00,000 awarded by the Arbitrator on grounds of revision of fair wages during the progress of work-(a) constituted income by itself as has been held by the CIT(A) or (b) whether it should form part of the turnover of the assessee to be used as a basis for estimating the profit as has been done in the past in the case of the assessee or (c) whether it should lie outside the ambit of taxation. While the ITO adopted the course in (b) above the CIT(A) adopted the course indicated in (a) but the assessee pleads for the course mentioned in (c) above. We have carefully considered the matter. The Arbitrator has found that the claim was made by the assessee because it incurred higher wages during the progress of work due to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee for purpose of estimating the net profit. Thus we set aside the enhancement made by the CIT(A) and uphold the order of the ITO on principle in this context, rejecting the argument of the assessee that the amount is not taxable. While so upholding, we direct the ITO to the adopt 10 per cent of this sum (instead of 12-1/2 per cent) as in the opinion of the arbitrator the actual amount of claim exceeded the sum Rs. 1,00,000. 14. The next issue is regarding the assessability of interest. We have gone through the contract entered into between the assessee-firm and the CPWD. The entire contract is contained in the paper book consisting of 17 pages. None of the provisions of the contract points to entitlement of interest or payment of interest either to the contractor or to the contractee, nor does a reading of the several clauses together give rise to a reasonable presumption in favour of interest payment in case of delayed payments of contracted sums, etc. The CIT(A) was right in holding that the contract with the CPWD did not specifically contain any clause for interest, but her inference that there was an implied condition on stipulation for payment of interest was w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereunder and for the time being in force shall apply to the arbitration proceeding under this clause." The assessee had a protracted litigation with the CPWD and ultimately it was referred to the decision of the arbitrator. The Arbitrator gave the award which was made the rule of the Court in O.S. No. 877 of 1978. There were claims and counter-claims and a sum of Rs. 1,88,420.90 was awarded to the assessee in full and final settlement of all the claims and counter-claims referred to the arbitrator. Thus, it is an omnibus amount though categorised under different heads. The interest part of the claim comes as an additional claim but not as an original claim. The interest was awarded not with reference to any specific clause of the contract nor with reference to any provision of the statute. Thus, the case will squarely fall within the ratio of the decision of the Orissa High Court in the Govinda Choudhury Sons vs. CIT. In that case, their Lordships of the Orissa High Court have dealt at great length with the several decisions of the Supreme Court and other High Courts and finally held at page 508 of the report: "The Supreme Court in T.N.K. Govindarajulu Chetty vs. CIT (1967) 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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