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TMI Blog1977 (3) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... 72,997 and following a settlement between it and the revenue reached for earlier years in the matter of computation of income of receipts from contract business adopted ten per cent. thereof as income. While examining the accounts, the Income-tax Officer found that the assessee had got some of its claims in relation to contract works executed in earlier years referred to arbitration and the awards passed in its favour contained a sum of Rs. 4,30,549 representing interest. He separated this item from other sums and on the footing that it represented interest on the assessee's money withheld by Government brought the amounts in entirety into the net of taxation. Assessee appealed to the Appellate Assistant Commissioner and contended that the amount referred to as interest should have been taken as a trading receipt and there was no justification, at any rate, for the bifurcation of this amount from the other amounts. The first appellate authority did not accept the stand of the assessee and upheld the addition. In second appeal before the Tribunal, the assessee advanced two alternative contentions : (i) the amount awarded as interest was not income at all as it was in the natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to pay interest or whether the interest was payable under a statute or an award are not at all germane to the basic issue........." The Tribunal noticed that the relevant term of the settlement ran thus: " A net profit rate of 10% will be applied on gross receipts including the cost of materials, to determine the profit of all the five firms covered by the settlement." It recorded a finding that the payments under consideration arose out of contracts covered by the settlement, but did not specifically say one way or the other about the acceptability of the alternative contention. The Tribunal, however, found that Rs. 2,77,692 out of the sum of Rs. 4,30,549 related to this year and ruled that the same should be held as income liable to tax in this year. Before we proceed to deal with the rival contentions of counsel on merits, as advanced before us, it is appropriate that we deal with a couple of submissions of learned standing counsel. Undoubtedly, the sum of Rs. 2,77,692 taken into consideration was made up of Rs. 2,15,583 and Rs. 62,109. According to learned counsel, the Income-tax Officer found that in the sum of Rs. 2,15,583 was included a sum of Rs. 41,052 representi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect in his stand that the assessee had pending disputes in court which were referred to arbitration. According to learned counsel for the assessee, the amount under consideration was not received as a consequence of any statutory provision or contract between the parties. Reliance is placed on the finding of the Appellate Assistant Commissioner in paragraph 33 of his order where he stated : "....... I find that there was no stipulation in the contract clause for payment of interest but the interest arose only on the arbitrator's award........" Learned standing counsel also does not claim that the assessee became entitled to the additional sums under consideration on account of any contract. According to him, however, the arbitrator had power to award interest and it must be assumed that there was an implied contract for payment of interest. Section 34 of the Code of Civil Procedure has no application to arbitration proceedings. In the case of Thawardas Pherumal v. Union of India AIR 1955 SC 468, 478, thus spoke Bose J. for the court: " It was suggested that at least interest from the date of 'suit' could be awarded on the analogy of section 34 of the Civil Procedure Code ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar's case AIR 1960 SC 307 no final view was expressed: In Satinder Singh's case AIR 1961 SC 908, 916 the same learned judge spoke for the court thus : " Bose J., who spoke for the court, has set four conditions which must be fulfilled before interest can be awarded under the Interest Act of 1839, and observed that not one of those was present in the case with which the court was concerned. That is why it was held that the arbitrator had erred in law in thinking that he had the power to allow interest simply because he thought the demand was reasonable. Having come to this conclusion the learned judge proceeded to make certain observations in respect of the applicability of section 34 of the Code of Civil Procedure. He added that section 34 does not apply because the arbitrator is not a court within the meaning of the Code, nor does the Code apply to arbitrators, and but for section 34 even a court would not have the power to give interest after the suit. These observations were considered by this court in Ct. A. Ct. Nachiappa Chettiar v. Ct. A. Ct. Subramaniam Chettiar AIR 1960 SC 307, and it was pointed out that they were obviously not intended to lay down any broad and unqual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the respondent was entitled to pendente life interest. The arbitrator could decide the dispute and he could award pendente life interest just as a court could do so under section 34 of the Code of Civil Procedure. Though, in terms, section 34 of the Code of Civil Procedure does not apply to arbitrations, it was an implied term of the reference in the suit that the arbitrator would decide the dispute according to law and would give such relief with regard to pendente life interest as the court could give if it decided the dispute." It would thus appear that the matter arose out of a case where a pending suit with the issue of payability of pendente life interest was referred to an arbitrator. In Bungo Steel Furniture's case AIR 1967 SC 1032, 1035, Ramaswami J. referred to the dictum of Bose J. and observed: " In the present case, all the disputes in the suit, including the question of interest, were referred to the arbitrator for his decision. In our opinion, the arbitrator had jurisdiction, in the present case, to grant interest on the amount of the award from the date of the award till the date of the decree granted by Mallick J. The reason is that it is an implied term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss sum decerned for; but there is nothing to prevent an arbiter, if he thinks it just and reasonable in a particular case, to make the allowance in the form of an actual interest calculation from a past date until the sum fixed as at that date is paid. In all such cases, however-whether the allowance is wrapped up in a slump award or is separately stated in the decree-the interest calculation is used in modum aestimationis only. The interest is such merely in name, for it truly constitutes that part of the compensation decerned for which is attributable to the fact that the claimant has been kept out of his due for a long period of time. It is not, therefore, 'interest of money' chargeable under Case III of Schedule D." In the case of Dr. Shamlal Narula v. Commissioner of Income-tax [1964] 53 ITR 151 (SC), the taxability of interest awarded under section 34 of the Land Acquisition Act of 1894 came up for consideration, the direct question being whether such receipt is capital or revenue in character. The Supreme Court referred to some English authorities and Indian precedents and came to uphold the view of the High Court of Punjab that it was income liable to tax. Therein, one o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble under section 34 is not compensation paid to the owner for depriving him of his right to possession of the land acquired, but that given to him for the deprivation of the use of the money representing the compensation for the land acquired.' Counsel for the assessee, however, contended that the principle of Dr. Shamlal Narula's case [1964] 53 ITR 151 (SC) is not applicable to this case, since there is no provision in the Requisitioned Land (Continuance of Powers) Act, 1947, and the Defence of India Act, 1939, and the Rules framed thereunder for payment of interest on the amount of compensation. Counsel said that, under the Act, the owner is paid not the market value of the property, but compensation determined in accordance with a highly artificial scheme, and that the interest paid in truth bears the same quality as compensation for deprivation of property and is on that account a capital receipt not exigible to tax. In support of his contention, counsel invited our attention to two decisions : Commissioners of Inland Revenue v. Ballantine [1924] 8 TC 595, 611 (C Sess) and Simpson v. Executors of Bonner Maurice as Executor of Edward Kay [1929] 14 TC 580 (CA). "In Ballantin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in Govindrajulu Chetty's case [1967] 66 ITR 465 (SC) laid down the clear rule that where interest has been awarded under statute or under contract, the same is income exigible to tax and where it is not attributable to either statute or contract, but has been awarded on ex gratia basis, it would partake the character of compensation. This principle has been adopted by the Kerala High Court in the case of Commissioner of Income-tax v. Periyar and Pareekanni Rubbers Ltd. [1973] 87 ITR 666 (Ker). In the instant case, interest was not admittedly payable either by statute or by contract and on the ratio indicated in Govindarajulu Chetty's case [1967] 66 ITR 465 (SC), it must be held that though the arbitrator styled the payment as interest, it was indeed an ex gratia payment by way of compensation worked out through the medium of interest and, therefore, we are of the view that the amount could not be treated as income exigible to tax. Our answer to the first question referred to this court would, therefore, be : "On the facts and in the circumstances of the case, the sum of Rs. 2,77,692 awarded to the assessee as interest has been wrongly held to be revenue receipt." The second ..... X X X X Extracts X X X X X X X X Extracts X X X X
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