Orissa High Court
Commissioner Of Income-Tax vs A. Lenka And Partners on 21 June, 1995
JUDGMENT
1. At the instance of the Commissioner of Income-tax, Orissa, Bhubaneswar, the present reference has come to this court raising the following questions :
"1. Whether, on the facts and circumstances of the case, the Tribunal was justified in law in holding that the pre-award interest of Rs. 34,677 on arbitration award received by the assessee was not taxable under the Income-tax Act, 1961 ?
2. Whether, on the facts and circumstances of the case, and when the principal award money was admittedly treated as a revenue receipt, whether the Tribunal was justified in holding that the interest was a capital receipt and as such not taxable under the Income-tax Act, 1961 ?"
2. The facts of the case reveal that the assessee is a firm of contractors deriving income from execution of contract works. During the previous year relevant to the assessment year 1982-83, the assessee-firm executed certain regular contract works against which it received an amount of Rs. 4,04,184 after deducting cost of materials. Besides, the assessee-firm also received an arbitration award and interest thereon. The principal award money was Rs. 5,10,510 and pre-award interest on the principal was Rs. 34,677. The entire award money was held by the Assessing Officer as taxable subject to some expenses incidental to the arbitration proceedings. The pre-award interest too was exigible to tax. On appeal, the Commissioner of Income-tax (Appeals) held that the pre-award interest of Rs. 34,677 was not taxable in view of the decision in Govinda Choudhury and Sons v. CIT [1977] 109 ITR 497 (Orissa). It is stated that the Department preferred an appeal before the Tribunal against the said order of the Commissioner of Income-tax (Appeals). The Tribunal, after consideration of the facts and arguments, upheld the order of the Commissioner of Income-tax (Appeals) as proper and justified.
3. In the course of hearing our attention has been drawn to the decision in CIT v. Govinda Choudhury and Sons [1993] 203 ITR 881 (SC). Our attention was also drawn to the decision in CIT v. Builders Union [1995] 211 ITR 993 (Orissa). It is held therein that the assessee had executed a civil contract for the Government during the financial years 1961-62 to 1965-66. Disputes having arisen between the parties, in accordance with the arbitration clause in the agreement, the same were referred to the arbitrator. The arbitrator made the award which comprised the principal amount, pre-award interest and post-award interest. The Assessing Officer taxed the entire amount received by the assessee under the award after allowing some deductions. The Tribunal held that the assessee's income should be determined at 12.5 per cent. of the award amount after excluding the interest component included therein. It also held that the pre-award interest should be totally excluded from the income of the assessee. On the aforesaid facts it was finally held that the Tribunal was justified in directing the Income-tax Officer to estimate the profit at 12.5 per cent. of the principal amount of the award. The Tribunal was not right in holding that the pre-award interest component of the amount was not taxable. Following the ratio of the aforesaid decision, we find that the interest out of the award is taxable. The finding of the Tribunal is not justified and right.
4. With regard to the second contention as to the rate of tax, it is brought to our notice that in view of the settled position of law the rates of tax on interest would be consistent with the rate of profit on the principal business at which the tax is levied in accordance with law.
5. With this observation, the matter is disposed of.