Arbitral interest treated as ex gratia and not taxable, even where the principal award was a revenue receipt.

Interest awarded by an arbitrator in a contractual dispute was treated as an ex gratia component in the prevailing legal context and, on that basis, was not chargeable to tax as income. The fact that the principal award was characterised as a revenue receipt did not change the separate tax treatment of the interest component. The Court therefore held that the interest element in the arbitral award was not exigible to tax and answered the question in favour of the assessee.

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Issues: Whether interest awarded by an arbitrator on a contractual dispute formed an ex gratia payment not exigible to tax, or was income forming part of the award and taxable as revenue receipt.

Analysis: The interest component awarded by the arbitrator was treated as falling within the principle earlier applied by the Court that such interest, in the circumstances of an arbitral award arising from a contractual dispute, is in the nature of an ex gratia payment and not income chargeable to tax. The characterization of the principal award as revenue receipt did not alter the separate treatment of the interest component for tax purposes in the relevant legal position then prevailing.

Conclusion: The interest awarded by the arbitrator was not exigible to tax and the question was answered in favour of the assessee.

Ratio Decidendi: Interest awarded in an arbitral award, where treated as ex gratia in the prevailing legal context, is not taxable as income merely because it accompanies a revenue receipt.

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