Compensatory interest on delayed dues is not taxable income where it does not arise from statute or contract.

Interest on delayed contractual dues is taxable only where it arises under a statute or a contract. Where no such legal source exists and the amount is merely labelled as interest but in substance compensates the claimant for being kept out of money due, it is treated as compensation or an ex gratia payment rather than income. On the facts noted, the arbitral award was characterised as compensatory, so the amount was held not to be a revenue receipt or taxable income.

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Issues: Whether the sum awarded to the assessee as interest on delayed contractual dues was a revenue receipt taxable as income.

Analysis: The amount was not payable under any statutory provision or under the contract. The authorities distinguishing taxable interest from compensatory payments showed that where interest flows from statute or contract it is taxable, but where no such source exists and the payment is merely styled as interest while in substance compensating the claimant for being kept out of money due, it partakes the character of compensation rather than income. On the facts found, the arbitrator's award was treated as an ex gratia compensatory payment worked out through the medium of interest.

Conclusion: The sum of Rs. 2,77,692 was not revenue receipt and was wrongly held to be taxable income; the answer was in favour of the assessee.

Final Conclusion: The reference was answered by holding that the amount awarded as interest did not constitute taxable income, and the remaining question did not require an answer.

Ratio Decidendi: Interest is taxable only when it arises under statute or contract; where no such legal obligation exists and the payment is merely compensatory or ex gratia, it is not income exigible to tax.

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