1992 (4) TMI 8 - SC - Income Tax

Interest on delayed contract payments under arbitration held business income, not income from other sources, u/s 28

SC held that interest awarded to the assessee-partnership under an arbitration award, arising from delayed contractual payments, constituted business ... Interest received as part of an arbitration award - nature of damages - partnership firm engaged in various businesses, including contracting - Whether, the sum awarded to the assessee as interest was rightly held to be a revenue receipt ? - HELD THAT:- It is well-settled that interest can be assessed under the head 'Income from other sources 'only if it cannot be brought within one or the other of the specific heads of charge. We find it difficult to comprehend how the interest receipts by the assessee can be treated as receipts which flow to him de hors the business which is carried on by him. In our view, the interest payable to him certainly partakes of the same character as the receipts for the payment of which he was otherwise entitled under the contract and which payment has been delayed as a result of certain disputes between the parties. It cannot be separated from the other amounts granted to the assessee under the awards and treated as 'income from other sources'. The second question is, therefore, answered in favour of the assessee and against the Revenue. We are conscious that the second question has not been answered by the High Court in view of its answer to the first question. We have considered whether it is necessary to send the matter back for the decision of the High Court. But, having regard to the facts that the appeal relates to a very old assessment year (1972-73) and also that all the necessary facts and the decision of the Tribunal are available before us, we have also proceeded to answer the second question straightaway in order to avoid further unnecessary delay. Appeal is disposed of accordingly. Issues:Assessment of interest received by the assessee as revenue receipt and its taxability under the head 'Income from other sources.'Analysis:The case involved a partnership firm engaged in various businesses, including contracting. The dispute centered around interest received by the assessee as part of an arbitration award. The Income-tax Officer and the Appellate Assistant Commissioner considered the interest as taxable revenue, which the assessee disputed. The Tribunal determined the taxable interest amount to be Rs. 2,77,692. The assessee argued that the interest was in the nature of damages and not taxable. Additionally, the assessee contended that if considered taxable, the interest should be treated as part of trading receipts, subject to a 10% net profit rate. However, the Tribunal ruled the interest as a revenue receipt and fully taxable under 'income from other sources,' separate from trading receipts.The High Court initially favored the assessee, holding the interest as a revenue receipt. Subsequently, the Commissioner of Income-tax appealed the decision. During the Supreme Court proceedings, the assessee conceded that the interest was a revenue receipt, leading to the first question being answered in favor of the Revenue. The second question addressed whether the interest should be separated from other amounts under the awards and taxed in full. The Court analyzed that the interest was related to the contracts executed by the assessee and was an accretion to the receipts from those contracts. It concluded that the interest could not be treated as income from other sources, as it was integral to the contract business. Therefore, the second question was answered in favor of the assessee.Despite the High Court not addressing the second question, the Supreme Court directly answered it due to the age of the assessment year and the availability of all necessary facts. The final decision disposed of the appeal, with the first question decided in favor of the Revenue and the second question in favor of the assessee, with no order as to costs.