Taxability of discretionary interest on salary arrears rejected where the payment was compensation for delayed disbursement.

Interest awarded by the High Court on arrears of salary, granted in its discretion as compensation for delayed payment, was treated as a discretionary compensatory receipt rather than salary or profits in lieu of salary. Although the underlying arrears were taxable, the interest component was not shown to fall within the charging provisions, and the Revenue's authorities were distinguished on the facts. The receipt was therefore held not taxable.

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Issues: Whether interest awarded by the High Court on arrears of salary, granted in exercise of discretion as compensation for delayed payment, was taxable as income.

Analysis: The arrears of salary were admittedly taxable, but the controversy concerned only the interest component. The interest was not paid under any statutory compulsion or as a fixed incident of employment; it was awarded by the High Court in its discretion while granting the higher pay scale. The receipt was therefore examined as one of compensation, and the Revenue had to establish that it fell within the charging provisions. On the facts, the receipt was held to be closer to a discretionary compensatory payment than to income in the nature of salary or profits in lieu of salary. The authorities relied on by the Revenue were distinguished, while the decisions supporting the assessee's case were found applicable.

Conclusion: The interest on arrears of salary was not taxable.

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