Court-awarded interest on disputed contract receipts accrues only when the right to receive becomes final and absolute.

Interest awarded by a civil court on delayed contract receipts was held not taxable in the year of receipt because the underlying right to receive the amount had not become final while the litigation remained pending and withdrawal was subject to an undertaking to refund. The interest was treated as accruing year by year over the period of delay, so it could not be assessed as a single lump sum in one year merely because it was quantified and paid then. Taxability was postponed until the dispute attained finality and the recipient's entitlement was finally upheld.

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Issues: (i) Whether interest awarded by the civil court on delayed payment of contract receipts was taxable as income in the assessment year of receipt; (ii) whether such amount could be assessed in a single year or had to be spread over the years to which it related; (iii) whether the amount could be brought to tax before the assessee's right to receive it had become final.

Issue (i): Whether interest awarded by the civil court on delayed payment of contract receipts was taxable as income in the assessment year of receipt.

Analysis: Interest payable for being kept out of money ordinarily bears the character of income, but taxability depends on the nature of the receipt and the stage at which the right to receive it accrues. The court-awarded interest in the present matter arose from disputed contract payments and was part of litigation that had not attained finality, with the assessee receiving the amount only on furnishing an undertaking to refund if the appeal succeeded.

Conclusion: The amount was not taxable as income in the assessment year of receipt.

Issue (ii): Whether such amount could be assessed in a single year or had to be spread over the years to which it related.

Analysis: Interest linked to delayed payment accrues year by year from the period during which the assessee is kept out of the money. The relevant principle is that such interest cannot be assessed in one lump sum merely because it is quantified and received in one year.

Conclusion: The amount was to be spread over the relevant years and not assessed in one year.

Issue (iii): Whether the amount could be brought to tax before the assessee's right to receive it had become final.

Analysis: Where the underlying decree and the award of interest are under appeal and withdrawal is subject to a bond, the right to receive is not absolute. Income does not accrue until the litigation is finally resolved in favour of the recipient.

Conclusion: The amount could not be taxed until the litigation attained finality and the right to receive was finally upheld.

Final Conclusion: The substantive appeals were decided in the assessee's favour on the question of timing of accrual and taxability of the court-awarded interest, and the matter was left to be acted upon only after final determination of the pending litigation.

Ratio Decidendi: Interest arising from a disputed claim does not accrue as income until the recipient's right to receive it becomes final and absolute, especially where withdrawal is allowed only on security or undertaking pending appeal.

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