Itxa/695/2004 Of M/S Konkan Bage Builders Pvt.ltd v. The Income-Tax

1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.695 OF 2004 M/s.Konkan Barge Builders Pvt. Ltd., 9, Loha Bhavan, P’Dmello Road, Mumbai - 400 009. .. Appellant. V/s. 1. The Income-tax Officer 6(2)(4), Room No.562, Aayakar Bhavan, M.K. Road, Mumbai 400 020. 2. The Commissioner of Income-tax, Mumbai City-6, Aayakar Bhavan, M.K. Road, Mumbai - 400 020. .. Respondents. Mr.A.K. Jasani with Mr.V.S. Hadade for the appellant. Mr.A.D. Kango for the respondents. J.P. DEVADHAR, JJ. DATED : 24TH AUGUST, 2007. ORAL JUDGMENT : (Per F.I. Rebello, J.) ORAL JUDGMENT : (Per F.I. Rebello, J.) 1. The appeal is admitted on the following questions of law : "1. Whether on the facts and in the circumstances of the case the Tribunal in law ought to have held that the interest of Rs.43,99,404/- received under the Arbitration Award dated 28th February, 1995 at the rate of 12% on the amount of Rs.67,92,524/- for the period from 31st July, 1989 to 25th July, 1995, was only a measure and method of payment of compensation and was not decisive of the character of compensation inasmuch as the award was made only on 28th February, 1995 and the question of payment of interest can arise only after the same is made ? 2. Whether on the facts and in the 2 circumstances of the case the Tribunal in law ought to have held the Appellant having received interest of Rs.43,99,404/- under the Arbitration Award dated 28th February, 1995 at the rate of 12% on the amount of Rs.67,92,524/- for the period from 31st July, 1989 to 25th July, 1995, only the interest pertaining to the period 1st April, 1995 to 25th July, 1995 could be taxed in the year under consideration, that is, assessment year 1996-97 inasmuch as interest income accrues from year to year and that the entire amount of interest could not be assessed in the year of receipt ? 2. Heard forthwith. A few facts may be set out. The appeal is in respect of the assessment year 1996-97. The appellant had signed two contracts with Mazagaon Dock Limited (MDL) for fabrication of panel from steel plates and for erection of panels. There was a dispute between the appellant and Mazagaon Dock Limited, pursuant to which an Arbitrator came to be appointed. The Arbitrator passed an Award in favour of the appellant in an amount of Rs.1,12,66,929/- as compensation and interest. The respondent No.1 treated the interest amount awarded of Rs.43,99,404/- as revenue receipt and added it to the total income, as against appellant’s claim that the same is also capital receipt. 3. Aggrieved by the order of respondent No.1, the appellant preferred an appeal before respondent No.2. The appeal was allowed by holding that the interest payment in the case of appellant was 3 ex-gratia payment forming part of compensation and the same originated on the basis of compensation award. Revenue aggrieved by the said order preferred an appeal before the Income Tax Appellate Tribunal. By order dated 4th March, 2004, the ITAT allowed the appeal preferred by revenue, by reversing the order of respondent No.2 and restored that of the respondent No.1, holding that the interest amount to be taxable income of the appellant. 4. We may now first deal with the first question namely, whether interest received under Arbitration Award was only a measure and method of payment of compensation and was not decisive character of compensation as the Award was made only on 28/2/1995 and the payment of interest can only arise after the same is made. On facts it may be pointed out that the learned Arbitrator was considering the claims arising out of construction Tribunal. By order dated 4th March, 2004, the ITAT allowed the appeal preferred by revenue, by reversing the order of respondent No.2 and restored that of the respondent No.1, holding that the interest amount to be taxable income of the appellant. 4. We may now first deal with the first question namely, whether interest received under Arbitration Award was only a measure and method of payment of compensation and was not decisive character of compensation as the Award was made only on 28/2/1995 and the payment of interest can only arise after the same is made. On facts it may be pointed out that the learned Arbitrator was considering the claims arising out of construction contract. The learned Arbitrator allowed the claim of Rs.67,92,524/-. Apart from that, the MDL was directed to pay to the appellants interest on that amount at the rate of 12% p.a. from 31st July, 1989 till payment or the date of decree on this Award, whichever is earlier. In support of their contention, that the 4 interest forms part of compensation, and as such the contract could not be treated as revenue receipt, our attention is invited to various judgments, which we may now consider. . In T.N.K. Govindaraju Chetty V/s. Commissioner of Income-tax, Madras[66 ITR 465], one of the issues before the Supreme Court was, whether the interest on compensation awarded in the proceedings under Land Acquisition, was assessable as income under the Income Tax Act. The compensation was payable under the provisions of the Requisitioned Lands (Continuance of Powers) Act, 1947 and the compensation was to be determined in accordance with the provisions of Section 19 of the Defence of India Act, 1939 and the Rules made thereunder. The Court noted that when the owner of the property was dispossessed pursuant to an order of compulsory acquisition, an agreement that the acquiring authority will pay interest on the amount of compensation was implied. The Court, therefore, held that the right of the appellant to interest arose by virtue of the provisions of Section 28 and 34 of the Land Acquisition Act, 1894 and in that case the Arbitrator and the High Court merely gave effect to that right in awarding interest on the amount of compensation. The Court held that the interest received by the appellant was, therefore, 5 taxable. Reference was made to the case of Shamlal Narula V/s. Commissioner of Income Tax [(1964) 53 I.T.R. 151 (S.C.)] where the Supreme Court has held that, if the source of the obligation imposed by the statute to pay interest arises because the claimant is kept out of his money, the interest received is chargeable to tax as income. The Court held that statutory interest payable under Section 34 of the Land Acquisition Act, is not compensation paid to the owner for depriving him of his right to possession of the land acquired, but that given to him for the deprivation of the use of the money representing the compensation for the land acquired. In deciding the issue, the Supreme Court apart from its earlier judgment in Dr.Shamlal Narula, also referred to some English judgments which it distinguished. The ratio of the judgment would be that, if the interest was awarded and the arbitrator was not seeking to give effect to or to recognise a right to interest, conferred by statute or contract it would not be taxable. On the other hand, if the interest arose by virtue of statute or by agreement and the Arbitrator or the High Court merely gives effect to that right, in awarding of interest on the amount of compensation then it would be revenue receipt which would be taxable. 5. This ratio in Govindaraju Chetty (supra) was 6 followed by the learned Division Bench of the Kerala High Court in the case of Commissioner of Income-tax its earlier judgment in Dr.Shamlal Narula, also referred to some English judgments which it distinguished. The ratio of the judgment would be that, if the interest was awarded and the arbitrator was not seeking to give effect to or to recognise a right to interest, conferred by statute or contract it would not be taxable. On the other hand, if the interest arose by virtue of statute or by agreement and the Arbitrator or the High Court merely gives effect to that right, in awarding of interest on the amount of compensation then it would be revenue receipt which would be taxable. 5. This ratio in Govindaraju Chetty (supra) was 6 followed by the learned Division Bench of the Kerala High Court in the case of Commissioner of Income-tax V/s. Mrs.Annamma Alexander & Others [191 I,.T.R. 551]. In that case, the issue arose of mesne profits and interest thereon. The question was whether the interest awarded on the mesne profit is a revenue receipt. Considering the concept of mesne profits, the Court noted that mesne profits being in the nature of damages, no invariable rule governing the Award and assessment in every case can be laid down and the Court may mould them according to the justice of the case. Gainful reference was to be made to the Law of Income Tax, by A.C. Sampath Iyengar, Seventh Edition, Volume I, page 518, for the distinction between "interest proper" and "damages by way of interest" for the purpose of income-tax, the observations are as under : "If the quality of the claim for interest is compensation, for the reason that the claimant has been deprived of the use of the money and has not had his money at the due date, it would be income in his hands. It may be regarded either as representing the profit he might have made if he had the use of the money in time, or, conversely, the loss he had suffered, because he had not had that use. If, on the other hand, the claim is for loss of property or loss of goods, or some other injury to capital and the element of interest comes in by way of estimating the compensation to be granted for such capital loss or capital injury, then, the receipt would be capital." Considering the various tests, the Court 7 held that mesne profits being an Award of compensation in the nature of damages are not taxable, interest thereon which is an integral part of the mesne profits is also not a revenue receipt and not taxable as income. 6. We may examine the judgments arising from Arbitration Awards. In Commissioner of Income-tax V/s. Govinda Choudhury & Sons reported in 203 ITR 881, the issue before the Supreme Court was whether the interest received on an award was rightly held to be revenue receipt and secondly whether on the facts and circumstances the sum of Rs.2,77,692/- was rightly separated from the other amounts under the awards and taxed in full. On the first issue, the counsel for the assessee conceded that interest was rightly held to be revenue receipt. On the second question, the Court observed that if the amounts are not paid at the proper time and interest is awarded or paid for such delay, such interest is only an accretion to the assessee’s receipts from the contracts. It is obviously attributable and incidental to the business carried on by him. The Court held that the interest payable 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 and cannot be 8 treated as "income from other sources". . In CIT V/s. B.N. Agarwal reported in 259 ITR 754 noticing the judgment in Govinda Chaudhury & Sons, the Supreme Court observed that, "It is true that on the question whether the interest not paid at the proper time and interest is awarded or paid for such delay, such interest is only an accretion to the assessee’s receipts from the contracts. It is obviously attributable and incidental to the business carried on by him. The Court held that the interest payable 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 and cannot be 8 treated as "income from other sources". . In CIT V/s. B.N. Agarwal reported in 259 ITR 754 noticing the judgment in Govinda Chaudhury & Sons, the Supreme Court observed that, "It is true that on the question whether the interest constitutes income or not, the said decision is based upon a concession, but we are of the opinion that it was a concession rightly made and is correct in law". In our opinion, therefore, the first question as raised is to be answered against the Assessee. 7. That brings us to the next question of law as framed. In our opinion, the issue can be answered by applying the ratio of the judgment of the Supreme Court in Rama Bai V/s. Commissioner of Income-tax, Andhra Pradesh [181 ITR 400]. In proceedings under Land Acquisition Act on enhanced compensation interest of Rs.37,529/- was awarded. The ITO held while making assessment for A.Y. 1967-68 and 1968-69 that the right to receive interest on enhanced compensation arose on the date when the City Civil Court passed the order. The assessee’s contention was that the interest should be distributed over the period commencing from the date of dispossession of the assessee under the Land Acquisition Act till the date of payment. The ITO 9 did not accept the same. In appeal before the Assistant Commissioner, the appeal was allowed for the A.Y. 1967-68 and the appeal was dismissed for the A.Y. 1968-69. The assessee filed appeal for A.Y. 1968-69 whereas revenue filed appeal for A.Y. 1967-68 for the protective measure. Before the Tribunal, judgment of the Andhra Pradesh High Court reported in 105 I.T.R. 172 was relied upon and consequently it was held that the assessees contention should be rejected and the entire interest on enhanced compensation was liable to be taxed for A.Y. 1968-69. The question framed by the Supreme Court was that, "Whether, on the facts and in the circumstances of the case, the interest of Rs.29,870 is liable to be assessed for the assessment year 1968-69 ?". Considering the conflicts amongst various High Courts and after considering the statement of case and relying upon the judgment in the case of Govindarajulu Chetty T.N.K. (supra), the Supreme Court answered the question as under :- "The effect of the decision, we may clarify, is that the interest cannot be taken to have accrued on the date of the order of the court granting enhanced compensation but has to be taken as having accrued year after year from the date of delivery of possession of the lands till the date of such order". In the instant case interest has been awarded at 12% from 31st July, 1989 till payment or 10 the date of the decree on the award. Considering the law as declared by the Supreme Court, in our opinion the second question of law as framed will have to be held in favour of the assessee and against the revenue. 8. In the light of above, inso far as first question is concerned, we hold in favour of the Revenue and against the assessee and insofar as the second question is concerned, we hold in favour of the assessee and against the revenue. To that extent the appeal is allowed. The appeal stands disposed of accordingly. There shall be no order as to costs. (F.I. REBELLO, J.) (J.P. DEVADHAR, J.)