April 2008
Income : Statutory and contractual interest awarded by arbitrator accrues from year to year
By K. B. Bhujle, Advocate
Reading Time 2 mins
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5 Income : Accrual of : A.Y. 1996-97 : Compensation/interest
awarded by arbitrator : Statutory and contractual interest accrues from year to
year : Other compensation is not taxable.
[Konkan Barge Builders P. Ltd. v. ITO, 297 ITR 39 (Bom.)]
The assessee had signed two contracts with MDL for
fabrication of panels from steel plates and for erection of panels. There was a
dispute between the assessee and MDL, pursuant to which an arbitrator came to be
appointed. The arbitrator passed an award in favour of the assessee in an amount
of Rs.1,12,66,929 as compensation and interest. The Assessing Officer treated
the interest awarded of Rs.43,99,404 as a revenue receipt and added it to the
total income for the A.Y. 1996-97. The Tribunal confirmed the addition.
On appeal by the assessee the Bombay High Court held as under
:
“(i) If interest were awarded and the arbitrator was not
seeking to give effect to or to recognise a right to interest conferred by the
statute or contract, it would not be taxable. On the other hand, if the
interest arose by virtue of the 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 a revenue receipt which would be
taxable.
(ii) The amount of interest was assessable as income.
(iii) Interest was awarded at the rate of 12% per annum
from July 31, 1989, till payment or the date of decree on this award,
whichever was earlier. The interest income accrued from year to year and the
entire amount of interest could not be assessed in the year of receipt.”
