COMMISSIONER OF INCOME TAX Vs. MALIK CONSTRUCTION CO

JUDGEMENT

(1.) AT the instance of the Commissioner of Income-tax, Meerut, the Income-tax Appellate Tribunal, Delhi Bench "D" has referred the following question of law for the opinion of this court under Section 256(1) of the Income-tax Act, 1961 :

(2.) THE dispute pertains to the assessment year 1977-78. During that year the assessee was a registered firm engaged in the business of execution of works contract. It had executed a contract "Balimela Project" for the Government of Orissa. After the receipt of the said contract in the year 1974 certain disputes arose between the assessee and the contractee (i.e., the Government of Orissa). THE assessee claimed that it had to carry out certain work over and above the items stipulated in the agreement. It demanded payment for the additional work and also interest thereon at the rate of 15 per cent, from the date when the payment ought to have been made till July 13, 1974. THE matter was ultimately referred to arbitration and the arbitrator gave an award dated May 21, 1976, holding that the assessee was entitled to recover Rs. 3,19,244 for the additional items of work executed by the assessee and the interest on the said amount at 12 1/2 per cent. which was calculated at Rs. 96,226. Thus, the assessee became entitled to recover Rs. 4,15,470 on this amount, the arbitrator further awarded pendente lite interest at 12 1/2 per cent. per annum for the period July 14, 1974 to May 21, 1976. THE total amount of compensation awarded came to Rs. 5,16,020. THE arbitrator also directed that the said amount was payable within 45 days of the date of award otherwise the assessee was entitled to further interest at 6 per cent. to be carried from the date of default till the date of payment. Because of the default provision the assessee received an amount of interest amounting to Rs. 3,304. In this way the total amount received under the award was Rs. 5,19,324. After adjusting an amount of Rs. 13,611 as irrecoverable security from the State Government, the balance amount of Rs. 5,05,713 was transferred by the assessee to its profit and loss account in the previous year relevant to the assessment year under consideration. In the agreed statement of the case the Tribunal has stated that the "assessee, however, showed net profit of Rs. 3,76,691 only and declared the income at still shorter amount of Rs. 1,80,877. One of the disputes at the stage of assessment was that according to the assessee an amount of Rs. 2,00,080 received by way of interest was not liable to be taxed." THE case taken was that the interest payable by the contractee was neither under a statute nor under a contract and so it was only on an ex gratia basis and cannot be taxed as a revenue receipt. THE Income-tax Officer, however, did not accept the claim of the assessee and completed the assessment on the income 6f Rs. 3,30,256.

(3.) WE have heard learned counsel for the parties. The question to be considered is whether the amount of Rs. 2,00,080 received by the assessee as the amount of interest under the award by the arbitrator, could be taxed as its income. It was argued on behalf of the assessee that the amount in dispute constituted damages for unlawful retention of money by the authorities concerned of the Orissa Government and, therefore, it was a capital receipt.