Income tax - Whether when a sum is awarded to assessee through a process of arbitration, interest received on such award is to be treated as income from other sources - NO, business income: HC

 THE issue before the HC is - Whether when a sum is awarded to the assessee through a process of arbitration, interest received on such award is to be treated as income from other sources. And the HC rules that it is nothing but business income.

Facts of the case

Assessee is a Civil Contractor. In respect of a contract executed during 1986 to 1989, there was a dispute between the assessee and Lucknow Development Authority. Finally, the dispute was referred to an Arbitrator by the Court. On 22.12.1999, the sole Arbitrator made an award of Rs.12.65 lakhs along with interest at the rate of 6%, which was also upheld by this Court. During the assessment year under consideration in reassessment proceedings, the A.O. opined that the interest received on the award is an "income from other sources", and not an "income from business" as claimed by the assessee in the original return. The view taken by the A.O. was upheld not only by the First Appellate Authority but also by the Tribunal. Still being not satisfied the assessee has filed the present appeal.On appeal to the High Court, the counsel for the assessee submitted that the interest received on the arbitration award, was the "income from business" as it was not earned separately. For this purpose, he relied on the ratio laid down in the case of CIT vs. B.N.Agarwala & Co. (2002-TIOL-714-SC-IT), by the Supreme Court. Lastly, he made a request that the impugned order passed by the Tribunal may kindly be set aside.

On the other hand, the counsel for the Revenue relied on the impugned order passed by the Tribunal. He further submitted that Section 44AD of the Income Tax Act was applicable in the instant case, where the profit rate will be determined @8% in the case of a contractor. He also submitted that the assessee had not incurred any expenditure for earning the interest. So, interest income can not be treated as income from business.

Having heard the parties, the Bench held that,

++ from the record, it appears that in this matter, the Civil Judge, Lucknow vide its order dated 28.04.1995 appointed a sole Arbitrator, who has made an award of Rs.12.65 lakhs on 22.12.1995 along with interest @6% and the same was upheld by this Court. The assessee has paid the fee to the Arbitrator as determined by the Civil Court, so he has incurred expenditure to have an award along with interest;

++ in the instant case, the amounts under a contract were not paid at the proper time and, as such, the interest was awarded to the assessee for such delay. The interest was only an accretion to the assessee's receipts from the contracts and was attributable to an incidental to the business carried on by it. The interest payable to the assessee partook of the same character as the receipts for the payments of which it was otherwise entitled under the contract and which payment has been delayed as a result of certain disputes between the parties. It cannot be separated from the other amount granted to the respondent under the awards and treated as "income from other sources". Had there not been any delay, the assessee might have received the amount from the Lucknow Development Authority and the same might have been circulated in the business. Therefore, we are of the view that the interest payable to the assessee is at par with the business receipts, as it was not acquired separately as already held by Apex Court in the case of CIT vs. Govind Chaudhary (2002-TIOL-717-SC-IT);

++ the interest earned along with the award is to be treated as "income from the business" already claimed by the assessee.