Law:

Section:

Section 4 of the Income-tax Act, 1961 [Corresponding to section 3 of the Indian Income-tax Act, 1922] - Income - Chargeable as - Assessment year 1943-44 - There was partition in joint family - One of coparceners, 'M', got assets of larger value than assessee - Parties arrived at an agreement that both of them would pay certain amount to each other to equalize shares in partition - Amount was payable in instalments with interest - 'M' defaulted in payment and as such certain disputes arose between parties - As a result of compromise 'M' paid certain amount immediately in cash - As regards interest, matter was referred to arbitrator who awarded that assessee should be allowed interest on said amount at certain rate - Whether interest awarded was not by way of damages for wrongful withholding of money by 'M' but for use of money by 'M' under agreement - Held, yes - Whether, therefore, interest amount was liable to tax - Held, yes FACTS At the time of the partition of the joint family, the parties determined the values of the movable and immovable properties and running businesses allotted to them. The properties were income yielding properties. In the partition, since 'M' got assets of larger value than the assessee; it was agreed that 'M' should pay certain amount to the assessee in order to equalize the shares in partition. They arrived at an arrangement under which assessee agreed to pay amount of Rs. 1,07,663 to 'M' immediately and the latter agreed to pay to the former Rs. 5 lakhs in ten equal annual instalments with interest thereon. If the interest was not paid punctually as provided in the deed, 'M' was liable to pay compound interest and the entire outstanding amount was to become payable in default of three instalments. 'M' paid the first two instalments on due dates but did not make any further payment on account of some dispute. The assessee instituted a civil suit. Subsequently, there was a compromise between the parties according to which 'M' paid certain amount in cash. As regards interest, the dispute was referred to arbitration. The arbitrator awarded that the assessee was entitled to interest. In the assessee's assessment litigation expenses were…

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