Law:

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Section 4 of the Income-tax Act, 1961 - Income - Chargeable as - Assessment year 1996-97 - Whether interest received by assessee on compensation amount under arbitration award was revenue receipt liable to be taxed - Held, yes - Whether as interest amount received by assessee under arbitration award pertained to a period ranging to six years, entire amount of interest could not be assessed in year of receipt inasmuch as interest income accrued from year to year - Held, yes FACTS The assessee-company had signed two contracts with 'MDL' for fabrication of panel from steel plates and for erection of panels. A dispute arose between the parties and matter was referred to the arbitrator. The arbitrator passed the award in favour of the assessee directing the 'MDL' to pay certain sum as compensation with interest thereon to the assessee. The ITO treated the interest amount as revenue receipt and added it to the total income, as against assessee's claim that the same was also capital receipt. The Commissioner (Appeals) allowed appeal of the assessee holding that interest payment was ex gratia payment forming part of compensation and same originated on the basis of compensation award. The Tribunal reversed the order of the Commissioner (Appeals) and restored the order of the ITO. On appeal, the assessee contended that interest received under arbitration award was only a measure and method of payment of compensation and was not decisive of the character of compensation and the question of payment of interest could only arise after the award was made. The assessee also contended that the entire amount of interest received by it for the period 31-7-1989 to 25-7-1995 could not be assessed in the year of receipt. HELD Following the decision of the Supreme Court in CIT v. B.N. Agarwal [2003] 259 ITR 754/129 Taxman 758, it was to be held in the instant case that the assessee was not justified in its submission that the interest received under the arbitration award 1995 was only a measure and method of payment of compensation and was not decisive of the character of compensation and the question of payment of interest could arise only after the award was made. Thus, the…

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