COMMISSIONER OF INCOME TAX Vs. BUILDERS UNION

JUDGEMENT

(1.) THE Tribunal, on an application being filed under s. 256(1) of the IT Act, has referred the following two questions to be answered by this Court :

(2.) THE short facts leading to the order of the Tribunal referring the two questions may be briefly stated. The assessee had executed some civil contract under the Government during the financial years 1961 -62 to 1965 -66. Disputes having arisen between the parties in accordance with the arbitration clause in the agreement the same were referred to the arbitrator. The arbitrator awarded a sum of Rs. 7,17,920 which comprised the principal amount of Rs. 1,03,382, pre -award interest of Rs. 5,95,244 and post -award interest of Rs. 19,293. The AO taxed the entire amount received by the assessee under the award after allowing some deductions. The assessee preferred an appeal which was heard by the CIT(A). The appellate authority relying upon the decision of this Court in the case of Govinda Choudhury and Sons vs. CIT : [1977] 109 ITR 497 (Orissa) excluded the interest component of the award from the total income on the ground that the same did not constitute revenue receipts and as such were not liable to tax. The appellate authority then held that the balance principal amount would be taxable subject to deduction of 1%, towards arbitration expenses. Against the appellate order, the assessee moved the Tribunal and the Department also moved the Tribunal. The Tribunal held that the assessees income should be determined at 12.5% of the award amount after excluding the interest component included therein. Following the decision of this Court in Govinda Choudhurys case (supra), it also held that the pre -award interest should be totally excluded from the income of the assessee. Thereafter, an application being filed under s. 256(1) by the Revenue, two questions have been referred to this Court for opinion.

(3.) THERE is no dispute on the facts, inasmuch as, the contractor had executed some works under the terms of an agreement and disputes having arisen between the parties the same had been referred to the arbitrator for arbitration and the arbitrator awarded some amount which included the interest. In Govinda Choudhurys case (supra), this Court relying upon the observations made by the Supreme Court in the case of T. N. K. Govindaraju Chetty vs. CIT : [1967] 66 ITR 465 (SC) and on examining the nature of the award came to the conclusion that the interest awarded by the arbitrator though styled as payment of interest but it was indeed an ex gratia payment by way of compensation worked out through the medium of interest and, therefore, the same could not be treated as income exigible to tax. But against the aforesaid decision of this Court in Govinda Choudhury and Sons vs. CIT (supra) the Department had moved the Supreme Court and the Supreme Court came to hold that the interest that was awarded on the amount which had not been paid at the proper time was only an accretion to the assessees receipts from the contracts and it was obviously attributable and incidental to the business carried on by the assessee. It further held that the said interest could not be said to be totally de hors the contract business. Their Lordships have also held that the interest payable to the contractor partakes of the same character as the receipts for the payment of which he was otherwise entitled to under the contract and which payment has been delayed as a result of certain disputes between the parties. In view of the aforesaid pronouncements of the Supreme Court, Mr. Paikray appearing for the assessee fairly stated that the Tribunal was not justified in holding that the pre -award interest component was not taxable and that the further direction of the Tribunal to estimate the profit at 12.5% of the principal amount of the award is in accordance with law. But Dr. S. N. Rath, learned counsel, who had a similar reference as question No. 2 in the present reference contended with vehemence that their Lordships of the Supreme Court in CIT vs. Govinda Choudhury and Sons : [1993] 203 ITR 881 (SC) have not deliberated upon the question as to whether the interest will be in the nature of a revenue receipt or not as the assessee conceded the same. According to Mr. Rath, the question answered on the basis of the concession of a party cannot be said to be the law on the subject. This contention of Mr. Rath cannot be said to be without any force. But while answering the second question, their Lordships of the Supreme Court have held that the interest awarded by the arbitrator is an accretion to the assessees receipts from the contract and is obviously attributable and incidental to the business carried on by him and it partakes of the character of receipts for payment of which he was otherwise entitled to under the contract. This being the position, it is difficult for us to accept the contention of Mr. Rath, appearing for the assessee that the Division Bench decision of this Court in Govinda Choudhurys case (supra) holding that the interest is not taxable still remains valid. It would be appropriate for us to notice the Constitution Bench decision in the case of Secretary, Irrigation Department, Government of Orissa vs. G. C. Roy : [1991] 3 SCR 417 , where the power of the arbitrator to award interest prior to the date of the award was being considered. After elaborate discussion of the law on the subject and on examining several decisions of the English Courts their Lordships came to hold that where the agreement between the parties did not prohibit grant of interest and where a party claimed interest and that dispute is referred to the arbitrator, he shall have the power to award interest pendente lite. In such a case, it must be presumed that interest was an implied term of the agreement between the parties and, therefore, when the parties referred all their disputes and referred the dispute as to the interest as such to the arbitrator he should have the power to award interest. Their Lordships also held that the principle of s. 34 of the CPC, should also apply to an arbitrator. In view of this pronouncement of the Constitution Bench, the Division Bench decision of this Court in Govinda Choudhurys case (supra) holding that the amount awarded as interest by the arbitrator is indeed an ex gratia payment by way of compensation must be held to be erroneous.