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Govinda Choudhury and Sons Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtOrissa High Court
Decided On
Case NumberSpecial Jurisdiction Case No. 135 of 1976
Judge
Reported in[1977]109ITR497(Orissa)
ActsIncome Tax Act, 1961 - Sections 256(1)
AppellantGovinda Choudhury and Sons
RespondentCommissioner of Income-tax
Appellant AdvocateG. Rath, Adv.
Respondent AdvocateStanding Counsel
Cases Referred and Simpson v. Executors of Banner Maurice
Excerpt:
.....reliance was placed on the ratio in the well-known cases of commissioners of inland revenue v. the arbitrator clearly stated that he has awarded interest on a certain sura for specified period. in this view of the matter we feel that considerations like whether there was any contractual obligation to pay interest or whether the interest was payable under a statute or an award are not at all germane to the basic issue. set out four conditions which must be satisfied before interest can be awarded under the interest act, and observed that none of them was present in the case ;and so he concluded that the arbitrator had no power to allow interest simply because he thought that the payment was reasonable. subramaniam chettiar [1960]2scr209 ,and it was pointed out that they were obviously not..........the view that the amount could not be treated as income exigible to tax. our answer to the first question referred to this court would, therefore, be:'on the facts and in the circumstances of the case, the sum of rs. 2,77,692 awarded to the assessee as interest has been wrongly held to be revenue receipt.'36. the second question as framed arose only if the first question was answered in the affirmative, namely, if we found that it was revenue receipt, the second question fell for answer. in view of our finding that the amount is not a revenue receipt, the second question does not arise for answer and we do not think it would be appropriate for us to examine the matter for rendering an answer. accordingly, we decline to answer the question.37. we direct parties to bear their respective.....
Judgment:

R.N. Misra, J.

1. On an application of the assessee under Section 256(1) of the Income-tax Act of 1961 (hereinafter referred to as 'the Act'), the Income-tax Appellate Tribunal, Cuttack Bench, has stated this case and has referred the following two questions for opinion of this court :

'1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,77,692 awarded to the assessee as interest was rightly held to be a revenue receipt ?

2. If the answer to question No. 1 is in the affirmative, whether, onthe facts and in the circumstances of the case, the aforesaid sum ofRs. 2,77,692 was rightly separated from the other amounts under theawards and taxed in full ?'

2. The relevant assessment year is 1972-73, corresponding to the financial year ending with March 31, 1972. The assessee is a firm engaged, inter alia, in execution of Government contracts. It disclosed in its return for the year a gross receipt of Rs. 22,72,997 and following a settlement between it and the revenue reached for earlier years in the matter of computation of income of receipts from contract business adopted ten per cent, thereof as income. While examining the accounts, the Income-tax Officer found that the assessee had got some of its claims in relation to contract works executed in earlier years referred to arbitration and the awards passed in its favour contained a sum of Rs. 4,30,549 representing interest. He separated this item from other sums and on the footing that it represented interest on the assessee's money withheld by Government brought the amounts in entirety into the net of taxation.

3. Assessee appealed to the Appellate Assistant Commissioner and contended that the amount referred to as interest should have been taken as a trading receipt and there was no justification, at any rate, for the bifurcation of this amount from the other amounts. The first appellate authority did not accept the stand of the assessee and upheld the addition.

4. In second appeal before the Tribunal, the assessee advanced two alternative contentions :

(i) the amount awarded as interest was not income at all as it was in the nature of a capital receipt given by way of compensation or damage for withholding of the assessee's legitimate dues; and

(ii) even if the amount under consideration was revenue receipt relating to contract business, in view of the settlement with the revenue that ten per cent. of the gross receipts would be computed as income, it was not open to the Income-tax Officer to break up the gross receipts and treat a part thereof as income in entirety and exclude the application of the settlement rate therefor.

5. In support of the first contention, reliance was placed on the ratio in the well-known cases of Commissioners of Inland Revenue v. Ballanline [1924] 8 TC 595 and Riches v. Westminster Bank Ltd. [1947] 15 ITR (Suppl) 86, Support was claimed for the second proposition on the terms of settlement between parties which has been upheld by this court in an inter party dispute in the case reported in : [1977]109ITR370(Orissa) [Govinda Choudhury & Sons v. Income-tax Officer],

6. The Tribunal found that the arbitrator had invariably calculated theamount due to the assessee from the dates on which it fell due under thecontract and awarded interest from that date till the date of award. Itrelied upon the ratio laid down by the Supreme Court in the case of Rama-nathan Chettiar v. Commissioner of Income-tax : [1967]63ITR458(SC) (SG) andheld:

' This principle, in our opinion, also applies to the case before us. The arbitrator clearly stated that he has awarded interest on a certain sura for specified period. He has also stated that this interest was awarded by him to compensate the loss suffered by the assessee due to the withholding of the money due to him. The loss which was compensated was obviously a loss which arose by depriving the assessee of the benefits that would have arisen from the use of the money. The assessee could have used the money in business and earned profit or simply could have put it to use and earned interest. It is that loss of profit or interest that was compensated by the arbitrator. Looked at from any angle, the true nature of the amount under consideration appears to us to be interest, pure and simple, for the use of the assessee's money though without its consent and it was not compensation for any damage on capital account. In this view of the matter we feel that considerations like whether there was any contractual obligation to pay interest or whether the interest was payable under a statute or an award are not at all germane to the basic issue.......'

7. The Tribunal noticed that the relevant term of the settlement ran thus :

' A net profit rate of 10% will be applied on gross receipts including the cost of materials, to determine the profit of all the five firms covered by the settlement.'

8. It recorded a finding that the payments under consideration arose out of contracts covered by the settlement, but did not specifically say one way or the other about the acceptability of the alternative contention. The Tribunal, however, found that Rs. 2,77,692 out of the sum of Rs. 4,30,549 related to this year and ruled that the same should be held as income liable to tax in this year.

9. Before we proceed to deal with the rival contentions of counsel on merits, as advanced before us, it is appropriate that we deal with a couple of submissions of learned standing counsel. Undoubtedly, the sum of Rs, 2,77,692 taken into consideration was made up of Rs. 2,15,583 and Rs. 62,109. According to learned counsel, the Income-tax Officer found that in the sum of Rs. 2,15,583 was includeda sum of Rs. 41,052 representing post-award interest. We do not think it would be appropriate to accept the contention of learned standing counsel in view of the categorical finding of the Tribunal at page 97 of the paper book where the Tribunal has stated :

' ......Here, the amount of interest awarded is confined till the date ofaward...... '

10. From the statement of the case drawn up by the Tribunal with consent of parties, it appears :

' The Appellate Tribunal, after carefully considering the contentions of either side, observed that out of Rs. 4,30,549 considered by the Income-tax Officer, only Rs. 2,77,692 could be properly considered during the year under consideration, the balance having fallen to be considered in other assessment years. They, then, observed that the arbitrators awarded the sums under consideration to the assessee as interest.'

11. The Supreme Court pointed out in the case of Commissioner of Income-tax v. Durga Prasad More : [1971]82ITR540(SC) , that the Tribunal is the final fact-finding body and in the case of Karnani Properties Ltd. v. Commissioner of Income-tax : [1971]82ITR547(SC) , it was again stated :

'We have earlier referred to the facts found and the circumstances relied on by the Tribunal, the final fact-finding authority. It is for the Tribunal to find facts and it is for the High Court and this court to lay down the law applicable to the facts found. Neither the High Court nor this court has jurisdiction to go behind or to question the statements of fact made by the Tribunal. '

12. In this view of the matter, it is appropriate that we proceed on the footing that the amount related to the period up to the making of the awards and not beyond.

13. Learned standing counsel next contended that the references to arbitration were of pending litigations in court. In the statement of the case, there is no mention of this fact. Learned standing counsel pointed out with reference to materials placed by the assessee before the Tribunal that the court of the sub-judge had been moved under the provisions of the Arbitration Act to appoint an arbitrator. Admittedly, the assessee had contracts with the State Government in the standard F. 2 form, paragraph 23 whereof contained the arbitration clause. Assessee had not filed any suit for its claim, but had moved the court for appointment of an arbitrator only. In the circumstances, learned standing counsel is not correct in his stand that the assessee had pending disputes in court which were referred to arbitration.

14. According to learned counsel for the assessee, the amount under consideration was not received as a consequence of any statutory provision or contract between the parties. Reliance is placed on the finding of the Appellate Assistant Commissioner in paragraph 33 of his order where he stated :

' ......I find that there was no stipulation in the contract clause forpayment of interest .but the interest arose only on the arbitrator's award...... '

15. Learned standing counsel also does not claim that the assessee became entitled to the additional sums under consideration on account of any contract. According to him, however, the arbitrator had power to award interest and it must be assumed that there was an implied contract for payment of interest.

16. Section 34 of the Code of Civil Procedure has no application to arbitration proceedings. In the case of Thawardas Phemmal v. Union of India : [1955]2SCR48 , thus spoke Bose J. for the court :

'It was suggested that at least interest from the date of 'suit' could be awarded on the analogy of Section 34 of the Civil Procedure Code, 1908. But Section 34 does not apply because an arbitrator is not a 'court' within the meaning of the Code nor does the Code apply to arbitrators, and, but for Section 34, even a court would not have the power to give interest after the suit. '

17. The dictum of Bose J. came for consideration before the Supreme Court in the cases of Ct. A. Ct. Nachiappa Chettiar v. Ct. A. Ct. Subramaniam Chettiar : [1960]2SCR209 , Satinder Singh v. Umrao Singh : [1961]3SCR676 , Union of India v. A. L. Rallia Ram : [1964]3SCR164 , Firm Madanlal Roshanlal Mahajan v. Hukumchand Mills Ltd. : [1967]1SCR105 , Union of India v. Bungo Steel Furniture Pvt. Ltd. : [1967]1SCR324 , Ashok Construction Company v. Union of India [1970] SCD 530 and State of Madhya Pradesh v. Saith and Skelton (P.) Ltd. : [1972]3SCR233 . In none of these cases, the ratio laid down by Bose J. has specifically been overruled though in many of them attempt has been made to either explain away or set a limitation to the application of the rule.

18. In Nachiappa Chettiar's case : [1960]2SCR209 , Gajendragadkar J., as the learned judge then was, pointed out:

' It appears that in that case (Thawardas Pherumal v. Union of India : [1955]2SCR48 ) the claim awarded by the arbitrators was a claim for an unliquidated sum to which the Interest Act of 1839 applied as interest was otherwise not payable by law in that kind of case. Dealing with the contention that the arbitrators could not have awarded interest in such a case Bose J. set out four conditions which must be satisfied before interest can be awarded under the Interest Act, and observed that none of them was present in the case ; and so he concluded that the arbitrator had no power to allow interest simply because he thought that the payment was reasonable. The alternative argument urged before this court that interest could be awarded under Section 34 of the Code of Civil Procedure, 1908, was also repelled on the ground that the arbitrator is not a court within the meaning of the Code nor does the Code apply to arbitrators..........It is open to doubt whether the observations on which Mr. Viswanatha Sastrirelies support or were intended to lay down such a broad and unqualifiedproposition. However, we do not propose to pursue this matter anyfurther because the present contention was not urged before the HighCourt.'

19. It is thus clear that in Nachiappa Chettiar's case : [1960]2SCR209 no .finalview was expressed:

In Satinder Singh's case : [1961]3SCR676 the same learned judge spoke for the court thus ;

'Bose J., who spoke for the court, has set four conditions which must be fulfilled before interest can be awarded under the Interest Act of 1839, and observed that not one of those was present in the case with which the court was concerned. That is why it was held that the arbitrator had erred in law in thinking that he had the power to allow interest simply because he thought the demand was reasonable. Having come to this conclusion the learned judge proceeded to make certain observations in respect of the applicability of Section 34 of the Code of Civil Procedure. He added that Section 34 does not apply because the arbitrator is not a court within the meaning of the Code, nor does the Code apply to arbitrators, and but for Section 34 even a court would not have the power to give interest after the suit. These observations were considered by this court in Ct. A. Ct, Nachi-appa Chettiar v. Ct. A. Ct. Subramaniam Chettiar : [1960]2SCR209 , and it was pointed out that they were obviously not intended to lay down any broad and unqualified proposition like the one which is urged before us.'

20. As a fact, the court found (page 916, col. 1):

'It would thus be noticed that the claim for interest proceeds on the assumption that when the owner of immovable property loses possession of it he is entitled to claim interest in place of right to retain possession. The question which we have to consider is whether the application of this rule is intended to be excluded by the Act of 1948, and as we have already observed, the mere fact that Section 5(3) of the Act makes Section 23(1) of the Land Acquisition Act of 1894 applicable we cannot reasonably infer that the Act intends to exclude the application of this general rule in the matter of the payment of interest. That is the view which the Punjab High Court has taken in Surjan Singh v. East Punjab Government AIR 1957 Pun 265, and we think rightly/'

21. The court further observed that even under the provisions of the Interest Act of 1839 which applied to the facts of the case, interest could be paid. The ultimate conclusion thus was reached on a different ground.

22. In Rallia Ram's case : [1964]3SCR164 , the court did not express anyopinion against the dictum laid down by Bose J., and in fact knocked offthe award of interest.

23. Bachawat J., speaking for the court, in the case reported in : [1967]1SCR105 (Firm Madanlal Roshanlal Mahajan v. Hukumhand Mills Ltd,) quoted the observation of Bose J. and stated (page 1032):

'The High Court (in the case under appeal) set aside the award regarding interest on the ground that the claim for interest was not referred toarbitration and the arbitrator had no jurisdiction to entertain the claim. In this court, counsel for the claimant contended that the arbitrator had statutory power under the Interest Act of 1839 to award the interest and, in any event, he had power to award interest during the pendency of the arbitration proceedings under Section 34 of the Code of Civil Procedure, 1908. Bose J. rejected this contention. It will be noticed that the judgment of this court in Thawardas's case : [1955]2SCR48 is silent on the question whether the arbitrator can award interest during the pendency of arbitration proceedings if the claim regarding interest is referred to arbitration. In the present case, all the disputes in the suit were referred to the arbitrator for his decision. One of the disputes in the suit was whether the respondent was entitled to pendente lite interest. The arbitrator could decide the dispute and he could award pendente lite interest just as a court could do so under Section 34 of the Code of Civil Procedure. Though, in terms, Section 34 of the Code of Civil Procedure does not apply to arbitrations, it was an implied term of the reference in the suit that the arbitrator would decide the dispute according to law and would give such relief with regard to pendente lite interest as the court could give if it decided the dispute. '

24. It would thus appear that the matter arose out of a case where a pending suit with the issue of payability of pendente lite interest was referred to an arbitrator.

25. In Bungo Steel Furniture's case : [1967]1SCR324 , Rama-swami J. referred to the dictum of Bose J. and observed:

'In the present case, all the disputes in the suit, including the question of interest, were referred to the arbitrator for his decision. In our opinion, the arbitrator had jurisdiction, in the present case, to grant interest on the amount of the award from the date of the award till the date of the decree granted by Mallick J. The reason is that it is an implied term of the reference that the arbitrator will decide the dispute according to existing law and give such relief with regard to interest as a court could give if it decided the dispute. Though, in terms, Section 34 of the Code of Civil Procedure does not apply to arbitration proceedings, the principle of that section will be applied by the arbitrator for awarding interest in cases where a court of law in a suit having jurisdiction of the subject-matter covered by Section 34 could grant a decree for interest.'

26. Here again, the pending dispute before a court was referred to arbitration and as would appear from paragraph 6 of the judgment, the dispute was with reference to post-award interest.

27. In the case of Ashok Construction Company [1970] SCD 530 (SC), the arbitration clause was extracted and it was observed :

' The terms of the arbitration agreement did not exclude the jurisdiction of the arbitrator to entertain a claim for interest, on the amount due under the contract...... '

28. To the same effect appears to be the observation of Vaidialingam J. speaking for the court in the case of the State of Madhya Pradesk v. Saith and Sketton (P.) Ltd. : [1972]3SCR233 of the judgment further shows that all the disputes including the claim for payment of interest had been referred to arbitration.

29. In all these cases before the Supreme Court, the jurisdiction of the arbitrator to pay interest was being considered and not the question as to whether such payment became due under a statute or as a result of contract. The angle from which the question was examined, therefore, was very different from what is material for determination of the issue before us.

30. In Ballantine's case [1924] 8 TC 595 the Lord President observed:

'Now it is familiar that an assessment of the kind may contain as one of its constituent elements an allowance in respect that the claimant has lain for a long time out of his remedy. The propriety of such an allowance may depend on the character of the claim, and its amount may depend on many considerations of which time is only one. But an interest calculation is a natural and legitimate guide to be used by an arbiter in arriving at what he thinks would be a fair amount. In most cases in which such an allowance is a constituent of an award it does not separately appear, but is slumped along with other elements in the gross sum decerned for; but there is nothing to prevent an arbiter, if he thinks it just and reasonable in a particular case, to make the allowance in the form of an actual interest calculation from a past date until the sum fixed as at that date is paid. In all such cases, however--whether the allowance is wrapped up in a slump award or is separately stated in the decree--the interest calculation is used in modum aestimationis only. The interest is such merely in name, for it truly constitutes that part of the compensation decerned for which is attributable to the fact that the claimant has been kept out of his due for a long period of time. It is not, therefore, 'interest of money' chargeable under Case III of Schedule D, '

31. In the case of Dr. Shamlal Narula v. Commissioner of Income-tax : [1964]53ITR151(SC) , the taxability of interest awarded under Section 34 of the Land Acquisition Act of 1894 came up for consideration, the direct question being whether such receipt is capital or revenue in character. The Supreme Court referred to some English authorities and Indian precedents and came to uphold the view of the High Court of Punjab that it was income liable to tax. Therein, one of the cases relied upon was of the House of Lords in Westminster Bank Ltd. v. Riches [1947] 28 TC 159 ; [1947] 15 ITR (Supp) 86, where interest had been paid under a statutory provision. In the case of T. N. K. Govindarajulu Chetty v. Commissioner of Income-tax : [1967]66ITR465(SC) , the question for consideration before the Supreme Court was whether a sum of Rs. 1,28,716 paid by way of interest in respect of a requisition made under the Requisitioned Land (Continuance of Powers) Act, 1947, was exigible to income-tax. Before the Madras High Court from whose decision the appeal had come to the Supreme Court, assessee's counsel had contended (see : [1964]52ITR867(Mad) --Commissioner of Income-tax v. T. N. K. Govindarajulu Chetty) that the rule in Riche's case [1947] 28 TC 159 : 15 ITR (Supp) 86is unexceptionable, but where the award of interest was not founded on law or contract but was only an ex gratia grant it could have no separate existence and must be treated as a blend of the primary award, and this contention in law had been negatived. Shah J. (See : [1967]66ITR465(SC) ) as the learned judge then was, referring to the court's earlier decision in Dr. Narula's case : [1964]53ITR151(SC) , speaking for the court, observed :

'It was held by this court in Dr. Shamlal Narula v. Commissioner of Income-tax : [1964]53ITR151(SC) that the statutory interest paid under Section 34 of the Land Acquisition Act, 1894, on the amount of compensation awarded from the date on which the Collector has taken possession of the land compulsorily acquired under the Land Acquisition Act, 1894, is interest paid for delayed payment of the compensation and is a revenue receipt liable to tax under the Income-tax Act. It was observed in that case at page 156 :

'.........interest, whether it is statutory or contractual, represents theprofit the creditor might have made if he had the use of the money or the loss he suffered because he had not that use. It is something in addition to the capital amount, though it arises out of it. Under Section 34 of the Act when the legislature designedly used the word 'interest' in contradistinction to the amount awarded, we do not see any reason why the expression should not be given the natural meaning it bears.

The scheme of the Act and the express provisions thereof establish that the statutory interest payable under Sectibn 34 is not compensation paid to the owner for depriving him of his right to possession of the land acquired, but that given to him for the deprivation of the use of the money representing the compensation for the land acquired.'

Counsel for the assessee, however, contended that the principle of Dr. Shamlal Narula's case : [1964]53ITR151(SC) is not applicable to this case, since there is no provision in the Requisitioned Land (Continuance of Powers) Act, 1947, and the Defence of India Act, 1939, and the Rules framed thereunder for payment of interest on the amount of compensation. Counsel said that, under the Act, the owner is paid not the market value ofthe property, but compensation determined in accordance with a highly artificial scheme, and that the interest paid in truth bears the same quality as compensation for deprivation of property and is on that account a capital receipt not exigible to tax. In support of his contention, counsel invited our attention to two decisions : Commissioners of Inland Revenue v. Battantine [1924] 8 TC 595 and Simpson v. Executors of Banner Maurice as Executor of Edward Kay [1929] 14 TC 580.

In Ballantine's case [1924] 8 TC 595 a claim of a firm of contractors against a railway company for 'additional costs, loss and damage' was referred to arbitration. The arbitrator awarded to the claimant a sum of money mainly as damages, together with interest thereon at 5 per cent. per annum from the date of lodgement of claim until payment. The revenue sought to charge the interest paid by the railway company to tax under Case III of Schedule D of the Income Tax Act, 1918. It was held that the sum added in the name of interest was part of damages, and was not ' interest of money ' chargeable to income tax under Case III of Schedule D......'

32. The learned judge again observed--See : [1967]66ITR465(SC) :

'But it must be noticed that liability to pay interest arose in Ballantine's case [1924] 8 TC 595 under the award of the arbitrator and in the Executors of Banner Maurice as Executor of Edward Ray's case [1929] 14 TC 580 under the order of the Mixed Arbitral Tribunal, and in each case it was held that what was paid, though called ' interest', was in truth compensation for loss suifered on account of deprivation of property. According to the view taken by this court in Dr. Shamlal Narula's case : [1964]53ITR151(SC) , if the source of the obligation imposed by the statute to pay interest arises because the claimant is kept out of his money, the interest received is chargeable to tax as income. The same principle would apply if interest is payable under the terms of an agreement and the court or the arbitrator gives effect to the terms of the agreement--express or implied--and awards interest which has been agreed to be paid.'

33. In the concluding paragraph of the judgment, the position of law was again restated in the following terms--See : [1967]66ITR465(SC) :

'It may be recalled that in those cases the arbitrator and the ArbitralTribunal were, in awarding interest, not seeking to give effect to or torecognize a right to interest, conferred by statute or conract. The sourceof the right to interest in both the cases did not arise from the statute oragreement. In the case on hand, the right to interest-arose by virtue ofthe provisions of Sections 28 and 34 of the Land Acquisition Act, 1894, andthe arbitrator and the High Court merely gave effect to that right in awarding interest on the amount of compensation.'

34. The Supreme Court in Govindrajulu Chetty's case : [1967]66ITR465(SC) laid down the clear rule that where interest has been awarded under statute or under contract, the same is income exigible to tax and where it is not attributable, to either statute or contract, but has been awarded on ex gratia basis, it would partake the character of compensation. This principle has been adopted by the Kerala High Court in the case of Commissioner of Income-tax v. Periyar and Pareekanni Rubbers Ltd. : [1973]87ITR666(Ker) .

35. In the instant case, interest was not admittedly payable either by statute or by contract and on the ratio indicated in Govindarajwlu Chetty's case : [1967]66ITR465(SC) , it must be held that though the arbitrator styled the payment as interest, it was indeed an ex gratia payment by way of compensation worked out through the medium of interest and, therefore, we are of the view that the amount could not be treated as income exigible to tax. Our answer to the first question referred to this court would, therefore, be:

'On the facts and in the circumstances of the case, the sum of Rs. 2,77,692 awarded to the assessee as interest has been wrongly held to be revenue receipt.'

36. The second question as framed arose only if the first question was answered in the affirmative, namely, if we found that it was revenue receipt, the second question fell for answer. In view of our finding that the amount is not a revenue receipt, the second question does not arise for answer and we do not think it would be appropriate for us to examine the matter for rendering an answer. Accordingly, we decline to answer the question.

37. We direct parties to bear their respective costs of their reference.

Panda, J.

38. I agree.


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