The Jaipur Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that no addition could be made on interest received from an arbitration award for settlement dispute with respect to contract of payment.
The Assessee Chandi Ram derived income from civil construction work. When a notice under section 148 of the Income-Tax Act, 1961 issued to assessee, the department had been sought through the Notice-Server it was required to deliver a return in the prescribed form of his income for the AY 2012-13 within 30 days from the date of service of that notice.
The reason for issuing the notice was that the assessee has received interest on arbitration receipts of Rs. 1,39,44,881 which has been credited in the capital account. But, he has not paid tax thereon as he did not disclose such receipts as revenue receipts.
The assesee rejected the notice and contended that the receipts received in the assessment year 2012-13 pertains to the work executed by the assessee in assessment year 1989-90 & 1990-91 but the payment was not released as the matters went in dispute to be decided by the arbitration.
It was also stated that the interest has been paid as compensation for delay and is of the character of contract receipts to be assessed by way of rate application.
Relying on the decision of the apex court in the case of Govinda Choudary, the assessee submitted that the interest payable in connection with the delayed payment of contract amount partakes the same character as the receipt of contract.
After considering the submissions of the assessee, the AO did not consider the receipts related to arbitration awards and made addition
Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals)[CIT(A)] who upheld the reopening proceedings and deleted the addition. Against the CIT(A) order, the revenue filed an appeal before the tribunal.
Counsel for the revenue submitted that assessee has not disclosed the award amount consist of contract and interest in the return of income filed for the year under consideration. The assessee also not produced details of the expenditure incurred to support the contentions while offering the income on estimate basis
Before the tribunal Siddharth Ranka, the counsel for the assessee submitted that the assessee received an amount of Rs. 32,16,195/- as award for Anandpuri Canal Work & in a civil suit filed against the irrigation department. The amount of award became final as it was finally decided by Apex Court dismissing the irrigation department’s appeal on limitation.
Further, the contract as well as interest award only partake the character of business receipts in the present case and were awarded on disputes & delay caused in regular course of contract works, the primary business of the assessee.
Upon reviewing the details, the tribunal consists of two members Rathod Kamlesh Jayantbhai, (Accountant Member) Sandeep Gosain (Judicial Member) allowed the appeal filed by the assessee and held that the interest is on delayed payment of the contract amount executed by the assessee and as decided by the apex court in the case of CIT Vs. Govinda Choudhury this interest is only an accretion to the assessee’s receipts from the contracts. It is obviously attributable and incidental to the business carried on by him.
Thus, the entire receipt of contract money and compensation on delayed payment as interest covered under the award pertaining to assessment year 1989-90 & 1990-91 is required to be considered as business income only.
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