Binani Bros. (P.) Ltd. vs Commissioner of Income Tax

Ajit K. Sengupta, J.—In this reference, u/s 256(1) of the income tax Act, 1961 (''the Act'') the Tribunal has referred the following questions for the opinion of this Court:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,52,470 received by the assessee from Hindusthan Cables Ltd. as a result of decisions of the Hon''ble High Court of Calcutta in suit Nos. 710 and 722 of 1967 and not out of statutory or contractual obligation was income from interest and exigible to tax under the provisions of the income tax Act, 1961 and the nature of receipt was neither that of compensation nor that of damages?

If answer to the question No. 1 is in the affirmative, whether the entire interest received by the assessee is exigible to tax in the year of receipt or in the years to which it related?

This reference relates to the income tax assessment of the assessee-company for the assessment year 1978-79. The assessee is a private limited company. It filed a revised return for the said year on 5-8-1978, claiming that a sum of Rs. 1,72,740 received by it from Hindusthan Cables Ltd. in pursuance to the decision of the Calcutta High Court in two Suit Nos. 710 and 722 of 1967 between the assessee-company and Hindusthan. Cables Ltd. is not chargeable to tax.

The assessee and Hindusthan Cables Ltd. agreed vide their letters dated 12-2-1966 and 14-3-1966 about the supply of 1100 tons of pig lead of 99.99 per cent purity and vide letters dated 6-12-1965 and 8-12-1965 for the import and supply of 800 tons of pig lead. The terms about the supply and payments were agreed upon by both the parties. The assessee in June 1966 intimated to Hindusthan Cables Ltd. that as a result of devaluation of Indian rupee, the cost shall be enhanced to which the latter agreed. The assessee supplied 1100 tons pig lead and from time to time it was getting payments. The assessee claimed that it was not paid the balance sum of Rs. 2,14,139.92 in respect of supply of 1100 tons of pig lead. Therefore, the assessee claimed the amount of Rs. 2,28,229.33 along with the interest. The dispute in respect of the second supply also arose due to the enhanced value on account of devaluation of rupee. The assessee supplied 598.0815 tons of pig lead before devaluation and the balance quantity of 200 tons was supplied after devaluation. The assessee on this ground inclusive of interest claimed the amount at Rs. 28,345.20. The matter was not settled between the parties. Ultimately the assessee filed two suit Nos. 710 and 722 of 1967 before the Hon''ble Calcutta High Court. The Hon''ble High Court in respect of suit No. 710 determined the amount payable by Hindusthan Cables Ltd. to the assessee-company on agreed basis at Rs. 2,10,712.44 with interest of 9 per cent per annum from 25-1-1967 till 5-4-1967. The assessee was also entitled to interim interest and interest on judgment both at the rate of 6 per cent per annum thereafter. The decree in respect of suit No. 722 was for the sum of Rs. 28,345.20 with interest of 9 per cent from 22-8-1966 till 5-4-1967. Thereafter the assessee was entitled to interim interest and interest on judgment at the rate of 6 per cent per annum and cost. The interest so awarded by this Court in both the said two cases had been worked out at Rs. 1,52,470. The amount was claimed by the assessee as exempt, being in the nature of compensation. The assessee before the ITO took the main plank on the terms of the contract. It was indicated by the assessee that there was no stipulation in the contract for interest and, therefore, even though the High Court has termed it as interest, it was in the nature of compensation. The assessee relied on Govinda Choudhury and Sons Vs. Commissioner of Income Tax, The said case was distinguished by the ITO on facts. The assessee further placed reliance in IRC v. Ballantime [1924] 8 TC 595 (C. Sess), T.N.K. Govindaraju Chetty v. CIT [1967] 66 ITR 465 (SC) and CIT v. Periyar & Pareekanni Rubbers Ltd. [1973] 87 ITR 666 (Ker.). The ITO on the basis of the plaint and the decision of the Hon''ble High Court found that the cases relied upon by the assessee are not helpful. He further concluded the matter against the assessee holding that the interest received by the assessee was chargeable to tax.

The assessee came in appeal before the Commissioner (Appeals) and contended that the receipt of Rs. 1,52,470 was not taxable. It was stated that even though the High Court might have termed the payment as interest, the High Court awarded it on ex gratia basis and, therefore, it was in the nature of compensation. The assessee relied on Govinda Choudhury & Sons'' case (supra) and T.N.K. Govindaraju Chetty''s case (supra). The Commissioner (Appeals) concluded the matter in favour of the assessee.

The revenue filed an appeal to the Tribunal against the decision of the Commissioner (Appeals). The Tribunal found the following facts:

The assessee supplied goods to Hindustan Cables Ltd. The assessee could not recover the principal amount in time according to the contract. The assessee filed the suit and the assessee claimed the principal amount and interest thereon for delayed payment as well as for the payment of interest which was made by the assessee to its banker. The assessee made the following claim in his plaint relating to suit No. 710 of 1967:

Rs.

Principal sum due as per Annexure ''D''

2,14,139.92

Interest at 9 per cent per annum thereon up to 15-3-1967

6,610.39

Interest for delayed payment of Bills:

Debit Note BB/1/66, dated 3-11-1966

6,441.22

Debit Note BB/2/66, dated 3-11-1966

1,037.80

2,28,229.33

Similar claim in suit No. 722 of 1967 was made as hereunder:

Balance 5 per cent of the price of the said 200 Metric Tons of Pig Lead Ingot

28,345.20

Interest at 9 per cent per annum from 22-8-1966 to 15-3-1967 on the principal sum due

1,439.78

29,784.98

Interest realised by bank as aforesaid

1,807.00

31,591.98

The assessee has also made an alternative claim in the plaint. The High Court had discussed the claim of the assessee. It was also referred to the defendant and after that the High Court directed the buyer to pay the principal amount with interest. The observation in this connection of the High Court in suit No. 710 of 1967 is quoted below:

Interest has been claimed by the plaintiffs under the Interest Act as also u/s 61 of the Sale of Goods Act by way of damages. A notice was given on the 25th January, 1967 by which the defendant was informed that interest would be charged at the rate of 9 per cent per annum from the date of presentation of bills if payment was not received within seven days of the receipt of such notice. It is not in dispute that this notice dated the 25th day of January, 1967 (at page 122 of Ext. A) was served or that bills were submitted to the defendant.

It has been contended on behalf of the defendant that this notice is not in strict compliance with the Interest Act as it has not been stated therein that the notice was being given under that Act and interest had been claimed retrospectively. Be that as it may, the defendant in any event is entitled to interest by way of damages u/s 61 of the Sale of Goods Act which the Court in its discretion may allow. It is evident that the bank was charging interest from the plaintiff at the rate of 9 per cent per annum from the said sum of Rs. 2,10,712.44 became due. I answer this issue to the extent as indicated above in the affirmative and in favour of the plaintiff.

It is clear from the aforesaid decision of this Court that the High Court considered the claim of the assessee u/s 61 of the Sale of Goods Act and the Interest Act, 1839 and was satisfied that the assessee suffered loss due to non-payment of principal amount in time and, accordingly, the High Court directed the buyer to pay the principal amount along with interest. The assessee itself included the interest of Rs. 1,807 as interest realised by the bank from the assessee. Therefore, there is no ambiguity in the order of the High Court. The High Court plainly awarded the principal with interest. The High Court order cannot be read otherwise. The assessee only received interest for the delayed payment and the additional amount awarded by the High Court was not in the nature of compensation.

In this view of the matter, the Tribunal held that the sum of Rs. 1,52,470 received by the assessee was income received by way of interest and was rightly taxed by the ITO.

We find that the findings of fact as recorded by the Tribunal have not been challenged by the assessee. The Tribunal has clearly recorded that the interest was paid in this case to the assessee-company u/s 61 of the Sale of Goods Act as well as under the Interest Act. The contract entered into by the assessee with Hindusthan Cables Ltd. was in the ordinary course of business. The assessee-company had suffered the loss due to non-payment of principal amount, being the sale consideration, in time by Hindusthan Cables Ltd. and, accordingly, this Court directed the buyer to pay principal amount along with interest. The interest in such circumstances was obviously allowed on account of delayed payment. This was clearly in the nature of revenue receipt chargeable to tax as income under the head ''Profits & gains of business or profession''.

In Westminster Bank Ltd. v. Riches [1947] 28 Tax Cas. 159, the House of Lords negatived the contention that interest which is really by way of damages cannot be income for the purposes of the Act. It was held that the real question in cases of this type is not whether the amount received was interest proper or damages, but whether it is income or a capital sum estimated in terms of interest. In that case, a decree was passed against the bank for � 36, 255 as representing debt due to R and in the exercise of its statutory powers, the Court also awarded a further sum of � 10,028 as representing interest due on the debt from the date when the cause of action arose. The additional sum of � 10,028 was held to be taxable as income. Viscount Simon held and observed that if damages are increased by adding interest upon principal sum, that does not prove that such interest is not liable to tax.

In Dr. Shamlal Narula Vs. Commissioner of Income Tax, Punjab, , the Supreme Court quoted with approval the aforesaid decision of the House of Lords in Westminster Bank Ltd.''s case (supra) and held that interest paid u/s 34 of the Land Acquisition Act, 1894 was nothing but interest paid for the delayed payment of the compensation and, therefore, a revenue receipt liable to tax under the income tax Act.

In this case, the interest was directed to be paid by this Court u/s 61 of the Sale of Goods Act, read with the provisions of Interest Act, for delayed payment of sale consideration by Hindusthan Cables Ltd. to the assessee-company. As such, payment of interest in our view is clearly a revenue receipt in the hands of the assessee-company. In this view of the matter, we answer the first question in the affirmative and in favour of the revenue. The second question does not arise out of the Tribunal''s order as at no stage of the proceedings, any argument was advanced by the assessee that the entire interest received was not chargeable to tax in the previous year relevant to the assessment year 1978-79. We, therefore, decline to answer this question.

Banerjee, J.

I agree.