Commissioner of Income Tax vs Hazari Lal Marwaha and Sons

R.C. Lahoti, J.—This application u/s 256(2) of the Income Tax Act, 1961, has been filed for direction to the Income Tax Appellate Tribunal to draw up a statement of the facts of the case and to refer the following question of law for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is correct in law in holding that the interest amount of Rs. 11,812.50 should be treated as revenue receipt and the balance amount of Rs. 7,59,748 be treated as capital receipt ?"

The matter arises out of the assessment year 1982-83. The assessed is a contractor. It appears that disputes arose relating to a work of contract taken by the assessed from M. E. S. Department, Firozepur, Punjab. The dispute was referred for adjudication by an arbitrator. The assessed had claimed award of interest from the arbitrator on several heads. Out of these several heads, one of the amounts of interest awarded was Rs. 7,59,748. The Tribunal treated the amount as capital receipt on the reasoning that the award of interest made by the arbitrator was neither under any statute nor by virtue of any contract but was an ex gratia award made by the arbitrator and hence was a capital receipt. It is not in dispute that the interest related to the period of pendency of the proceedings before the arbitrator and it was awarded on the amount to which the assessed was found entitled on account of the work executed by him under the contract. The Tribunal relied on the Supreme Court decision in T.N.K. Govindarajulu Chetty Vs. Commissioner of Income Tax, Madras, to hold that the interest earned by the assessed was not liable to tax.

An application u/s 256(1) of the Income Tax Act, 1961, has been rejected by the Income Tax Appellate Tribunal holding that the answer to the question was self-evident and was covered by the decision of the Supreme Court and hence did not require to be referred.

With the pronouncement of their Lordships of the Supreme Court in Santokh Singh Arora Vs. Union of India and others, , following the decision of the Constitution Bench in Secretary, Irrigation Department, Government of Orissa and others Vs. G.C. Roy, , it is well-settled that where the agreement between the parties does not prohibit the grant of interest and the reference to arbitration is without the intervention of the court, the arbitrator has the power to award interest pendente lite. It cannot, Therefore, be held that the award was ex gratia.

Learned counsel for the Revenue has placed reliance on Karam Chand Thapar and Bros. P. Ltd. Vs. Commissioner of Income Tax, (Central), Calcutta, , Commissioner of Income Tax, Orissa Vs. Govinda Choudhury and Sons, Gosaninuagaon, Orissa, , Commissioner of Income Tax Vs. Abbasbhoy A. Dehgamwalla and others, to submit that interest on compensation would be a revenue receipt and whether interest should be treated as a revenue receipt or a capital receipt is a question of law.

Learned counsel for the assessed placed reliance on State of Orissa Vs. Niranjan Swain, , to submit that the arbitrator is not competent to grant interest even pendente lite and so the interest awarded by him must be held to be ex gratia. He also relied upon the decision in Patnaik and Co. Ltd. Vs. Commissioner of Income Tax, Orissa, to submit that if the findings of fact recorded by the Tribunal were not open to challenge, a question of law, which would not arise unless the findings of fact were disturbed, is not available for reference. Placing reliance on Mathura Prasad Vs. Commissioner of Income Tax, Uttar Pradesh, , it was submitted that the question which was concluded by the judgment of the Supreme Court could not be referred to the High Court. Learned counsel submitted that a specific finding recorded by the Tribunal was that the amount of interest to the tune of Rs. 7,59,748 was awarded by the arbitrator ex gratia and in view of that finding, which was not challenged, the reference application was rightly rejected by the Tribunal and deserved to be rejected by this court also.

We find substance in the submission of learned counsel for the Revenue that the question as framed is wider in its scope and would necessarily require adjudication of the question whether the amount of interest accrued to the assessed under the award made by the arbitrator was rightly held by the Tribunal to be a capital receipt which too and by itself is a question of law.

At this stage, we are not called upon to examine the merits of the question or to see how the question would be answered. We are concerned only with examining whether the question arises as a question of law from the order of the Tribunal. In our opinion, in so far as the interest amount of Rs. 11,812.50 is concerned, that has already been held to be a revenue receipt and taxed by the Assessing Officer. The assessed has not chosen to challenge that part of the assessment. It is not necessary to retain that amount of interest as part of the question. The remaining part does arise as a question of law from the order of the Tribunal and we direct the Tribunal to draw up a statement of the facts of the case and refer the following question for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that the amount of Rs. 7,59,748 be treated as a capital receipt ?"