By TIOL News Service

JAIPUR, NOV 18, 2017: THE issue is - Whether Interest received towards late payment following award passed by District Court is taxable income. YES is the verdict.

Facts of the case

The Assessee-firm was engaged in the business of contractor. The Assessee firm had filed its return for the relevant AY. In the course of the assessment proceeding, a notice u/s 143(2) was issued. The AO made a trading addition on contract receipt by applying the profit rate of 8%. The noted that the Assessee had also undertaken a contract work with the Irrigation Department of Dausa however, failed to complete the same within the stipulated period. Out of the full cost of the said work, the Assessee had received a sum of amount and the balance remained unpaid. Further, the District & Sessions Judge of Jaipur City decided an award against the cost of work and further an interest towards the late payment. Accordingly, the Assessee had received the payment during the FY 2006-07. An appeal was preferred by the State government before the Rajasthan High Court which was pending during the pendency of the assessment proceedings. The AO found that the Assessee had maintained its accounts on mercantile basis hence, the AO applied net profit rate of 8% on contract receipt which was taxed as business income and later the interest under 'Income from other sources'.

On appeal, the CIT(A) had examined all the material facts extensively and then only held that neither trading addition could be made nor any addition could be made on account of interest. The CIT(A) also explained that the interest component was not that the Assessee had earned any interest income on account of principal award which was deposited in the bank. When a matter was under dispute, no addition could be made in the relevant AY. The findings made by the CIT(A) was also confirmed by the Tribunal and thereby dismissed the Revenue's appeal.

the High Court held that,

++ the carry forward loss was not there and in view of the decision of the Supreme Court in Ghayshyam, we are of the view that the interest actually received was income. We restore the order of the AO and the order of CIT(A) and order of the Tribunal is quashed and set aside;

++ it is made clear that ultimately Assessee will make payment in case he lost before the court the same will be treated as set off expenses. If the Assessee apply u/s 155(16), the AO will decide the same in accordance with law. In that view of the matter, the issue is answered in favour of the Department and against the Assessee.

(See 2017-TIOL-2423-HC-RAJ-IT)