ITO, NEW DELHI vs. SH. RAJIV KHOLI, NEW DELHI

ORDER PER O.P. KANT, A.M.: This appeal by the Revenue is directed against order dated 09/07/2012 passed by the Ld. Commissioner of Income Tax (Appeals)-XXVI, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2009-10, raising following grounds: A. Whether on the facts and circumstances of the case, CIT(A) was justified in deleting the addition of Rs.1,14,08,717/- made by the AO on account of interest received by the assessee owing to award of arbitration. B. Whether on the facts and circumstances of the case, CIT(A) was justified in treating the sum of Rs.1,14,08,717/- received by assessee as capital receipt when the receipts pertained to work carried out by assessee for DDA and both principal & interest are revenue receipts.

C. Whether on the facts and circumstances of the case, CIT(A) was justified in allowing deprecation of Rs.2,89,938/- on car without the asset shown to be used for business purposes. D. The appellant craves leave to add, alter or amend any/fall all the grounds of appeal before or during the course of hearing of the appeal.

2. At the outset, we may like to mention that this appeal was heard on 21.05.2018, however, at the time of dictation, a decision of the Tribunal in the case of JCIT Vs. Mohinder Singh (ITA No. 4168/Del/2000 & 3443/Del/2001) was found against the assessee and thus case was again re-fixed and a copy of the decision was brought to the knowledge of the assessee. On the date fixed i.e. 22.06.2018, none attended on behalf of the assessee and, thus, the case was adjourned to 29.06.2018. On the said date also, none attended on behalf of the assessee, and thus, the appeal is disposed accordingly.

2. Briefly stated facts of the case are that the assessee is an individual and proprietor of a construction firm namely “M/s SANYUKT NIRMATA”. For the year under consideration, the assessee filed return of income declaring income of Rs.8,42,370/- on 30/09/2009. This income included receipt of arbitration award including interest from “Delhi Development Authority” (DDA). The case of the assessee was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961( in short ‘the Act’) was issued and complied with. The Assessing Officer observed that interest received on arbitration award from DDA was claimed by the assessee as capital receipt, not taxable under the Act. This contention of the assessee was not accepted by the Assessing Officer. In the assessment order passed under section 143(3) of the Act on 20/12/2011, the Ld. Assessing Officer after making certain additions/disallowances including interest received on arbitration award, assessed the total income at Rs.1,28,59,640/-. Aggrieved, the assessee filed appeal before the Ld. CIT(A), who partly allowed the appeal of the assessee. Aggrieved, the Revenue is in appeal before the Tribunal raising the grounds as reproduced above.

3. The ground Nos. A and B of the appeal relates to interest on arbitration award amounting to Rs.1,14,08,717/-, which has been held by the Ld. CIT(A) as capital receipt not taxable in the year under consideration. 3.1 The facts qua the issue in dispute are that the sole proprietorship firm of the assessee, namely, M/s SANYUKTA NIRMATA was earlier a partnership firm, consisting of five partners, namely, Sh. Y.P. Kohli, Sh. R.C. Kohli, Sh. M.P. Kohli, Sh. S.P. Puri, S.h. Rajiv Kohli (i.e. the assessee). The partnership firm M/s SANYUKTA NIRMATA had executed contracts with the DDA for constructing residential houses, however, certain dispute arose between the firm and the DDA and the matter was referred to arbitration. During the pendency of the matter before the Arbitrator, there were changes in the constitution of the partnership firm and the assessee became sole proprietorship of the firm. The firm received arbitration awards in respect of the works executed, amounting to Rs.1,83,63,432/-, which included principal sum of Rs.69,54,715.50 and interest of Rs.1,14,08,716.5/-. The assessee credited the principal sum to the profit and loss account and offered the same for taxation, however, the interest amount of Rs.1,14,08,716.50 was credited directly to capital account. Before the lower authorities, the assessee claimed the interest amount as non-taxable capital receipt, relying on the decision of the Income-Tax Appellate Tribunal (in short ‘the Tribunal’) Delhi benches dated 30/01/1992 in the case of Income Tax Officer versus Hazari Lal Marwah and Sons reported in 41 ITD 1. 3.2 The assessee also claimed that the erstwhile partner of the firm, Sh. RC Kohli has filed a suit in Tees Hajari Court against the assessee claiming award amount. Thereafter, the assessee and the erstwhile partner Sh. M.P Kohli agreed to refer their disputes to the arbitration with one of their relatives at Mumbai. Pending the arbitration proceedings, the assessee and the erstwhile partner reached an out-of-court settlement, under which the assessee agreed to share in the award amount with the erstwhile partners after retaining some amount towards payment of tax liability that may arise. The erstwhile partners then did not honour the agreement and fraudulently obtained an award from the Arbitrator, Sh. RD Kohli at Mumbai to the detriment of the assessee. The assessee then challenged this arbitration award before the Hon’ble Delhi High Court. In view of the above facts, the assessee claimed that it has not obtained a clear title to the arbitration award and he was holding the sum in trust. According to the assessee, these were contingent receipt and assessee might be liable to part with partly or wholly and thus no income accrued in the hands of the assessee. 3.3 The Assessing Officer held that the amount received are incidental to carrying on the business of execution of work contracts and this amount was paid to the assessee on account of loss of his earning from the funds withheld by the DDA and the same was in the nature of trading receipt. The Assessing Officer accordingly held the amount of interest awarded by the Arbitrator as a revenue receipt taxable in the hands of the assessee and stated that the litigation between the assessee and erstwhile partner Sh. MP Kohli was created only to avoid taxation. 3.4 Before the Ld. CIT(A), the assessee reiterated its submissions, which were made before the Assessing Officer and further submitted that the documents submitted shows that there was no anticipation, or legal right or to claim and/or to receive any interest in what amounts and awarding of interest was discretionary at the prerogative of the Arbitrator and therefore, a capital receipt not arising from the anticipation of business activities. 3.5 The Ld. CIT(A) relied on the decision of the Tribunal in the case of Hazari Lal Marwah & Sons (supra). Further, he also relied on the decision of the Hon’ble Supreme Court in the case of TNK Govindaraju Chetty, 66 ITR 465, where the Hon’ble Supreme Court has held that ‘interest received on award is not attributable to either a statute or a contract, but has been awarded as ex- gratia, it would partake the character of compensation’. The Ld. CIT(A) noted that this principle has been followed by the Kerala High Court in the case of CIT Vs. Periyar Pareekanii Rubbers Limited (1973) 87 ITR 66, and also by the Orissa High Court in the case of Govinda Chaudhary and Sons (1977) 109 ITR 497. Accordingly, he held that interest awarded to the assessee by the Arbitrator in this case is ex gratia, as there was no contract or a statutory obligation to pay such interest to the assessee and, thus, a capital receipt as it partakes the character of compensation. 3.6 Before us, the Ld. DR submitted that the interest was paid for delay and it was only accretion to the assessee’s receipts from contract. He submitted that award has been given to the assessee by the Arbitrator in the ordinary course of business and on the items governed by the terms of contract and the interest is for compensation of the loss of earnings during the period from the funds withheld. According to him, the profit which the assessee would have otherwise earned during the course of business, had the payments/settlements been made on time, has been compensated by grant of interest. He submitted that in the case of Govinda Chaudhary and Sons (supra), the Hon’ble High Court answered the question in favour of the assessee that the interest awarded to the assessee is not a revenue receipt, but when the matter came up before the Hon’ble Supreme Court the Ld. counsel of the assessee conceded that the interest amount might be taxed as receipt and, therefore, Hon’ble Supreme Court refrain from giving any considered opinion on the first question. Accordingly, the Ld. DR relied on the decision of the Hon’ble Supreme Court in the case of Govinda Chaudhary and Sons 203 ITR 881 (SC) which has been followed subsequently in CIT Vs. BN Agarwal & Co 259 ITR 754 (SC). 3.7 On the contrary, the Ld. Counsel of the assessee filed the paper book containing pages 1 to 60 and also filed a complete copy of award. The Ld. counsel submitted that the relevant contract did not envisage any payment of interest nor the interest was provided in the statute, the interest awarded by the Arbitrator solely in his discretion could not be treated as revenue receipt. In support of his contention, he relied on the decision of the Tribunal in the case of ITO versus Hazarilal Marwah & Sons (supra) and decision of the Hon’ble Supreme Court in the case of TNK Govindaajula Chetty Vs, CIT (supra). He further submitted that the interest payment is not statutory as has been provided in the Land Acquisition Act, 1894 or Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013. 3.8 We have heard the rival submissions and perused the relevant material on record. On perusal of the award dated 09/04/2008 of the Arbitrator in the matter of arbitration between M/s Sanyukta Nirmata and the DDA, we find that in para 200 to 201, the interest claimed by the assessee has been mentioned and the interest has been awarded as under: “200. The claimant has claimed interest @20% per annum on the claimed amounts. It is stated that the claimant is a commercial organization and if the payment had been made then those would have been used in the business. Because of respondent's failure to make the payment, the claimant in order to run the business had to pay interest @18% per annum with quarterly rests on the funds borrowed by them and this rate of interest in fact is more than 20%. The claimant referred various letters filed C-10 dated 17.6.1991, C-64 dated 28.2.1992, C-68 dated 6.3.1992, C-75 dated 12.4.1992, C-76 dated .5.5.1992, C-84 dated 4.7.1992 and C-114 dated 1.6.1993 claiming the interest.

3.9 Thus, it is evident that interest has been claimed by the assessee to cover the interest paid by the assessee on fund borrowed for the purpose of the business. The assessee has made such claim before the DDA by way of the different letters, which are cited in above paragraphs of the Award. 3.10 In view of the above claim, it is evident that quality of the claim for interest is compensation, for the reason that the assessee has been deprived of the use of the money and required to pay interest on the money borrowed for the purpose of business. Had this money received by the assessee earlier, the assessee would not have been required to pay interest on the money borrowed. Thus, the interest may be regarded as representing the profit he might have had, if the assessee had received the money in time or conversely, the loss, assessee suffered because he had not that money with him for use. 3.11 We note that in identical question came up before the Tribunal in the case of JCIT Vs. Mahinder Singh and Company in and 3443/Del/2001 for assessment year 1997-98 and 1998-99. In the said case also the assessee is a construction contractor and received an award of an Arbitrator in consequence of the arbitration proceeding with airport authority of India in Bombay which was included in the income of the firm, however, amount of interest of Rs.1,96,72,751/- received by the assessee by way of the interest was not included in the income and credited to the capital account for partners in equal amount. The total amount of interest paid by the airport authority of India was claimed by the assessee as ex-gracia payment not accessible to tax and assessee relied upon decisions of the Hon’ble Supreme Court in the case of TN Govindaraju Chetty (supra), CIT Vs. Periyar and Pareekani Rubbers Ltd. (supra) and Govinda Chowdhery & Sons (supra) besides decision of the Tribunal in the case of Hazarilal Marwah and Sons (supra). The Tribunal after considering the facts and circumstances of the case and going through the various decisions relied upon by the assessee held that receipt of pre-award and post-award interest is revenue receipt attributable and incidental to the business carried on by the assessee and bears the same character of receipt of payments of which it was otherwise entitled to under the contract. The Tribunal observed that the disputed amount of interest is only an accretion to the assessee receipt from contract business and accordingly, has the same as revenue receipt. In the above case all the decision cited before us, were available before the Tribunal. The relevant finding of the Tribunal is reproduced as under:

“9. We have heard both the parties and gone through the facts of the case as also the decisions relied upon by both sides. The issue before us is as to whether the interest awarded by Hon'ble Bombay High Court from date of decree till payment was made i.e. interest of `1,96,72,751/- paid by Airport Authority of India on 30.7.1996 to the assessee ,is income and is liable to be included in its assessment for the AY 1997-98. As is apparent from the aforesaid facts, the AO brought to tax interest amount of ``1,96,72,751/-in the AY 1997-98 & amount of ``3,33,59,343/- in the AY 1998-99 awarded by the arbitrator and endorsed by Bombay High Court as a revenue receipt, following the decisions of Hon'ble Supreme Court in the case of Govinda Choudhary & Sons reported in 203 ITR 881(SC); Rockwell Engineering Co. Ltd. 180 ITR 277 (Kerala), Abbasbhoy A. Dehgamwalla 195 ITR 681 (Bom) and Bishambarnath Swaroop Narain 119 ITR 681 (All). On appeal, the ld. CIT(A) ,however, allowed the claim of the assessee following the decision of the ITAT, Cuttuck Bench, Cuttuck in 10 & 3443/Del./2001 I.T.A. No.169/90 in the case of J.C. Budhraja Vs. Income-tax Officer, which in turn followed the decision in Govinda Choudhary & Sons vs. CIT,109 ITR 497(Orissa) regarding pre award interest. Whereas in the instant case interest was awarded by Hon'ble Bombay High Court from date of decree till payment was made i.e .interest of `1,96,72,751/-was paid by Airport Authority of India on 30.7.1996 to the assessee in the AY 1997-98. In the AY 1998-99,issue relates to interest of `3,33,59,343/- for the period 1.8.1980 to 7.11.1992 i.e.date of award and from 8.11.1992 to the date of actual payment. We find that in the decision relied upon on behalf of the assessee in Govinda Chowdhary & Sons (supra),Hon'ble Orissa High Court was considering the issue of taxability of interest. In that case,the arbitrator had calculated the amount due to the assessee from the dates on which it fell due under the contract and awarded interest from that date till the date of award .Hon'ble High Court in the light the ratio indicated in Govindarajulu Chetty's case [1967] 66 ITR 465 (SC), 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, the amount could not be treated as income exigible to tax. On appeal by the Revenue, before the Hon'ble Apex Court, ld. counsel on behalf of the assessee conceded the answer to the question regarding taxation of interest awarded, in favour of the Revenue .The ld. AR while referring to decision in Govindrajulu Chetty's case [1967] 66 ITR 465 (SC) vehemently argued before us 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. It was further argued that in the instant case, interest was not payable either by statute or by contract and was purely discretionary. On the other hand ,ld. DR while relied upon decision in B.N. Aggarwal and Co.(supra).In this decision Hon'ble Apex Court observed as under: "It is now brought to our notice that the decision of the Orissa High Court in Govinda Choudhury and Sons v. CIT [1977] 109 ITR 497 was brought to this 11 ITA nos.4168/Del/2000 & 3443/Del./2001 court in appeal and has since been disposed of, which is reported in CIT v. Govinda Choudhury and Sons [1993] 203 ITR 881. In the said decision, it is recorded that learned counsel for the assessee conceded that interest did constitute a revenue receipt. The court, however, held on the other question (arising in that appeal) that the said amount of interest cannot be taxed under the hea d "Income from other sources" which necessarily meant that it has to be taxed as a business receipt. It is true that on the question whether the interest constitutes income or not, the said decision is based upon a concession but we are of the opinion that it was a concession rightly made and is correct in law. Accordingly, we hold that interest is income and it has to be assessed as a business receipt. The question referred is accordingly answered in favour of the Revenue and against the assessee in the above terms. The appeals are disposed of accordingly." 9.1 Though the ld. AR on behalf of the assessee relied upon the decision in Ghanshyam(supra),we find that the question in that case was as to whether additional amount under s. 23(1A), solatium under s. 23(2), interest paid on excess compensation under s. 28 and interest under s. 34 of the 1894 Act, could be treated as part of the compensation under s. 45(5) of the 1961 Act? and what was the meaning of the words "enhanced compensation/consideration" in s. 45(5)(b) of the 1961 Act? & would it cover "interest"? & year of its taxability. Hon'ble Apex Court held that interest under s. 28 unlike interest under s. 34 is an accretion to the value, hence it was a part of enhanced compensation or consideration which is not the case with interest under s. 34 of the 1894 Act. So also additional, amount under s. 23(1A) and solatium under s. 23(2) of the 1961 (sic-1894) Act forms part of enhanced, compensation under s. 45(5) (b) of the 1961 Act. In fact, this is reinforced by the newly inserted cl. (c) in s. 45(5) by the Finance Act, 2003 w.e.f. 1st April, 2004,Hon'ble Apex Court concluded. We fail to understand as to how the observations made by the Hon'ble Apex Court in this decision rendered in altogether different context and settings,could be applied in the instant case .In the case before us, the ,ld. CIT(A) merely relied upon decision of the ITAT, Cuttuck Bench, Cuttuck in in the case of J.C. Budhraja Vs. Income-tax Officer, which in turn followed the decision in Govinda Choudhary & Sons vs. CIT,109 ITR 497(Orissa). This decision was followed by Hon'ble High Court in CIT vs. B.N. Aggarwala and Co,200 ITR 12 ITA nos.4168/Del/2000 & 3443/Del./2001 246,which has been subsequently reversed by Hon'ble Apex Court in aforesaid decision reported in 259 ITR 754(SC) wherein Hon'ble Apex Court followed their own decision in Govinda Choudhary & Sons vs. CIT,203 ITR 881.Hon'ble Apex Court in this decision observed that "it is true that on the question whether the interest constitutes income or not, the said decision is based upon a concession but we are of the opinion that it was a concession rightly made and is correct in law. Accordingly, we hold that interest is income and it has to be assessed as a business receipt." In this decision a dispute arose between the assessee- contractor and the Government and the arbitrator awarded certain amount by way of compensation for the work done as also interest. Interest awarded by arbitrator on compensation amount has been held to be income. Thus, decision in Govinda Choudhary & Sons v. CIT [1977] 109 ITR 497 (Ori.) has been disapproved. 9.2 It may be pointed out that in CIT v. Builders Union [1995] 211 ITR 993 (Orissa) and CIT v. Lenka (A.) and Partners [1995] 215 ITR 298 (Orissa), two different Division Benches of the Hon'ble Orissa High Court in referring to the decision of the Supreme Court on appeal in the case of Govinda Choudhury's case [1993] 203 ITR 881, have held that the earlier decision of that High Court was no longer a good law. Following the ratio of the Supreme Court decision it was held that the interest out of award was taxable. Similar view was taken in CIT vs. Malik Construction Co.,238 ITR 450(All.),wherein Hon'ble High Court held " Now, if the quality of the claim for interest is compensation, for the reason that the claimant had been deprived of the use of the money and had not had his money at the due date, it would be income in his hands. It may be regarded either as representing the profit he might have made if he had had the use of the money in time or conversely the loss he had suffered because he had not had that use. 9.3 In view of the above discussion and the legal position emerging from the aforesaid decisions , it must be held that the receipt of pre- award and post-award interest is a revenue receipt attributable and incidental to the business carried on by the assessee and it bears the same character of receipts payment of which it was otherwise entitled to under the contract. The disputed amount of interest is only an accretion to the assessee's receipts from the contract business. Accordingly, we have no hesitation in reversing the findings of the ld. CIT(A) and upholding the order of the AO in the assessment orders for these two assessment years. Consequently, grounds raised by the Revenue in these two appeals are allowed.” 3.12 The facts and circumstances of the instant case being exactly identical to the above case, we respectfully following the decision of the Tribunal in the case of Mohinder Singh & Company (supra), reverse the decision of the Ld. CIT(A) on the issue in dispute and uphold the finding of the Assessing Officer in the assessment order. Accordingly, the ground Nos. A & B raised by the Revenue are allowed.

4.2 Before us, the Ld. DR on the issue in dispute relied on the order of the Assessing Officer, whereas the Ld. counsel relied on the order of the CIT(A). 4.3 We have heard the rival submissions and perused the relevant material on record. In our opinion, the assessee has duly explained the ownership of the vehicle on which depreciation has been claimed and thus, assessee is fully justified for claiming the said depreciation on the vehicle, which has been used for the purpose of the business. We do not find any error in the order of the Ld. CIT(A) on the issue in dispute and accordingly, we uphold the same. Ground No. C of the appeal of the Revenue is accordingly dismissed.