ITO 22(3)(2), NAVI MUMBAI vs. MEHUL CONSTRUCTION, NAVI MUMBAI

3 CIT Vs. M/s Mehul Construction

where in the interest element in the arbitration award was treated as income from other sources while treating the original claim as part of business income.

4 Aggrieved by the order of AO the assessee filed an appeal before CIT(A) who allowed the appeal of the assessee by observing as under:

I have gone through the order of the AO as well as the submissions made by the appellant, I have also perused the arbitration award and found that the appellant has during the year under consideration received sum total of Rs.33,55,458/- which, inter alia, includes the sum of Rs.22,27,565/- being interest payable at the rate of 10%. The only question which arises in this case is as to whether such interest is chargeable under the head Income from other sources or the same should be treated as Income from business and profession as part of contract receipt. I am in agreement with the assessee that the amount received by virtue of the arbitral award relates to the contract receipts and that such interest also forms part of the said receipt as has been held by Supreme Court in case of Govinda Chaudhary and Sons (supra) where their lordship was pitted with the same question as to whether the interest was part of contract receipt and as such 10% income offered by the assessee in respect of the said interest in that case was correct. Dealing with the issue their lordship has held as under:

"This brings us to a consideration of the second question. The sum of Rs. 2,77,692 was received by the assessee as interest on the amounts which were determined to be payable by the assessee in respect of certain contracts executed by the assessee and in regard to the payments under which there was a dispute between the two parties. The assessee is a contractor. His business is to enter into contracts. In the course of the execution of these contracts, he has also to face disputes with the State Government and he has also to reckon with delays in payment of amounts that are due to him. If the amounts are not paid at the proper time and interest is awarded or paid for such delay, such 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. It would

4 CIT Vs. M/s Mehul Construction

not be correct, as the Tribunal has held, to say that this interest is totally de hors the contract business carried on by the assessee. It is well-settled that interest can be assessed under the head "Income from other sources "only if it cannot be brought within one or the other of the specific heads of charge. We find it difficult to comprehend how the interest receipts by the assessee can be treated as receipts which flow to him de hors the business which is carried on by him. In our view, the interest payable to him certainly partakes of the same character as the receipts for the payment of which he was otherwise entitled under the contract and which payment has been delayed as a result of certain disputes between the parties. It cannot be separated from the other amounts granted to the assessee under the awards and treated as "income from other sources". The second question is, therefore, answered in favour of the assessee and against the Revenue. We are conscious that the second question has not been answered by the High Court in view of its answer to the first question. We have considered whether it is necessary to send the matter back for the decision of the High Court. But, having regard to the facts that the appeal relates to a very old assessment year (1972-73) and also that all the necessary facts and the decision of the Tribunal are available before us, we have also proceeded to answer the second question straightaway in order to avoid further unnecessary delay.”

Considering the facts of the case and judicial pronouncements of the apex court interest in the instant case is chargeable as business income and that too from contract receipt, and , since the turnover of the assessee did not exceed the limit u/s 44AB, it at as its option to offer 8% of such receipt as income. Accordingly, the AO is directed to treat the interest as business receipt and also to allow the assessee the benefit of the provisions of Sec.44AD as claimed by the assessee.

5 The ld. DR submitted that the order of CIT(A) is bad as CIT(A) failed to appreciate that interest received in the arbitration award amounting to Rs.26,79,226/- was taxable as income from other sources and not as income from business which was rightly done by the AO and therefore, prayed for reversing the order of CIT(A) and 5 CIT Vs. M/s Mehul Construction

restoring the order of ld.AO. On the other hand the ld. Counsel for the assessee submitted that amount received under arbitration award which comprised of both the principal claim lodged and interest thereon was part of the business income and the assessee has rightly treated the same as income from business . The ld. Counsel strongly placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT Vs. Govinda Chaudhary and Sons reported in 203 ITR 881. The counsel also relied on the judgement of Juri ictional High court in the case of Emkay Exports reported in 188 Taxmann 195(Bom). The ld. Counsel finally submitted that the order passed by CIT(A) after following the decision in the case of CIT Vs. Govinda Chaudhary and Sons (SUPRA) was perfect, as per law and deserved to be upheld.

6

We have considered the rival submissions and perused the material on record. We note that the assessee received arbitration award of Rs.38,45,155/- inclusive of TDS of Rs.5,26,027/-. The said amount was inclusive of interest element . The assessee treated the entire amount as income from business and filed its return of income u/s 44AD of the Act by taking the net receipt after TDS and failed to gross up the same while filing the return of Income Tax. The ld.AO while framing the assessment order u/s 143(3) accepted the returned income however the assessment was re-opened by issuing notice u/s 148. While framing the order u/s 143(3) r.w. s. 147 of the Act Ld AO bifurcated the total amount of award into claim originally lodged and interest thereon and treated amount of original claim as part of business income by considering same u/s 44AD of the Act while treating interest thereon as income from other sources. The ld. CIT(A) reversed the order of AO on this issue and directed the AO to treat the interest amount as part of business income of the assessee for the purpose of computing income u/s 44AD of the Act by following the ratio laid

6 CIT Vs. M/s Mehul Construction

by the Hon’ble Supreme Court in the case of Govinda Chaudhary and Sons (supra). We find that the assessee during the course of execution of contract had some disputes with M/s. Konkan Railway which went into arbitration and the assessee was awarded Rs.11,65,889/- as claimed loss by assessee with interest for the delayed payment @ 10% p.a. of Rs. 26,79,266/- . In our opinion the interest is only the amount of addition and accretion to the assessee receipts from the contracts and it is obviously attributable and incidental to the business carried out by the assessee. In the decision referred to above in the case of Govinda Chaudhary and Sons (supra) similar issued came up for consideration before the the Hon’ble Supreme Court and it was held by the Hon’ble Court that interest is also part of the business receipt of the assessee. We therefore, do not find any infirmity in the order passed by the CIT(A) and upheld the same by dismissing the appeal of the revenue.

In the result, Revenue’s appeal is dismissed.

प"रणामतः राज"व क" अपील" खा"रज क" जाती है । Order pronounced in the open court on November 20th, 2015 (Joginder Singh ) (Rajesh Kumar) "या"यक सद"य / Judicial Member लेखा सद"य / Accountant Member मुंबई Mumbai; "दनांक Dated : 20 .11.2015 Ashwini Gajakosh Ps

7 CIT Vs. M/s Mehul Construction

आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant

उप/सहायक पंजीकार (Dy./Asstt.