COMMISSIONER OF INCOME-TAX VS ELOOR CONSTRUCTIONS, 1998 PTD-KERALA-HIGH-COURT-INDIA 3092 (1996)

Income-tax---

----Reference--Penalty---Concealment of income---Business---Other sources- Interest- --Interest received by way of compensation is assessable as business income---Penalty levied on the ground that it constituted income from other sources---Tribunal justified in cancelling the penalty---No question of law arises from its order---Indian Income Tax Act, 1961, Ss.256 & 271(1)(c),

If the amounts under a contract were not paid at the proper time and interest is awarded either for delay or in the nature of compensation, such interest would only be an accretion to the assessee's receipts from the contract and would, consequently, be attributable to and incidental to the business carried on by it. It would not be income from other sources because it would have to be understood as income from other sources only if it cannot be brought within one or the other of the specific heads of the charge.

Held, dismissing the application for reference that the Income-tax Officer had levied penalty on the ground that interest received attributable to the delay in payment and by way of compensation was assessable under the head "Other sources". The amount was assessable as business income. The Tribunal was justified in cancelling the penalty. No question of law arose from its order.

CIT v. B.N. Agarwala & Co. (1993) 200 ITR 246 (Orissa); CIT v. Govinda Choudhury & Sons (1993) 203 ITR 881 (SC) and Govinda Choudhury & Sons v. CIT (1977) 109 ITR 497 (Orissa) ref.

N.R.K. Nair for Petitioner.

K.P. Dandapani for Respondent.

JUDGMENT

V. V. KAMAT, J.---The Department has approached this Court by this petition praying for direction under section 256(2) of the Income Tax Act, 1961, for reference of the following as many as seven questions:

" 1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and in fact,---

(i) in cancelling the order of penalty?

(ii) in not confirming the order of penalty at least to the extent confirmed by the Commissioner of Income-tax (Appeals)?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and in fact and had materials to hold,

(i) thus, in the first return of income, the assessee had stated the income at a higher figure than what is warranted in law;

(ii) 'there has been no understatement of income in the first return and are not the above findings wrong and unwarranted since penalty is leviable for concealing the particulars of the Income/furnishing ' inaccurate particulars of such income'?

(iii) 'thus, in the first return of income the assessee admitted even the payment of interest also'?

(iv) 'such interest was found to be not due to the assessee in the subsequent development' and are not the above findings (especially in the case of the assessee maintaining accounts on mercantile basis) and conclusion of 'not due' based on 'subsequent development' against law, unreasonable and unwarranted?

3. Whether, on the facts and in the circumstances of the case will not the non-return of the interest income amount to concealment of the particulars of income or furnishing of particulars of income despite the finding that 'that in the first return of income the assessee had stated the income at a higher figure than what is warranted in law and is not the finding wrong, against law and fact'?

4. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that ' there has been no understatement of income either in the first return of income or in the second return'; there has been no understatement of income leading to underassessment in the first instance or in second instance' and are not the above findings wrong against law and based on a misconception of law and wrong approach?

5. Whether, on the facts and in the circumstances of the case, and the provisions in section 271(1)(c) being 'concealed the particulars of the income or furnishing inaccurate particulars of such income, will not the findings of the Tribunal that 'failure of the assessee to bifurcate the receipt into contract receipts and interest receipts' attract penalty?

6. Whether, on the facts and in the circumstances of the case and when a percentage of the contract receipt alone is taxable and the entire interest receipt is taxable will not inclusion of interest receipts in the contract receipts, eschewing the difference, amount concealment of the particulars of income or furnishing inaccurate particulars of such income and attract penalty under section 271(1)(c) also in view of the finding of failure of the assessee to bifurcate the receipts into contract receipts and interest receipts'?-

7. Whether, on the facts and in the circumstances of the case, should not the Tribunal have considered the issue under the relevant Explanation to section 271(l)(c)?"

It must be stated at the outset that reading the text of all these questions, they relate to the factual context with regard to the matrix which could be really narrowed down and also shortened in view of the decision of the apex Court in CIT v. Govinda Choudhury & Sons (1993) 203 ITR 881.

The assessee is partnership-firm dealing the execution of civil contracts for the Kerala State Electricity Board. The year in question is 1985-86. Although the proceedings o~ this petition relate to the question of penalty and the basic question to be answered would be whether the payment of compensation received through the Court showing inclusion of interest would be properly shown as "business income: or as "receipt from other sources", and the controversy is settled by the decision of the Supreme Court CIT v. Govinda Choudhury & Sons (1993) 203 ITR 881, the necessary factual matrix is inevitable.

For the assessment year 1985-86, the original return was filed on December 31, 1985, showing Rs.2,36,253 as income under the head "Business". In the accompanying profits and loss account an item---contract receipt of Rs.21,50,304 was shown and in regard thereto net profit of Rs.2,06,133 is stated.

Then came a revised return, dated February 19, 1987, showing Rs.3,56,250 as profit on contract receipts of Rs.31,50,305. This was alongwith a covering letter specifying admissions in regard to the original return including a sum of Rs.9,94,239 from the work of Idukki Hydro Electric Power Cement Concrete Lining Project referring a sum of Rs.19,94.239 stating in regard thereto that the said amount was deposited by the Electricity Board in pursuance of the arbitration award in regard thereto. In regard to this revised return, the income admitted' was accepted in an assessment under section 143(3) of the Act by an order, dated March 30, 1987. It is observed that with regard to Rs.5,48,167 assessment had escaped arid in regard thereto a notice under section 148 of the Act was issued.

There was a third filing of return on March 20, 1988, whereunder the additional income of Rs.3,87,118 was shown. In regard to this, the facts were similarly explained in the annexed covering letter referring to an amount of Rs.31,50,305 as the contract receipt including a sum of Rs.6,59,485 towards interest attributable to the delay in payment and by way of compensation.

The Assessing Officer considered the situation and held that Rs.18,65,917 would be an amount of interest received by the assessee during the assessment year in question. The Assessing Officer proceeded to assess the same as the amount not being under the head "Business", But as the amount under the head "Other sources". The contention of the assessee was rejected.

The first appellate authority (the Commissioner of Income-tax (Appeals)) accepted the assessee's contention that Rs.12,07,349 would have to be excluded.

In is necessary to state that the Assessing Officer had initiated penalty proceedings under section 271(1)(c) of the Act and in regard thereto imposed penalty of Rs.3,26,000 by the order, dated September 25, 1990. Before the authority dealing with the above penalty-proceedings (the Deputy Commissioner of Income-tax (Assessment), Special Range, Trichur), it was strenuously contended that the amount that is received by the assessee would have to be properly shown as "business income". In regard thereto if was contended that the interest amounts are paid by the Electricity Board as part of the contract receipts and could not be understood and appreciated as having a separate origin in regard thereto. It was also contended that it is not even the case of the Department that anything was kept away from the books of account or the original statements. It was urged that it would be proper and correct to consider the entire payment as "business income" and any part of the said payment could not be understood as falling in any other head, more especially "other sources" separately. In the process, in support reliance was placed on the decision of the Orissa High Court in Govinda Coudhury & Sons v. CIT (1977) 109 ITR 497 and other High Courts also. It was held that it showed furnishing of inaccurate particulars by showing the amount as falling under the wrong head as a result of which, it is observed that an advantage is sought for by reason of the contract receipt being subjected to only 11 per cent taxation as against the amount of interest it had been shown in the other column would have been taxable to the extent of 89 per cent. of the concerned amount.

The proceedings of further appeal before the first appellate authority resulted in reducing of the amount of penalty. The appellate authority (Commissioner of Income-tax (Appeals)-I, Kochi), although confirmed the order of penalty under section 271(1)(c) of the Act held that the levy of penalty at Rs.5,26,856 as the basis, it would be proper to have the basis for levy of penalty, as Rs.4,35,738.

Now, the Income-tax Appellate Tribunal, Cochin, Bench (Annexure "E"), considered the question going to the very root of the situation. The Tribunal observed that every receipt received and enjoyed by the taxpayer need not necessarily assume the character of income. In the process of reasoning, the Tribunal also observed, by referring to the material and correspondence in the form of covering letters that the assessee honoured the view of the Department and was in a spirit of cooperation with the Department to be in peace in regard thereto.

The Tribunal considered the legal situation and observed that it cannot be definitely said that the interest awarded in the arbitration proceedings is exigible to tax in the light of the decision of the Orissa High Court in Govinda Choudhury & Sons v. CIT (19.77) 109 ITR 497. The Tribunal also referred to yet another decision of the Orissa High Court in, CIT v. B.N. Agarwala & Co. (1993) 200 ITR 246 affirming the earlier decision in the case of Govinda Choudhury (1977) 109 ITR 497.rThis was to record the proper character of the nature of the source of contract receipts and inclusion of contract interest in regard thereto. Factually, the Tribunal observed that the intention of the assessee is manifest, which would be clear from the accompaniments to the revised returns as well as the third return.

The situation that now it is unnecessary to travel all the way to the Orissa High Court is placed by learned senior counsel to place to problem beyond all controversies as everything that is required is declared by the apex Court in regard thereto. It is observed that if the amounts under a contract were not paid at the proper time and interest is awarded either for delay or in the nature of compensation, such interest would only be an accretion to the assessee's receipt from the contract and would consequently be attributable to and incidental to the business carried on by it. The logical extension of the above declaration is that the contract receipts and the interest calculated and included therein would partake of the same character as the receipts for the payment of which it was otherwise entitled under the terms and conditions of the original contract of work with a necessity of appreciation and understanding that the payment of interest partakes of the same character in view of its payment either on account of delay or in the nature of compensation in regard thereto. It is well-settled that it would not be "income from other sources" because it would have to be understood as "income from to other sources" only if it cannot be brought within one or the other of the specific heads of the charge. In other words, the Supreme Court has also declared something about the nature of the items which could be included in this last residuary column "income from other sources" to rule that the matters or items not falling under the earlier heads could only be considered to fall under the head in question. The direction is that the attempt is definitely expected to find out the proper head with regard to the item of income firstly by looking at its place in the other heads and it is only when that is not possible, a resort can be made to the head under consideration, which is "income from other sources".

In view of the above uncontroverted and binding situation, the conclusion of the Tribunal that this is not a case fit for levy of penalty by reasons of mistake of showing the amount under the wrong head will have to be confirmed.

The natural corollary would be that it would not be necessary to direct any reference as prayed for by the Department. For the above reasons, the original petition stands dismissed.

M.B.A./1570/FC Petition dismissed.