08 October 2010
A Govt. contractor has received a arbitration compensation along with interest @ 18% in current year. The dispute relates to payment of year 1998.
My query is that whether this interest component to be taxed as Revenue receipt or it can be considered as capital receipt.
Secondly, is there any way to reduce the tax liability. I have referred case laws high court but decisions are conflecting with each other.
09 October 2010
The nature of intrest will be depend on wether the contractor received the compensation against his capital assest or against his work contract. If he received that compansation against his work contract or an asset having revenue in nature than the intrest will be treated revenue receipt otherwise capital receipt and will be taxed accordingly
10 October 2010
The interest on delayed payment is a revenue receipt. Only way to reduce tax liability is to offer interest for taxation on accrual basis and allocate receipt year wise. Do consider element of interest for short payment of tax for your evaluation exercise.
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