The main legal point established in the judgment is the taxability of interest received as a revenue receipt and the allowance of deduction for interest paid during the accounting period.

Sreedharan, J.

At the instance of the assessee and the Department, the Income Tax Appellate Tribunal, Cochin has referred the following four questions of law for decision by this Court. The first three questions arc referred at the instance of the assessee and the fourth at the instance of the Department:

"At the instance of that assesses.

(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest amount of Rs. 36,066.70 being the interest payable to the assessee as per the award of the arbitrator on the amount of Rs. 3,00,556 withheld by the P.W.D. is a revenue receipt?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was following the cash system of accounting after the termination of its business in 1974 and consequently in holding that the interest amount received by the assessee during the accounting period relevant to assessment year 1979-80 is assessable in the said assessment year?

(iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is not entitled to claim deduction during the assessment year 1979-80 of the interest paid by the assessee to the Federal Bank during the accounting periods relevant to earlier assessment years?

At the instance of the department:

(iv) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is entitled to claim deduction of the interest paid by the assessee to the Federal Bank during the accounting period relevant to assessment year 1979-80?".

2. The assessee was a contractor under the Public Works Department. He was mainly engaged in the construction of sea wall near Kayamkulam. He stopped his work by April, 1974. At that time, a sum of Rs. 3,00,556/- was due to the assessee from the Department and the payment of the same was withheld by the Department. Payment was also due for some work done, for which bills were pending. The matter was referred to arbitration. An award was passed by the Arbitrator on 20-7-1977. As per the Award, assessee became entitled to:

(i) Rs. 12,000/- for the work done and for which the bill was pending;

(ii) Rs. 36,066.70 by way of interest for the period from 1-6-1974 to 29-5-1976 on the sum of Rs. 3,00,556 withheld by the department; and

(iii) Future interest at the rate of 6% per annum on amounts awarded under items (i) and (ii) above which came to Rs. 790.15 and Rs. 2,076.50.

Amounts by way of interest were received by the assessee during the accounting period relevant to the assessment year with which we are concerned in this proceeding. These amounts were brought to tax by the Income Tax Officer as revenue receipt. The assessee contended that interest payable by P.W.D. was neither under a statute nor under a contract and so it was only on ex-gratia basis, which cannot be taken as revenue receipt. This contention was negatived by the Income Tax Officer, the Appellate Assistant Commissioner and the Tribunal. Yet another contention that was raised by the assessee was that he was following the the i can tile system of accounting and so, the amount cannot be brought to tax in the assessment year 1979-80. This contention was also negatived by the Tribunal. Assessee further contended that he had overdraft/loan facilities from the Federal Bank for carrying out the contract work. Even after the termination of the contract work, the assessee was paying interest on the amounts due to the bank. The interest so paid should be allowed as deduction from the amounts received under the arbitration award. In view of the finding recorded by the Tribunal that the assessee was following the cash system of accounting, the amount paid by the assessee to the bank during the accounting period relevant to the assessment year alone was allowed as a deduction. According to the Tribunal, even under the mercantile method the interest paid by the