Excluding from taxable income the settlement amount for emotional distress to a contractor for unpaid commission? I think you want to read what the IRS states:

https://www.irs.gov/government-entities/tax-implications-of-settlements-and-judgments

And you know interest is taxable.

Your client didn't have lost income. They had an unpaid receivable, which they sued for and got paid. "Lost" income is like this example:

You invoice someone for $1,000. They don't pay. You basically have a 100% discount situation. If you manage to collect later, that's 100% income.

There was a peer here that used to point out: You can't write off what you don't write on.

So, even then, you have $1,000 revenue offset by $1,000 for returns and allowances (hint: it's a wash). But a cash basis entity wouldn't put unpaid revenue on the tax return, because it hasn't happened yet.