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PETITIONER: DR. SHAMLAL NARULA

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, PUNJAB

DATE OF JUDGMENT: 09/04/1964

BENCH: SUBBARAO, K. BENCH: SUBBARAO, K. SHAH, J.C. SIKRI, S.M.

CITATION:  1964 AIR 1878            1964 SCR  (7) 668  CITATOR INFO :  F          1967 SC 657  (4)  F          1968 SC 129  (6,9)  R          1970 SC1582  (4)  R          1970 SC1702  (3)  R          1972 SC 260  (9)

ACT: Income  Tax-Land acquired-Award made by  Collector--Interest on  compensation awarded-If interest amounted to a  part  of compensation-Indian  Income-tax Act, 1922 (11 of 1922),  ss. 3, 4--Land Acquisition Act, 1894, s. 34.

HEADNOTE: The State acquired the land of the appellant.  The Collector made an award under the Land Acquisition Act as a result  of which the appellant received Rs. 2,81,822/-, which  included a  sum  of  Rs. 48,660/- as interest upto the  date  of  the award.   ’The Income-tax Officer included Rs. 48,660/-  (the said  interest) in the total income of the appellant on  the ground that the said amount was not a capital receipt.   The matter  went  upto the Income-tax Appellate  Tribunal.   The Tribunal excluded the said interest from the total income of the assessee (appellant) on the ground that it was a capital receipt.   On a reference the High Court held that the  said interest was not a capital but a revenue receipt and as such liable  to  tax under the Indian Income-tax Act.   The  High Court  granted  a certificate to the appellant  to  file  an appeal to the Supreme Court.  Hence the appeal. Held:     (i) The scheme of the Land Acquisition Act and the express provisions thereof establish that the statutory  in- terest  payable under s. 34 is not compensation paid to  the owner  for depriving him of his right to possession  of  the land acquired, but that given to him for the deprivation  of the  use of the money representing the compensation for  the land  acquired.  In other words the statutory interest  paid under  s.  34 of the Act is interest paid  for  the  delayed payment  of  the compensation amount and,  therefore,  is  a revenue receipt liable to tax under the Income-tax Act. Behari Lal Bhargava v. Commissioner of Income-tax, C.P.  and U.P.,  (1941), 9 I.T.R. and P. V. Kurien, v. Cmmissioner  of Income-tax, Kerala, (1962), 46 I.T.R. 288, overruled.

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Westminister Bank Ltd. v. Riches, (1947), 28 T.C. 159,  Com- missioner  of Income-tax, Madras v. CT.  BM.   N.  Narayanan Chettiar, (1943), 11 T.T.R. 470 and Commissioner of  Income- tax Bihar and Orissa v. Maharajadhiraj Sir Kameshwar  Singh, (1953), 23 I.T.R. 212, approved. Inglewood Pulp and Paper Co. Ltd. v. New Brunswaick Electric Power   Commission,  A.I.R.  1928  P.C.  287   and   Revenue Divisional  Officer,  Trichinopoly  v.  Venkatarama   Ayyar, A.I.R. 1936 Mad. 199, distinguished. Shaw  Wallace’s  case,  A.I.R. 1932  P.C.  138,  Schulze  v. Bensted,  (1915),  7  T.C. 30, and  Commissioner  of  Inland Revenue v.     Barnato, (1934-36), 20 T.C. 455, referred to. (ii) The interest under s. 34 of the Land Acquisition Act shall be  paid  on  the  amount awarded from  the  time  the Collector take possession  until  the  amount  is  paid   or deposited.  It 669 makes  no  difference in the legal position between  a  case where  possession  has  been taken  before  and  that  where possession  ’has been taken after the award, for  in  either case   the  title  vests"  in  the  Government  only   after possession has been taken. In  no sense of the term can it (interest) be  described  as damages  or  compensation for the owner’s right  to,  retain Possession,  for  as he has no right  to  retain  possession after possession was taken under s. 16 or s. 17 of the Act.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 503 of  1963. Appeal  from the judgment and order dated January 31,  1962, of the Punjab High Court in I.T.R. No. 28 of 1960. B. N. Kripal and A. N. Kripal, for the appellant. Gopal Singh and R. N. Sachthey, for the respondent. April 9, 1964.  The judgment of the Court was delivered by      SUBBA RAO, J.-This appeal by certificate granted by the High  Court of Punjab raises the question  whether  interest paid under s. 34 of the Land Acquisition Act, 1894,  herein- after called the Act, is of the nature ’of a capital receipt or of a revenue receipt. The  relevant  facts  are not in dispute  and  they  may  be briefly  stated.  The appellant, Dr. Shamlal Narula, is  the Manager  of  a Hindu undivided family,  which  owned,  inter alia,  40  bighas  and  11 biswas of land  in  the  town  of Patiala.   The  Patiala  State  Government  initiated   land acquisition  proceedings for acquiring the said  land  under Regulation  then  prevailing in the Patiala  State.   It  is common  case that the State Regulations are in pari  materia with the provisions of the Act.  The State of Patiala  first merged into the Union of Pepsu and later the Union of  Pepsu merged  into  the State of Punjab.  It is also  common  case that there was a Land Acquisition Act in the Union of  Pepsu containing provisions similar to those obtaining in the Act. On  October  6, 1953, the Act was extended to the  Union  of Pepsu.  On September 30, 1955, the Collector of Patiala made an  award under the Act ,as a result of which the  appellant received on December 1, 1955, a sum of Rs. 2,81,822/-, which included a sum of 48,660/- as interest up to the date of the award.   For  the  year  1956-57,  the  Income-tax   Officer included  the  said  interest in the  income  of  the  Hindu undivided family of which the appellant is the manager,  and assessed  the  same  to  income-tax,  after  overruling  the appellant’s contention that the said interest was a  capital

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receipt  and,  therefore, not liable to tax.   On  June  14, 1957,  the  Appellate Assistant Commissioner  confirmed  the order of the Income-tax Officer.  The Appellant preferred an appeal  to  the  Income-tax Appellate  Tribunal.   The  said Tribunal by its order dated July 9, 1957, held that 670 the said amount representing the interest was a capital  re- ceipt and on that finding the said amount was excluded  from the  total income of the assessee.  At the instance  of  the Commissioner  of Income-tax the said Tribunal  referred  the following question to the High Court of Punjab under s.  66- (1) of the Income-tax Act, 1922:               "Whether  on a true interpretation of  section               34  of the Land Acquisition Act and the  Award               given  by the Collector ’of Pepsu on the  30th               September, 1955, the sum of Rs. 48,660/-,  was               captital  receipt not liable to tax under  the               Indian Income tax Act?" The said reference was heard by a Division Bench of the High Court and it held that the said amount was not a capital but a revenue receipt and as such liable to tax under the Indian Income-tax Act.  Hence the present appeal. Learned  counsel  for  the appellant raised  before  us  two contentions,  namely, (i) the sum of Rs. 4.8,660/-  received by  the  appellant  under the  award  was  compensation  for deprivinl,7  him of his right to possession of his  property and was therefore, a capital receipt not liable to tax;  and (ii)  whatever  may be the character of the  amount  awarded under  s. 34 of the Act by way of interest in a  case  where possession of the land has been taken by the State after the award,  in a case where possession of the land acquired  has been taken before the award, it would be a capital  receipt, for  it is said that in the latter the interest  necessarily takes the character of compensation for depriving the  owner of the land his, right to possession. On  behalf  of the Revenue the order of the  High  Court  is sought to be sustained for the reasons stated therein. The  question  raised  turns upon the true  meaning  of  the provisions of s. 34 of the Act.  It reads:               "When  the amount of such compensation is  not               paid   or  deposited  on  or   before   taking               possession  of the land, the  Collector  shall               pay  the amount awarded with interest  thereon               at  the  rate ’of six per ˜centum  per  ˜annum               from  the time of so ˜takin- possession  until               it should have been so paid or deposited". The  section itself makes a distinction between  the  amount awarded  as  compensation and the interest payable  on  the, amount so awarded.  The interest shall be paid on the amount awarded  from the time the Collector takes possession  until the amount is paid or deposited.  To appreciate the scope of the  section it is necessary to notice briefly the scope  of an  award and the manner in which possession is taken  under the  Act.  After the statutory notifications are issued  and the 671 requisite  notice is given to the persons interested in  the land so acquired, the Collector, after holding the necessary enquiry, makes an award, inter alia, determining the  amount of  compensation payable for the land so acquired.   Section 15  in  of the Act says that in determining  the  amount  of compensation the Collector shall be guided by the provisions contained  in  ss. 23 and 24.  Section 23 provides  for  the matters to be considered in determining compensation; s.  24 describes  the  matters to be neglected in  determining  the

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compensation.   A perusal of the provisions of s.  23  shows that  interest is not an item included in  the  compensation for  any  of  the  matters  mentioned  therein;  nor  is  it mentioned  as  a consideration for the  acquisition  of  the land.   Under cl. (2) of s. 23, the Legislature  in  express terms  states  that in addition to the market value  of  the land  the  court shall in every case award a sum of  15  per cent.  of  such  market  value  in  consideration  of   -the compulsory  nature of the acquisition.  If interest  on  the amount of compensation determined under s. 23 is  considered to  be a part of the compensation or given consideration  of the  compulsory nature of the acquisition,  the  Legislature would  have provided for it in s. 23 itself.   But  instead, payment  of interest is provided for separately under s.  24 in Part V of the Act under the heading "Payment".  It is  so ,done,  because interest pertains to the domain  of  payment after  the  compensation  has been  ascertained.   It  is  a consideration  paid  either  for the use  of  the  money  or forbearance  from  demanding  it after it  has  fallen  due. Therefore, the Act itself makes a clear distinction  between the  compensation  payable  for the land  acquired  and  the interest payable on the compensation awarded. Another  approach to the problem leads to the  same  result. Under s. 16 of the Act when the Collector has made an  award under  s. 11 he may take possession of the land which  shall thereupon  vest absolutely in the Government free  from  all encumbrances.  Under s. 17 thereof:               "In cases of urgency, whenever the appropriate               Government  so directs, the Collector,  though               no  such  award  has been made,  may,  on  the               expiration   of   fifteen   days   from    the               publication of the notice mentioned in section               9,  sub-section  (1), take possession  of  any               waste  land or arable land needed  for  public               purposes or for a Company.               Such  land shall thereupon vest absolutely  in               the Government, free from all encumbrances". Under  both the sections the land acquired vests  absolutely in the Government after the Collector has taken  possession- in one case after the making of the award and in the  other, even 672 before  the making of the award.  In either case, some  time may  lapse between the taking of possession of the  acquired land by the Collector and the payment or deposit of the  com pensation to the person interested in the land acquired.  As the  land acquired vests absolutely in the  Government  only after the Collector has taken possession of it, no  interest therein will be outstanding in the claimant after the taking of such possession: he is divested of his title to the  land and  his right to possession thereof, and both of them  vest thereafter  in  the  Government.   Thereafter  he  will   be entitled only to be paid compensation that has been or  will be  awarded  to him.  He will be entitled  to  compensation, though the ascertainment thereof may be postponed, from  the date  his  title  to the land and the  right  to  possession thereof have been divested and vested in the Government.  It is  as it were that from that date the  Government  withheld the compensation amount which the claimant would be entitled to under the provisions of the Act.  Therefore, a  statutory liability  has  been  imposed  upon  the  Collector  to  pay interest  on the amount awarded from the time of the  taking possession  until  the amount is paid  or  deposited.   This amount is not, therefore, compensation for the land acquired or  for deprivin- the claimant of his right  to  possession,

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but is that paid to the claimant for the use of his money by the  State.  In this view there cannot be any difference  in the legal position between a case where possession has  been taken before and that where possession has been taken  after the  award,  for  in  either case the  title  vests  in  the Government only after possession has been taken. The Legislature expressly used the word "interest" with  its well konwn  connotation  under  s. 34 of the  Act.   It  is, therefore,     reasonable   to  give  that  expression   the natural meaning it  bears.    There   is   an   illuminating exposition  of  the expression "interest" by  the  House  of Lords in Westminster Batik, Ltd. v. Riches(1).  The question there  was whettier where in an action for recovery  of  any debt or damages the court exercises its discretionary  power under  a statute and orders that there shall be included  in the sum for which the judgment is given interest on the debt or damages, the sum of interest so included is taxable under the  Income-tax Acts.  If the said amount was  "interest  of money" within Schedule D and the General Rule 21 of the  All Schedules Rules of the Income Tax Act, 1918, income-tax  was payable  thereon.   In. that context it was  contended  that money awarded as damages for the detention of money was  not interest  and bad not the quality of interest.  Lord  Wright observed:               "The  general idea is that he is  entitled  to               compensation  for the deprivation.  From  that               point of view               (1)   (1947) 28 T.C. 159, 189.               673               it would seem immaterial whether the money was               due  to  him  under  a  contract  express   or               implied,  or a statute, or whether  the  money               was  due  for  any other reason  in  law.   In               either  case the money was due to him and  was               not paid or, in other words, was withheld from               him by the debtor after the time when  payment               should have been made, in breach of his  legal               rights,  and  interest  was  a   compensation,               whether the compensation was liquidated  under               an agreement or statute, as for instance under               section 57 of the Bills of Exchange Act, 1882,               or  was unliquidated and claimable  under  the               Act  as  in the present case.   The  essential               quality  of the claim for compensation is  the               same,  and the compensation is  properly  des-               cribed as interest". This   passage  indicates  that  interest,  whether  it   is statutory or contractual, represents the profit the creditor might  have made if he had the use of the money or the  loss he  suffered, because he had not that use.  It is  something in addition to the capital amount, though it arises ’out  of it.  Under s. 34 of the Act when the Legislature  designedly used the word "interest" in contradistinction to the  amount awarded, we do not see any reason why the expression  should not be given the natural meaning it bears. The  scheme of the Act and the express  provisions  there,of establish that the statutory interest payable under s. 34 is not compensation paid to the owner for depriving him of  his right to possession of the land acquired, but that given  to him for the deprivation of the use of the money representing the compensation for the land acquired. We  shall now proceed to consider the case law cited at  the Bar.  Where a Tribunal directed the Improvement Trust, under the provisions of s. 28 of the Land Acquisition Act, to  pay interest to the assessee from the date of taking  possession

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,of the property to the date of payment, a Division Bench of the  Allahabad  High Court held, in Behari Lal  Bhargava  v. Commissioner  of Income-tax, C. P. and U. P. (1),  that  the interest  so awarded was in the nature of  compensation  for the loss of the assessee’s right to retain possession of the property  acquired and, therefore, was no income  liable  to tax.  The reason for the said conclusion is stated thus:               "It is not the "fruit of a tree"-to borrow the               simile used in Shaw Wallace’s case (2)-but was               compensation or damages for loss of the  right               to re               (1) (1941) 9 I.T.R. 9, 24.               (2)   A.I.R. 1932 P.C. 138.               LP(D)lSC-22 . .               674               tain  possession;  and  it seems  to  us  that               Section 28 was designed as a convenient method               of   measuring  such  damages  in   terms   of               interest". As we have pointed out earlier, as soon as the Collector has taken  possession  of the land either before  or  after  the award  the  title  absolutely vests in  the  Government  and thereafter owner of the land so acquired ceases to have  any title  or right of possession to the land  acquired.   Under the  award  he  gets  compensation  for  both  the   rights. Therefore, the interest awarded under s. 28 of the Act, just like  under  s.  34 thereof, cannot  be  a  compensation  or damages  for the loss of the right to retain possession  but only compensation payable by the State for keeping back  the amount payable to the owner.  Adverting to the said decision a Division Bench of the Madras High Court in Commissioner of Income-tax,  Madras  v. CT. RM.   N.  Narayanan  Chettiar(1) observed:               "...........   with  great  respect  we   find               ourselves  unable  to  follow  the  reasoning.               Certainly  we are not prepared to  accept  the               judgment  as  a guide to the decision  in  the               present case". So  was the interest granted to an assesse under s.  18A  of the  Income-tax  Act on the advance payment of  tax  by  him under  the  provision  of that section  held  to  be  income taxable  in his hand: see Commissioner of Income-tax,  Bihar and  Orissa v. Maharajadhiraj Sir Kameshwar Singh(2).  There when the decision of the Allahabad High Court in Behari  Lal Bhargava’s  case(3)  was relied upon, the  learned  Judges,. refusing to follow it, observed thus:               "It  is  not a matter of  discussion  for  the               Central   Government  but  the  duty  to   pay               interest  is imposed by statute.   Apart  from               this  I  think (with great respect)  that  the               Allahabad  decision is of doubtful  authority.               The  decision  is  not  consistent  with   the               principle  laid down in Schulze v.  Bensted(1)               and   Commissioners  of  Inland   Revenue   v.               Barnato(5).   The Madras High Court  expressly               declined  to  follow  the  Allahabad  case  in               Commissioner   of  Income-tax   v.   Narayanan               Chettiar(1)." The  Kerala  High Court in P. V. Kurien v.  Commissioner  of Income-tax, Kerala(6) held that interest paid on the enhanc- ed  amount  of  compensation  directed  to  be  paid  by  an appellate (1)  (1943) 11 I.T.R. 470, 477. (2)  (1953) 23 I.T.R. 212, 225. (3)  9 I.T.R. 9.

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(4)  (1915) 7 T.C. 30. (5) (1934-36) 20 T.C. 455. (6) (1962) 46 I.T.R. 288. 675 court  in  an appeal against an award  of  compensation  for compulsory  acquisition of land under the  Land  Acquisition Act  represented  capital and was not income  liable  to  be taxed under the Indian Income-tax Act.  It was argued there, sum  estimated  in  terms  of interest.  In  coming  to  the conclusion     which  they  did, the learned  Judges  relied upon the decision   of  the Judicial Committee in  Inglewood Pulp and Paper Co., Ltd.  v.  New Burnswick  Electric  Power Commission(1) and   that of the Madras High Court in Revenue Divisional Officer, Trichinopoly v. Venkatarama Ayyar(2). In the  former, the Judicial Committee directed  the  purchaser who had taken delivery and possession of the property he had purchased  before the sale to pay interest to the vendor  on the purchase money from the date he had taken possession  on the  ground  that "the right to receive interest  takes  the place  of the right to retain possession and is  within  the rule";  and  in the latter, though it arose under  the  Land Acquisition  Act,  possession was taken  by  the  Government under circumstances falling outside the scope of ss. 16  and 17  of  the said Act.  In both the cases the title  did  not pass to the vendee in one case and to the State in the other when possession was taken by them and, therefore, it may  be said that the owner was given interest in place of his right to  retain possession of the property.  But in a case  where title  passes to the State, the statutory interest  provided thereafter  can only be regarded either as representing  the profit  which owner ’of the land might have made if  he  had the use of the money or the loss he suffered because he  had not  that use.  In no sense of the term can it be  described as  damages or compensation for the owner’s right to  retain possession,  for he has no right to retain possession  after possession  was taken under s. 16 or s. 17 of the Act.   We, therefore, hold that the statutory interest paid under s. 34 of  the Act is interest paid for the delayed payment of  the compensation  amount  and, therefore, is a  revenue  receipt liable  to tax under the Income-tax Act.  The order  of  the High Court is, therefore, correct. In the result, the appeal fails and is dismissed with costs.                           Appeal dismissed. (1) A.I.R. 1928  P.C. 287.  (2)   A.I.R. 1936 Mad. 199. L/ P(D) ISCI--22(a)  . . 676