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PETITIONER: T. N. K. GOVINDARAJULU CHETTY

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, MADRAS

DATE OF JUDGMENT: 17/04/1967

BENCH: SHAH, J.C. BENCH: SHAH, J.C. SIKRI, S.M. RAMASWAMI, V.

CITATION:  1968 AIR  129            1967 SCR  (3) 653

ACT: Income-tax  Act. 1922(11 of 1922)-Interest  on  compensation for property acquired-If taxable.

HEADNOTE: The assesses& were offered compensation and interest on  the amount  of compensation in respect of their  property  which was first requisitioned under r. 75A of the Defence of India Act, 1939 and later acquired by the State under s. 5 of  the Requisitioned   Land  (Continuance  of  Powers)  Act.    The Requisition Act provided that. compensation payable shall be determined in accordance with the provisions of s. 19 of the Defence  of India Act and the rules thereunder, but  neither s. 19 nor the Rules provided that interest shall be paid  on the  amount  of compensation.  The  assessee  demanded  more compensation  and  interest, and, the High Court  in  appeal enhanced  the  compensation and awarded interest on  it  The Revenue assessed to income-tax the amount of interest, which was  upheld,  in reference, by the High Court.   In  appeal. this Court. HELD : Interest received by the assessee was taxable. If  the source of the obligation imposed by the  statute  to pay interest arises because the claimant is kept out of  his money, the interest received is chargeable to tax as income. The same principle would apply if interest is payable  under the  terms of an agreement and the court or  the  arbitrator gives  effect  to  the terms  of  the  agreement-express  or implied and awards interest which has been agreed to be paid Clauses (a) to, (f) of s. 19(1) of the Defence of India  Act are  a  Code relating to a arbitration  in  determining  the compensation  payable to a person depraved of his  property. Provisions  relating  to  payment  of  interest,  are   not, however,  part of the law relating to arbitration and  there is nothing in  cl. (g) which excludes the application of the substantive law relating to   payment  of interest when  the arbitration  is determining the amount of compensation.   In this  case,  the right to interest arose by  virtue  of  the provisions  of  Ss. 28 and 34 of the Land  Acquisition  Act, 1894,  and  the arbitrator ’and the High Court  merely  gave effect to that right in awarding interest on the account  of compensation. [658 E-F; 660 D-H]

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Dr.   Shamtal Narula v. Commissioner of Income-tax,  Punjab, Jammu  and Kashmir, Himachal Pradesh and Patiala, 53  I.T.R. 151, and Satinder Singh & Ors. v. Amrao Singh & Ors.  [1961] 3 S.C.R. 676, followed. The  Commissioners of Inland Revenue v. Bellantine,  8  T.C. 59,5,  and Simpson (H.  M. Inspector of Taxes) v.  Executors of  Bonner Maurice as Executor of Edward Kay, 14  T.C.  580, distinguished.

JUDGMENT: CIVIL  APPELLATE JURISDICTION: Civil Appeals Nos.  1425  and 1426 of 1966. Appeals  by special leave from the judgment and order  dated October  29, 1962 of the Madras High Court in Tax  Case  No. 195 of 1960. S.   Swaminathan  and R. Gopalakrishnan, for  the  appellant (in both the appeals). 654 T.   V.  Viswanatha Iyer, T.  A. Ramachandran, S. P.  Nayyar for  R.  N.  Sachthey,  for  the  respondent  (in  both  the appeals). The Judgment of the Court was delivered by Shah,  J.  The Income-tax Appellate Tribunal  submitted  two questions for the opinion of the High Court of Madras :               "1.  Whether  the  sum of  Rs.  1,28,716/-  is               assessable   as  income  under  any   of   the               provisions of the Act ?               2.    If the answer is in the affirmative, the               assessment years in which the amount falls  to               be assessed by suitable apportionment." The  first  question was answered by the High Court  in  the affirmative.   The High Court declined to answer the  second question  because it did not, :in their view, arise  out  of the  order of the Tribunal.  The assessees have appealed  to this Court. By  order dated January 30, 1944, the Collector  of  Madras, ,,exercising  power  under r. 75A of the  Defence  of  India Rules,  1939, requisitioned a property known  as  "Lutterals Gardens" belonging to the assessees.  The property continued to remain under requisition till it vested in the Government of Madras absolutely in consequence of an order made on  May 24,  1949  by  the Collector of Madras under  s.  5  of  the Requisitioned  Land  (Continuance  of  Powers)  Act,   1947, declaring.the  intention  of  the Government  of  Madras  to acquire  that  property.  The assessees declined  the  offer made by the Collector to pay Rs. 2,40,000/- as  compensation for acquisition of the property and interest at the rate  of 6%  thereon from the date, of notification for  acquisition, and  the  dispute relating to compensation  payable  to  the assessees  was referred to the Chief Judge of the  Court  of Small Causes, Madras.  By order of the High Court of  Madras in appeal from the order of the Chief Judge it was  adjudged that  the assessees be paid Rs. 5,00,0001-  as  compensation for  the property.  The High Court also awarded interest  at the  rate of 6% on the amount of compensation from the  date of notification for acquisition. During   the  two  previous  years  corresponding   to   the assessment years 1955-56 and 1956-57 the assessees received, pursuant to the ,order of the High Court, a total sum of Rs. 6,28,716/-.   In proceedings for assessment of tax  for  the assessment years 1955-56 and 1956-57, the Income-tax Officer apportioned  the  amount of Rs. 1,28,716/- on the  basis  of actual  receipts in the two previous years and assessed  the

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amounts   so  apportioned  to  income-tax.   The   Appellate Assistant  Commissioner  held that the  apportioned  amounts were of the nature of revenue and not capital receipts, but’ in his view the income received was liable to be  calculated on  accrual  basis  year after year from  the  date  of  the notification for ac- 655 quisition,  and  on  that account  the  assessments  of  the previous  years from 1950-51 to 1954-55 should  be  reopened and  the  interest which accrued in those  years  should  be assessed. The Commissioner of Income-tax and the assessees appealed to the  Appellate Tribunal against the order of  the  Appellate Assistant  Commissioner.  The assessees submitted  that  Rs. 1,28,716/received  as  interest being part  of  compensation were not assessable to tax, whereas the Commissioner claimed that  the Income-tax Officer was justified in assessing  the amounts  in  the  years in which they  were  received.   The Income-tax Appellate Tribunal accepted the contention of the assessees  that  the  receipts were not  assessable  to  tax because they were of the nature of capital receipts.  At the instance of the Commissioner, the Tribunal referred the  two questions set out here-in-before. Section 5 of the Requisitioned Land (Continuance of  Powers) Act,  1947 authorises the Government by which or  under  the authority  of which land has been requisitioned, to  acquire the  land subject to requisition, by publishing a notice  to the ’effect that the Government has decided to acquire  such land.   Section  6  of the Act provides,  inter  alia,  that compensation  payable  to  the owner of the  land  shall  be determined in accordance with the provisions of s. 19 of the Defence  of India Act, 1939, and the rules made  thereunder. Section  19 of the Defence of India Act, 1939, sets out  the principles  for  determining the compensation payable  to  a claimant.  The amount of compensation may be fixed by agree- ment  between the owner and the Government : where  no  such agreement  is reached the Central Government is enjoined  to appoint  an arbitrator having the qualifications  prescribed therein.   Under s. 19(1) (e.) the arbitrator in making  his award  must  have regard, inter alia, to the  provisions  of sub-s. (1) of s. 23 of the Land Acquisition Act, 1894 in  so far  as  the  same can be made applicable.   An  appeal  Res against the award of the arbitrator to the High Court.  Sub- sections  (2)  and  (3) of s. 19  confer  upon  the  Central Government  authority  to  frame rules for  the  purpose  of carrying  into effect the provisions of s. 19.  In  exercise of  that power, the Government of India framed "The  Defence of  India (Payment of Compensation and  Arbitration)  Rules, 1943"  which  amongst  other provisions  directed  that  the Collector   shall  pay  compensation  as  soon  as  may   be practicable.   But neither s. 19(1) of the Defence of  India Act,  nor  the Rules framed under s. 19(2) and  (3)  provide that  interest shall be paid on the amount of  compensation. In  the present case, interest was, however, offered  to  be paid  by  the  Collector; and the High  Court  also  awarded interest on the amount of compensation from the date of  the notification of acquisition. It  was held by this Court in Dr. Shamlal Narula v.  Commis- sioner of Income-tax, Punjab, Jammu and Kashmir, Himachal 656 Pradesh  and  Patiala(1) that the  statutory  interest  paid under S. 34 of the Land Acquisition Act, 1894, on the amount of compensation awarded from the date on which the Collector has taken possession of land compulsorily acquired under the Land  Acquisition  Act, 1804, is interest paid  for  delayed

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payment of the compensation and is a revenue receipt  liable to  tax under the Income-tax Act.  It was observed  in  that case at p. 156               ". . . . 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  section 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   thereof   establish   that    the               statutory  interest payable under section,  34               is not compensation paid to the owner for  de-               priving 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." Counsel   for  the  assessee  however  contended  that   the principle of Dr.  Shamlal Narula’s case(1) is not applicable to   this  case,  since  there  is  no  provision   in   the Requisitioned  Land. (Continuance of Powers) Act,  1947  and the  Defence  of  India  Act, 1939,  and  the  rules  framed thereunder  for  payment  of  interest  on  the  amount   of compensation.  Counsel said that under the Act, the owner is paid not the market value of the property, but  compensation determined  in accordance with a highly  artificial  scheme, and that the interest paid, in truth, bears the same quality as  compensation for deprivation of property and is on  that account  a capital receipt not exigible to tax.  In  support of  his.contention,  counsel invited our  attention  to  two decisions   :  The  Commissioners  of  Inland   Revenue   v. Ballantine(2) and Simpson (H.M. Inspector of Taxes) v.  Exe- cutors-of Bonner Maurice as Executor of Edward Kay(3). In  Ballantine’s  case(2) a claim of a firm  of  contractors against  a railway company for "additional costs,  loss  and damage’ was referred to arbitration.  The arbitrator awarded to the claimant a sum of money mainly as damages,  together with interest thereon at 5 per cent. per annum from the date of lodgement of claim until payment.  The Revenue sought  to charge the interest paid by the (1) 53 I.T.R. 51.                             (3) 14 T.C. 580. (2) 8 T.C. 595. 657 railway  company  to tax under Case III of Sch.   D  of  the Income-tax Act, 1918.  It was held that the sum added in the name of interest was part of damages, and was not  "interest of  money" chargeable to income-tax under Case III  of  Sch. D. Lord President Clyde observed :               "Now it is familiar that an assessment of  the               kind  may  contain as one of  its  constituent               elements  an  allowance in  respect  that  the               claimant  has lain for a long time out of  his               remedy.   The propriety of such  an  allowance               may depend on the character of the claim,  and               its  amount may depend on many  considerations               of  which time is only one.  But  an  interest               calculation is a natural and legitimate  guide

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             to  be used by an arbiter in arriving at  what               he  thinks  would be a fair amount.   In  most               cases   in  which  such  an  allowance  is   a               constituent of an award it does not separately               appear,  but  is  slumped  along  with   other               elements  in the gross sum decerned  for;  but               there is nothing to prevent an arbiter, if  he               thinks it just and reasonable in a  particular               case, to make the allowance in the form of  an               actual  interest calculation from a past  date               until  the sum fixed as at that date is  paid.               In   all  such  cases,   however-whether   the               allowance is wrapped up in a slump award or is               separately  stated in the decree-the  interest               calculation  is  used in  modum  aestimationis               only.   The interest is such merely  in  name,               for  it  truly constitutes that  part  of  the               compensation  decerned  for  which  is  attri-               butable to the fact that the claimant has been               kept out of his due for a long period of time.               It  is  not  therefore  "interest  of   money"               chargeable under Case ITT of Schedule D." In  Simpson  v. Executors of Bonner Maurice as  Executor  of Edward  Kay(1) the executors of Kay, a  naturalised  British subject,  who died during the First World War  received,  as the result of the peace treaty claims, amounts  representing partly capital of securities, stocks and shares in Banks  in Germany deposited by Kay; partly interest and dividends; and partly compensation under the Peace Treaty.  In a proceeding for  assessment of the receipt to tax it was held  that  the compensation  computed  on  the basis of  interest  was  not income  for the purposes of income-tax.  Lord  Hanworth,  M. R., observed at p. 601               "I want to add now one more word in  reference               to  the  sum  which has been paid  by  way  of               compensation under Article 297.  It-is said in               reference.to  that ’that.. at least, arose  at               the  time when it was paid under the order  of               the Mixed Arbitral Tribunal’.  It wag a sum               (1) 14 T.C. 580.               c.CI/67- 12               658               which was calculated as interest"-.’and it  is               interest,  and-  therefore it  is  within  the               words  of  the  Schedule,  which   undoubtedly               impose  a  tax upon interest which  arises  or               accrues to a person liable to tax.’ But is  it               interest  ?  Is  that its quality,  or  is  it               compensation  estimated and measured in  terms               of  interest  ? It appears to me  quite  clear               that,  apart  from Article 297,  no  such  sum               could have been recovered."               Lawrence, L.J., observed at p. 605               "Neither  the fact that the  compensation  was               measured by the amount of the interest,  which               but  for the embargo placed upon the money  by               the  German Government could have been  earned               by the Respondents, nor the fact that part  of               the  compensation was described as  "interest"               in the decision of the Mixed Arbitral Tribunal               in my judgment, has the effect of altering the               character  of  the compensation  paid  to  the               Respondents." But it must be noticed that liability to pay interest  arose in  Ballantine’s case(1) under the award of  the  arbitrator

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and in the Executors of Bonner Maurice as Executor of Edward Kay’s  case  (2)  under  the order  of  the  Mixed  Arbitral Tribunal, and in each case, it was held that what was  paid, though called "interest", was in truth compensation for loss suffered  on account of deprivation of property.   According to  the  view taken by this Court in  Dr.  Shamlat  Narula’s case(3),  if  the course of the obligation  imposed  by  the statute to pay interest arises because the claimant is  kept out of his money, the interest received is chargeable to tax as  income.  The same principle would apply if  interest  is payable under the terms of an agreement and the Court or the arbitrator    gives   effect   to   the   terms    of    the agreement--express or implied and awards interest which  has been agreed to be paid. It   is  therefore  necessary  to  determine   whether   the obligation  to pay interest awarded under the order  of  the High Court of Madras arose out of the statute or out of  the award.   In Satinder Singh & Ors.  V. Amrao Singh  and  Ors. (4) lands forming part of Cis-Sutlej Jagir were compulsorily acquired  under the East Punjab Acquisition and  Requisition of  Immovable  Property (Temporary Powers) Act,  1948.   The claimants  to  the lands claimed in  addition  to  statutory compensation  interest  from the date from which  they  were dispossessed  and till the date of payment of  compensation. The  arbitrator appointed under the Act awarded interest  on the  amount of compensation and the High Court of Punjab  in appeal  Confirmed  the  order.  This  Court  held  that  the claimants were (1) 8 T.C. 595, (2) 14 T. C. 580. (3)   53  I.T.R.  151 (4) [1961] 3 S.C R. 676,                             659 entitled  to  interest on the compensation amount  from  the date of dispossession till the date on which ’the amount  of compensation  was paid to the claimants.  Section 5  of  the East   Punjab  Acquisition  and  Requisition  of   Immovable Property   (Temporary  Powers)  Act,  1948,  set   out   the principles according to which compensation was to be paid in regard  to the acquired property, and by cl. (e) thereof  it was  provided that the arbitrator in making the award  shall have  regard ’to the provisions, of sub-s. (1) of s.  23  of the Land Acquisition Act, 1894 in so far as the same may  be applicable.   The  Act contained no  express  provision  for payment  of  interest  on  compensation  determined  by  the arbitrator.  This Court rejected the contention of the State of  Punjab, that ss. 28 and 34 of the Land  Acquisition  Act which  dealt with the payment of interest were not  intended to  apply to the proceedings before the arbitrator.  It  was observed               "Stated  broadly the act of taking  possession               of  immovable  property generally  implied  an               agreement to pay interest on the value of  the               property  and it is oil this principle that  a               claim for interest is made against the State.               " The Court further observed :               "It  would thus be noticed that the claim  for               interest proceeds on the assumption that  when               the   owner   of  immovable   property   loses               possession  of  it  he is  entitled  to  claim               interest   in   place  of  right   to   retain               possession.   The  question which we  have  to               consider  is whether the application  of  this               rule is intended to be excluded by the Act  of               1948,  and  as we have already  observed,  the

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             mere  fact  that s. 5(e) of the Act  makes  s.               23(1)  of  the Land Acquisition  Act  of  1894               applicable we cannot reasonably infer that the               Act intends to exclude the application of this               general rule in the matter of the, payment  of               interest."               The Court also observed               "When a claim for payment of interest is  made               by a person whose Immovable property has  been               acquired  compulsorily he is not making  claim               for damages properly or technically so called;               he  is  basing his claim on the  general  rule               that  if be is deprived of his land he  should               be   put   in   possession   of   compensation               immediately;  if  not, in lieu  of  possession               taken   by  compulsory  acquisition   interest               should  be paid to him on the said  amount  of               compensation." The scheme of the East Punjab Acquisition and Requisition of Immovable  Property (Temporary Powers) Act, 1948 is  similar to  the  scheme of the Requisitioned  Land  (Continuance  of Powers)  Act, 1947.  The Court in Satinder  Singh’s  case(1) held that be- (1)[1961] 3 S.C.R. 676. 660 cause of the injunction expressly to apply the provisions of s.  23(1)  of  the  Land  Acquisition  Act,  1894,  in   the determination of compensation, the application of ss. 28 and 34  dealing  with  the payment of  interest  on  the  amount awarded  as  compensation cannot be  deemed  excluded.   The Court  also  held  that  when  the  owner  of  property   is dispossessed  pursuant  to  an  order  for  compulsory   ac- quisition,  an agreement that the acquiring  authority  will pay interest on the amount of compensation is implied. The  reasoning on which the right of the owner of the  lands acquired  to  interest  was  affirmed  in  Satinder  Singh’s case(1), prima facie, applies in this case.  Counsel for the assessees contended that the application of ss. 28 and 34 of the  Land  Acquisition Act in  proceedings  for  arbitration under  the  Requisitioned Lands  (Continuance  Powers)  Act, 1947,  was expressly excluded by s. 19(1)(g) of the  Defence of India Act which enacted that:               "Save  as provided in this section and in  any               rules made thereunder, nothing in any law  for               the  time  being  in  force  shall  apply   to               arbitration under this section." But  cl. (g) is not susceptible of any such  interpretation. Clauses  (a)  to  (f) of s. 19(1) are  a  Code  relating  to arbitration  in  determining the compensation payable  to  a person  deprived  of his property.  Provisions  relating  to payment  of  interest  are not, however,  part  of  the  law relating  to arbitration and there is nothing in cl  1.  (g) which excludes the application of the substantive law relat- ing   to  payment  of  interest  when  the  arbitration   is determining the amount of compensation. We are therefore of the view that the principle on which The Commissioners of Inland Revenue v. Ballantine(2) and Simpson (H.M. Inspector of Taxes) v. Executors of Bonner Maurice  as Executor  of Edward Kay(3) were based has no application  to this  case.   It  may be recalled that in  those  cases  the arbitrator  and  the  Arbitral Tribunal  were,  in  awarding interest,  not seeking to give effect to, or to recognize  a right  to interest, conferred by statute or  contract.   The source  of the right to interest in both the cases  did  not arise  from the statute or agreement.  In the case on  hand,

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the  right to interest arose by virtue of the provisions  of ss.  28  and 34 of the Land Acquisition Act, 1894,  and  the arbitrator  and  the High Court merely gave effect  to  that right  in awarding interest on the amount  of  compensation. Interest  received  by the assessee was  therefore  properly held taxable. The appeals fail and are dismissed with costs.  One hearing Y.P.                             Appeals dismissed. (1)[1961] 3S.C.R. 676. (2)8T.C. 595 (3)14 T.C. 580 661