ORDER
Dr. O.K. Narayanan, Accountant Member
1. These two income-tax appeals are filed by the Revenue. These appeals relate to assessment years 1991-92 and 1992-93. They are filed against the common order passed by the Commissioner (Appeals), Visakhapatnam on 9-12-1994, and arise out of regular assessments completed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961.
2. The Respondent-assessee in these cases is an individual doing business of trading in cycles and cycle parts. He also derives income from agriculture from the lands owned by him. Some of the agricultural lands owned by the assessee situated at Turangi Village, Kakinada Rural Mandal, East
Godavari District were proposed to be acquired by the Land Acquisition authority. In accordance with the said proposal, the lands belonging to the assessee were taken possession of by the authorities on 30-1- 1988 with the consent of the assessee. When the possession of the lands was taken by the authorities with the consent of the assessee, there was an agreement to the effect that no interest would be payable by the Government upto 30-10-1988, or tilt the date of the award whichever would be earlier. Subsequently, necessary notifications were issued and official acquisition awards were passed on 29-3-1992. The compensation payable to the assessee was declared in the award at Rs. 7.74 lakhs and Rs. 3.7 lakhs for the two pieces of land acquired. The award also stipulated that interest at 9 per cent per annum would be allowed on the compensation payable from 1-11-1988 to 28-1-1989 and at 15 percent per annum for the period from 29-1-1989 to 28-3-1992. This interest amount worked out to Rs. 3.84 lakhs and Rs. 0.81 lakhs. The above interest specified in the acquisition award actually related to the period from the take over of the physical possession of the lands to the date of the formal declaration of award. That is, the interest related to the period prior to the passing of the award.
3. The Assessing Officer treated the interest noted above, as revenue income liable to income-tax, and made proposals to the assessee for the
assessment of the said amounts. The assessee replied in detail, contending that the interest received for the period from 1-11-1988 to 29-3-1992, i.e. for the period prior to the formal passing of the award, was in the nature of compensation paid for the loss of use of the land, and therefore, it was capital in nature, and as such could not be taxed. Any how, the Assessing Officer did not agree with the above contention, and treated the interest as revenue income, and accordingly completed the assessments for the years under appeal.
4. When this matter was taken in first appeal, the learned Commissioner (Appeals) held as follows –
“On careful consideration of the submissions of the appellant and the facts and circumstances of the case I am fully convinced that interest granted by the Land Acquisition Department prior to the period of passing the award is to be treated as compensation for depriving from the use of the land and therefore, is of capital nature. Hence, the addition does not stand. The same is deleted.”
5. It is against the above finding and order of the learned Commissioner (Appeals) that the revenue has preferred these second appeals before this Tribunal.
6. The Revenue has raised the following effective grounds, which are common for both the assessment years under appeal –
“1…..
2. The date of vesting of the property in the Government shall be reckoned from the date of which the lands acquired from the assessee were
distributed to the weaker section of the public through house-site pattas, on which date the assessee is no longer the legal owner. Accordingly, interest paid for the period prior to the date of Award shall be treated as only revenue receipt.”
7. Shri C.P. Ramaswamy, the learned Senior Departmental Representative appearing for the Revenue argued that the learned Commissioner (Appeals) has gone wrong in holding that the interest received by the assessee was capital in nature. He contended that the Hon’ble Supreme Court of India has held in K.S. Krishna Rao v. CTT [1990] 181 ITR 408 that interest on compensation awarded is in the nature of income and cannot be considered as capital receipt. He argued that the Hon’ble Supreme Court has declared the legal nature of the interest payable on land acquisition compensation as revenue and income in nature, and therefore, it is not permissible to take any other view in the matter, that interest amount received for the period prior to the date of award was capital in nature. Therefore, he submitted that the order of the CIT(A) is liable to be set aside. Accordingly, he submitted that the appeals of the revenue are liable to be allowed.
8. Sudha Oleti, the learned counsel appearing for the Respondent-assessee argued that the learned CIT(A) was right in holding that interest received by the assessee for the period prior to the declaration of the award was capital in nature and not susceptible to the levy of income-tax. She contended that the vesting of land in Government took place on the date of the award and not on the date of taking possession of the land. For this proposition, she relied on the decision of the Andhra Pradesh High Court in CITv. Pandari Laxmaiah [1997] 223 ITR 671. She further contended in the light of the above decisions that though the possession of the land was taken by the Government even before the initiation of the acquisition proceedings under the Land Acquisition Act, yet for the purposes of vesting of the land in the Government, the relevant date would be the date when the award was passed. She contended therefore that the interest pertaining to the period from the taking possession of the land to the date of passing of the award could not be treated as interest payable on the compensation for land acquisition, but it has necessarily to be held as compensation for deprivation of property. The compensation paid for deprivation of property was capital in nature and not liable to tax, she submitted. For this proposition, the learned counsel relied on the decision of the Kerala High Court in CITv. Periyar & Pareekanni Rubbers Ltd. [1973] 87 ITR 666. She also placed reliance on the decision of the Tribunal in the case of Shri B.N. Rama Reddy v. ITO [IT Appeal No. 94 (Hyd.) of 1980] rendered on 15-2-1982, and filed a copy thereof before us.
9. We heard both sides in detail and considered the rival contentions very carefully. Here the issue to be considered is not whether the interest payable on the compensation payable to the assessee on acquisition of the land is taxable or not. Acquisition in the sense is on vesting of the land in
the Government. Once the land is vested in the Government, or the land is acquired on the basis of the award, charging of income-tax on the interest due on such compensation is now beyond dispute, as rightly argued by the learned Departmental Representative, especially in view of the decision of the Hon’ble Supreme Court in K.S. Krishna Rao’s case (supra). The Hon’ble Supreme Court has declared the principle applicable to the interest payable on compensation due on acquisition of land. That interest is in the nature of income. But, in this case before us, interest is for the period prior to the passing of the acquisition award. This is because the land was taken possession of, by the Government, even before the passing of the necessary award. At the same time, the property in the land has never passed along with the act of taking possession of the land from the assessee. The physical possession of the land was taken from the assessee on the basis of the consent. The assessee was actually deprived of the possession, but at the same time, the assessee was not deprived of the ownership. The assessee was deprived of the ownership of the land only on the date of passing of the award. This legal position is clearly upheld by the Hon’ble High Court of Andhra Pradesh in the case of Pandari Laxmaiah (supra). The right of compensation for the land acquired actually devolves upon the assessee only with effect from the actual passing of the property from him, i.e. when the property is vested with the Government. That is, from the date of passing of the property. Interest paid for the interregnum period from the date of taking over of the possession of the land by the Government to the date of actual passing of the award is in the nature of compensation for the deprivation of the physical possession of the land, which in turn amounts to deprivation of the enjoyment of the land by the assessee, who continues to be the owner till the award is passed. Examining the true nature of that interest, it has been declared by the Hon’ble Kerala High Court in Periyar & Pareekanni Rubbers Ltd.’s case (supra) as follows –
“There is a distinction between possession of land assumed under the provisions of the Land Acquisition Act, 1894, and possession otherwise taken. In the former case sections 16 and 17 of the Act stipulate that on possession being taken the property will vest in the Government. In the absence of any such statutory provision, when possession is assumed by the Government, whether under some provision of law or by agreement or unauthorisedly, there is deprivation of property and interest paid by the Government is merely compensation for deprivation of property. The fact that such compensation is calculated as a percentage of interest on the amount does not affect the question. It is still compensation for deprivation of property” [Emphasis supplied]
10. In the light of the above legal position, examining the facts of the assessce’s case, we are of the view that the interest received by the assessee for the interregnum period from the date of possession of the land taken over by the Government, to the date of formal award of acquisition has to be held as a capital receipt in the hands of the assessee,
since the same is paid by way of compensation for deprivation of the property, to the assessee. As for the decision of the Hon’ble Supreme Court in the case of K.S. Krishna Rao (supra) relied upon by the learned Departmental Representative, we find that the ratio of that decision has no application to the facts of the present case. In that case, the Hon’ble Supreme Court was examining the nature of interest due on the amount of compensation awarded on acquisition, for the period after the date of award. On the other hand, in the present case before us, we are concerned with the nature of interest for the period upto the date of the award. Question of interest for the period prior to the date of award arose in this case on account of passing on of the possession over the property to the Government prior to the passing of the award by the land acquisition authorities. Though the basis for the computation of interest in both the cases, viz. in the case before us and in the case considered by the Hon’ble Supreme Court, is common, i.e. the compensation awarded, the true nature and the reasons for the payment of these two types of interest are different. While interest in the instant case for the period upto the passing of the award is paid, since the assessee, who is the legal owner of the property is deprived of the enjoyment of the same, on account of the possession taken over by the Government even before the passing of the award, interest in the case considered by the Hon’ble Supreme Court in K.S. Krishna Rao’s case (supra) came to be paid for the period after the passing of the award, for the payment of the compensation beyond the dates prescribed in the award.
11. In the light of the above discussion, we agree with the view taken by the learned Commissioner (Appeals) that the interest received by the assessee in this case for the period from the date of handing over of the possession of the lands to the Government till the date of passing of the award, partakes the character of capital receipt, being compensation for depriving the assessee from enjoying the property as its legal owner, and as such, it is not liable to income-tax. In this view of the matter, we uphold the impugned order of the CIT(A), and reject the contentions of the Revenue in these appeals.
12. In the result, both these appeals of the Revenue are dismissed.