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. 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
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
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,
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
,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.
(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