JUDGMENT
Manohar Lal, J. – This is a reference by the Commissioner of Income Tax under Section 66 (2) of the Indian Income Tax Act asking for the opinion of this Court upon the question formulated at page 8 “Whether such part of the installment payment made under the terms of the Exhibit compromise as corresponds to the award of “Interest up to decree” described in column 2 of the analysis in Paragraph 5 of this Statement, is income within the charge of Section 3 of the Act read with Section 4 (3) (vii)” which arose out of the following facts.
The assessee is one of the widows of the Raja of Jharia who died in 1916 leaving an impartible Raj consisting of a large number of moveable and immovable properties some of which were the self-acquisitions of the then Raja. Upon his death Raja Shiva Prasad Singh, a collateral, took possession of all these properties as the owner of the Jharia Raj. In 1919 the assessee along with two other co-widows of the late Raja instituted a suit for recovery of possession of the whole of the impartible Raj including the moveable and immovable properties thereof chiefly on the ground that Raja Shiva Prasad Singh was not the rightful owner and that the three Ranis as heirs of their deceased husband were entitled to succeed to the Raj and all other properties left by the previous Raja. The defendant, Raja Shiva Prasad Singh, claimed to be in rightful possession of all the properties in suit as the rightful Raja and also relied upon certain deeds called bantannamas executed by the plaintiffs by which the Ranis were alleged to have relinquished their claims for consideration. He also pleaded that the acquisitions made by the Raja were accretions to the Raj and therefore belonged to the defendant by virtue of his right of ownership to the impartible Raj. The history of the litigation is elaborately set out in Shiva Prasad Singh v. Prayag Kumari Debi (I.L.R. 61 Cal. 711). The decision of the Calcutta High Court was affirmed substantially by the Privy Council in the case of Shiva Prasad Singh v. Rani Prayag Kumari Debi (L.R. 59 I.A. 331). The decree granted by the Calcutta High Court so far as it is relevant to the present dispute was passed in 1933 and awarded to the assessee a number of moveable properties which were held not to belong to the Raj such as tents, jewelleries and cash in till or deposits in the Bans or money lent out to various debtors. In case the moveables could not be returned in specie the Court fixed a valuation thereof. The total of the moveables, including arrears of maintenance, came to Rs. 25,40,401. The Court also awarded sums as damages for each item of moveables which were ordered to be returned, the damages being damages for detention. The total of such damages is stated to be Rs. 22,34,031. It also appears that during the pendancy of, or before the litigation was started the Raja had taken possession of the cash and bank deposits which were ultimately decreed to the assessee and had also realised loans from the debtors. After the decree was passed by the Subordinate Judge the defendant agreed to pay certain sums in part liquidation of the decretal dues. He paid Rs. 18,28,626 towards the principal amount and Rs. 8,47,611 towards damages. It may be stated here that the principal amount was to carry interest at 6 per cent. per annum generally but no interest was fixed on the damages. Subsequently there was a compromise between the parties by which the claim of the assessee was adjusted by fixing the total dues which then remained payable at a sum of Rs. 18,00,000, the assessee receiving Rs. 2 lakhs in cash and the Raja taking over the liability to pay Rs. 4,40,000 to the creditors of the assessee thus leaving the balance to be paid to the assessee of a total of Rs. 11,60,000. It was provided in the compromise petition by paragraph 6 that all payments which will be made by the judgment-debtor in the future would be credited in the proportion of six annas and ten annas, that is to say six annas will be set off towards the principal amount which was fixed at Rs. 7,16,463-1-9 and the remaining ten annas will be set off against the damages, balance amounting to Rs. 10,83,536-14-3.
The question formulated above arose out of the assessment for the year 1937-38 with regard to the previous year 1343 B.S. In the previous year the assessee admittedly received a sum of Rs. one lakh which according to the terms of the compromise just set out was credited in the proportion of six annas towards the capital (Rs. 37,500) and the balance (Rs. 62,500) towards damages. The Income-tax Department taxed the assessee on among other items this sum of Rs. 62,500 which was asserted as being income received by the assessee in the previous year. The contention of the assessee that this amount was not income but merely an amount received by her on account of damages awarded to her for the detention of her properties was overruled. The question for consideration, therefore, is whether the sum of Rs. 62,500 received by the assessee by the way of damages awarded to her by a decree in the circumstances stated above is assessable to income-tax.
As has been pointed out the Lord President in Renfrew Town Council v. Commissioners of Inland Revenue (19 Tax Cas. 13 at page 18) “the question is never more embarrassing that when it is concerned with payments in the nature of compensation or damages. The Income Tax Rules are of little assistance when it becomes necessary to distinguish between a capital receipt and a revenue one.” A large number of cases reported in Tax Cases have clustered round this difficult problem and it will serve no useful purpose to go through them all. The cases may be divided into three groups. The first group consists of cases arising out of a claim by or against a trustee who has been negligent in the discharge of his trust and has been ordered to repay the amount with interest or who, if found to have committed a fraudulent breach of trust, has been ordered to pay damages. In the former class of cases the portion of the amount received or paid as interest has been held to be assessable to income-tax but in the cases where damages were awarded income-tax was held not to be eligible. The earliest case which is usually considered in this group is the case of Schulze v. S. W. Bensted (7 Tax Cas. 30). This case and the later cases on the same topic were reviewed exhaustively in a recent decision reported in Commissioners of Inland Revenue v. Barnato (20 Tax Cas. 455) a decision of the Court of Appeal consisting of Lord Wright, M.R., Slesser, L.J., and Romer, L.J., and this has been again recently considered by Mr. Justice Finlay in Barlow v. Commissioners of Inland Revenue (21 Tax Cas. 354) where it is pointed out that in such cases the principle deduced from the case of Vyse v. Foster (1873, 8 Ch. 309) applies. There Jams, L.J., in the well-known passage pointed out that “if an executor commits a breach of trust, he and all those who are accomplices with him in the breach of trust are all the each of them bound to make good the trust funds and interest.” It is also pointed out that “if an executor or trustee makes profit by an improper dealing with the assets or the trust fund that profit he must give up for the trust,” and also account for trade interest at 5 per cent. If this passage is kept in view the apparent contradictions in the decisions are easily reconcilable because it shows that in England where the trustee committed a breach of trust or behaved in a negligent or careless manner he is bound under the law or the rule of law to pay interest, but where the trustee commits a fraudulent breach of trust no interest can be awarded but only damages. In the Barnato case already referred to, the Court decided that the interest which fell to be taxed was interest payable under a contract, because the obligation in respect of this interest was fixed by admission No. 9 representing the consent agreement of the parties at the stage when the case was before Romer, J. (See per Lord Wright towards the end of his judgment). Lord Justice Slesser in his judgment pointed out that it is important to turn to the statement of claim upon which Captain Barnato ultimately succeeded in obtaining money through the process of the order of the Court the investigation and ultimate compromise, to see whether there is any suggestion in that statement of claim that damages in the sense in which they were claimed, or said to have been claimed, in the case of the National Bank of Wales (1899, 2 Ch. 629) were ever demanded at all and he pointed out that the whole matter was put as on a basis of wrongful accounting and failure to account for matters which ought to have been accounted for and made this important observation : “It seems to me that such a demand for an account and inquiry as to the administration of the trusts and the partnership is wholly different from a claim sounding in damages or anything like damages.” Towards the end of his judgment he also indicates that “where on the consideration of the realities of the case, it emerges that the money is paid as interest and not paid merely as a means of measuring damages, there it can properly be said that it satisfies the requirement of Case III, Rule I, of Schedule D, that the tax shall extend to “any interest of money.” Lord Justice Romer, who had made the order under which the amount was claimed by the assessee, pointed out that his order contained certain admissions as to the principle upon which the accounts and inquiries that were going to be directed should be ascertained and that it was agreed that the trustees should be charged with compound interest at 4 1/2 per cent. per annum on all or any money found due to the plaintiff from time to time until payment.” This group, therefore, deals with that class of cases where interest is payable either under a contract or under a rule of law.
The second group of cases deals with the situation where damages pure and simple have been awarded. The Lord President has given a number of illustrations to appreciate this question in Renfrew Town Council v. Commissioners of Inland Revenue (19 Tax Cas. 13 at p. 18) where he says thus : “Take, for instance, the case of a transport company which unavoidably incurs liability for damages to persons injured by accident. The damages are revenue charges because they are expenses inseparably connected with the conduct of the business from year to year. Thus, in a case of serious injury resulting in payment of a Thousand Pounds or Two by the company, the sum paid will be treated as a revenue charge in the companys accounts. But how will the matter stand as regards the liability to Income Tax of the payee ? It would appear to be all a question of circumstances. If he is permanently disabled, the damages would appear to be a capital increment in so far as he is concerned, but if he is only knocked out for, say, six months, during which time he loses, say, professional income, the damages look like a revenue receipt just as the professional income (if earned) would have been; (see Burmah Steamship Co. v. Inland Revenue, 1931 S.C. 156). It would be easy to multiply examples. In other words, annual payments may be capital payments, and a single payment may be a revenue charge in the accounts of the payer and it may be either a capital or a revenue receipt in the hands or account of the payee according to the circumstances of the payee and the character of the injury.”
In Schulze v. S. W. Bensted (7 Tax Cas. 30) Lord Johnston observed : “The question is whether a sum paid under decree eo nominee as interest on a principal sum recovered by the pursuers in an action, was interest in their hands which fell to be assessed to income-tax. Where a pursuer recovers damages with interest from the date of decree, I do not think that that interest is chargeable. It is part of the damages. But where a sum is due on a definite date, with interest from the date of advance and decree goes out the case is different. The interest ought to have been in the creditors hands on the stipulated date, and is none the less interest when it is recovered along with the principal under the decree. Between these two cases there may be many, some partaking more of the characteristics of the one, some more of those of the other;” and at the same page he later on observed that in the circumstances of the case “there was restored to the trust a principal sum which ought throughout to have been in the trustees hands and bearing interest, and there was also restored to the trust a sum representing that interest at the rate of 3 1/2 per cent.” so that “when it reached the hands of the trustees it was a surrogatum for that which ought to have termly reached the hands of the trustees and have been applied by them as income, in which case it would have been subject to income-tax, and when it did reach their hands I think they were equally bound to apply it in accounting with the beneficiaries as income, and I am unable to see any sound reason for holding that it did not become liable to income-tax in the hands of the trustees when received.” These remarks were approved by Lord Justice Slesser in his judgment in the Barnato Case.
In Commissioners of Inland Revenue v. Ballantine (8 Tax Cas. 595) a firm of contractors made a claim for costs, loss and damage against the railway company. The matter was referred to arbitration and the arbiter awarded the firm a certain sum mainly as damages, together with interest thereon at 5 per cent. The Lord President in considering the question of assessability of the damages said : “I think it may be safely taken that the award was not an adjustment of a contract debt at contract rates, but was substantially an assessment of compensation to the contractors for their outlays and losses under the particular circumstances in which those outlays and losses were incurred. It is impossible of course to know precisely the reasons which influenced the arbiter in taking the plan of fixing three capital sums in the first instance as at the date of the lodging of the amended claim, and then adding interest on those sums from that date until payment. It is enough that that was the mode he thought fair for the purpose of assessing compensation to the contractors in the circumstances of the case before him.” He then points out : “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 to be used by an arbiter in arriving at what he things 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 the elements in the gross sum discerned 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 modem estimations only. The interest is such merely in name, for it truly constitutes that part of the compensation discerned for which is attributable to the fact that the claimant has been kept out of his due for a long period of time.”
Simpson v. Executors of Bonner Maurice as Executor of Edward Kay (14 Tax Cas. 580) has an important bearing on the question which is now before us. In that case a naturalized British subject, domiciled and ordinarily resident in the United Kingdom, had at various dates deposited securities, stocks and shares in banks in Germany with instructions to collect the interest thereon; he died during the Great War. Before the termination of the war, however, the interest and dividend in respect of the securities were duly collected by the Bank but owing to the legal position created by the war the owner or his representatives could not deal with his accounts in the German Bank. As a result of the Peace Treaty and by virtue of an award by the mixed Arbitral Tribunal the sums due to the deceased were paid over to his representatives along with compensation, the compensation being the sum calculated upon the basis of interest in respect of that sum. Justice Rowlatt pointed out that although (sic) the German law recognized the security as remaining the property of its owner, Mr. Kay, but not so as to bear interest. “The Treaty did not give Mr. Kay any right to interest, nor did it declare the Treuhander a trustee so as to found any consequential claim for interest; it did not empower the Tribunal to give interest as such, or to make any declaration as to the character of the purpose for which the Treuhander had held the money. The Treaty gave compensation, and the tribunal which assessed the principal sum has assessed it on the basis of interest. I think this sum first came into existence by the Award, and no previous history or anterior character can be attributed to it. It is exactly the damages for detention of a chattel, and unless it can be said that damages for detention of a chattel can be called rent or hire for the chattel, during the period of detention. I do not think this compensation can be called interest.” The case was taken to the Court of Appeal and the Master of the Rolls in the course of his judgment dealing with the nature and quality of the compensation which was paid under Article 297 of the Treaty observed : “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. It could not have been recovered according to English law as interest. In the case of London, Chatham and Dover Railway v. The South Eastern Railway Company which was before the House of Lords (1893 A.C. 429), there was a delay in payment of an important sum by one railway to another, and the creditor sought to recover interest in consequence of the delay. It was pointed out that interest, according to our law, depends upon, first, a contract express or implied, and, secondly, the Statute of 3 and 4 William IV, Chapter 42, under which you can make interest payable in respect of a debt or sum certain, payable by virtue of a written instrument at a certain time, or after a demand has been made giving notice that interest will be charged. Now it is quite clear that there was no contract made by the Germans to pay this interest. The duty to pay compensation. So far as English law goes, as pointed out by Lord Herschell and the others, and much as they would desire to impose a liability to pay interest, yet interest cannot be given under English law by way of damages for the detention of the debt;” and he concluded his remarks thus : “For withholding this sum, for preventing Mr. Kay, or his executors, exercising the power of disposition over his property, the Germans have been compelled to pay compensation. The way to estimate that compensation or damages – the sensible way no doubt -would be by calculating a sum in terms of what interest it would have earned. That has been done, but the sum that was paid has not been turned into interest so as to attach Income Tax to it.” Lord Justice Lawrence and Lord Justice Russell came to the same conclusion. This group, then, deals with that class of cases where damages are awarded either on calculations based on interest or otherwise but where interest as such was neither payable under any law nor demandable by virtue of any contractual obligation incurred by the parties.
The third group of cases is illustrated by Ensign Shipping Co. Ltd. v. Commissioners of Inland Revenue (12 Tax Cas. 1169) and Burma Steamship Company, Limited v. Commissioners of Indian Revenue (16 Tax Cas 67). The facts of the former case were that during a coal strike in 1920 two ships belonging to the appellant company, which were ready to proceed to sea with cargoes of coal, were detained in port by order of the Government for periods of 15 and 19 days. The Company received from the Government a certain sum as compensation for the loss of use of the ships and for wages. The Court of Appeal confirmed the decision of Mr. Justice Rowlatt and held that the compensation received by the company was properly assessed to Excess Profits duty as a trading receipt of the Company. The Master of the Rolls pointed out that looking at the nature of the undertaking which the Ensign Company was carrying on, that it was to make use of their vessels day by day, and to make use of the earnings which they secured to make a profit, “it seems to me that, looked at from a businesses point of view, all that has happened is that the two vessels arrived much latter at the ports to which they were consigned than they would have done, with the consequent result that for the certain number of days which they were late they could not possibly make any earnings, and it is in respect of that direct loss by reason of the interference with the rights exercised on behalf of His Majesty that they made a claim and have been paid compensation” and latter on he came to the conclusion that the view adopted by Mr. Justice Rowlatt was correct when he states : “I think I ought to regard this sum as these Commissioners have obviously regarded it, as a sum paid which to the ship owners stands in lieu of the receipts of the ship during the time of the interruption” and therefore, “this sum falls into the trading receipt earned by these two ships, as would the receipts from a charter for the 15 or the 19 days if there had been separator charters for those respective periods entered into by the ship owners for the ships for that time”.
In Burma Steamship Company, Limited v. Commissioners of Inland Revenue, (16 Tax Cas. 67), the appellant company jointly with another company bought a motor vessel second-hand and immediately placed it in the hands of repairers for overhaul. But the time stipulated for completion of the overhaul was exceeded and the owing companies claimed from the repairers damages calculated by reference to the estimated profit which would have been earned by the vessel had she been trading during the excess time taken for overhaul. The claim having been compromised and the repairs having paid certain sub towards the amount agreed upon, the question arose whether the sum was assessable to income-tax. The Court of Session, Scotland, came to the conclusion that the amount received was a trading receipt and should be included in the computation of the Companys profits. This group, therefore concerns with the receipts of damages or compensation in courses of business or trade carried on by a trader.
The present case falls, in may opinion, within the second line of cases refereed to by me above. The amount of Rs. 60,500 was received as damages for detention of the movable properties of the Rani “for the wrongful withholding of possession by the defendant” (per Sir Dinshah Mullah at page 357 of L.R. 59 Indian Appeals while delivering the Judgment of their Lordships in the Jharia Raj case). The Raja was bound under no contract to pay any interest to the Rani for these properties. Indeed the Raja was claiming these properties was ultimately disposed of by a decree of the Court affirmed by their Lordships of the Judicial Committee. The matter is made clears by the mode of accounting which was ordered by the decree of the Calcutta High Court in respect of the payment which had been made bay the defendants during the pendency of the appeal. Regarding the amount in the Bank, the Subordinate Judge credited the payments which were made by the defendant in the first instance against the damages which had been adjudged as due to the assessee. This was overruled by the Calcutta High Court in these words : “This is in clear contravention of what is provided for in Mr. Boses decree and in the High Courts decision and what has been approved and confirmed by the Judicial Committee ………… The interest that has been awarded in plaintiffs favour in this case in not an interest provided for in any contract between the parties, express or implied, but by way of damages only. The payments that were made were not payments made against interest expressly and there has been no agreement between the parties and no order of court under which such payments or any of them, if made, were to be credited against interest. A rights of a creditor to appropriate a payment against unliquidated damages and when no interest was in fact running under any contract, express or implied, is a thing unknown to law.” Such being the nature of the sum awarded as damages I think the present case clearly falls within the rule laid down in Simpson v. Executors of Bonner Maurice as Executor of Edward Kay (14 Tax Cas. 580). It may be pointed out that the decision of the House of Lords referred to by the Master of the Rolls in London Chatham and Dover Railway Company v. The South Eastern Railway Company, (1893 A.C. 429) was followed in this Court in the case of J. H. Pattinson v. Srimati Bindhya Debi (I.L.R. 12 P. 216). In a recent case decided by their Lordships of the Judicial Committee in Bengal Nagpur Railway Company Limited v. Ruttanji Ramji (L.R. 65 Indian Appeals, 66) Sri Shadi Lal delivering the judgment of the Board cited with approval the decision of the House of Lords in 1893 Appeal Cases, 429 and also the decision of Lord Tomlin in Main and New Brunswick Electrical Power Company Limited v. Alice M. Hart (1929 Appeal Cases, 631) and came to the conclusions that “in the absence of any usage or contract, express or implied or of any provision of law to justify the award of interest on the decretal for that period could not be allowed by way of damages caused to the respondents for the wrongful detention of their money by the railway company.”
For the reason given above I would answer the question formulated at page 8 of the paper book in the negative. The assessee is entitled to Rs. 500 as cost from the Commissioner.
Harries, C.J. – I agree.
Fazl Ali, J. – I agree.
Reference answered in the negative.