Dr. Shamlal Narula v. Commissioner of Income-Tax, Punjab

Judgment

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 503 of 1963. Appeal from the judgment and order dated January JI, 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 • SuBBA RAO, J .-This appeal by certificate granted by the Su!Jba Rao, J. High Court of Punjab raises the question whether interest paid under s. 34 of the Land Acquisition Act, 1894, hereinafter 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 uncH.vided family, which owned·, inter alia, 40 bighas and 11 biswas of land in the town of PatiaJa. 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 I-, 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 inc~me 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 preferr~d an appeal to the Income-tax Appellate Tribunal. The said Tribunal by its order dated July 9, 1957, held that · [1964] the said amount representing the interest was a capital re- Dr. Shamlal Narula ceipt and. on that finding the said amou~t was excluded from the total mcome of the assessee. At the mstance of the Com- Commissioner of missioner of Income-tax the said Tribunal referred the follow- Income-1'""· Pnnjab ing question tcr the High Court of Punjab under s. 66-(1) of Subba Rao, J. the Income-tax Act, 1922: "Whether on a tr~e 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 lncometax 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. 48.660/- received by the appellant under the award was compensation for deprivinr; him of his right to possession of his property and was therefore, a capital receipt not liable to tax; and (ii) whatever may b~ 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 t<:kes the character of compensation for depriving the owner of the land his right to possession. bn 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 ,Jf s.1 taking possession until it should have been so paid or deposited".

The section itself makes a distinction between the amtmnt 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 brietly the scope of an award and the manner in which possession is taken under the Act. After the statutory notifications are issued and the I 7 S.C.R~ '·. t I ;i SUPRE:\IE COURT REPORTS 671 __ .. requisite notice is given to the perso~s interested in the land · 1964 · :so . acquired, ·the Collector, afte.r holding· ~h_e . necessary en- /Jr. Shaffllal Narula . qmry, makes an award, inter aba. · determmmg the amount · ·of compensation payable for the land so acquired. Section 15 Oommi .. irmer 0/. f th A Income·Tax Punjab o ct says·t at m etermmmg t e amount o compensation the Collector shall be guided by the provisions contained Subba Rao, J . in ss. 23 and.

24. Section 23 provides for the matters to be ·considered dn 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 consider- ·ed 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. :14 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 conside- -ration 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 iii 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 1he Government after the Collector has taken possession-in •One case after the making of the award and in the other, even ···;-, ·/.- :"": 1\ . ':;::·"- " -. · .. , t . 672 --._' --_---__ -.. SUPREl\IE -COURT REPORIS [1931} before -the making of the award. _In either case. some time: llr. 8,,,,-;;;;;J Narula may lapse between the taking of possession of. the -acquired _ land by the Collector and the payment or deposit of the com- Oommissianer oJ. pensation to -the person interested in the land -acquired. As.

1•come·Tax, Pun;ab the land acquired vests absolutely in the Government only S"1iba Rao, J. 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 entitledto under the provisions of the Act.

Therefore. a statutory liability has. been irilposed upon the Collector_ to pay interest on the amount awarded ·from the time of the-taking possession until the ainoun( is paid or deposited. This amount is not •. therefore, compensation for the land acquired or for depriving theclaimant 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 betweerr a case where possession has been taken before and that wherepossession 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 · naturar meaning it bears. There is an illuminating exposition of the: expression '.'interest .. by· the House of Lords in Westminster- Bank. Ltd. v. -Riches(').

The question there was whether where in an action for recovery of any debt or damages thecourt exercises: its discretionary power under a statute and orders that there shall be included in the suin 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. lnthat context it was contended that .money awarded as <lama~ · ges forthe detention of money was not interest and had not the quality of interest: Lord Wright observed: _"The general idea is that he is entitled to compensation for _the deprivation. Fromthat point of view (') (1947) 28 T~C. 159,-189. -- '1 S.C.R. it would seem immaterial whether the money was due to him under a contract express or implied, •/Jr. s~am/al N....i.. or a statute, or whether the money was due for any other reason in law.

In either case the money Commiuioner 0f Income-Tax, Punjab was ue to 1m an was not pa1 or, m ot er words, was withheld from him by the debtor after Subba R<UJ, J. 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 described as interest". This passage indicates that interest, whether it is statutory or .,;ontractual, 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 wbrd "interest" in contradistinction to the amount awarded, we do not see any reason why the expression should not be given the naturnl meaning it bears. The scheme of the Act and the express provisions thereof establish that the statutory interest payable under s. 34 is nbt 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 prbperty to the date of payment, a Division Bench of the Allahabad High Court held, in Behari Lal Bhargava '" Commissioner of Income-tax, C. P. and U. P. ('), 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 ls not the "fruit of a tree"-to borrow the simile used in Shaw Wal/ace's case (')-but was compensation or damages for loss of the right to re- ('l (1941) 9 l.T.R. 9, 24. 1') A.LR. 1932 P.C. 138. L P(D)i8C-"'J Dr. Shamlal Naro/a . v. [1964} tain possession; and it seems to us that Section 28 was designed as a convenient method of measuring such damages in terms of interest" . Commiuioner of 11!!'-0me.Tax, Punjab As we have pointed out earlier, as soon as the Collector has B.V,ba Rao, J, 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 less 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(') 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 assessee under s. I SA of the Income-tax Act on the advance payment of tax by him under the provision of that section held to be incame taxable in his hand: see Commissioner of Income-tax, Bilwr and Orissa v. Mahara}µdhi~aj Sir Kameshwar Singh(').

There. when the decision of the Allahabad High Court in Behari Lal Bhargava's case(') was relied upon, the learned Judges, refusing to follow it, observed thus i "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 gr~at respect) that the Allahabad decision is of doubtful authority. The decision is not consistent with the principle laid down in Schulze v. Bensted(') and Commissioners of Inland Revenue v. Barnato('). The Madras High Court expressly declined to follow the Allahabad case in Commissioner of Income-tax v. Nm•ayanan Chettiar(')." The Kerala High Court in P. V. Kurien v. Commissioner of !11co111e-tax, Kera/a(") held that interest paid on the enhancl'd amount of compensation directed to be paid by an appellate (') (1943) 11 I.T.R. 470, 477. (') (1953) 23 I.T.R. 212, 225. (') 9 I.T.R. 9. i') (1915) 7 T.C. 30. (') (1934-36) 20 T.C. 455. (') (1962) 46 I.T.R. 288.

7 S.C.R. court in an appeal against an award of compensation for 196' compulsory acquisition of land under the Land Acquisi- Dr. SlwmJal Narul~ tion Act represented capital and was not income liable to he _v.. I d. I I Oommts"""'' o, taxed un er t e n ian ncome-tax ct. t was argue t ere, Imome-Tax Puniab as is argued before us, that the interest awarded was a capital sum estimated in terms of interest. In coming to the conclu- Suhba R''°• J. sion which they did, the learned Judges relied upon the decision of the Judicial Committee in Inglewood Pulp and Paper Co., Ltd. v. New Burmwick Electric Power Commission(') and that of the Madras High Court in Re•'enue Dh·isional Officer, Trichinopoly v. Venkatarama Ayyar(").

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. J 6 or s. J 7 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. <') A.LR. 1928 P.C. 287. (') A.LR. 1936 Mad. 199. J4P{D)ISCI-·22~n).