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

_1964_ _.April 9_ 668 SUPREME COURT REPORTS (1964] DR. SHAMLAL NARULA _v._ COMMISSIONER OF INCOME-TAX, PUNJAB (K. SUBBA RAO, J.C. SHAH ANDS. M. SIKRI, JJ.J _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 o.f 1922), _ss._ 3, _4-Land_ _Acquisition Act,_ 1894, _s._ 34. The State acquired the land of the appellant. Tne Collector made an award under the Land Acquisition Act as a result of which the appellant received Rs. 2,81,822/c, 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 Acquis'tion 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 acquir·ed, 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 compensa**tion** **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. _Commissioner_ of _Income-tax, Kerala,_ (1962), 46 I.T.R. 288, overruled. _Westminister Bank_ Vtd. v. _Riches,_ (1947), 28 T.C. 159. _Com-_ _missioner of Income-tax, Madras_ v. _CT. BM._ _N._ _Narayanan_ _Chettiar,_ (1943), 11 I.T.R. 470 and _Commissioner of Income-tax_ _**Bihar and Orissa**_ **v.** _**Maharajadhiraj**_ _**Sir !(ameshwar**_ Singh~ (1953), 23 I.TR. 212, approved. _Inglewood Pulp and Paper_ _Co._ _Ltd._ v. _New Brunswaick_ _Electric Power Commission,_ A.LR. 1928 P.C. 287 and _Revenue_ _Divisiqnal Officer, Trichinopoly_ v. _Venkatarama Ayyar,_ A.LR. 1936 Mad. 199, distinguished. _Shaw_ Wallace's _case,_ A.LR. 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 Collec tor take possession until the amount is paid or deposited. It ###### '7 S.C.R. SUPREl\IE COURT REPORTS 669 makes no difference in the legal position between a case where _1964_ possession has been taken before and that where possession _Dr_ _Shamlal Nanda_ has been taken after the award, for in either case the title vests · T. in the Government only after possession has been taken. _Oommi88ioner of_ In no sense of the term can it (interest) be described as _lncome-Taz, Punjah_ <iamages or compensation for the owner's right to retain pos session, for as he has no right to retain possession after possession was taken under s. 16 or s. 17 of the Act. 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 simi lar 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 · ###### 670 SUPREME COURT REPORTS [1964] ' _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 v. 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 capi tal 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 . ; ......... - ' ' ~, . -... .• ··• , _f_ /,L - i", ·- ·- #### / ) . .. - . ·-- ' ' . -_,,-., '- '·. t : I ' ###### ;i SUPRE:\IE COURT REPORTS 7 S.C.R~ # ""'·· . 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 v. - ·of compensation payable for the land so acquired. Section 15 _Oommi .. irmer_ _[0]_ _/._ - d - · h - f _Income·Tax Punjab_ ### o f th A e ct says·t h at m etermmmg t e amount o compensa- _' tion 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\ ' ...... - ' - ... :-:'-""." __ - c _(_ '. ~ _· __,, #### . ':;::·"- " -. · .., t . 672 --._' --_---__ -.. SUPREl\IE -COURT REPORIS [1931} ##### .. ', . _1961_ 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 entitled- to 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 for- the 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. From- that point of view (') (1947) 28 T~C. 159,-189. - ###### '1 S.C.R. SUPREME COURT REPORTS 673 it would seem immaterial whether the money was _1964_ 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 v. any other reason in law. In either case the money _Commiuioner_ _[0]_ _f_ d 'd . h _Income-Tax,_ _Punjab_ was d ue to h 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 ###### 674 SUPREME COURT REPORTS [1964} _1964_ _1964_ tain possession; and it seems to us that Section _Dr. Shamlal Naro/a_ 28 was designed as a convenient method of mea . v. suring 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: _Dr. Shamlal Naro/a_ . v. " ......... 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 Govern ment but the duty to pay interest is imposed by statute. Apart from this I think (with gr~at res pect) 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. SUPREME COURT REPORTS 675 _196_ court in an appeal against an award of compensation for _'_ compulsory acquisition of land under the Land Acquisi- _Dr._ _SlwmJal_ Narul~ tion Act represented capital and was not income liable to he _v..,, I A I d h _Oommts"""'' o,_ taxed un er t e n ian ncome-tax d h I d [. ] 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).