Appeals Nos
1425 and 1426 of 1966
Appeals by special leave from the judgment and order dated October 29 1962 of the Madras High Court in Tax Case No 195 of 1960
section Swaminathan and R Gopalakrishnan for the appellant in both the appeals
654 T V Viswanatha Iyer T A Ramachandran section P Nayyar for R N Sachthey for the respondent in both the appeals
The Judgment of the Court was delivered by Shah J
The Income tax Appellate Tribunal submitted two questions for the opinion of the High Court of Madras  1
Whether the sum of Rs 128716 is assessable as income under any of the provisions of the Act  2
If the answer is in the affirmative the assessment years in which the amount falls to be assessed by suitable apportionment
 The first question was answered by the High Court in the affirmative
The High Court declined to answer the second question because it did not in their view arise out of the order of the Tribunal
The assessees have appealed to this Court
By order dated January 30 1944 the Collector of Madras exercising power under r 75A of the Defence of India Rules 1939 requisitioned a property known as Lutterals Gardens belonging to the assessees
The property continued to remain under requisition till it vested in the Government of Madras absolutely in consequence of an order made on May 24 1949 by the Collector of Madras under section 5 of the Requisitioned Land Continuance of Powers Act 1947 declaringthe intention of the Government of Madras to acquire that property
The assessees declined the offer made by the Collector to pay Rs 240000 as compensation for acquisition of the property and interest at the rate of 6 thereon from the date of notification for acquisition and the dispute relating to compensation payable to the assessees was referred to the Chief Judge of the Court of Small Causes Madras
By order of the High Court of Madras in appeal from the order of the Chief Judge it was adjudged that the assessees be paid Rs 5000001 as compensation for the property
The High Court also awarded interest at the rate of 6 on the amount of compensation from the date of notification for acquisition
During the two previous years corresponding to the assessment years 1955 56 and 1956 57 the assessees received pursuant to the order of the High Court a total sum of Rs 628716 
In proceedings for assessment of tax for the assessment years 1955 56 and 1956 57 the Income tax Officer apportioned the amount of Rs 128716 on the basis of actual receipts in the two previous years and assessed the amounts so apportioned to income tax
The Appellate Assistant Commissioner held that the apportioned amounts were of the nature of revenue and not capital receipts but  in his view the income received was liable to be calculated on accrual basis year after year from the date of the notification for ac 655 quisition and on that account the assessments of the previous years from 1950 51 to 1954 55 should be reopened and the interest which accrued in those years should be assessed
The Commissioner of Income tax and the assessees appealed to the Appellate Tribunal against the order of the Appellate Assistant Commissioner
The assessees submitted that Rs 128716received as interest being part of compensation were not assessable to tax whereas the Commissioner claimed that the Income tax Officer was justified in assessing the amounts in the years in which they were received
The Income tax Appellate Tribunal accepted the contention of the assessees that the receipts were not assessable to tax because they were of the nature of capital receipts
At the instance of the Commissioner the Tribunal referred the two questions set out here in before
Section 5 of the Requisitioned Land Continuance of Powers Act 1947 authorises the Government by which or under the authority of which land has been requisitioned to acquire the land subject to requisition by publishing a notice to the effect that the Government has decided to acquire such land
Section 6 of the Act provides inter alia that compensation payable to the owner of the land shall be determined in accordance with the provisions of section 19 of the Defence of India Act 1939 and the rules made thereunder
Section 19 of the Defence of India Act 1939 sets out the principles for determining the compensation payable to a claimant
The amount of compensation may be fixed by agree ment between the owner and the Government  where no such agreement is reached the Central Government is enjoined to appoint an arbitrator having the qualifications prescribed therein
Under section 191 e the arbitrator in making his award must have regard inter alia to the provisions of sub section
1 of section 23 of the Land Acquisition Act 1894 in so far as the same can be made applicable
An appeal Res against the award of the arbitrator to the High Court
Sub sections 2 and 3 of section 19 confer upon the Central Government authority to frame rules for the purpose of carrying into effect the provisions of section 19
In exercise of that power the Government of India framed The Defence of India Payment of Compensation and Arbitration Rules 1943 which amongst other provisions directed that the Collector shall pay compensation as soon as may be practicable
But neither section 191 of the Defence of India Act nor the Rules framed under section 192 and 3 provide that interest shall be paid on the amount of compensation
In the present case interest was however offered to be paid by the Collector and the High Court also awarded interest on the amount of compensation from the date of the notification of acquisition
It was held by this Court in Dr Shamlal Narula vs Commis sioner of Income tax Punjab Jammu and Kashmir Himachal 656 Pradesh and Patiala1 that the statutory interest paid under section 34 of the Land Acquisition Act 1894 on the amount of compensation awarded from the date on which the Collector has taken possession of land compulsorily acquired under the Land Acquisition Act 1804 is interest paid for delayed payment of the compensation and is a revenue receipt liable to tax under the Income tax Act
It was observed in that case at p 156 
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 section 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 thereof establish that the statutory interest payable under section 34 is not compensation paid to the owner for de priving 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
 Counsel for the assessee however contended that the principle of Dr Shamlal Narula s case1 is not applicable to this case since there is no provision in the Requisitioned Land
Continuance of Powers Act 1947 and the Defence of India Act 1939 and the rules framed thereunder for payment of interest on the amount of compensation
Counsel said that under the Act the owner is paid not the market value of the property but compensation determined in accordance with a highly artificial scheme and that the interest paid in truth bears the same quality as compensation for deprivation of property and is on that account a capital receipt not exigible to tax
In support of hiscontention counsel invited our attention to two decisions  The Commissioners of Inland Revenue vs Ballantine2 and Simpson HM Inspector of Taxes vs Exe cutors of Bonner Maurice as Executor of Edward Kay3
In Ballantine s case2 a claim of a firm of contractors against a railway company for additional costs loss and damage  was referred to arbitration
The arbitrator awarded to the claimant a sum of money mainly as damages together with interest thereon at 5 per cent
per annum from the date of lodgement of claim until payment
The Revenue sought to charge the interest paid by the 1 3 2 657 railway company to tax under Case III of Sch
D of the Income tax Act 1918
It was held that the sum added in the name of interest was part of damages and was not interest of money chargeable to income tax under Case III of Sch
D Lord President Clyde observed  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 thinks 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 other elements in the gross sum decerned 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 modum aestimationis only
The interest is such merely in name for it truly constitutes that part of the compensation decerned for which is attri butable to the fact that the claimant has been kept out of his due for a long period of time
It is not therefore interest of money chargeable under Case ITT of Schedule D In Simpson vs Executors of Bonner Maurice as Executor of Edward Kay1 the executors of Kay a naturalised British subject who died during the First World War received as the result of the peace treaty claims amounts representing partly capital of securities stocks and shares in Banks in Germany deposited by Kay partly interest and dividends and partly compensation under the Peace Treaty
In a proceeding for assessment of the receipt to tax it was held that the compensation computed on the basis of interest was not income for the purposes of income tax
Lord Hanworth M R observed at p 601 I want to add now one more word in reference to the sum which has been paid by way of compensation under Article 297
It is said in referenceto that that at least arose at the time when it was paid under the order of the Mixed Arbitral Tribunal 
It wag a sum 1 c
CI67 12 658 which was calculated as interest  and it is interest and therefore it is within the words of the Schedule which undoubtedly impose a tax upon interest which arises or accrues to a person liable to tax  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
 Lawrence LJ observed at p 605 Neither the fact that the compensation was measured by the amount of the interest which but for the embargo placed upon the money by the German Government could have been earned by the Respondents nor the fact that part of the compensation was described as interest in the decision of the Mixed Arbitral Tribunal in my judgment has the effect of altering the character of the compensation paid to the Respondents
 But it must be noticed that liability to pay interest arose in Ballantine s case1 under the award of the arbitrator and in the Executors of Bonner Maurice as Executor of Edward Kay s case 2 under the order of the Mixed Arbitral Tribunal and in each case it was held that what was paid though called interest was in truth compensation for loss suffered on account of deprivation of property
According to the view taken by this Court in Dr Shamlat Narula s case3 if the course of the obligation imposed by the statute to pay interest arises because the claimant is kept out of his money the interest received is chargeable to tax as income
The same principle would apply if interest is payable under the terms of an agreement and the Court or the arbitrator gives effect to the terms of the agreement express or implied and awards interest which has been agreed to be paid
It is therefore necessary to determine whether the obligation to pay interest awarded under the order of the High Court of Madras arose out of the statute or out of the award
In Satinder Singh  Ors
V Amrao Singh and Ors
4 lands forming part of Cis Sutlej Jagir were compulsorily acquired under the East Punjab Acquisition and Requisition of Immovable Property Temporary Powers Act 1948
The claimants to the lands claimed in addition to statutory compensation interest from the date from which they were dispossessed and till the date of payment of compensation
The arbitrator appointed under the Act awarded interest on the amount of compensation and the High Court of Punjab in appeal Confirmed the order
This Court held that the claimants were 1  2 3 4   659 entitled to interest on the compensation amount from the date of dispossession till the date on which the amount of compensation was paid to the claimants
Section 5 of the East Punjab Acquisition and Requisition of Immovable Property Temporary Powers Act 1948 set out the principles according to which compensation was to be paid in regard to the acquired property and by cl
e thereof it was provided that the arbitrator in making the award shall have regard to the provisions of sub section
1 of section 23 of the Land Acquisition Act 1894 in so far as the same may be applicable
The Act contained no express provision for payment of interest on compensation determined by the arbitrator
This Court rejected the contention of the State of Punjab that sections 28 and 34 of the Land Acquisition Act which dealt with the payment of interest were not intended to apply to the proceedings before the arbitrator
It was observed Stated broadly the act of taking possession of immovable property generally implied an agreement to pay interest on the value of the property and it is oil this principle that a claim for interest is made against the State  The Court further observed  It would thus be noticed that the claim for interest proceeds on the assumption that when the owner of immovable property loses possession of it he is entitled to claim interest in place of right to retain possession
The question which we have to consider is whether the application of this rule is intended to be excluded by the Act of 1948 and as we have already observed the mere fact that section 5e of the Act makes section 231 of the Land Acquisition Act of 1894 applicable we cannot reasonably infer that the Act intends to exclude the application of this general rule in the matter of the payment of interest
 The Court also observed When a claim for payment of interest is made by a person whose Immovable property has been acquired compulsorily he is not making claim for damages properly or technically so called he is basing his claim on the general rule that if be is deprived of his land he should be put in possession of compensation immediately if not in lieu of possession taken by compulsory acquisition interest should be paid to him on the said amount of compensation
 The scheme of the East Punjab Acquisition and Requisition of Immovable Property Temporary Powers Act 1948 is similar to the scheme of the Requisitioned Land Continuance of Powers Act 1947
The Court in Satinder Singh s case1 held that be 11961 3 SCR 676 660 cause of the injunction expressly to apply the provisions of section 231 of the Land Acquisition Act 1894 in the determination of compensation the application of sections 28 and 34 dealing with the payment of interest on the amount awarded as compensation cannot be deemed excluded
The Court also held that when the owner of property is dispossessed pursuant to an order for compulsory ac quisition an agreement that the acquiring authority will pay interest on the amount of compensation is implied
The reasoning on which the right of the owner of the lands acquired to interest was affirmed in Satinder Singh s case1 prima facie applies in this case
Counsel for the assessees contended that the application of sections 28 and 34 of the Land Acquisition Act in proceedings for arbitration under the Requisitioned Lands Continuance Powers Act 1947 was expressly excluded by section 191g of the Defence of India Act which enacted that Save as provided in this section and in any rules made thereunder nothing in any law for the time being in force shall apply to arbitration under this section But cl
g is not susceptible of any such interpretation
Clauses a to f of section 191 are a Code relating to arbitration in determining the compensation payable to a person deprived of his property
Provisions relating to payment of interest are not however part of the law relating to arbitration and there is nothing in cl 1
g which excludes the application of the substantive law relat ing to payment of interest when the arbitration is determining the amount of compensation
We are therefore of the view that the principle on which The Commissioners of Inland Revenue vs Ballantine2 and Simpson HM Inspector of Taxes vs Executors of Bonner Maurice as Executor of Edward Kay3 were based has no application to this case
It may be recalled that in those cases the arbitrator and the Arbitral Tribunal were in awarding interest not seeking to give effect to or to recognize a right to interest conferred by statute or contract
The source of the right to interest in both the cases did not arise from the statute or agreement
In the case on hand the right to interest arose by virtue of the provisions of sections 28 and 34 of the Land Acquisition Act 1894 and the arbitrator and the High Court merely gave effect to that right in awarding interest on the amount of compensation
Interest received by the assessee was therefore properly held taxable
The appeals fail and are dismissed with costs
One hearing YP Appeals dismissed
11961 3SCR 676


Summary:
The assesses were offered compensation and interest on the amount of compensation in respect of their property which was first requisitioned under r 75A of the Defence of India Act 1939 and later acquired by the State under section 5 of the Requisitioned Land Continuance of Powers Act
The Requisition Act provided that
compensation payable shall be determined in accordance with the provisions of section 19 of the Defence of India Act and the rules thereunder but neither section 19 nor the Rules provided that interest shall be paid on the amount of compensation
The assessee demanded more compensation and interest and the High Court in appeal enhanced the compensation and awarded interest on it The Revenue assessed to income tax the amount of interest which was upheld in reference by the High Court
In appeal
this Court
HELD  Interest received by the assessee was taxable
If the source of the obligation imposed by the statute to pay interest arises because the claimant is kept out of his money the interest received is chargeable to tax as income
The same principle would apply if interest is payable under the terms of an agreement and the court or the arbitrator gives effect to the terms of the agreement express or implied and awards interest which has been agreed to be paid Clauses a to f of section 191 of the Defence of India Act are a Code relating to a arbitration in determining the compensation payable to a person depraved of his property
Provisions relating to payment of interest are not however part of the law relating to arbitration and there is nothing in cl
g which excludes the application of the substantive law relating to payment of interest when the arbitration is determining the amount of compensation
In this case the right to interest arose by virtue of the provisions of Ss 28 and 34 of the Land Acquisition Act 1894 and the arbitrator and the High Court merely gave effect to that right in awarding interest on the account of compensation
658 E F 660 D H Dr Shamtal Narula vs Commissioner of Income tax Punjab Jammu and Kashmir Himachal Pradesh and Patiala 53 ITR 151 and Satinder Singh  Ors
vs Amrao Singh  Ors   followed
The Commissioners of Inland Revenue vs Bellantine 8 TC 595 and Simpson H M Inspector of Taxes vs Executors of Bonner Maurice as Executor of Edward Kay  distinguished