ITA No.495 of 2009 *** IIN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Income-tax Appeal No.495 of 2009 Date of decision: 30.3.2011 Drawing and Disbursing Officer ...Appellant Versus Income Tax Officer ...Respondent and other connected appeals being ITAs No. 496, 497, 498, 499, 500 of 2009 and 130 of 2010. CORAM: HON'BLE MR.JUSTICE ADARSH KUMAR GOEL HON'BLE MR.JUSTICE AJAY KUMAR MITTAL Present: Mr. Anmol Rattan Singh, Addl. A.G.Punjab. for the appellant. Ms. Yogesh Putney, Senior Standing Counsel for the respondent. **** Adarsh Kumar Goel, J 1. This order will dispose of ITAs No.495, 496, 497, 498, 499, 500 of 2009 and 130 of 2010 as it is stated by the learned counsel for the parties that all the appeals involve common question of law. 2. ITA No.495 of 2009 has been preferred by the 1 ITA No.495 of 2009 *** assessee under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) against order dated 31.10.2008 passed by the Income Tax Appellate Tribunal, Chandgiarh Bench (SMC-B), Chandigarh in ITA No.386/Chandi/2008, for the assessment year 2000-01, claiming following substantial questions of law:- “i)Whether interest allowed by the Ld. MACT in accident case on the amount of award can be termed as 'Income from interest' or the same is a part of compensation for the delay caused in legal proceedings? ii) Whether the department can initiate action afterwards when it has already made the assessment and no infirmity was pointed out at the time of assessment? iii) Whether an order passed by the court is absolute and has to be complied with in Toto? iv) Whether the Judgment Debtor can make deductions and if so, whether it would amount to contempt of court? v) Whether interest allowed on compensation amount can be equated with interest earned on Principal amount? vi) Whether the interest awarded by the MACT is not a part of compensation?” 3. The assessee is providing transport facility by plying buses from one place to other place in the State of Punjab and in neighbouring States. On account of its buses being involved in accidents, it paid compensation under the provisions of Motor Vehicle Act, 1988 (M.V.Act) with interest as awarded by the Motor Accident Claims Tribunals (MACT). Since it failed to deduct tax at source out of interest income received by the claimants as per awards, the assessee was held to be assessee in default. The plea of the assessee was that interest being part of compensation was not 2 ITA No.495 of 2009 *** taxable income from which TDS could be deducted. It only deposited with the Tribunal compensation as awarded which had the component of statutory interest to satisfy the award. The assessee could not make any deduction from the said amount. This plea was not accepted by the Assessing Officer. The said view was upheld by the CIT(A) as well as the Tribunal. The Tribunal observed:- “Section 194A is a machinery section and has to be interpreted in a manner by which the object of the Act is effectuated rather than frustrated. It is not the case that the Tribunal/MACT/Court has directed not to deduct the TDS rather it was the duty of the person responsible to deduct TDS and furnish the information before the Hon'ble Court. In the impugned order, the Ld. first Appellate authority vide Para 10 (Pg10) has already reproduced the decision from the Hon'ble Madras High Court in the case of New India Assurance Ltd. V Mani 270 ITR 394 (Madras).” 4. We have heard learned counsel for the parties. 5. Learned counsel for the assessee submitted that compensation determined by the MACT was a capital receipt and was not income. Interest under the statutory provisions becomes part of the principal amount of compensation and partakes the same character as compensation itself. It is only after the amount is disbursed that any income by way of interest thereon may be liable to be taxed as income under the applicable head of income under the Act. 6. Learned counsel for the revenue does not dispute the nature of receipt of compensation as being capital receipt. He, 3 ITA No.495 of 2009 *** however, submits that interest component of the award of the MACT has to be treated separately and treated as income. In support of this submission reliance is placed on Section 194A(3)(ix) excluding applicability of requirement of deduction at source on interest income from the compensation awarded by the MACT upto Rs.50,000/- in a financial year. He also relies on Section 171 of the M.V.Act to submit that interest was not part of compensation but separate from it. 7. We have considered the rival submissions. 8. The question for consideration is whether interest component in MACT award has to be treated as taxable income or as part of compensation which being in the nature of capital receipt is not taxable. In our view, interest component is a part of compensation and is not taxable. 9. Admittedly, compensation under the award of MACT is not income. The expression ‘income’ used in Entry 82 of List I of Seventh Schedule to the Constitution can be given widest meaning. Under Section 2(24), inclusive and not exhaustive definition has been given. 10. In absence of an express provision to the contrary, income can be held to refer to something earned. What is received as compensation for loss in one or the other form may not be income. 11. Considering this aspect, it was observed in Commissioner of Income Tax, Bengal Vs. Shaw Wallace and Company, AIR 1932 Privy Council 138 by Privy Council:- “The object of the Indian Act is to tax “income” a term which it does not define. It is expanded, no doubt, into 4 ITA No.495 of 2009 *** income, profits and gains,” but the expansion is more a matter of words than of substance, Income, their Lordships think, in this cannotes a periodical monetary return “coming in” with some sort of regularity, or expected regularity, from definite sources. The source is not necessary one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essential the produce of something, which is often loosely spoken of as “capital”. But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production.” 12. In Rani Amrit Kunwar Vs. Commissioner of Income Tax, C.P.& U.P. (1946) XIV ITR 561, the Allahabad High Court observed:- “Under Indian law, therefore, we come back in my opinion, to the relatively simple test whether in the ordinary parlance of language what the assessee receives is “income” or not. I should not dream of suggesting that every payment made by one person to another is necessarily the recipient's income since it may, as Viscount Dunedin has said, be merely a casual payment or, as Sir George Lowndes has suggested, a mere windfall. Such sweeping proposition would be absurd. Many things have to be considered. In the case of a payment by a parent to a child or by a husband to a wife or by one relation to another obvious questions arise whether in the particular circumstances of each case the payments are made in such a way as to constitute what is paid the money of the recipient at all or whether the payments themselves are not merely a 5 ITA No.495 of 2009 *** series of casual payments or windfalls. But there seems to me to be another class of cases altogether in which in particular circumstances payments may be made by one person to another which can only be explained on the ground that the giver intends to give, and the recipient expects to receive, with regularity or expected regularity and from a source the nature of which is to produce such a payment, an “income” which is in the income-tax sense his own. I can find nothing in the Indian Income-tax Act to warrant any general conclusion that it is only in a case in which, if the payment is discontinued, the recipient will have an immediate right of action against the payer, that it will be income in his hands in the Indian income-tax sense. That is to put too limited a construction on the word “income.” If the payments are such as to come within the category of payments which are casual and non- recurring, then it is to be observed that the Act itself has taken them out of the category of “income”. The very fact that the framers of the Indian Income-tax Act found it necessary by a special clause to exempt casual and non-recurring receipts from the category of income, profits and gains is itself, in my opinion, an indication that, but for that exemption, they are to be regarded as capable of falling within the class of income, profits or gains under the charging section. If it is to be assumed that ex hypothesi a casual and non- recurring payment could never be income, then, as I see it, the statutory exception of it would be otiose and unnecessary. Another reason is afforded by Section 4 (3)(ii) of the Income-tax Act for inducing me to think that so narrow a construction cannot be placed on the word “income”. If the assessee were right in saying that the test of “obligation” has in all cases to be applied in deciding what is or is not “income”, it is difficult to see why voluntary contributions to a 6 ITA No.495 of 2009 *** religious or charitable institution (whether applicable solely to religious or charitable purposes or not) should be specially excepted by the Act. The conclusion, therefore, I have reached is that, in construing that word “income” in the Indian Income-tax Act, one has to ask oneself whether, having regard to all the circumstances surrounding the particular payments and receipts in question, what is received is of the character of income according to the ordinary meaning of that word in the English language or whether it is merely a casual receipt or mere windfall.” 13. In Raghuvanshi Mills Ltd., Bombay Vs. Commissioner of Income-Tax, Bombay City, (1952) XXII ITR 484 while considering the nature of receipt of insurance claim for the business loss, the Hon'ble Supreme Court observed:- “It is true the Judicial Committee attempted a narrower definition in Commissioner of Income-tax v. Shaw Wallace & Co., by limiting income to “a periodical monetary return 'coming in' with some sort of regularity, or expected regularity, from definite sources” but, in our opinion, those remarks must be read with reference to the particular facts of that case. The non-recurring aspect of this kind of receipt was considered by the Privy Council in The King v. B.C. Fir and Cedar Lumber Co. and we do not think their Lordships had in mind a case of this nature when they decided Shaw Wallace & Company's case.” 14. In Raja Bahadur Kamakshya Narain Singh of Ramgarh Vs. Commissioner of Income-Tax, Bihar and Orissa, AIR 1943 Privy Council 153, it was observed:- “Income is not necessarily the recurrent return from a definite 7 ITA No.495 of 2009 *** source, though it is generally of that character. Income again may consist of a series of separate receipts, as it generally does in the case of professional earnings. The multiplicity of forms which “income” may assume is beyond enumeration. Generally, however, the mere fact that the income flows from some capital assets, of which the simplest illustration is the purchase of an annuity for a lump sum, does not prevent it from being income, though in some analogous cases the true view may be that the payments, though spread over a period, are not income, but instalments payable at specified future dates of a purchase price. Such a case is illustrated by (1903) A.C.299. But, in their Lordships' judgment, the royalties here are clearly income and not capital. They are periodical payments for the continuous enjoyment of the various benefits under the leases. The actual acquisition of the property in a particular ton of coal at the moment when the lessees have cut and taken away the coal is only the final stage.” 15. In Navinchandra Mafatlal, Bombay Vs.Commissioner of Income Tax, Bombay City, AIR 1955 S.C. 58, while considering the question whether capital gain could be treated as income if so provided for under statutory provisions, it was observed:- “7. What, then, is the ordinary, natural and grammatical meaning of the word "income" ? According to the dictionary it means "a thing that comes in." (See Oxford Dictionary, Vol. V. p. 162; Stroud, Vol. II, pp. 14-16). In the United States of America and in Australia both of which also are English speaking countries the word "income" is understood in a wide sense so as to include a capital gain. Reference may be made to - 'Eisner v. Macomber', (1919) 252 US 189 (K); -'Merchants' Loan and Trust Co. v. Smietanka', (1920) 255 US 509 (L) and - 'United States of America 8 ITA No.495 of 2009 *** v. stewat', (1940) 311 US 60 (M) and - 'Resch v. Federal Commissioner of Taxation', (1943) 66 CLR 198 (N). In each of these cases very wide meaning was ascribed to the word "income" as its natural meaning.” 16. In The Commissioner of Income-Tax, Hyderabad, Deccan Vs. M/s Vazir Sultan and sons, AIR 1959 SC 814 the issue was whether compensation for loss of agency was a capital receipt. It was held that compensation for loss of agency to be capital receipt on the ground that agency was a capital asset in that case. It was observed:- “35. .....The agency agreements in fact formed a capital asset of the assessee's business worked or exploited by the assessee by entering into contracts for the sale of the "charminar" cigarettes manufactured by the Company to the various customer and dealers in the respective territories. This asset really formed part of the fixed capital of the assessee's business. It did not constitute the business of the assessee but was the means by which the assessee entered into the business transactions by way of distributing those cigarettes within the respective territories. It really formed the profit-making apparatus of the assessee's business of distribution of the cigarettes manufactured by the Company. If it was thus neither circulating capital nor stock-in-trade of the business carried on by the assessee it could certainly not be anything but a capital asset of its business and any payment made by the Company as and by way of compensation for terminating or cancelling the same would only be a capital receipt in the hands of the assessee.” 17. In Navnit Lal C. Javeri Vs. K.K.Sen AIR 1965 SC 9 ITA No.495 of 2009 *** 1375, it was observed:- “16. The question which now arises is, if the impugned section treats the loan received by a shareholder as a dividend paid to him by the company, has the legislature in enacting the section exceeded the limits of the legislative field prescribed by the present Entry 82 in List I? As we have already noticed, the word "income" in the context must receive a wide interpretation; how wide it should be it is unnecessary to consider, because such an enquiry would be hypothetical. The question must be decided on the facts of each case. There must no doubt be some rational connection between the item taxed and the concept of income liberally construed. If the legislature realises that the private controlled companies generally adopt the device of making advances or giving loans to their shareholders with the object of evading the payment of tax, it can step in to meet this mischief, and in that connection, it has created a , fiction by which the amount ostensibly and nominally advanced to a shareholder, as a loan is treated in reality for tax purposes as the payment of dividend to him. We have already explainer how a small number of shareholders controlling a private company adopt this device. Having regard to the fact that the legislature was . aware of such devices, would it not be competent to the legislature to device a fiction for treating the ostensible loan as the receipt of dividend? In our opinion, it would be difficult to hold that in making the fiction, the legislature has travelled beyond the legislative field assigned to it by entry 82 in List 1.” 18. In Senairam Doongarmall Vs. Commissioner of Income-Tax, Assam, AIR 1961 SC 1579, the question was whether compensation received from military authority on account 10 ITA No.495 of 2009 *** of loss of earning of tea estate was income or capital receipt. It was observed that quality of payment was decisive of the character of income and compensation received was not income. During the discussion following passage from English judgment in Sutherland Vs. Commissioners of Inland Revenue (1918) 12 Tax Case 63 was referred:- “Now it is quite clear that if a source of income is destroyed by the exercise of the paramount right... and compensation is paid for it, that that is not income, although the amount of compensation is the same sum as the total of the income that has been lost.” 19. In CIT v. G.R. Karthikeyan, 1993 Supp 3 SCC 222, it was observed:- “7. It is not easy to define income. The definition in the Act is an inclusive one. As said by Lord Wright in Kamakshya Narayan Singh v. CIT, (1943) 11 ITR 513 (PC) “income ... is a word difficult and perhaps impossible to define in any precise general formula. It is a word of the broadest connotation”. In Gopal Saran Narain Singh v. CIT (1935) 3 ITR 237 (PC) the Privy Council pointed out that “anything that can properly be described as income is taxable under the Act unless expressly exempted”. This Court had to deal with the ambit of the expression ‘income’ in Navinchandra Mafatlal v. CIT, (1954) 26 ITR 758. The Indian Income Tax and Excess Profits Tax (Amendment) Act, 1947 had inserted Section 12(B) in the Indian Income Tax Act, 1922. Section 12(B) imposed a tax on capital gains. The validity of the said amendment was questioned on the ground that tax on capital gains is not a tax on ‘income’ within the meaning of Entry 54 of List 1, nor is it a tax on the capital value of the assets of individuals and companies within the meaning of Entry 11 ITA No.495 of 2009 *** 55 of List 1 of the Seventh Schedule to the Government of India Act, 1935. The Bombay High Court repelled the attack. The matter was brought to this Court. After rejecting the argument on behalf of the assessee that the word ‘income’ has acquired, by legislative practice, a restricted meaning — and after affirming that the entries in the Seventh Schedule should receive the most liberal construction — the Court observed thus: “What, then, is the ordinary, natural and grammati- cal meaning of the word ‘income’? According to the dictionary it means ‘a thing that comes in’. (See Oxford Dictionary, Vol. V, p. 162; Stroud, Vol. II, pp. 14-16). In the United States of America and in Australia both of which also are English speaking countries the word ‘income’ is understood in a wide sense so as to include a capital gain. Reference may be made to Eisner v. Ma- comber, 252 US 189; Merchants’ Loan and Trust Co. v. Smietunka, 255 US 209 and United States v. Stewart, 311 US 60 and Resch v. Federal Commissioner of Taxation, 66 CLR 198 (1943). In each of these cases very wide meaning was ascribed to the word ‘income’ as its natural meaning. The relevant observations of learned Judges deciding those cases which have been quoted in the judgment of Tendolkar, J. quite clearly in- dicate that such wide meaning was put upon the word ‘income’ not because of any particular legislative prac- tice either in the United States or in the Commonwealth of Australia but because such was the normal concept and connotation of the ordinary English word ‘income’. Its natural meaning embraces any profit or gain which is actually received. This is in consonance with the ob- servations of Lord Wright to which reference has al- ready been made. * * * 12 ITA No.495 of 2009 *** The argument founded on an assumed legislative practice being thus out of the way, there can be no difficulty in apply- ing its natural and grammatical meaning to the ordinary English word ‘income’. As already observed, the word should be given its widest connotation in view of the fact that it occurs in a legislative head conferring legislative power.” (emphasis supplied) 8. Since the definition of income in Section 2(24) is an inclu- sive one, its ambit, in our opinion, should be the same as that of the word income occurring in Entry 82 of List I of the Sev- enth Schedule to the Constitution (corresponding to Entry 54 of List I of the Seventh Schedule to the Government of India Act).” 20. In the context of compensation received under the Motor Vehicle Act, the compensation is either on account of loss of earning capacity on account of death or injury or on account of pain and suffering. Such receipt is not by way of earning or profit. Award of compensation is on the principle of restitution to place the claimant in the same position in which he would have been had the loss of life or injury not been suffered. In Gobald Motor Service Ltd. and another Vs. R.M.K.Veluswami and others AIR 1962 SC 1, it was observed:- “The same principle was restated with force and clarity by Viscount Simon in Nance v. British Columbia Electric Railway Co. Ltd., 195l AC 601. There, the learned Lord was considering the analogous provisions of the British Columbia legislation, and he put the principle thus at p. 614: "The claim for damages in the present case falls under two separate heads. First, if the deceased had not been killed, but had eked out the full span of life to which in the absence of the accident he could reasonably have looked forward, what sums during that period would he 13 ITA No.495 of 2009 *** probably have applied out of his income to the maintenance of his wife and family?". 21. Having regard to nature of receipt of compensation as per award under the M.V.Act, compensation is in the nature of capital receipt for death or injury and cannot be held to be in the nature of income. Learned counsel for the revenue also fairly accepts this legal position. It appears to be for this reason that the said receipt is not sought to be treated as income. 22. We may now consider the question whether interest on account of delay in adjudication becomes part of compensation or can be treated as a separate component of income. 23. Section 171 of the M.V.Act authorizes the Tribunal to award interest on the claim made under the Act from the date of making the claim. It reads thus: “171.Award of interest where any claim is allowed: Where any Claims Tribunal allows a claim for compensation made under this Act, such Tribunal may direct that in addition to the amount of compensation simple interest shall also be paid at such rate and from such date not earlier than the date of making the claim as it may specify in this behalf.” 24. In the context of compensation under the provisions of Land Acquisition Act, 1894, the Hon'ble Supreme Court in Commissioner of Income-Tax Vs. Ghanshyam (HUF), (2009) 315 ITR 1 SC held that interest paid by the