Case: T. N. K. Govindarajulu Chetty Vs. Commissioner Of Income-Tax, Madras

2. By order dated January 30, 1944, the Collector of Madras, exercising power under Rule 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, declaring the intention of the Government of Madras to acquire that property. The assessees declined the offer made by the Collector to pay Rs. 2,40,000 as compensation for acquisition of the property and interest at the rate of 6 per cent 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. 5,00,000 as compensation for the property. The High Court also awarded interest at the rate of 6 per cent on the amount of compensation from the date of notification for acquisition3. 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. 6,28,716. In proceedings for assessment of tax for the assessment years 1955-56 and 1956-57, the Income-tax Officer apportioned the amount of Rs. 1,28,716 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 acquisition, 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 assessed4. The Commissioner of Income-tax and the assessees appealed to the Appellate Tribunal against the order of the Appellate Assistant Commissioner. The assessee submitted that Rs. 1,28,716 received 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 herein before.

Reasoning:
According to the view taken by this Court in Dr. Shamlal Narulas case, 1964-53 ITR 151 = (AIR 1964 SC 1878  ) 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 paid11. The reasoning on which the right of the owner of the lands acquired to interest was affirmed in Satinder Singhs case, (1961) 3 SCR 676   = (AIR 1961 SC 908  ) prima facie, applies in this case12. We are therefore of the view that the principle on which (l924) 8 Tax Cas 595 and (1929) 14 Tax Cas 580 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 taxable9. But it must be noticed that liability to pay interest arose in Ballantines case, (1924) 8 Tax Cas 595 under the award of the arbitrator and in the Executors of Bonner Maurice as Executor of Edward Kays case, (1929) 14 Tax Cas 580 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 ofg to the view taken by this Court in Dr. Shamlal Narulas case,3 ITR 151 = (AIR 1964 SC 1878  ) 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 theand awards interest which has been agreed to be paid10. It is therefore necessary to determine whetherthe obligation to pay interest awarded under the order of the High Court of Madras arose out of the statute or out of the. In Satinder Singh v. Umrao Singh, (1961) 3 SCR 676   = (AIR 1961 SC 908  ) lands forming part ofj 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 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 clause (e) thereof it was provided that the arbitrator in making the award shall have regard to the provisions ofn (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 on this principle that a claim for interest is made against the StateThe 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 5 (e) of the Act makes Section 23(1) 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 interestThe 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 he is deprived of his land he should be put in possession or compensation immediately; if not, in lieu of possession taken by compulsory acquisition interest should be paid to him on the said amount of compensationThe scheme of the East Punjab Acquisition and Requisition of Immovable Property (Temporary Powers) Act, l948 is similar to the scheme of the Requisitioned Land (Continuance of Powers) Act, 1947. The Court in Satinder Singhs case, (l96l) 3 SCR 676   = (AIR 1961 SC 908  ) held that because of the injunction expressly to apply the provisions of Section 23 (1) 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 acquisition an agreement that the acquiring authority will pay interest on the amount of compensation is implied.