VAIDYA J. - This is a reference under section 66(1) of the Indian Income-tax Act, 1922, by the Commissioner of Income-tax, Andhra Pradesh, Hyderabad.
The question referred for our opinion is :
'Whether, on the facts and in the circumstances of the case, the interim compensation of Rs. 80,843, Rs. 40,422, Rs. 1,21,146 and Rs. 80,391 received by the assessee under section 50 of the Madras Estates (Abolition and Conversion into Ryotwari) Act, 1948, was of a capital nature and not liable to tax ?'
The consolidated statement of the case agreed to by the parties states that the assessee Hindu undivided family was holder of the estate of Devarkota and Challapalli. This estate was abolished under the Madras Estates (Abolition and Conversion into Ryotwari) Act, 1948 (hereinafter referred to as the Abolition Act). From the notified date the estate came to be vested in the Government. The total compensation payable to the assessee has not yet been determined. However, as contemplated under section 54A of the Abolition Act, the assessee was paid the following amounts towards interim compensation in the years noted against them from the Estates Abolition Tribunal under section 50 of the Abolition Act.
In the court of the assessment proceedings for the assessment years 1956-57 and 1958-59 the assessee contended before the Income-tax Officer that the aforesaid amounts were agricultural income as defined in section 2(1) of the Income-tax Act. He also took an alternative plea that the amounts were receipts of capital nature and as such did not fall to be taxed.
A further contention was also raised that, as the compensation received was to be apportioned among the principal landholder and the other persons referred to in section 50(2) of the Abolition Act, the entire amount did not fall to be assessed in the hands of the assessee alone. All these contentions were rejected by the Income-tax Officer who held that the amounts in question were not agricultural income as those were paid to him not only for the lands which were under cultivation but for the entire estate which included other sources of income like fisheries, mines, quarries, etc. He also held that the receipts were not of capital nature. With regard to the last contention, the Income-tax Officer held that, as there had not been any disruption in the family, and as no claim had been made under section 25A of the Income-tax Act and as the assessee had credited the compensation in lump sum amounts in his own estate books and did not make any allocation among the coparceners, the amount fell to be assessed in the assessment of the Hindu undivided family. The assessee appealed to the Appellate Assistant Commissioner and in the appeals he sought to impugn the orders of the Income-tax Officer only on two grounds. The first ground was that, as the interim payments made to the assessee were actually in lieu of its share in the land revenue itself, the income received therefrom clearly fell under the definition of 'agricultural income' as contained in section 2(1) of the Income-tax Act. The second ground was that the interim payments should have been considered individually in the hands of the principal landholder and his sons and not in the hands of the Hindu undivided family as the compensation was to be apportioned between them under section 50(5) of the Abolition Act. The Appellate Assistant Commissioner rejected both the grounds of the appeal filed by the assessee and dismissed the appeals.
The assessee aggrieved by the orders of the Appellate Assistant Commissioner, filed further appeals before the Tribunal. It was contended before the Tribunal that the amount in question was a receipt of a casual and non-recurring nature and that the compensation received by the assessee was not income as it was clearly in the nature of compensation for the acquisition of capital assets. The payments were covered by the provisions of section 4(3)(viii) of the Abolition Act and thus exempted. It was also contended that under section 45(2) of the Abolition Act after payments had been made to the persons enumerated in section 45(2)(a) and (b) and in section 45(3), the balance of the aggregate compensation was to be divided among the shares s if they owned such balance and as if a partition thereof had been effected among the members of the joint Hindu family on the notified date. Their entire amount therefore did not fall for inclusion in the assessment of the assessee alone but should be in the individual assessments of the coparceners constituting the Hindu undivided family. The Tribunal, without dealing with the other contentions, held that the receipts were of a capital nature and were not liable to tax because the interim payments which had been made to the assessee were not because of loss of any income but were mainly made for the reason that a particular source of income which was an income-producing asset of the assessee had been lost to him. The Tribunal relied on the decision of the Madras High Court in the case of Shanmugha Rajeswara Sethupathi v. Income-tax Officer, Karaikudi.
In respect of the appeals for the assessment years 1953-54, 1954-55 and 1958-59, the Tribunal for the reasons recorded in its order for the assessment year 1956-57 held that the said amounts being of capital nature, are not liable for inclusion in its assessment. Shri C. Kondaiah, the learned counsel for the department, contends that the Madras case referred to by the Tribunal has been wrongly decided. The approach of the learned judges of the Madras High Court was to find whether interim payments made under section 50 of the Abolition Act were by way of capital nature or by way of income under the provision of Income-tax Act. He contends that the Supreme Court has laid down in Raja Rameshwar Rao v. Commissioner of Income-tax, that the nature of payments has to be sole determined accordance to the provisions of the Act under which the payments have been made. He also relied upon the decision of the Supreme Court and contented that in view of the various criteria laid down in the said decision, the interim payments under the Abolition Act are of the nature of income and not capital. He further contented that the Madras High Court has not taken into consideration all the provisions of the Abolition Act and the conclusion reached by it is therefore not correct. He laid particular stress on the amendment of clause (e) of section 3 of the Abolition Act. His argument was that by virtue of the amendment of clause (e) of section 3 of the Abolition Act in Madras it could probably be said that the interim payments were compensation for loss of capital assets, which he did not concede, but as far as the Andhra Pradesh is concerned, the provision of clause (e) of section 3 makes it very clear that what a landholder and others are entiled to are compensation and additional compensation and additional compensation alone and whatever is paid over and above such compensation was to compensate for the loss of income and was an income receipt. He also relied on a decision of this court in Kumara Rajah of Venkatagiri v. Income-tax Officer, Nellore, which is the subject-matter of Writ Appeals Nos. 34, 35, 217 and 218 of 1966. It may be noted here that as far as the question of the nature of interim payment was concerned this R.C. and the aforesaid W. As. were heard together, but as further point to raised by the appellant in those W. As. it was ordered on 24th July, 1967, that the R.C. and the W. As. should be separated and this R.C. was reserved for judgment.
Sri Narasaraju, the learned counsel for the assessee, contents that the Madras High Court has correctly decided that the interim payments made under section 50 of the Abolition Act are capital receipts in the hands of the assessee and that the decision of the Supreme Court in Raja Rameshwar Rao v. Commissioner of Income-tax does not in any way affect the decision of the Madras High Court. He also relied upon Raja Rameshwar Rao v. Commissioner of Income-tax and contented that it is provisions of the Act which will have to be considered for purposes of ascertaining the nature of payment made under the particular Act. He further contended that the Supreme Court in Raja Rameshwar Rao v. Commissioner of Income-tax held that the payments made to the ex-jagirdars of Hyderabad under the Hyderabad (Abolition of Jagirs) Regulation, were income receipts in view if the special provisions of the said Regulation which had clearly denoted that those payments were by way of income. He laid particular stress on the expression 'interim maintenance allowance' used in the Abolition of Jagirs Regulation and also that this interim maintenance allowance was paid as the balance of income of the jagirs for a particular year after deducting the expenses payable to the Government for administration and after payment of haq-e-malikana and guzara-yabs. As regards the decision of this court in Kumara Rajah of Venkatagiri v. Income-tax Officer, Nellore his argument was that various provisions of the Act relied upon, do not lead to the conclusion that the interin payments were income receipts and not capital receipts. There is no basis for the view adopted in Kumara Rajah of Venkatagiri v. Income-tax Officer, Nellore that these payments were 'in lieu of consequential loss to the landholder for the non-receipt of compensation which, had it been received immediately on his being deprived of his estate, he would have earned as income therefrom.'
His main contention was that the Abolition Act was enacted after the enforcement of the Government of India Act, 1935. Section 299, sub-section (2), of the said Act laid down a consitutional limitation that neither a federal nor provincial legislature shall have the power to make any law authorising the compulsory acquisition for public purposes of any land unless the law provided for the payment of compensation for the property acquired and either fixes the amount of compensation or specifies the principles on which and the manner in which it is to be determined. According to him, whenever a property is acquired, all provisions for payments under the Acquisition Act will have to constructed as compensation for loss of property because of section 299 of the Government of India Act. His further contention is that the landholders having lost their proprietorship in the land on the notified date by virtue of the provisions of the Abolition Act, they are not entiled to claim anything as from that date. That being so, all payments made to them under the Abolition Act, should necessarily be payments towards compensation for loss of capital assets and cannot be constructed as income receipts. The various provisions of Act which provide for compensation, additional compensation and interim payments are all payments for compensation for the loss of capital asset, and merely because interim payments have not been called as compensation in the Abolition Act or because the Abolition Act specifically provides in section 50(8) that such interim payments will not form part of compensation under section 41 of the Act, it does not necessarily follow that interim payments are income receipts. Those payments are by way of additional compensation to the landholders to compensate for the delay in paying the compensation provided for in the Act.
The Supreme Court in Raja Rameshwar Rao v. Commissioner of Income-tax, while considering the question as to whether the interim maintenance allowance received by the assessee under the Hyderabad (Abolition of Jagirs) Regulation, 1358 Fasli, is income and, therefore, liable to tax, has observed at page 145 :
'The point at issue is whether these payments constituted capital or income. The answer to this question will have to be found in the Abolition Regulation under which the payments were made and another Regulation called the Hyderabad Jagirs (Commutation) Regulation, 1359 F. (hereinafter called the Commutation Regulation), which was intented to be supplementary to the earlier Regulation.'
It is, therefore, not disputed by both the sides that it is the provisions of the Abolition Act that will have to be considered to ascertain whether the interim payments made under the said Act constituted capital or income.
It is, therefore, necessary to refer to the provisions of the Abolition Act. The Abolition Act was enacted in 1948, when the Government of India Act, 1935, was in force. By section 3(b) of the said Act, the entire estate, all communal lands and porombokes, other non-ryoti lands, waste lands, pasture lands, lanka lands, forests, mines and minerals, quarries, rivers and streams, tanks and irrigation works, fisheries and ferries, stood transferred to the Government and vast in them free from all encumbrances with effect on and from the notified date. Clause (c) of the said section further provides that all rights and interests created in or over the estate before the notified date by the principal or any other landholder shall as against the Government cease and determine. Clause (e) of the said section is of special significance which reads :
'The principal or any other landholder and any other person whose right stand transferred under clause (b) or cease and determine under clause (c) shall be entiled only to compensation from the Government as provided in this Act.'
Both the sides have built their arguments on the provisions of clause (e) of section 3 to which we will advert in due course.
Section 24 of the Abolition Act provides that the compensation payable in respect of the estate shall be determine in accordance with the provisions that follow. Section 26 enjoins the determination of sum called the basic annual sum. The manner in which the basic annual sum for the zamindari estate has to be determined is laid down in sections 27 to 30 of the Abolition Act. Section 31 to 35 provide for the determination of basic annual sum for inam estates. The determination of the basic annual sum for under-tenure estate is provided for in section 36 of the Abolition Act. The scale of compensation is laid down in section 37 which is the multiple of the basic annual sum. This section clearly lays down that, 'The total compensation payable in respect of any estate shall, except in the case governed by section 38 be determined in accordance with the' scale given in the said section. Section 38 provides for payments to religious, educational and charitable institutions, in which case the Government shall pay to the institutions, every year a tasdik allowance. The Director has been empowered by section 39 of the Abolition Act to determine the basic annual sum and total compensation payable in respect of the estate. By section 40, the compensation payable to any person under the Abolition Act may be paid in such form and manner and at such time or times and in one or two instalments as may be prescribed by the rules made by the Government. Section 41 of the Abolition Act enjoins upon the Government to deposit in the office of the Tribunal the amount of compensation in respect of estate as finally determined under section 39, in such form and manner and at such time or times and in one or more instalments as may be prescribed by the rules. Sections 42 and 43 provide for entertainment of claims to the compensation deposited and the decision of these claim by the Tribunal. The Tribunal by virtue of section 44 has to apportion compensation among the principle landholder and any other person whose rights or interest in the estate stand transferred to the Government. Section 49 provides for the devolution of interest in compensation. Section 54A was inserted by the Amending Act XXIV of 1958 which provides :
'In the case of every estate not governed by section 38, the Government shall estimate roughly the amount of the compensation payable in respect of the estate, and deposit one half of that within six months from the notified date in the office of the Tribunal, as advance payment on account of compensation.'
Sub-Section (2) of that section entitles the Government to deduct one half of all the moneys referred to in the proviso to section 41(1) and one half of the basic annual sum referred to in sub-section (3) of section 50, it the deposit in pursuance of this section is made in the Fasli year in which the estate is notified but after the interim payment in respect of Fasli year has been deposited under section 50. By virtue of sub-section (3) of the said section, Government on the making of a deposit shall be deemed to have been completely discharged in respect of all claims to or enforceable against the amount deposited. Sub-section (4) of the said section provides for apportionment of the amount deposited among the principle landholder and the other persons referred to in section 42 and the provisions of sections 42 to 46, 48, 49, 51, 52, and 53 shall apply mutates mutandis in respect of the amount so deposited. It should be noted here that section 50 is not one of those sections mentioned in sub-section (4) of section 54A. Section 54B, which was also enacted along with section 54A in 1958, provides that, if after the final determination of the amounts of compensation payable under section 39 it is found that the aggregate of such amounts falls short of twelve and half crores of rupees, the Government shall be under an obligation to distribute among the zamindari estate and under-tenure estates an amount equal to that by which aggregate so falls short. This amount has been termed in the Act as 'additional compensation.'
Thus it will be seen that by virtue of clause (e) of section 3 the person whose rights stand transferred under clause (b) or cease and determine under clause (c) shall be entitled only to compensation. Section 24 and the following provisions including section 37 lay down the manner of determination of such compensation and its quantum. Section 37 of the Abolition Act speaks of total compensation which is a multiple of the basic annual sum. Section 54A is a provision for deposit of advance compensation which, it will be seen when we refer to the provisions of section 50, is related with the interim payments to be made under that section. Section 54B provides for additional compensation the determination of which does not take in the provisions of section 50 of the Abolition Act. Now we turn to the provisions of section 50 under which the question referred to us has arisen. This section has been made applicable to every case not governed by section 38 (which is applicable to religious, educational and charitable institutions). Under sub-section (2) of the said section after the notified date and before the compensation has been finally determined and paid in pureness of this Act, interim payments shall be made by the Government every Fasli year to the principal landholder and to the other persons referred to in section 44, sub-section (1), in the manner laid down in the said section. From this it very clear that these interim payments are for a period intervening between the notified date and the final determination and payments of compensation under the provision of the Abolition Act. By virtue of sub-section (3), the persons entitled to interim payments will be entitled, in respect of the Fasli year in which the estate is notified, to such amount as the Government may on a rough calculation determine to be the basic annual sum if the deposit in pursuance of section 54A has not been already made and to an amount equal to one half of the basic annual sum so calculated if deposit has already been made. The proviso to this sub-section makes provisions for the deduction that can be made while making interim payments. This provision very clearly shows that the amount of interim payments is related to the deposit of advance compensation under section 54A of the Abolition Act. In case where the amount the amount is not so deposited, the interim payment will be equal to the annual basic sum and on deposit of such amount, the interim payment will be reduced by half. In respect of each subsequent Fasli year, the persons entitled to the interim payments shall be entitled to the amount estimated under sub-section (3) to be one half of the basic annual sum and if data for better calculation of the basic annual sum has since become available in which case the amount to be paid shall be revised by the Government with the reference to such data and the excess or deficit in respect of the amount already deposited for the previous Fasli or Faslis shall either be adjusted towards interim payment due for that Fasli or subsequent Faslis or deposited in addition, as the case may be. The first proviso to this sub-section says that :
'Where the compensation as finally determined for the estate is not paid in one lump sum, but in instalments, the amount payable under this sub-section every year after the first instalment of compensation has been paid, shall be reduced in proportion to the compensation amount outstanding in that year.'
This proviso clearly brings out that, on payment of the remaining amount of compensation in instalments, the interim payments will be proportionately reduced. Sub-section (5) of the said section makes provisions for the apportionment of the amount deposit among the principal land holder and other persons. By virtue of sub-section (6), the Government shall be deemed, on the making of such deposit, to have been completely discharged in respect of all claims to, or enforceable against the amount so deposited. Sub-section (7) provides for the determination of the aggregate interim payment due in respect of the estate after the compensation has been finally determined. Sub-section (9), which was inserted by the Amending Act XXIV of 1958, empowers the Tribunal to revise the apportionment of the interim payment with reference to the aggregate interim payments as finally determined by the Government under sub-section (7).
It is necessary now to read the provisions of sub-section (8) of section 50.
'50.(8) No interim payments made under this section shall be deemed to constitute any part of the compensation which the Government are liable to deposit under section 41, sub-section (1) or to any extent to be in lieu of such compensation.'
It will thus seen that section 50 makes in itself a complete provision for the deposit of amount of interim payment, determination and apportionment thereof. These provisions in themselves were sufficient to hold that the interim payments made under section 50 were not part and parcel of the total compensation to be determined under section 37 of the Abolition Act. That position was made absolutely clear by enacting sub-section (8) of section 50 which did not form part of the original bill. Even without the provisions of sub-section (8) it could be held that the interim payments under section 50 cannot be taken into account while paying the total compensation as determined under section 37 of the Abolition Act. The only purpose of enacting sub-section (8) was to put it beyond any possible doubt that the interim payments do not form part of the total compensation. Both the sides agree that by virtue of the provisions of the Act and, especially, by virtue do sub-section (8) it is beyond the pale of any doubt that the interim payments do not form part of the total compensation to be determined under the provisions of the Abolition Act. The dispute that arises between the parties is as to the nature of such interim payments. According to the learned counsel for the department, the very fact that this interim payment is excluded from the amount of compensation determined under the Act shows that it is not compensation for the loss of capital asset; but it is compensation for the loss of income and, therefore, an income receipt. According to the learned counsel for the assessee, the mere fact that interim payments do not form part of the compensation determined under section 37 of the Abolition Act does not make it an income. He lays stress on the wording of sub-section (8) of section 50 and contends that the interim payments do not form part of the compensation which the Government are liable to deposit under section 41, sub-section (1) or to any extent to be in lieu of such compensation. According to him that does not rule out that these interim payments can also be by way of compensation for loss of capital asset.
Having cleared the position that the interim payments under section 50 of the Abolition Act do not form part of the compensation payable under section 41, sub-section (1), of the said Act nor it is to any extent in lieu of such compensation, it now remains to be seen as to what was the intention of the legislature in granting such interim payments. For that purpose, the provisions of clause (e) of section 3 of the Abolition Act assume importance. That clause postulates what a landholder and any other persons whose rights stand transferred under clause (b) of that section or ceased and determined under clause (c) of the said section shall be entitled to. According to that clause, what such persons are entitled to, is only compensation as provided in the Act. It is argued by Shri Kondaiah that from this provision it is clear that under clause (e) such persons are only entitled to what is termed as compensation determined according to the provisions of section 24 to 37, section 54A and section 54B of the Act. In this context he brings to our notice the amendment effected in Madras in 1956, giving retrospective effect to that amendment. By virtue of that amendment the expression 'shall be entitled only to compensation from the Government as provided in this Act' was deleted and in its place was substituted the expression 'shall be entitled only to such rights and privileges as are recognised or conferred on him by or under this Act.' His contention is that by this amendment the Madras legislature has laid down that such persons are entitled not only to compensation but also such right and privileges as are recognised or conferred by or under the Abolition Act. The expression 'such rights and privileges' will also take in compensation, advance compensation, additional compensation, interim payments under section 50 and other provisions of the Act wherein certain rights to such persons have been created for obtaining pattas of the lands and also in buildings standing in the estate. It might, therefore, be argued that by virtue of this amendment the interim payments can also be considered as payment for loss of capital asset. That is the view taken by the Madras High Court in Shanmuga Rajeswara Sethupathi v. Income-tax Officer, Karaikudi. At page 863 the Division Bench observed :
'Under clause (e) the landholder became entitled only to such rights and privileges as are recognised or conferred upon him by and under the Act and one of such rights and privileges which he became entitled to was to receive these interim payments. Obviously, the right to receive these interim payments must stem from clause (e) and from no other provision in the Act and clause (e) specifically equates that right to compensation for the loss of the rights of the landholder which stood transferred to the Government under clause (b) or which ceased or determined under clause (c) of the Act.'
That cannot be said with respect to the unamended clause which is in force in the State of Andhra Pradesh. It cannot also be said that the right to interim payments must stem from clause (e) and no other provision of the Act. If we consider the difference in phraseology in section 24 of the Act and section 50, it will be clear that the right to interim payment is not created by clause (e) of section 3 of the Abolition Act but by section 50. Having provided that such persons are entitled only to compensation in clause (e) of section 3, section 24 merely says that the compensation payable in respect of the estate shall be determined in accordance with the provisions that follow. That section does not say that such person will be entitled to compensation as determined in accordance with the provision that follow. Section 41(1) of the Abolition Act provides for deposit in the office of the Tribunal the compensation as determined under section 39; whereas section 50(2) of the Abolition Act enjoins upon the Government to make interim payments every Fasli to such persons after the notified date and before the compensation has been finally determined. The contention of Sri Narasaraju in this respect is that the word 'compensation' used in clause (e) is a comprehensive term which will take in all the payments that are made under the Abolition Act, his reason being that the after the abolition of the estates and the vesting of those estates in the Government, the landholder or person are entitled only to compensation for loss of the estate and nothing else. We do not agree with this contention. It overlooks the position that nothing precludes the legislature from granting payments by way of income in addition to compensation for the loss of a capital asset. Reference to section 299 of the Government of India Act also does not serve the purpose of the learned counsel. That section provides that no property can be acquired without paying compensation for the same and without making any provision for determination of such compensation. That section does not lay down that the property holder will not be entitled to income in addition to the compensation. Any law which does not provide for payment of compensation will be void because of the provisions of section 299 of the Government of India Act. From this it cannot be postulated that all the amounts paid under the provisions of an Act which provides for acquisition of the capital assets.
It is pertinent to see that the legislature has used the following expressions in regard to payments to be made under the Abolition Act. Those expressions are : compensation, tasdik allowance under section 38, interim payments and additional compensation. If it was the intention of the legislature to term the interim payments made under the Act as interim compensation, they would have done so and would have in addition to that provided that such interim compensation would not form part or would not be in lieu of compensation to be determined under section 37 of the said Act. There is no dispute that compensation provided for under section 37 of the said Act and also under section 54B is for the loss of capital asset. The same phraseology has not been used in section 50. It is legitimate to conclude that the legislature did not intend this payment as part of compensation for loss of estate or in lieu of such compensation. This conclusion derives support from certain provisions of section 50 itself. The interim payments are by virtue of section 50(2) payments for the period intervening between the notified date abolishing the estate and the final payment of the compensation determined in pursuance of the Abolition Act. Further, by virtue of sub-section (3) of the said section, this payment will be the basic annual sum in the Fasli year in which the estate is notified if any advance compensation has not been deposited under section 54A and if such advance compensation has been deposited, it will be half of the basic annual sum. The provisions of sub-section (4) also show that interim payment for subsequent Fasli years which will be half of the basic annual sum after the deposit of the advance payment, will be further reduced in proportion to the instalment of compensation deposited. The advance compensation deposited under section 54A and instalments of the compensation become immediately payable to the landholder and other persons so that they may utilise the same and earn income therefrom. The fact that the quantum of interim payment is correlated to the deposit of advance compensation and instalments of compensation and the fact that the advance compensation and instalments of compensation are payable to the landholder and other persons after such deposit and the consequent deduction in the interim payments, clearly brings out the intention of the legislature that the amount of compensation having become available to the landholder and other persons for purposes of earning income therefrom, the interim payment was reduced. This leads to one simple conclusion that these interim payments were made with the intention of providing the landholder and other persons with income for the period during which the compensation was not paid to them. This conclusion derives further support from the expression 'total compensation' used in section 37 of the Abolition Act. That section very clearly lays down that the total compensation which a landholder and other persons will be entitled to, will be a multiple of the annual basic sum, which is evidently for loss of capital. Further in section 54A the expression 'additional compensation' has been used so that there may not be any conflict with the provisions of sections 37 and 54A.
We may now refer to Kumara Rajah of Venkatagiri v. Income-tax Officer Nellore, a judgment delivered by Jaganmohan Reddy J. (as he then was). After exhaustively dealing with various provisions of the Abolition Act and distinguishing Shanmugha Rajeswara Sethupathi v. Income-tax Officer, Karaikudi, the learned judge clearly held on page 278 :
'... they are, in my view, in lieu of consequential loss to the land holder for the non-receipt of compensation which, had it been received immediately on his being deprived of his estate, he would have earned as income therefrom.'
Further, on the same page, he has held :
'None the less, these interim payments are in the nature of revenue amounts payable for the non-payment of compensation on the abolition of the estate, on which date, ordinarily, the landholder would be entitled to it.'
We are in full agreement with the aforesaid observations.
We also adopt the reasoning of the learned judge for arriving at the aforesaid conclusion and the reasons given by him for distinguishing Shanmugha Rajeswara Sethupathi v. Income-tax Officer, Karaikudi.
We also derive support for our view from the decision of the Supreme Court in Raja Rameshwar Rao v. Commissioner of Income-tax. In that case, their Lordships were dealing with the provisions of the Hyderabad (Abolition of Jagirs) Regulation, 1358 Fasli. After considering the various provisions of the Act, their Lordships have held on page 147 :
'The allowances were measured as a fraction of the current income while the commutation was a multiple of annual revenue. The allowances were recurring payments for a certain time while the commutation sum was a fixed sum payable at once or by instalments. Then we find that under section 14 of the Abolition Regulation the interim maintenance allowances were payable until such time as the terms for the commutation of jagirs are determined.
In other words, after the terms for commutation are determined, the interim maintenance allowances are to cease to be payable. It follows that when compensation begins to be paid, the payments of the maintenance allowances have to stop.'
On page 148 their Lordships further observed :
'We have earlier said that it is not in dispute that the commutation sum was paid as compensation for the loss of the jagir and was, therefore, capital which was not liable to be taxed. We thus find that the Regulations make a clear distinction between the commutation sum or compensation and the interim maintenance allowances. These allowances were obviously not intended to be compensation.
The question then arises, if these allowances were not paid as compensation for the loss of the jagir and were not of the nature of capital as such, what was their nature We think if we have regard to the provisions of the Regulations under which they were paid, as we must, there is no doubt that they were of the nature of income. No doubt they were not income of any of the kinds that are commonly found, but are, as Lord Radcliffe said in a case to which we shall later refer, sui generis. We proceed now to discuss why we think they were income.
These allowances, we notice, were treated by the Regulations as something other than the compensation for the loss of the jagir. They were, therefore, not treated as capital as representing compensation for the jagir. If they were treated as capital for the reason that they were not compensation for the loss of the jagir, we find no ground on which we can say they were capital. It would follow that they must be income and taxable as such. They were certainly not windfall, for a right to them was created by the Abolition Regulation a right which under section 21 could be enforced in a civil court. Then we find that these allowances were payable with a regularity and were of a recurring nature, both of which are recognised as characteristic of income : see Commissioner of Income-tax v. Shaw Wallace & Co. Next, we observe that the Regulation advisedly called the payments maintenance allowance, a nomenclature peculiarly suited for payments of the nature of income. Lastly, it may be pointed out that the payments were made for the interim period between the time when the income of the jagir began to be collected by the Government through the jagir administrator and April, 1, 1950, when the compensation for the loss of the jagir first became payable. The payments were, therefore, by way of compensation for the loss of income in the interim period. In the words of Jenkins L.J., as will appear later, they were 'income compensation' and therefore of the income nature.
We think for all these reasons the interim maintenance allowances were taxable income. If a source had to be found for them, the Regulation had to be held the source.'
The following reasons have been given by their Lord ships of the Supreme Court to arrive at the conclusion that the interim maintenance allowance paid under the Hyderabad (Abolition of Jagirs) Regulation, 1358 Fasli, was an income and, therefore, taxable.
(1) The interim maintenance allowance did not form part of the commutation sum which was compensation for loss of capital asset;
(2) they were not treated as capital representing compensation of the jagirs;
(3) as they were not treated as a part of capital, it must follow that they must be income and taxable as such;
(4) they were not windfall, for a right to them had been created by the Regulation;
(5) those allowances were paid with a regularity and were of a recurring nature;
(6) the Regulation advisedly called the payments, 'maintenance allowances', a nomenclature, peculiarly suited to payments of the nature of income; and
(7) payments were made for the interim period.
All the reasons given above apply to the interim payments paid under the Abolition Act. These payments : (1) were treated by the Act as something other than compensation for the loss of the estate; (2) as they were not treated as capital representing compensation for the estate, it would follow therefore that they were income and taxable as such; (3) they were not windfall, for a right to them was created by section 50 of the Abolition Act; (4) they were payable with a regularity and were of a recurring nature; (5) they were advisedly termed as 'interim payments', a nomenclature peculiarly not suited for payments in the nature of capital, and lastly, (6) they were for interim period between the notified date and payment of full compensation to the landholder and other persons.
It is not necessary for us to refer in detail to Senairam Doongarmall v. Commissioner of Income-tax. In that case, the assessees were tea growers and tea manufacturers and owned a tea estate, on which there were factories, labour quarters, etc. During the 2nd World War, the military authorities requisitioned all the factory buildings, etc., but the tea garden however was left in the possession of the assessees. During the possession of the military, though the assesses looked after the tea garden, there was absolutely no manufacture of tea during that period. Under the Defence of India Rules, the military authorities paid compensation, the measure being the out-turn of tea which would have been manufactured by the assessees during that period. The question that arose was whether the compensation paid by the military authorities was profits of a business which could be taxed. On the facts of the case, the Supreme Court held :
'The payments in question could not be treated as partaking the character of profits because business not having been done during the two years, no question of profits taxable under section 10 arose. The whole of the amount received by the assessees was, therefore, not assessable.'
The learned counsel for the assessees relied on this observation of the Supreme Court :
'It is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure, and makes it fall within capital or revenue.'
and contends that because the measure for payment of interim payment is the annual basic sum, the interim payment under the Act should not be considered as income. We are in respectful agreement with the proposition laid down by the Supreme Court and we have not taken into consideration the fact that the interim payment was related to the basic annual sum for arriving at the conclusion that it was not in the nature of capital received.
The learned counsel for the assessee also relied upon Ramachandran v. A.N. Krishna Moorthi Iyer which is a decision relying upon Shanmugha Rajeswara Sethupathi v. Income-tax Officer, Karaikudi. As we have disagreed with the conclusion arrived at in Shanmugha Rajeswara Sethupati v. Income-tax Officer, Karaikudi, it is not necessary for us to discuss this case.
Our opinion on the question referred to us is that the interim compensation of Rs. 80,843, Rs. 40,422, Rs. 1,21,146 and Rs. 80,391, received by the assessee under section 50 of the Madras Estates (Abolition and Conversion into Ryotwari) Act, 1948, was an income receipt.
It was contended before us that even though the interim payments are by way of income receipts, further question will arise as to whether any tax can be levied on that income. Two contentions arise in this context. First, whether that income is taxable as a whole in the hands of the assessee having regard to the provisions that it was apportionable among the assessee and other persons as provided for in the Abolition Act and (2) whether that income is an agricultural income. As these questions have not been referred to us, we do not express any opinion on the same. We merely hold that the interim payments under section 50 of the Abolition Act are income receipts and not capital receipts. The reference is answered accordingly. The Commissioner of Income-tax shall have costs of this reference. Counsels fee is fixed at Rs. 500.
Reference answered accordingly.