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Raojibhai H. Desai Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Pune
Decided On
Reported in(1985)14ITD84(Pune.)
AppellantRaojibhai H. Desai
Respondentincome-tax Officer
.....receipt is not to be judged by the label given to it but on the basis of its true character. the funds deposited by a british subject in a german bank were confiscated during the first world war.the right to get back the same was revived in terms of armistice. the amounts returned were not merely original funds but also something more, worked out at 5 per cent per annum. it was held that this working is a mere measure of compensation and does not constitute interest at the rate of 5 per cent per annum as held by the revenue. the relevant observations are : for withholding the sum for preventing mr. kay or his executors exercising the power of disposition over his property, the german have been compelled to pay compensation. the way to estimate that compensation of damages--the sensible.....
1. These appeals have been filed against the orders of the Commissioner (Appeals), Pune, dated 29-11-1983 for the assessment year 1980-81 holding that the interest of Rs. 12,194 and Rs. 349, respectively, accruing to the assessee under the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974 ('the CDS Act') [subject to relief under section SOL of the Income-tax Act, 1961 ('the Act')] is taxable.

2. Shri Mukesh Patel appearing on behalf of the assessee opened his arguments with a remark that the issue has possibly not been examined so far by any Tribunal or the High Court and, therefore, requires a studied and objective approach. The idea was first mooted by him in an article in TAXMAN (February 1983). The compulsory deposit, as the scheme shows, is an investment to be compulsorily made with the Government by the taxpayer. The taxpayer's right of free choice of investment or spending away is curtailed by statute, in respect of all the individuals and HUFs, trustees, etc. (except individuals above 65).

As the preamble to the CDS Act shows, the scheme is devised in public interest, viz., in the interest of national economic development for compulsory deposit by certain classes of income-tax payers. Under article 31(2) of the Constitution of India in respect of acquisition of property in public interest, the Government has to give an amount which, though not justifiable with reference to quantum always bears the character of compensation and not interest. For understanding the concept of income, one can conveniently refer to some English decisions particularly Simpson v. Maurice's Executors 14 TC 580 (CA). The taxability of receipt is not to be judged by the label given to it but on the basis of its true character. The funds deposited by a British subject in a German Bank were confiscated during the First World War.

The right to get back the same was revived in terms of armistice. The amounts returned were not merely original funds but also something more, worked out at 5 per cent per annum. It was held that this working is a mere measure of compensation and does not constitute interest at the rate of 5 per cent per annum as held by the revenue. The relevant observations are : For withholding the sum for preventing Mr. Kay or his executors exercising the power of disposition over his property, the German have been compelled to pay compensation. The way to estimate that compensation of damages--the sensible way no doubt-would be by calculating a sum in terms of interest it would have earned. That has been done but the sum that was compensation and for these reasons, it appears to me that it is not a sum which attracts or attaches income-tax to it.

Shri Patel took us through the CDS Act and submitted that as failure to pay the CDS attracts penalty, there is absolute compulsion, making a citizen forgo his right of free choice of investment, control or management over the funds. What is paid for such deprivation is, thus, compensation though called interest.

3. Elaborating his point further, Shri Patel referred to Kettlewell Sullen & Co. Ltd. v. CIT [1964] 53 ITR 261 (SC) and contended that funds under the domain of the assessee are capital assets and where its utility is impaired for any reasons, amounts received for such impairment constitute capital receipt. He further referred to Senairam Doongarmall v. CIT [1961] 42 ITR 392 (SC) to show that the measure and method of determining the amount is not decisive and even the name given by the parties is not decisive, one has to see the substance and not merely the form. Lastly, he referred to Bombay Burmah Trading Corpn. Ltd. v. CIT [1971] 81 ITR 777 (Bom.) in support of his contention.

4. Shri Patel then pointed out that Section 2(24} of the Act does not refer to interest on the CDS as income. Even in the wealth-tax, although the statute referred to Compulsory Deposit Scheme as bank deposit, it was held in WTO v. S.D. Nargolwala [1983] 5 ITD 690 (Delhi) that such deposits constitute annuities under Section 2(e)(2)(ii) of the Wealth-tax Act, 1957. Referring to Section 7(1) and Section 7(3) of the CDS Act, the former dealing with payment of interest on CDS and the latter treating the interest as interest on bank account, Shri Patel submitted that there can be no such fiction in law. The Legislature has merely specified the measure of compensation and not interest. The name given, viz., interest is not decisive.

5. Lastly, Shri Patel submitted that since two interpretations are possible, the one in favour of taxpayer should be preferred. Reliance was placed on CIT v. Madho Pd. Jatia [1976] 105 ITR 179 (SC) and CIT v.MM. Muthiah [1977] 109 ITR 463 (Mad.) in support.

6. In reply, Shri Walvekar submitted that we should not allow the issue to be contended by looking into the genesis of compulsory deposit or the words of article 31. We have to see the provisions as they are and not as they should or could have been. The Legislature has full powers to deem any receipt as income or to deem even a compensation as interest. Where the language is clear, as explained in Chandroji Rao v.CIT [1970] 77 ITR 743 (SC), there is no question of mixing up compensation with interest. Further, in this case there is no permanent deprivation of source of income which is the test for determining whether a receipt is capital or not [vide CIT v. Manna Ramji & Co.

[1972] 86 ITR 29 (SC) explaining Senairam Doongarmall's case (supra) relied upon by Shri Patel].

7. Simpson's case (supra) is clearly distinguishable. Firstly, [in that case no interest could be claimed as a matter of right as there was no such statutory right under the German law under which the funds were confiscated (not merely temporarily frozen as in the case of CDS). It was only the truce treaty which enabled the party to get back the funds with damages. That was, thus, a case of estimate of damages. In the case of CDS, there is not even a whisper that the authorities thought of granting interest at bank rate in lieu of damages for immobilisation of the funds. Even in respect of permanent deprivation of property only compensation is capital. Interest on compensation is revenue as held in Dr. Shamlal Narula v. CIT [1964] 53 ITR 151 (SC).

8. Shri Walvekar then referred to CIT v. Maharajadhiraj Sir Kameshwar Singh No. 2 [1953] 23 ITR 212 (Pat.) in which interest on advance tax (which is as compulsory as CDS) under Section 214 of the Act is held to be income from other sources. CDS interest is not materially different.

9. Shri Walvekar submitted that the legal fictions created under Section 7(1) and 7(3) of the CDS Act are to be taken to their logical end. There is, thus, no scope for two opinions or benefit of doubt to the taxpayer. Relying on the observations of the Full Bench in Nandlal Sohanlal v. CIT [1977] 110 ITR 170 (Punj. & Har.), the departmental representative stated that when the words of statute are clear there is nothing like giving benefit of doubt to the assessee.

10. Shri Walvekar further pointed out that the compulsory deposit is really not compulsory. If a person is prepared to pay the penalty (which is leviable only in absence of a reasonable cause) the citizen can utilise the funds as he likes, without getting into the net of CDS.The various judgments relied upon by the assessee do not constitute authority for the proposition canvassed on behalf of the assessee. The name given by the parties is admittedly not conclusive regarding the true nature, but this does not apply to cases where the name is given by statute.

11. In his rejoinder, Shri Patel pointed out that he has not challenged the vires of the CDS statute. He referred to article 31 for the limited purpose of showing that the Constitution demands that compensation in respect of the property over which the assessee's domain is snatched away temporarily or otherwise is given. Chandroji Rao's case (supra) is distinguishable in that interest was paid in terms of Section 8(2) of the Madhya Bharat Abolition of Jagirs Act, 1951. The compensation for jagir was distinct from interest which was payable only when there is delay. The compensation became ascertained and payable from the date of resumption. The provision for interest was made only because the compensation was payable in ten instalments. Under the CDS, the instalment returnable is a single indivisible item with no scope for splitting the same notionally into original deposit and interest thereon. Similarly, Manna Ramji & Co.'s case (supra) deals with the question of revenue receipt in respect of compensation for taking over a godown under the Defence of India Act, the acquisition having resulted in shrinkage in volume of business. In CIT v. New India Assurance Co. Ltd. [1980] 122 ITR 633 (Bom.), it has been held that right of management of property or business is a property right. In the case before us also, the property rights are curtailed by statute. Shri Patel admitted that Maharajadhiraj Sir Kameshwar Singh No. 2's case (supra} deals with interest on advance tax, which also entails statutory compulsion. At the relevant time, interest was payable on the full amount. After 1-4-1952 interest became payable only on the advance tax in excess of regular tax. But none of the points now canvassed were taken up before their Lordships. This judgment should not, therefore, be applied as a matter of course.

12. We have examined the contentions. We do not find any merit in this appeal. Firstly, how compulsory is the compulsory deposit In the past too taxing statutes had deposit schemes. Excess Profit Tax Act, required the taxpayer to deposit amounts on which deduction was admissible. Compulsory Deposit Scheme of 1963 gave rebate on additional surcharge otherwise payable. In surtax reduction in surcharge was given on deposits with IDBI, which fetched interest at the specified rate. AD scheme also gave a deduction from income for the deposit and taxed the returns without making any distinction between deposit and interest embedded in the AD return. The only distinguishable feature of Compulsory Deposit Scheme of 1974 is that it does not give any such reduction in income or tax. There is, however, no bar to any person utilising the funds as he likes if he feels that he would be better off even after forsaking the attractive interest and after paying penalty, which again is leviable for non-payment without reasonable cause (statute amended in 1981 retrospectively for all years). The taxpayer who has to pay compulsory deposit on advance tax basis under Section 4 of CDS Act can also avoid payment by riling lower advance tax estimate if he feels that he would be better off even after facing the penal consequences, if any. The compulsory deposit is, thus, really not as compulsory as is made out. The non-payment does entail some penalty, but the citizen can choose to opt out, if he so desires.

13. Secondly, it does not follow as a matter of course that in every case of temporary deprivation of right to use property in any manner, what is paid is compensation or damages. Compensation or damages are normally to be determined by basing the same on the footing that the affected party would get as compensation only as much as would put him in a position in which he would have been if the compulsion were not there. As each taxpayer may have his own method of utilising the funds, there cannot be a standard compensation applicable to all cases. The percentage as provided in Section 7(1) is fixed and is linked with bank rate. Thirdly, the Legislature has full powers to describe as interest, what may or may not amount to interest under some other law. The Legislature has done this in Section 7(1) leaving no scope whatever for any doubt on this issue. We agree with the departmental representative on this point. Besides, the facts of this case are similar to those in Chandroji Rao's case (supra). The jagir was taken away under a statute, which itself deferred the dates of payment of compensation and awarded interest. The latter clearly bore the character of interest. CDS interest is no different. For this purpose, it is not necessary to have a separate express provisions in Section 2(24) of the 1961 Act. The provisions of Section 7(1) of CDS Act are comprehensive enough for the purpose. Further, the ratio of Maharajadhiraj Sir Kameshwar Singh No.2'j case (supra) cannot be lightly brushed aside on the plea that the decision would have been different if the new points now canvassed before us were canvassed before their Lordships. The ratio of the judgment is that when the Legislature itself specifies a receipt as interest, it acquires the character of interest income. Kettlewell Bullen & Co. Ltd.'s case (supra) deals with receipt on account of loss, managing agency, and does not affect the above reasoning.

14. Coming to the question of possibility of two interpretations, we agree that in case of a genuine doubt, it may be possible to resolve the same in favour of the taxpayer. But when one has to make a fair construction as in this case, unless we put a forced construction or do violence to the language, we find no scope for holding that what the assessee has secured is compensation and not interest. The observations in Nandlal Sohanlal's case (supra) are applicable to this case. The label given by parties to a transaction may not be conclusive and it may be necessary to see the substance and not merely form, but this principle does not apply to a statutory provision where one has to read what is plainly written. Section 7(1) leaves no scope for even a remote ambiguity or uncertainty.

15. Coming now to the other case law relied upon by Shri Patel, we find that they do not help the assessee, Simpson's case (supra) as pointed out above, enabled the taxpayer to get a sum in addition to what was confiscated in terms of a statute which did not provide separately for interest. On facts, it was held on the peculiar facts that the figure of 5 per cent per annum was only a measure of compensation and not interest. Although the concept of income in India initially was the same as in UK we have now our own High Courts and the Supreme Court, whose decisions on the point are to be preferred. Senairam Doongarmall's case (supra) and Kettlewell Sullen & Co. Ltd.'s case (supra) deals with the question of capital and revenue and there can be no dispute with the principles laid therein. New India Assurance Co.

Ltd.'s case (supra) deal with the undisputed question as to what constitutes property. There is no controversy that compulsory deposit if made does disable the taxpayer from utilising the same funds elsewhere but this is true of any deposit, statutory or contractual.

Lastly, S.D. Nargolwala's case (supra) deals with wealth-tax. It is held that bank deposit and annuity are not mutually exclusive terms and what is deemed as bank deposit under statute may still constitute annuity under the same statute. In the Compulsory Deposit Scheme, however, there is no reference to compensation. So the possibility of any amount being compensation and not interest does not arise. Taking all these aspects, we hold that the findings of the lower authorities are correct and warrant no interference.

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