SRINIVASAN J. - In W.P. Nos. 343, 391 to 396 and 418 of 1960, the ex-zamindar of Ramnad is the petitioner. He prays for the issue of a writ of certiorari to call for the records of the First Additional Income-tax Officer, Karaikudi, and to quash the orders of assessment made by that officer for the assessment years 1951-52 to 1955-56, 1957-58, 1958-59 and 1959-60 in respect of certain receipts of the petitioner by way of interim payments provided for in the Madras Estates (Abolition and Conversion into Ryotwari) Act (XXVI of 1948). W.P. No. 849 of 1960 is directed against a notice of demand issued under section 29 of the Act calling upon the petitioner to pay advance tax under section 18A(1) of the Act for the assessment year 1960-61.
In the remaining writ petitions - W.P. Nos. 419 to 424 and 1236, 1237 of 1960 - the ex-zamindar of Sivaganga is the petitioner. He prays for writs of prohibition as the assessments in those cases have not yet proceeded beyond the stage of the issue of notices under section 34 of the Indian Income-tax Act.
Since the question calling for determination in all these petitions is identical in so far as it relates to the assessability to tax of the interim payments, the details of one petition will be set out.
In W.P. No. 343 of 1960, the ex-landholder (zamindar) of the Ramnad zamindari estate is the petitioner. The estate was taken over on September 7, 1949, and an amount of Rs. 19,74,144 was deposited by way of advance compensation under section 54A of the Act. For each of the faslis from fasli 1359, the Government also deposited a sum of Rs. 1,60,470 as interim payment under section 50 of the Act. In due course, the Tribunal adjudicated upon the claim of the several persons entitled to these amounts and the petitioner received his share thereof. In July, 1959, the Income-tax Officer issued a notice to the petitioner calling for his objections to the assessment to income-tax of the interim payments received by the petitioner. The petitioner contended that the interim payment was part of the compensation which he received for the loss of his estate and should, therefore, be regarded as capital and not income. These objections were overruled and an order of assessment was in due course made on March 25, 1960, under section 23(3) read with section 34(1)(a) of the Income-tax Act. This assessment was in respect of the assessment year 1951-52 as the receipt of the relevant interim payment was during the accounting period ending on the 30th June, 1950. Similar notices were issued by the Income-tax Officer in respect of the assessment years 1952-53, 1953-54, 1954-55, 1955-56, 1957-58 and 1958-59. But no final assessments had been made in respect of these assessment years by the date the connected Writ Petitions Nos. 391 to 396 were filed in this court. Contending that the Income-tax Officer lacked jurisdiction to start the proceedings under section 34 of the Act, and further that these interim payments are not income but part of the compensation which the landholder was entitled to by reason of the deprivation of his estate which was his income-producing asset, the writ petitions were filed in this court. In W.P. No. 343 of 1960, the petitioner sought for the issue of a writ of certiorari to quash the order of assessment made by the Income-tax Officer, and in the other writ petitions, he sought for writs of prohibition to restrain the Income-tax Officer from proceeding further with the assessment proceedings. By the time, however these writ petitions came on for hearing, orders of assessment had been made in respect of the subsequent assessment years also and the prayer in regard to those years stands amended to suit the circumstances, viz., writs of certiorari are also prayed for in respect of these cases.
We have noticed above that the main contention raised by the petitioners in these writ petitions is that the interim payments made under section 50 of the Act constitute items of capital receipt. The contention of the department, however, is that under the scheme of the Estates Abolition Act, there is a sharp distinction between compensation for the acquisition of the estate by the Government and the payments made under section 50. This interim payment it is said was necessitated by the fact that long delay was bound to occur before the determination of the final compensation and its payment to the landholder. While under the Act the Government took immediate possession of the estates, since the landholder was deprived of the possession of the estate and the income therefrom without any actual payment of the compensation to him on such dispossession, it was provided that an annual and recurring payment was to be made to him pending the final payment and that this should, therefore, be regarded as a measure to provide an income to the landholder during the period referred to. The departments claim is accordingly that the interim payment is in the nature of a substituted annual income and that in any event could be regarded as interest on the compensation amount remaining payable to him. The further contention was that unless this receipt could be brought within any of the exempting provisions of the Indian Income-tax Act, it cannot escape assessment.
Before we proceed to examine the respective contentions on either side, it is desirable to set out the relevant provisions of the Abolition Act in so far as they serve to provide any clue to the nature of these interim payments.
Section 3 of the Act provided in clause (b) thereof that the entire estate, including all interests detailed therein, shall stand transferred to the Government, and vest in them free of all encumbrances. Clause (c) further put an end to all rights and interests created in or over the estate before the notified date by the principal or any other landholder. Clause (e) laid down :
'The principal or any other landholder and any other person whose rights stand transferred under clause (b) or cease and determine under clause (c) shall be entitled only to such rights and privileges as are recognised or conferred on him by or under this Act.'
Originally, this clause (e) ran :
'The principal or any other landholder and any other person whose rights stand transferred under clause (b) or cease and determine under clause (e) shall be entitled only to compensation from the Government as provided in this Act.'
This clause was substituted by that extracted earlier by Madras Act XLIV of 1956, which also made the provision retrospective in its operation with effect from 19th April, 1949.
The determination of the rights of the landholder thus entitled him to compensation under section 3, clause (e), or in its more extended form, to such rights and privileges as are recognised or conferred upon him by or under the Act. Section 24 laid down that the compensation payable in respect of an estate shall be determined in accordance with the following provisions, and section 25 further stated that such compensation shall be determined for the estate as a whole and not separately for each of the interests therein. Under section 27, a sum called the 'basic annual sum' had first to be determined, and broadly stated, such sum was taken to be one-third of the gross annual ryotwari demand, subject to certain deductions. All the items of revenue were to be taken into account for the purpose of determination of this basic annual sum, and what amounts had to be deducted therefrom were provided in detail in section 27 of the Act. Sections 28, 29 and 30 indicated the manner in which the various items which went into the composition of the basic annual sum were to be computed. In the case of inam estates, other provisions contained in sections 31 to 35 set out the manner in which such basic annual sum was to be ascertained. The case of under-tenure estates was dealt with in section 36. On the basis of the determination of the basic annual sum, section 37 of the Act laid down the scale of compensation in respect of any estate, excepting those held by religious, educational and charitable institutions, for which section 38 and 38(a) provided otherwise. In the case of zamindari and inam estates, the total compensation was fixed on a sliding scale. It was to be so many multiples of the basic annual sum as determined in respect of that estate, the multiples varying according as the basic annual sum was above or below certain figures. Under section 40 of the Act, compensation payable by any person under the Act was to be paid in such form or manner and at such time or times and in one or more instalments as may be prescribed by rules made by the Government.
The Act itself made further provisions for the deposit and apportionment of the compensation amount. Under section 41, the Government had to deposit in the office of the Tribunal the compensation in respect of each estate as finally determined under section 39 by applying the earlier provisions referred to in such form and manner, and at such time or times and in one or more instalments, as may be prescribed by the rules made under section 40. While providing for such payment in instalments and in such manner as laid down in the rules, section 54A however required the Government to estimate roughly the amount of compensation payable in respect of the estate and to deposit one half of that amount within six months from the notified date in the office of the Tribunal as advance payment on account of compensation. It is common ground that in respect of the two estates of Ramnad and Sivaganga such advance compensation was duly deposited by the Government in the office of the Tribunal.
Even from the brief summary of the relevant provisions, it would be clear that before the basic annual sum and the consequent quantum of total compensation under section 39 could be determined, the ryotwari demand in respect of the lands in the estate had to be ascertained. This called for a survey and settlement of the estates. Under section 22 of the Act, the Settlement Officer had to effect a ryotwari settlement of the estate in accordance with the settlement notification framed and published by the Government for the purpose. Section 23 also set out the manner of determination of the land revenue before the settlement was brought into force, while section 22 made provision for the notification of the Government laying down the principles to be adopted in making ryotwari settlements in the estates. It is clear from the foregoing that immediately following upon the notification of the estate, the Government had to deposit a sum roughly equivalent to an estimated half of the total compensation that would eventually be payable in respect of the estate. The compensation, however, could not be accurately ascertained till after the survey and settlement had taken place and the precise quantum of basic annual sum following upon such settlement had been computed. Since such final determination of the compensation payable might in the case of several of the estates take a long time, the Government provided in section 50 of the Act for the making of 'interim payments' to the principal landholders and others. Sub-section (2) of that section states :
'After the notified date and until the compensation is finally determined and deposited in pursuance of this Act, interim payment shall be made by the Government every fasli year prior to the fasli year in which the said deposit is made, to the principal landholder and to the other persons referred to in section 44, sub-section (1) as follows :
(3) In respect of the fasli year in which the estate is notified, they shall together be entitled to such amount as the Government may, on a rough calculation, determine to be the basic annual sum referred to in section 26, 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 as so calculated, if the deposit aforesaid has been already made.....
(4) In respect of each subsequent fasli year, they shall together be entitled to the amount estimated under sub-section (3) to be one half of the basic annual sum, unless data for the better calculation thereof have since become available, in which case the amount to be paid shall be revised by the Government with reference to such data....'
It is seen from those provisions that half of the estimated total compensation has to be deposited in the office of the Tribunal within six months of the notified date. For that fasli year in which the estate is notified, the landholder and other persons are entitled to an interim payment equal to the basic annual sum, if the deposit required under section 54A has not been made within that fasli year; if such deposit has been made, the interim payment is limited to one half of the estimated basic annual sum. Naturally, in the subsequent faslis, since the deposit under section 54A would then have been made, the landholder and the other persons would be entitled to the interim payment of one half of the estimated basic annual sum, and these interim payments continue till the date on which the balance of the total compensation is deposited in the office of the Tribunal. The connected provisions contain details with regard to deductions which are not relevant. It may, however, be mentioned that even these interim payments are to be deposited in the office of the Tribunal and the Tribunal is authorised to apportion the amounts among the several persons who may be entitled to them.
The above summary of the provisions of the Act would suffice to understand the points in controversy in these petitions.
The principal question that has been raised in these petitions is, accordingly, the character of the interim payments. It has to be decided whether these payments are in the nature of income in the hands of the recipient or whether they partake of the nature of capital as claimed by the petitioner. While the petitioner claims that the interim payment, notwithstanding that it has been separately dealt with under section 50 of the Act, is part of the compensation which the petitioner is entitled to receive in respect of the estate he has been deprived of, that is to say, as the equivalent for the loss of a capital asset, the department would contend that the interim payment is really in substitution of the annual income which the petitioner would have derived from the estate or at any rate, it may be equated to the interest upon the compensation which the petitioner would be entitled to but which had not yet been paid to him. Another argument on behalf of the department is that unless this amount can be brought within the category of any sum expressly exempted by the provisions of the Income-tax Act, must be regarded as taxable income.
Both sides rely upon the scheme of the Act in support of their respective contentions. Learned counsel for the petitioner points out that in the Bill as it was originally published, there was no provision for the payment of advance compensation. That Bill no doubt provided for interim payments, but, it was not quite clear whether such interim payments would be adjusted against the compensation to be paid finally, the passed Act provided for the deposit of advance compensation under section 54A of the Act, and further made it clean by section 50, sub-clause (8), that no interim payment 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. This provision forms the main support of the departments contention. Its scope will be considered in due course. The petitioner, however, claims that the compensation which the landlord has to receive for the deprivation of his estate, really consisted of the advance compensation deposited under section 54A, of the final compensation determined under section 39 and deposited in the manner provided by section 41(1), and the total of the interim payments made up to the day of deposit of the final compensation, as also the further compensation payable under section 54B. It is pointed out by the petitioner that the several provisions of the Act make it clear that the rights to and the liability of the amount termed 'interim payment' are exactly similar to those in respect of either the advance compensation or the final compensation. The various adjustments which are contemplated in section 54A or under section 41 are also applicable to the interim payment. Section 59 of the Act statutorily makes claims or liabilities enforceable immediately before the notified date against the principal or other landholder of the estate, whose rights stand transferred to Government in pursuance of section 3, sub-section (b), enforceable subsequent to that date only against the interim payments or the compensation or other sums paid or payable to him under this Act. No distinction is made in this regard between the interim payments and compensation. In particular, reference is made to section 44(1) of the Act where the apportionment of compensation is provided for among the principal landholder and any other persons whose rights or interests are affected by section 3, clause (b) or section 3, clause (c), as including persons who are entitled to be maintained from the estate and its income as far as possible in accordance with the value of their respective interests in the estate. Under section 50, sub-section (2), this interim payment is made to all those persons referred to in section 44, sub-section (1), and obviously even in respect of persons entitled to be maintained from the estate and its income, an apportionment is made to them out of this interim payment in accordance with the value of their interests in the estate. Even the claim of persons against the income only of the estate is made to depend upon their interest in the estate and to the extent of that interest such persons are entitled to claim a portion of the interim payment. This feature is relied upon to indicate that even though interim payments are provided for separately from the total compensation, it is manifest from these provisions that it does not lose the character of compensation payable in lien of the interests of the principal landholder and other persons in the estate.
Section 54B provides for what is called additional compensation. It appears that the total amount of compensation which the Government felt themselves bound to pay for the acquisition of this zamindari and other estates was the sum of Rs. 12 1/2 crores. This section provides that if the total compensation computed under section 39 in respect of estates shall fall short of Rs. 12 1/2 crores the Government shall distribute the difference to the various estates in specified propositions. Admittedly, this sum of Rs. 12 1/2 crores does not appear to include the interim payments. But what the learned counsel for the petitioner argues is that the intention of the Government in making the various payments was only to compensate the landholder for the deprivation of the estate and the particular nomenclature employed by the Government in giving effect, to their intention is not conclusive of the character of the sum in question. While the learned counsel for the petitioner seeks to base his contention that interim payment is no less compensation than any other sum so specifically described, the learned Advocate-General, appearing for the department, claims that there is a sharp distinction between the compensation and the interim payment. Wherever the expression 'compensation' is used in the Act, it refers to that amount as ascertained by the application of section 39 of the Act to be dealt with under section 41 thereof. Interim payments are, according to him, dissociated from compensation as the Act understands it. He claims that the determination of the compensation is based on the ascertainment of the basic annual sum and that compensation is equated to the value of the estate as on the date of the vesting of the estate under section 3(c) of the Act. The ascertainment, however, of the basic annual sum is dependent upon the completion of the survey and settlement of the estate which may in the generality of cases involve considerable delay. For each year of delay in the ascertainment, therefore, the Act provides that a sum equal to the basic annual sum, or if advance compensation should have been deposited, half of such basic annual sum, should be paid to the principal or other landholder as interim payment. Emphasis is laid by the learned Advocate-General upon section 39 of the Act which provides for the determination of the basic annual sum and the total compensation payable in respect of the estate and to section 37 which lays down the number of multiples of the basic annual sum which should represent the total compensation payable in respect of any estate. According to him, the total compensation payable in respect of an estate is entirely unrelated to the interim payment which is made no part of the compensation at all. On this reasoning, the character of the interim payment is sought to be dissociated from a capital payment and equated to either the income from the property which the landholder might but for his dispossession have derived or to interest on the compensation amount still remaining unpaid.
Payments made to the persons having rights in the estate are advance compensation, interim payment, final compensation and additional compensation. We have pointed out that section 3, clause (e) of the Act which originally provided only for compensation was later amended with retrospective effect to such rights and privileges as are recognised or conferred on him by or under the Act. This was apparently intended to take into account the other privileges to which the landholder became entitled. He was entitled to ryotwari pattas in respect of his private lands. He was also entitled to the possession of some of the buildings on the estate. While section 3, sub-clause (e) made no specific reference to such rights of the landholder, in its amended form it recognised the landholders right to these privileges.
We are unable to accept the argument of the learned Advocate-General that solely for the reason that compensation so styled under the Abolition Act is to be determined in accordance with the provisions contained in sections 24 to 39 (leaving out sections 38 and 38A, which relate to religious, educational and charitable institutions) and because section 39 makes pointed reference to the total compensation and section 41 directs the deposit of such compensation as determined under section 39, compensation for the loss of the estate is solely left to be provided by the above provisions of the Act, and that any payment that is directed to be made under other provisions such as section 50 of the Act does not form part of the compensation for the loss of the estate. This argument is rested more or less upon the wording employed in the Abolition Act. We may state at once that the terminology used in the Abolition Act is not conclusive in so far as the character of the payments for purposes of the Indian Income-tax Act falls to be considered. Under section 3, clause (b) of the Act, the entire estate stood transferred to the Government and vested in them free of all encumbrances with effect from the notified date. As from that date, the ex-zamindar lost all his rights in the estate. Clause (e) also further provided that all rights and interests created in and over the estate before the notified date by the principal or any other landholder shall as against the Government cease and determine. Following upon the notification, possession of the estate was actually taken over by the State and the State realised all the revenue from the estate which the landholder was till that date in enjoyment. Under clause (e) the landholder became entitled only to such rights and privileges as are recognised or conferred upon him by or 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. It was not the intention of the Act that pending the determination of the final compensation and its payment to the landholder, the landholder should be paid any portion of the income as such from the estate, or even that on the roughly estimated amount of final compensation, the Government undertook to pay him any interest on that sum till the date of its actual payment. We shall in due course deal with the method of calculation of the interim payment in so far as it purports to be relied on by the department in support of its contention. But, at this stage, we may emphasise that the right to receive the interim payment was undoubtedly part of such rights and privileges as are recognised and conferred on the landholder by and under the Act in lieu of the lights which he had in his estate and which stood transferred to Government and of which he was deprived either under clause (b) or under clause (c) of section 3. The scheme of the Act was only to compensate the landholder for the loss of these rights, and if the right to such compensation flowed only from section 3, clause (e), in whatsoever manner such compensation was computed, it is difficult to infer any intention to provide for payment of an income to the landholder till the date of the actual payment of 'compensation' under section 41.
We have pointed out that the quantum of these interim payments is computed on the basis of the basic annual sum determined under section 26 and it is payable to the landholder for every fasli following the notification in the manner provided in section 50. If no part of the compensation is deposited as required by section 54A of the Act, for that fasli the landholder is entitled to an amount equal to the basic annual sum, and after the deposit of the advance payment of compensation, which is one half of the total amount of compensation as roughly estimated, the landholder is entitled to interim payment of one half of the basic annual sum. At first blush it might, therefore, appear that since the basic annual sum itself is linked to the annual ryotwari demand, and may roughly be taken to represent the net annual income which the landholder would but for the abolition of the zamindari have realised from the estate, the interim payments were so specifically provided for the purpose of making available to the landholder, who was deprived of his estate but who had not yet been paid the compensation, an amount which might be equated to the net annual realisation from the estate. But the mere fact that the quantum of the interim payment is computed in such a manner cannot lead to the conclusion that it was in fact paid to the landholder in lieu of the income. It is not as if pending the abolition of the zamindari, the Government provided for the taking over of the estate and for its management by the State and for the payment over to the landholder of the net income from the estate pending the payment of compensation and the determination of the landholders rights. On the other hand, section 3, clauses (b) and (c), put an end to the landholders rights over the estate, and on and after the date of the notification, the landholder was not in law entitled to any portion of the income from the estate. The interim payment cannot, therefore, retain the character of income from the estate, and notwithstanding that its quantum was determined in relation to the income the character of the payment must necessarily be inferred from the right of the person in receipt thereof. If, therefore, the landholder has no right to receive any portion of the income from the estate which was notified, any payment made by the State must necessarily be rested upon section 3, clause (e) of the Act. Neither that provision nor any of the subsequent provisions of the Act indicate any intention that these interim payments represent anything other than compensation for the loss of the estate.
The further circumstance that these payments were annual in character and were to enure for only a few years, that is to say, till the deposit of the final compensation in the office of the Tribunal, cannot serve to support any conclusion to the contrary.
We referred to the arguments of Mr. Vedantachari for the petitioners that these interim payments are under the several provisions of the Act treated in identically the same manner as the compensation amounts so-called, in the sense that any person having a right against the estate or its income could proceed against both the compensation amount and the interim payment in enforcement of such rights. It is conceivable that while a person might have a right against the estate, he might not have the same right against the income and vice versa. But the statute makes no distinction between these cases. It makes available the interim payment also for apportionment in just the same measure as compensation is also liable in enforcement of claims of persons so entitled under section 44 of the Act. The learned Advocate-General, however, argued that no inference of similarity of character between compensation and interim payments should be made and that the above argument is at best inconclusive. We cannot treat this argument isolated from the rest of the features that we have referred to. In so far as the Abolition Act was concerned, the entire scheme of the Act would certainly support the conclusion that the interim payment was regarded as no different from the compensation that was payable for the deprivation of the estate; it was in fact one of the items of compensation.
The learned Advocate-General appeared to place great reliance upon section 50, sub-section 8, which reads thus :
'No, interim payment 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 seems to us that this provision cannot be given the very extended interpretation which the learned Advocate-General seeks to place upon it. According to him, here is a clear declaration that the interim payment is not part of the compensation. We have pointed out that in the Bill as it was originally published, this sub-section did not appear, though interim payments were in fact provided for. It was therefore doubtful if these payments would be adjusted against the total compensation payable to the landholder. This provision seems to have been inserted in order to remove any such doubts and to make it clear that these payments were in addition to the compensation determined under section 39 of the Act. Coming to the section itself what it purports to lay down is that the Government undertook to make these interim payments in addition to the total compensation as determined by section 39 of the Act and declare their decision that they would not adjust these payments against the compensation. But for this provision, the Government would perhaps have been in a position to make that adjustment. If the learned Advocate-Generals argument under this head meant that the Government clearly specified that this was not also compensation for the loss of the estate, we are not able to interpret this provision in that light. What it states is that the interim payment shall not be part of the compensation which the Government are liable to deposit under section 41. That it is not part of the compensation so computed under section 39 and liable to be deposited under section 41, sub-section (1), does not mean that it is not compensation for all purposes. This section cannot to our minds lead to any such conclusion.
The underlying implications of the argument on behalf of the department appear to be that because the Abolition Act styles one part of the payment as compensation and another part as interim payment, the latter cannot be regarded as compensation payable to the landholder for the deprivation of his rights in the estate. What we are at present dealing with is whether these payments constitute part of the compensation which a person obtains for the loss of a capital asset for purpose of the application of the Indian Income-tax Act. We must repel the suggestion that the State legislature could therefore so define any amount in a State enactment as to affect the rights and liabilities under the Indian Income-tax Act. It is obvious that in coming to any conclusion in relation to the application of any of the provisions of the Indian Income-tax Act, we cannot accept the nomenclature used in the State enactment as conclusive. Whatever differences might exist in the character of final compensation and interim payment, in so far as the Abolition Act is concerned, they cannot be taken bodily over into the scheme of the Indian Income-tax Act.
It is not necessary to examine at length the further argument that these payments might be regarded as interest on the undeposited portion of the compensation. Clearly, there is no such intention on the part of the Government to make these payments as interest. That is sufficient to dispose of this argument.
The argument that unless the petitioner can place reliance upon any of the exempting provisions of the Indian Income-tax Act, he cannot avoid the liability of this amount to assessment is one which we are unable to accept. The Indian income-tax Act is obviously a measure to tax an income receipt. It was not designed to tax capital and if the receipt of an amount is of a capital nature, it obviously goes outside the purview of the Indian Income-tax Act. No specific exemption contained in the Act is required to enable the petitioner to avoid assessment in such a case. If, therefore, the petitioner can establish that this receipt is not of an income nature, he is entitled to the relief he prays for.
Though no decided case directly bearing on the point is available, some decisions do furnish a clause as to the mode of determination of the character of a receipt as in this case is. In Secretary of State in Council of India v. Scoble [ A.C. 299.] the question arose whether the payment of the value of a railway purchased by the Secretary of State in instalments by way of an annuity for a term of years amounted to a revenue receipt liable for tax as annuity. Though the decision went upon the specific provisions of the English Income Tax Acts, it is nevertheless of value in so far as it lays down that the Income-Tax Acts do not tax capital as income and that income-tax is not payable upon a part of the annuity which represented capital. The House of Lords examined the nature of the transaction in order to see whether annuity payment was capital or was to be treated as income and came to the conclusion that the mere provision for the payment of the price in yearly instalments and the loose use of the word 'annuity' would not justify what was obviously a taxation of capital. A similar case came before the Court of Appeal in East Indian Railway Co. v. Secretary of State in Council of India [ 2 K.B. 413.]. There also as the purchase price of the interest of certain railways in India a so-called annuity had been granted by the purchaser, the Secretary of State. Income-tax on these annual payments was deducted, and the question arose whether the payments were liable to income-tax. The decision cited earlier was considered and it was held that the fundamental character of the transaction was not altered by the method adopted in the payment of the purchase price. It represented only capital and not income.
A decision which comes closer to the present case is Simpson v. Executors of Bonner Maurice as Executor of Edward Kay [(1929) 14 Tax Cas. That was a case where a naturalised British subject had deposited securities, stocks and shares in banks in Germany. He died during the war. As a result of the peace treaty claims on the part of his representatives were admitted in respect of amounts representing partly capital or securities realised by sale or redemption, partly interest and dividends and interest thereon and partly compensation under the treaty computed on the basis of interest on certain amounts. The question arose whether the compensation computed on the basis of interest was or was not income for purpose of income tax. It appears that an award by the Mixed Arbitral Tribunal was made in respect of these claims and the compensation was a sum calculated upon the basis of interest in respect of a fund consisting of dividends which had been held as alien property under the German law. Rowlatt J. observed :
'The question is whether it is income at all. It is called compensation, but the mere word in the Award, compensation, does not decide the matter; one must look at the substance of what it was, and if it is annual profits and gains or income..... arising from a foreign possession, then it is to be taxed. The foreign possession must have been the fund in the hands of the Treuhander and the Crowns case is that this has been transmuted into sterling at the pre-war rate of exchange and awarded with annual interest... The Treuhander did not receive this money subject to any liability to hold it at interest. No doubt the German law recognised it as remaining the property of Mr. Kay, but not so as to bear interest. The Treaty did not give Mr. Kay any right to interest, nor did it declare the Treuhander a trustee so as to found any consequential claim for interest; it did not empower the Tribunal to give interest as such, or to make any declaration as to the character of the purpose for which the Treuhander had held the money. The Treaty gave compensation, and the Tribunal which assessed the principal sum has assessed it on the basis of interest. I think this sum first came into existence by the Award, and no previous history or anterior character can be attributed to it...' It was accordingly held that the amount was not income and therefore not liable to tax. In confirming the decision of Rowlatt J. the Court of Appeal observed :
'The duty to pay compensation was imposed up on them by the Treaty. The Statute does not apply it, and the root of the payment is the duty to pay compensation... For withholding this sum, for preventing Mr. Kay, or his executors, exercising the power of disposition over his property, the Germans have been compelled to pay compensation. The way to estimate that compensation or damages - the sensible way no doubt - would be by calculating a sum in terms of what interest it would have earned. That has been done, but the sum that was paid has not been turned into interest so as to attach income-tax to it. It remains compensation and, for these reasons, it appears to me that it is not a sum which attracts or attaches income tax to it.'
It is not necessary for us to examine the other content on put forward by Mr. Vedantachari, that if the interim payment is not regarded as part of the compensation payable for the loss of the estate, it would by reason of the manner of its determination partake of the character of agricultural income. It seems clear from the very fact that the petitioners were not entitled to receive any revenue from the lands of which they were dispossessed, that these payments cannot be regarded as in the nature of income arising from agricultural land. It is unnecessary to cite any decisions. Whatever might be the character of these interim payments, it is certainly not agricultural income.
On behalf of the department, reliance has been placed upon Raja Rameswar Rao v. Commissioner of Income-tax [ 40 I.T.R. 576.]. That was a case which arose under the Hyderabad (Abolition of Jagirs) Regulation 1358F, which provided a scheme for the abolition of jagirs. Until such time as the Government was in a position to fix the commutation payable in respect of each jagir, the jagirdar was to be paid an interim allowance equal to the net income that used to be derived from the jagir less the expenses of the management. The question arose whether these amounts were income assessable to income-tax. A Bench of the Andhra Pradesh High Court held that these interim allowances partook of the nature of income and did not form part of the commutation amount and were also not casual and non-recurring receipts, and that payments subsequent to the determination of the commutation were not liable to taxation. We have examined the relevant provisions of the Hyderabad Regulation referred to. Under the scheme of that Regulation, administration of the jagirs was transferred to the Government and the management of the jagirs was, therefore, in the hands of the Government through duly appointed managers. There was no provision in that Regulation analogous to section 3(b) and (c) of the Abolition Act, and obviously the jagirdar continued to be entitled to the jagir, though he was deprived of the possession and management thereof. The Regulation on further provided that out of the gross revenue realised from each jagir, certain deductions should be made as also administration expenses incurred by the Government and out of the balance payments were to be made to the jagirdars. Section 11 of the Regulation specifically provided for the distribution of the 'net income'. Section 14 specified further that these payments were to be in the nature of maintenance allowances till the commutation of the jagirs was determined. Upon these facts, it seems fairly clear that what was paid to the jagirdar was income from the jagir itself. It was certainly in the nature of income that he received the amount. Whether or not that income would be exempt being agricultural income does not appear to have been canvassed before the learned judges who decided the case. But, in so far as the decision is material for the present purpose, it is abundantly clear that the provisions to the Regulation clearly specified that the jagirdar was only deprived of possession; the management of the estate was taken over by the Government and till the commutation payable to him for the abolition of the jagir was settled, he was to be paid the net income out of the gross revenue of the jagir. That was clearly income. We are unable to see how this decision is of any help in the circumstances of the persons case.
We are accordingly of the opinion that the interim payments were made to the landholders not as income or as interest on the undeposited portion of the compensation; these payments in so far as the scheme of the Act reveals their nature were clearly in addition to the compensation provided in section 39 of the Act to compensate for the deprivation of the estate and for the loss of an income-producing asset of the landholders. They are accordingly of a capital nature and not liable to income-tax.
In relation to W.P. No. 343 of 1960, the learned counsel for the petitioner raised a further ground, viz., that the proceedings under section 34 were incompetent. It was, however, finally submitted that the question may be left undecided. In any event, in the view we have taken as to the character of the interim payments, a decision on this question is not necessary in these writ petitions.
In the result, the petitions are allowed. The rule nisi will be made absolute in each case. Writs of certiorari will issue on the application filed by the Raja of Ramnad and writs of prohibition on the application filed by the Raja of Sivaganga. They will be entitled to their costs, but each of them will be allowed only one counsels fee. Counsels fee Rs. 250.
Learned counsel for the department drew our attention to the fact that during the arguments the learned Advocate-General referred to the decision of the Privy Council in Maharajkumar Gopal Saran v. Commissioner of Income-tax [ 3 I.T.R. 237.]. In our judgment we did not consider it necessary to refer to every one of the cases cited during the arguments, and in our opinion, the decision we have referred to above did not help us in solving the real question at issue in these petitions.