JAGADISAN J. - The two questions that stand referred ar :
'(1) Whether the sum of Rs. 1,28,716 is assessable as income under any of the provision of the Act?
(2) If the answer is in the affirmative, the assessment years in which the amount falls to be assessed by suitable apportionment?'
The assessee is a registered firm trading in yarn. Its business income for the assessment years 1955-56 and 1956-57 was Rs. 87,655 and Rs. 1,35,482 respectively as returned by it and this was accepted by the department. The assessee firm purchased two properties in Kilpauk Garden Road on 2nd April, 1943; they were (i) 'Woodlands', a bungalow with 85 grounds appertaining to it; (ii) 'Lutterals Gardens', a bungalow with 138 grounds. The property called 'Lutterals Gardens' was requisitioned by the Collector of Madras for locating offices of various Government departments on 30th January, 1944. Subsequently on 24th May, 1949, the Collector of Madras notified the intention of the Government to acquire the property under section 5 of the Requisitioned Land (Continuance of Powers) Act, 1947. On 12th December, 1949, the Collector fixed the compensation payable for the property at Rs. 2,40,000 stating that it would be twice the market value of the property at the time of the requisition. The following communication was issued by the Collector to the assesse :
'Please state whether you are agreeable to receive the said sum of Rs. 2,40,000 towards the compensation with interest at 6% from the date of publication of the notice under section 5 of the Act, namely, 24th May, 1949.'
The assessee was not willing to accept the Collectors offer and the matter was, therefore, referred to the Chief Judge of the Court of Small Causes, Madras, who was the competent authority to act as arbitrator and to fix the proper amount of compensation. This authority fixed the amount of compensation at Rs. 3,67,666 and passed the following awar :
'That the respondent (Collector) do pay the claimant (assessee) Rs. 3,67,666 as compensation and do also pay interest at the rate of 6% per annum from 24th May, 1949, on the said compensation herein awarded.'
Dissatisfied with the order of the Chief Judge of the Court of Small Causes, the assessee preferred an appeal to this court. By order dated 16th December, 1954, this court fixed the compensation at Rs. 5 lakhs. This amount of Rs. 5 lakhs was to carry interest at 6% from the date of acquisition, that is, 24th May, 1949. The assessee received the sum of Rs. 2,54,885 during the accounting year 1954-55, the previous year for the assessment year 1955-56 and a sum of Rs. 3,78,831 during the accounting year 1955-56, the previous year of for the relevant assessment year 1956-57. Of this total amount received, Rs. 1,28,716 represented the interest awarded to the assessee by virtue of the order of this court dated 16th December, 1954.
In the assessment proceedings for the years 1955-56 and 1956-57, the assessee contended that the receipt of interest payment of Rs. 1,28,716 was not income chargeable to tax but was only a capital receipt of the same nature as the sum of Rs. 5 lakhs admittedly received as compensation for the compulsory acquisition of the property. The Income-tax Officer, however, included the amount as part of the assessable income taking the view that it was chargeable to tax as miscellaneous income under section 12 of the Act. He apportioned the amount of Rs. 1,28,716 between the two years and included Rs. 50,595 as part of the income of the assessment year 1955-56 and Rs. 78,121 as includible in the income of the assessment year 1956-57. This apportionment was made by the officer by working out the proportion of the total of Rs. 1,28,716 on the basis of the receipts from the Collector in each of the two years. The assessee preferred appeals to the Appellate Assistant Commissioner but failed. There were further appeals to the Income-tax Appellate Tribunal and the assessee was successful. The Tribunal held that the receipt was not income and, therefore, not chargeable to tax. On an application for reference by the Commissioner of Income-tax, Madras, as stated already the above questions have been referred to us.
The short point is whether the receipt of Rs. 1,28,716 is capital or income. The contention of the department is that statedly the amount was received only as interest differentiating is from the amount of Rs. 5 lakhs paid as compensation for the acquisition of the property, and that, therefore, the materials on record would only support the conclusion that the receipt is of an income nature. The assessee contends that the amount cannot be treated as income from the mere description of the amount as interest, as in substance what was paid to it was only compensation either for the taking of the property by the Government or for withholding the proper amount of compensation till the High Court rendered its decision. In either view of the matter, the assessee submits, the amount is only something in the nature of damages received and that such damages can only be of a capital nature.
It is necessary to refer briefly to the provisions of the Act under which the acquisition was made. This Act is the Requisitioned Land (Continuance of Powers) Act, VII of 1947, which has now been repealed by Act XXX of 1952. Immovable property could be requisitioned by the Government prior to the 1947 Act, under the Rules framed under the Defence of India Act, 1939. After the expiry of that Act necessity for legislation arose to deal with the properties requisitioned under the 1939 Act. Section 3 of the 1947 Act, which we shall hereafter refer to as the Act, provides that notwithstanding the expiration of the Defence of India Act, 1939, and the Rules made thereunder all requisitioned lands shall continue to be subject to requisition until the expiry of the Act. The appropriate Government is given power under section 5 of the Act to acquire requisitioned land, which means immovable property which had been requisitioned under the Rules under the Defence of India Act. The appropriate Government may at any time when any requisitioned and continues subject to requisition acquire such land by publishing in the Official Gazette a notice to the effect that the Government have decided to acquire such land. When such notice is published in the Official Gazette the requisitioned land shall vest absolutely in the appropriate Government on and from the commencement of the day on which notice is published. On such vesting all encumbrances upon the property case to exist, and the period of requisition is automatically terminated. In effect the title to the requisitioned land is statutorily transferred from the owner to the appropriate Government. The owner of the acquired land is however entitled to compensation. The provision in regard to fixation of compensation is contained in section 6(2). It read :
'In respect of any acquisition of requisitioned land under this Act... the amount of compensation payable shall be such sum as would be sufficient to purchase at the market rate prevailing on the date of the notice under section 5 a piece of land equal in area to, and situated within a distance of three miles from the acquired land, and suitable for the same use as that to which the acquired land was being put immediately before the date of its requisition or a sum equivalent to twice the market value of the acquired land on the date of its requisition, whichever is less; and such amount shall be determined and paid in accordance with the procedure set out in the aforesaid section 19 and the Rules made thereunder.'
Section 19 that is referred to is the section under the Defence of India Act, 1939.
The appropriate Government in this case is the State of Madras. The Rules framed by the Government, called Arbitration Rules, prescribe the procedure for the determination of the value of the compensation and the remedy of the owner where he is dissatisfied with the quantum of compensation awarded by the Collector. The Collector has to make an offer to the owner of the amount of the compensation payable. The owner of the property to whom the offier is made should, within 15 days of the receipt of the offer, communicate in writing to the Collector his acceptance or otherwise of the offer. If he accepts the offer the Collector shall enter into an agreement with him on behalf of the Government in the prescribed form. The Collector, except in cases of dispute over the amount of compensation, should as soon as may be practicable pay to such person the sums specified in the offer. Rule 7 prescribes the remedy of the aggrieved person (owner) where he is not satisfied with the compensation amount fixed by the Collector. That rule read :
'If any person to whom an offer is made under rule 4 does not accept the offer or does not within 15 days of the receipt of the offer communicate in writing to the Collector his acceptance or otherwise of the offer, the Collector shall, as soon as may be, submit to the Provincial Government through the Board of Revenue a report setting forth in full the facts of the case particularly as regards the nature and extent of disagreement between himself on the one hand and the said person on the other and he shall also forward with the report all the connected papers. The Collector shall at the same time deposit in court the amount offered by him to the said person under rule 4.'
There is no provision either under the Act or under the Rules framed by the Government for payment of interest as such on the amount of compensation fixed for the acquisition of the land. But the Collector who made the offer of Rs. 2,40,000 as and for compensation on 21st December, 1949, offered to pay interest at 6% from 24th May, 1949, which was the date of publication of the notice under section 5 of the Act. Both the Chief Judge of the Court of Small Causes and this court have granted interest at 6% on and from 24th May, 1949, on the amount of compensation fixed as payable. The statute fixes the limit of compensation as the market value of the land on the date of the notification under section 5 or twice the market value on the date of the requisition whichever is less. There is no power on the part of the Government to pay anything more than ceiling fixed under the Act and it follows that the subject whose property is acquired has no right or claim to demand anything in excess thereof. The amount of Rs. 5 lakhs which has now been determined as the proper compensation payable to the assessee falls within the statutory limits, and it is conceded that any payment over and above the said sum of Rs. 5 lakhs would not represent the statutory compensation payable under the Act. It is, therefore, clear that the interest 6% awarded as and from the date of section 5 notification is not part of the compensation but something over and above the compensation payable for the acquisition. In fact the learned counsel for the assessee submits that the payment of interest awarded by the authority and received by the assessee must be deemed to have been an ex gratia payment without any legal right. He would, therefore, submit that the interest payment cannot represent an income arising out of the compensation amount of Rs. 5 lakhs. The contention of the department, however, is that the assessee having been awarded interest by the competent authority only on the principal amount of compensation of Rs. 5,00,000 as and from the date of the notification, it has got the character only of income, it being clear that under no circumstance can it be deemed to be part of the compensation amount.
Learned counsel for the assessee relied upon certain decisions in support of the contention that though the amount of Rs. 1,28,716 was paid as and for interest, it should be deemed to be really part of the compensation amount, which was undoubtedly a capital receipt. The first case relied upon is that reported in Commissioners of Inland Revenue v. Ballantine. The headnote in that case sets out the facts and the actual decision as follow :
'A claim for additional costs, loss, and damage incurred by a firm of contractors against a railway company was referred to arbitration on the 1st March, 1916. On the 14th January, 1921, the arbiter awarded the firm a certain sum, mainly as damages, together with interest thereon at 5 per cent. per annum, from the 4th November, 1918 (the date of lodgment of an amended claim), until payment.
Long before the award was made, the firm had assigned any sums they might recover from the railway company, with any interest accruing thereon, to a bank as security for advances, but, notwithstanding notice of this assignment, the railway company paid the amount awarded, including Pounds. 678 interest (without deduction of income-tax), to the solicitors of judicial factor of the estate of the sole partner in the firm....................... Held, that as the award was substantially one of damages, the sum added in the name of interest was merely part of the damages, and was not interest of money chargeable to income tax under case III of Schedule D.....'
At page 611, Lord President (Clyde) observes thu :
'But an interest calculation is a natural and legitimate guide to be used by an arbiter in arriving at what he thinks would be a fair amount. In most case in which such an allowance is a constituent of an awarded it does not separately appear, but is slumped along with other elements in the gross sum decerned for; but there is nothing to prevent an arbiter, if he thinks it just and reasonable in a particular case, to make the allowance in the form of an actual interest calculation from a past date until the sum fixed as at that date is paid. In all such cases, however - whether the allowance is wrapped up in a slump award or is separately stated in the decree -the interest calculation is used in modum aestimationis only. The interest is such merely in name, for it truly constitutes that part of the compensation decerned for which is attributable to the fact that the claimant has been kept out of his due for a long period of time. It is not therefore interest of money chargeable under case III of Schedule D.'
The decision in this case rested on the view that the arbiter directed payment of interest only as part of the solatium and not as interest due and payable on a debt which became due to the claimant from the opposite party.
The next case relied upon by assessees learned counsel is Simpson v. Executors of Bonner Maurice as Executor of Edward Kay .In that case a British subject ordinarily resident in the United Kingdom had deposited securities, stocks and shares in banks in Germany. He had left instructions under which the interest and dividends collected from the deposits and securities were to be credited to his account in the banks. 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 of securities realised by sale or redemption, partly interest and dividends and interest thereon, partly compensation under the treaty computed on the basis of interest on certain amounts. The question raised was whether the compensation computed on the basis of interest was or was not income for the purpose of the Income-tax Act. It was held that the compensation was not income for income-tax purpose. At page 605, Lawrence J. observed thu :
'Article 297 of the treaty says nothing about the payment of interest, and the money paid under the direction of the Mixed Arbitral Tribunal was paid as compensation and not as interest. Neither the fact that the compensation was measured by the amount of the interest, which but for the embargo placed upon the money by the German Government could have been earned by the respondents, nor the fact that part of the compensation was described as interest in the decision of the Mixed Arbitral Tribunal, in my judgment, has the effect of altering the character of the compensation paid to the respondents.'
The decision in this case also turned upon the fact that in substance the amount that was received by the assessee was only compensation awarded by the tribunal, though the compensation was described as interest and was measured in terms of interest.
In Southport Corporation v. Lancashire County Council there was a transfer of the functions of a poor law authority to county and county borough councils, under section 1 of the Local Government Act. The institutional property and liabilities of the authority were also transferred under section 113, sub-section 2(a) and (b) and were divided between the councils. By the agreement between the two councils under section 113 a certain sum of balance became due under the adjustment from the defendant to the plaintiff council, and that sum included a sum which under the agreement was called interest. The defendant council accordingly paid over the amount which was the aggregate of the two sums deducting therefrom income-tax on that part of it which represented the interest. It was held that the latter part was not interest within the meaning of the Income-tax Act but that was an element in the calculation of the capital sum, that is, the total sum paid over which had to be made for the purpose of the said adjustment and that accordingly the defendant had no right to deduct income-tax therefrom. This case is on a line with the cases already referred to. The question for decision depended upon the constructions of the terms of the agreement between the two councils. At page 598, Lawrence J. observes thu :
'............ I am of opinion that the terms of the agreement do not indicate the intention to agree upon a payment of interest in the true sense of that word. The parties had to agree upon an adjustment,and they did so in the terms of clause 3 of the agreement........ If that is the true interpretation of this agreement, then the provision which is contained in the clause 3(c) and (d) with reference to interest is, in the words of the Lord President, Lord Clyde, in Inland Revenue Commissioners v. Ballantine, only in modum aestimationis and not in reality interest within the meaning of the Income Tax Act, 1918.'
The law reports abound with cases of either description; cases where the use of the word 'interest' did not prevent the court from holding that the true nature of the amount was capital; and cases where that word was held to be descriptive of an amount of revenue receipt. Some cases evolve the formula that the true position is whether the amount, though styled as interest, is part of the capital award in respect of which interest is directed to be given. A few cases prescribed the test whether the amount was really damages, measured in terms of interest. The maze of case-law before the decision of the House of Lords in Riches v. Westminster Bank Ltd. did not enunciate any clear principle and was therefore not of much value as precedent. The House of Lords however in Riches case gave a clear guidance in the matter and removed many cobwebs that hung round this part of the tax law by laying down the straight rule, 'Is it capital or income?'
Simon in his Income Tax Law, referring to Riches case, observes thus at page 41 :
'The result of the decision in Riches v. Westminster Bank Ltd. may be epitomised by two extracts from the speeches in the House of Lords. Viscount Simon L.C : But I see no reason why, when the judge orders payment of interest from a past date on the amount of the main sum awarded (or on a part of it), this supplemental payment... should not be treated as interest attracting income tax. It is not capital. It is rather the accumulated fruit of a tree which the tree produces regularly until payment.'
And Lord Wright, speaking of various decisions on compensation payments, quoted that of Glenboig Union Fireclay Co. Ltd. v. Inland Revenue Commissioners, where compensation on an interest basis had been given in respect of the sterilisation of a capital asset, and sai :
'The distinction through these cases is whether the payments were payments of profits, that is, were income, or were payments on capital account estimated in terms of interest.'
Riches case had been consistently followed by several High Courts in India, and we have recently adopted the rule laid down therein in T.C. No. 144 of 1960. We do not feel called upon to add to the discussion in that case.
Mr. Swaminathan, learned counsel for the assessee, submits that the rule in Riches case is unexceptionable but contends that where award of interest is not founded on law or contract but is only as ex gratia grant it can have no separate existence but must be treated as a blend of the primary award. We do not agree with this contention. The question is not under what authority the payment of interest was directed to be made. The real question is what is the character of the amount received. On ultimate analysis the answer to this question would always depend upon the facts and circumstances of each case. The nomenclature or the description of the amount would not of course be conclusive. We have no doubt that in the present case the award of interest was not part of the compensation fixed for the acquisition of the land. The statute authorised the Government to pay only the market value of the land as per the provisions of section 6 of the Act. It would be in contravention of the statute to hold that the direction to pay interest was in effect to result in a payment over and above the market value, the upper limit of which is fixed by the statute itself. So much is clear. The assessee having received the amount, the only question that arises for consideration is, did he receive it as income or as capital. It seems to us that the award of interest was made on the footing that the State Government became a debtor to the assessee for the payment of the true compensation for the acquired land under the Act as on the date of section 5 notification, and that the debt not having been discharged by payment on that particular date, the assessee was entitled, in law or in equity, to have interest at 6 per cent. till payment. This in substance appears to be the proper way of justifying the payment of interest and determining its true character.
We, therefore, answer the first question against the assessee and in favour of the department. The amount of Rs. 1,28,716 is assessable to tax as income in the hands of the assessee. The Tribunal has not dealt with the question of apportionment of the tax amount between the two assessment years 1955-56 and 1956-57 as in its view the amount was not taxable at all. Question No. 2, therefore, does not arise out of the order of the Tribunal. It will be open to the Tribunal to go into this question afresh and pass suitable orders after hearing the assessee and the department.
The assessee will pay the costs of the department. Counsels fee Rs. 250.