T. N. K. Govindarajulu Chetty Vs.
Commissioner of Income-Tax, Madras  INSC 112 (17 April 1967)
17/04/1967 SHAH, J.C.
CITATION: 1968 AIR 129 1967 SCR (3) 653
Income-tax Act. 1922(11 of 1922)-Interest on compensation
for property acquired-If taxable.
The assesses& were offered compensation
and interest on the amount of compensation in respect of their property which
was first requisitioned under r. 75A of the Defence of India Act, 1939 and later
acquired by the State under s. 5 of the Requisitioned Land (Continuance of
Powers) Act. The Requisition Act provided that. compensation payable shall be
determined in accordance with the provisions of s. 19 of the Defence of India
Act and the rules thereunder, but neither s. 19 nor the Rules provided that
interest shall be paid on the amount of compensation. The assessee demanded
more compensation and interest, and, the High Court in appeal enhanced the
compensation and awarded interest on it The Revenue assessed to income-tax the
amount of interest, which was upheld, in reference, by the High Court. In
HELD : Interest received by the assessee was
If the source of the obligation imposed by
the statute to pay interest arises because the claimant is kept out of his
money, the interest received is chargeable to tax as income.
The same principle would apply if interest is
payable under the terms of an agreement and the court or the arbitrator gives
effect to the terms of the agreement-express or implied and awards interest
which has been agreed to be paid Clauses (a) to, (f) of s. 19(1) of the Defence
of India Act are a Code relating to a arbitration in determining the
compensation payable to a person depraved of his property.
Provisions relating to payment of interest,
are not, however, part of the law relating to arbitration and there is nothing
in cl. (g) which excludes the application of the substantive law relating to
payment of interest when the arbitration is determining the amount of
compensation. In this case, the right to interest arose by virtue of the
provisions of Ss. 28 and 34 of the Land Acquisition Act, 1894, and the
arbitrator 'and the High Court merely gave effect to that right in awarding
interest on the account of compensation. [658 E-F; 660 D-H] Dr. Shamtal Narula
v. Commissioner of Income-tax, Punjab, Jammu and Kashmir, Himachal Pradesh and
Patiala, 53 I.T.R.
151, and Satinder Singh & Ors. v. Amrao
Singh & Ors.  3 S.C.R. 676, followed.
The Commissioners of Inland Revenue v.
Bellantine, 8 T.C.
59,5, and Simpson (H. M. Inspector of Taxes)
v. Executors of Bonner Maurice as Executor of Edward Kay, 14 T.C. 580,
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 1425 and 1426 of 1966.
Appeals by special leave from the judgment
and order dated October 29, 1962 of the Madras High Court in Tax Case No. 195
S. Swaminathan and R. Gopalakrishnan, for the
appellant (in both the appeals).
654 T. V. Viswanatha Iyer, T. A.
Ramachandran, S. P. Nayyar for R. N. Sachthey, for the respondent (in both the
The Judgment of the Court was delivered by
Shah, J. The Income-tax Appellate Tribunal submitted two questions for the
opinion of the High Court of Madras :
"1. Whether the sum of Rs. 1,28,716/is
assessable as income under any of the provisions 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 first question was answered by the High Court in the
affirmative. The High Court declined to answer the second question because it
did not, :in their view, arise out of the order of the Tribunal. The assessees
have appealed to this Court.
By order dated January 30, 1944, the
Collector of Madras, ,,exercising power under r. 75A of the Defence of India
Rules, 1939, requisitioned a property known as "Lutterals Gardens"
belonging to the assessees. The property continued to remain under requisition
till it vested in the Government of Madras absolutely in consequence of an
order made on May 24, 1949 by the Collector of Madras under s. 5 of the
Requisitioned Land (Continuance of Powers) Act, 1947, declaring.the intention
of the Government of Madras to acquire that property. The assessees declined
the offer made by the Collector to pay Rs. 2,40,000/as compensation for
acquisition of the property and interest at the rate of 6% thereon from the
date, of notification for acquisition, and the dispute relating to compensation
payable to the assessees was referred to the Chief Judge of the Court of Small
Causes, Madras. By order of the High Court of Madras in appeal from the order
of the Chief Judge it was adjudged that the assessees be paid Rs. 5,00,0001as
compensation for the property. The High Court also awarded interest at the rate
of 6% on the amount of compensation from the date of notification for
During the two previous years corresponding
to the assessment years 1955-56 and 1956-57 the assessees received, pursuant to
the order of the High Court, a total sum of Rs. 6,28,716/-. In proceedings for
assessment of tax for the assessment years 1955-56 and 1956-57, the Income-tax
Officer apportioned the amount of Rs. 1,28,716/on the basis of actual receipts
in the two previous years and assessed the amounts so apportioned to
income-tax. The Appellate Assistant Commissioner held that the apportioned
amounts were of the nature of revenue and not capital receipts, but' in his
view the income received was liable to be calculated on accrual basis year after
year from the date of the notification for acquisition, and on that account the
assessments of the previous years from 1950-51 to 1954-55 should be reopened
and the interest which accrued in those years should be assessed.
The Commissioner of Income-tax and the
assessees appealed to the Appellate Tribunal against the order of the Appellate
Assistant Commissioner. The assessees submitted that Rs. 1,28,716/received as
interest being part of compensation were not assessable to tax, whereas the Commissioner
claimed that the Income-tax Officer was justified in assessing the amounts in
the years in which they were received. The Income-tax Appellate Tribunal
accepted the contention of the assessees that the receipts were not assessable
to tax because they were of the nature of capital receipts. At the instance of
the Commissioner, the Tribunal referred the two questions set out
Section 5 of the Requisitioned Land
(Continuance of Powers) Act, 1947 authorises the Government by which or under
the authority of which land has been requisitioned, to acquire the land subject
to requisition, by publishing a notice to the 'effect that the Government has
decided to acquire such land. Section 6 of the Act provides, inter alia, that
compensation payable to the owner of the land shall be determined in accordance
with the provisions of s. 19 of the Defence of India Act, 1939, and the rules
made there under.
Section 19 of the Defence of India Act, 1939,
sets out the principles for determining the compensation payable to a claimant.
The amount of compensation may be fixed by agreement between the owner and the
Government : where no such agreement is reached the Central Government is
enjoined to appoint an arbitrator having the qualifications prescribed therein.
Under s. 19(1) (e.) the arbitrator in making his award must have regard, inter
alia, to the provisions of sub-s. (1) of s. 23 of the Land Acquisition Act,
1894 in so far as the same can be made applicable. An appeal Res against the
award of the arbitrator to the High Court. Subsections (2) and (3) of s. 19
confer upon the Central Government authority to frame rules for the purpose of
carrying into effect the provisions of s. 19. In exercise of that power, the
Government of India framed "The Defence of India (Payment of Compensation
and Arbitration) Rules, 1943" which amongst other provisions directed that
the Collector shall pay compensation as soon as may be practicable. But neither
s. 19(1) of the Defence of India Act, nor the Rules framed under s. 19(2) and
(3) provide that interest shall be paid on the amount of compensation.
In the present case, interest was, however,
offered to be paid by the Collector; and the High Court also awarded interest
on the amount of compensation from the date of the notification of acquisition.
It was held by this Court in Dr. Shamlal
Narula v. Commissioner of Income-tax, Punjab, Jammu and Kashmir, Himachal 656
Pradesh and Patiala(1) that the statutory interest paid under S. 34 of the Land
Acquisition Act, 1894, on the amount of compensation awarded from the date on
which the Collector has taken possession of land compulsorily acquired under
the Land Acquisition Act, 1804, is interest paid for delayed payment of the
compensation and is a revenue receipt liable to tax under the Income-tax Act.
It was observed in that case at p. 156 ". . . . interest, whether it is
statutory or contractual, represents the profit the creditor might have made if
he had the use of the money or the loss he suffered because he had not that
use. It is something in addition to the capital amount, though it arises out of
it. Under section 34 of the Act when the legislature designedly used the word
"interest" in contradistinction to the amount awarded, we do not see
any reason why the expression should not be given the natural meaning it bears.
The scheme of the Act and the express
provisions thereof establish that the statutory interest payable under section,
34 is not compensation paid to the owner for depriving him of his right to
possession of the land acquired, but that given to him for the deprivation of
the use of the money representing the compensation for the land acquired."
Counsel for the assessee however contended that the principle of Dr. Shamlal
Narula's case(1) is not applicable to this case, since there is no provision in
the Requisitioned Land. (Continuance of Powers) Act, 1947 and the Defence of
India Act, 1939, and the rules framed there under for payment of interest on
the amount of compensation. Counsel said that under the Act, the owner is paid
not the market value of the property, but compensation determined in accordance
with a highly artificial scheme, and that the interest paid, in truth, bears
the same quality as compensation for deprivation of property and is on that
account a capital receipt not exigible to tax. In support of his contention,
counsel invited our attention to two decisions : The Commissioners of Inland
Revenue v. Ballantine(2) and Simpson (H.M. Inspector of Taxes) v. Executors-of
Bonner Maurice as Executor of Edward Kay(3).
In Ballantine's case(2) a claim of a firm of
contractors against a railway company for "additional costs, loss and
damage' was referred to arbitration. The arbitrator awarded to the claimant a
sum of money mainly as damages, together with interest thereon at 5 per cent.
per annum from the date of lodgement of claim until payment. The Revenue sought
to charge the interest paid by the (1) 53 I.T.R. 51.
(3) 14 T.C. 580.
(2) 8 T.C. 595.
657 railway company to tax under Case III of Sch.
D of the Income-tax Act, 1918. It was held that the sum added in the name of
interest was part of damages, and was not "interest of money"
chargeable to income-tax under Case III of Sch.
D. Lord President Clyde observed :
"Now it is familiar that an assessment
of the kind may contain as one of its constituent elements an allowance in
respect that the claimant has lain for a long time out of his remedy. The
propriety of such an allowance may depend on the character of the claim, and
its amount may depend on many considerations of which time is only one. 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 cases in which
such an allowance is a constituent of an award 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 ITT of Schedule D." In Simpson v.
Executors of Bonner Maurice as Executor of Edward Kay(1) the executors of Kay,
a naturalised British subject, who died during the First World War received, as
the result of the peace treaty claims, amounts representing partly capital of
securities, stocks and shares in Banks in Germany deposited by Kay; partly
interest and dividends; and partly compensation under the Peace Treaty. In a
proceeding for assessment of the receipt to tax it was held that the
compensation computed on the basis of interest was not income for the purposes
of income-tax. Lord Hanworth, M. R., observed at p. 601 "I want to add now
one more word in reference to the sum which has been paid by way of
compensation under Article 297. It-is said in reference to that 'that.. at
least, arose at the time when it was paid under the order of the Mixed Arbitral
Tribunal'. It wag a sum (1) 14 T.C. 580.
c.CI/6712 658 which was calculated as
interest"-.'and it is interest, andtherefore it is within the words of the
Schedule, which undoubtedly impose a tax upon interest which arises or accrues
to a person liable to tax.' But is it interest ? Is that its quality, or is it
compensation estimated and measured in terms of interest ? It appears to me
quite clear that, apart from Article 297, no such sum could have been
recovered." Lawrence, L.J., observed at p. 605 "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." But it must be noticed that liability to pay interest
arose in Ballantine's case(1) under the award of the arbitrator and in the
Executors of Bonner Maurice as Executor of Edward Kay's case (2) under the order
of the Mixed Arbitral Tribunal, and in each case, it was held that what was
paid, though called "interest", was in truth compensation for loss
suffered on account of deprivation of property. According to the view taken by
this Court in Dr. Shamlat Narula's case(3), if the course of the obligation
imposed by the statute to pay interest arises because the claimant is kept out
of his money, the interest received is chargeable to tax as income. The same
principle would apply if interest is payable under the terms of an agreement
and the Court or the arbitrator gives effect to the terms of the
agreement--express or implied and awards interest which has been agreed to be
It is therefore necessary to determine
whether the obligation to pay interest awarded under the order of the High
Court of Madras arose out of the statute or out of the award. In Satinder Singh
& Ors. V. Amrao Singh and Ors.
(4) lands forming part of Cis-Sutlej Jagir
were compulsorily acquired under the East Punjab Acquisition and Requisition of
Immovable Property (Temporary Powers) Act, 1948. The claimants to the lands
claimed in addition to statutory compensation interest from the date from which
they were dispossessed and till the date of payment of compensation.
The arbitrator appointed under the Act
awarded interest on the amount of compensation and the High Court of Punjab in
appeal Confirmed the order. This Court held that the claimants were (1) 8 T.C.
595, (2) 14 T. C. 580.
(3) 53 I.T.R. 151 (4)  3 S.C R. 676,
659 entitled to interest on the compensation amount from the date of
dispossession till the date on which 'the amount of compensation was paid to
the claimants. Section 5 of the East Punjab Acquisition and Requisition of
Immovable Property (Temporary Powers) Act, 1948, set out the principles
according to which compensation was to be paid in regard to the acquired
property, and by cl. (e) thereof it was provided that the arbitrator in making
the award shall have regard 'to the provisions, of sub-s. (1) of s. 23 of the
Land Acquisition Act, 1894 in so far as the same may be applicable. The Act
contained no express provision for payment of interest on compensation
determined by the arbitrator. This Court rejected the contention of the State
of Punjab, that ss. 28 and 34 of the Land Acquisition Act which dealt with the
payment of interest were not intended to apply to the proceedings before the
arbitrator. It was observed "Stated broadly the act of taking possession
of immovable property generally implied an agreement to pay interest on the
value of the property and it is oil this principle that a claim for interest is
made against the State.
" The Court further observed :
"It would thus be noticed that the claim
for interest proceeds on the assumption that when the owner of immovable
property loses possession of it he is entitled to claim interest in place of
right to retain possession. The question which we have to consider is whether
the application of this rule is intended to be excluded by the Act of 1948, and
as we have already observed, the mere fact that s. 5(e) of the Act makes s.
23(1) of the Land Acquisition Act of 1894
applicable we cannot reasonably infer that the Act intends to exclude the
application of this general rule in the matter of the, payment of
interest." The Court also observed "When a claim for payment of
interest is made by a person whose Immovable property has been acquired
compulsorily he is not making claim for damages properly or technically so
he is basing his claim on the general rule
that if be is deprived of his land he should be put in possession of
compensation immediately; if not, in lieu of possession taken by compulsory
acquisition interest should be paid to him on the said amount of
compensation." The scheme of the East Punjab Acquisition and Requisition
of Immovable Property (Temporary Powers) Act, 1948 is similar to the scheme of
the Requisitioned Land (Continuance of Powers) Act, 1947. The Court in Satinder
Singh's case(1) held that be(1) 3 S.C.R. 676.
660 cause of the injunction expressly to
apply the provisions of s. 23(1) of the Land Acquisition Act, 1894, in the
determination of compensation, the application of ss. 28 and 34 dealing with
the payment of interest on the amount awarded as compensation cannot be deemed
excluded. The Court also held that when the owner of property is dispossessed
pursuant to an order for compulsory acquisition, an agreement that the
acquiring authority will pay interest on the amount of compensation is implied.
The reasoning on which the right of the owner
of the lands acquired to interest was affirmed in Satinder Singh's case(1),
prima facie, applies in this case. Counsel for the assessees contended that the
application of ss. 28 and 34 of the Land Acquisition Act in proceedings for
arbitration under the Requisitioned Lands (Continuance Powers) Act, 1947, was
expressly excluded by s. 19(1)(g) of the Defence of India Act which enacted
"Save as provided in this section and in
any rules made there under, nothing in any law for the time being in force
shall apply to arbitration under this section." But cl. (g) is not
susceptible of any such interpretation.
Clauses (a) to (f) of s. 19(1) are a Code
relating to arbitration in determining the compensation payable to a person
deprived of his property. Provisions relating to payment of interest are not,
however, part of the law relating to arbitration and there is nothing in cl 1.
(g) which excludes the application of the substantive law relating to payment
of interest when the arbitration is determining the amount of compensation.
We are therefore of the view that the
principle on which The Commissioners of Inland Revenue v. Ballantine(2) and
Simpson (H.M. Inspector of Taxes) v. Executors of Bonner Maurice as Executor of
Edward Kay(3) were based has no application to this case. It may be recalled
that in those cases the arbitrator and the Arbitral Tribunal were, in awarding
interest, not seeking to give effect to, or to recognize a right to interest,
conferred by statute or contract. The source of the right to interest in both
the cases did not arise from the statute or agreement. In the case on hand, the
right to interest arose by virtue of the provisions of ss. 28 and 34 of the
Land Acquisition Act, 1894, and the arbitrator and the High Court merely gave
effect to that right in awarding interest on the amount of compensation.
Interest received by the assessee was
therefore properly held taxable.
The appeals fail and are dismissed with
costs. One hearing Y.P. Appeals dismissed.
(1) 3S.C.R. 676.