The Judgment of the Court was delivered by

V. Ramaswami, J.:— The following three questions have been referred to us under s. 256(1) of the I.T Act, 19611

“1. In the facts and circumstances of the case, whether the Tribunal was right in holding that the sum of Rs. 5,557 was income liable to be assessed to tax for the assessment year 1969–70?

2. In the facts and circumstances of the case, whether the Tribunal was right in holding that the sum of Rs. 6,197 was income liable to be assessed to tax for the assessment year 1970–71?

3. In the facts and circumstances of the case, whether the Tribunal was right in holding that the sum of Rs. 10,971 was income liable to be assessed to tax for the assessment year 1971–72?”

2. The assessee paid an advance tax during the financial year 1963–64, relevant to the assessment year 1964–65. The assessment was completed on March 22, 1969, resulting in a refund of Rs. 22,219. In computing the refund due, interest amounting to Rs. 5,557 due to the assessee under s. 214 of the I.T Act was included. The ITO assessed the interest forming part of the refund of tax for the assessment year 1964–65 as income for the assessment year 1969–70 under the head “Other sources”. This was confirmed both by the A AC and the Tribunal. The first question referred to us questions the correctness of these orders. The assessee paid advance tax during the financial years 1964–65 and 1965–66. When the relevant assessments for the assessment years 1965–66 and 1966–67 were completed, it was found that the tax in advance already paid by the assessee was in excess and this resulted in a refund. While granting the refund of the amount due to the assessee, interest on it amounting to Rs. 3,811 pertaining to the assessment year 1965–66 and Rs. 2,386 pertaining to the assessment year 1966–67 amounting in all to Rs. 6,197, was actually paid to the assessee under s. 214 of the Act during the previous year relevant to the assessment year 1970–71. The ITO treated this amount of Rs. 6,197 as the assessee's income under the head “Other sources”. This order was confirmed by the AAC and the Tribunal. The second question referred to us relates to the assessability of this money to tax.

3. Similarly, as a result of excess advance tax paid in respect of assessment year 1969–70, a sum of Rs. 10,971 was allowed to the assessee as interest under s. 214 of the Act and this was assessed as income under the head “Other sources” for the assessment year 1971–72. The third question relates to this assessment order.

4. The learned counsel for the assessee in a very able argument contended that the amounts in question became payable to her as a result of income-tax assessment orders and not as a result of any income earning activity, business or investment and whatever that comes to the assessee by way of income-tax assessments is only a tax refund or a remission in tax liability measured by way of interest. He invited our attention to ss. 4(2), 207 and 214(1 A) of the Act. The argument of the learned counsel is that these provisions make it clear that what the assessee pays in advance during the financial year is tax and not a deposit. The tax is made payable in advance under s. 207 of the Act in accordance with the provisions of ss. 208 to 219 of the Act and this is authorised by the charging s. 4(2) of the Act. Consistent with this, s. 214(1 A) of the Act deems any excess payment of interest as tax payable by the assessee. There is a difference in the payment of interest under s. 214 of the Act and that paid under s. 237 read with s. 243 of the Act. The interest paid under s. 237 read with s. 243 of the Act is on the basis that a certain amount is due to the assessee, whereas in the case of interest paid under s. 214 of the Act, it amounts to a relief in tax or a concession in tax. The concept of advance tax under s. 18A of the Indian I.T Act, 1922, is different. Under the old Act, the amount paid during the financial year is treated as deposit, whereas under the new Act, it is paid as tax as per the charging section. So ran the argument.

5. Under sub-s. (1) of s. 4 of the Act, the levy of income-tax is on the total income of the previous year computed in the manner laid down in the Act. Sub-section (2) provided that in respect of income chargeable under sub-s. (1), income-tax shall be deducted at the source or paid in advance where it is so deductible or payable under any provision of the Act. Section 4(2) talks of “income chargeable under sub-section (1)”. The liability to pay advance tax is with reference to the income chargeable to tax. Any amount paid in excess is, therefore, not paid for income chargeable to tax. The concept of remission or relief necessarily implies that there must have been a liability to tax. The excess amount found refundable on assessment cannot be said to be paid as tax or collected as tax. It may be it was paid or collected by way of tax. It may also be not a voluntary payment and it is a forced payment by virtue of the provisions of the Act. But since in the assessment, it is found as not referable to any income chargeable to tax, in our view, it could not be treated either as tax paid or its refund or the interest paid on that amount as a remission or rebate in tax. Nor can we accept the argument that it becomes payable as a result of income-tax assessment. It became payable because the amount paid was found not referable to any income chargeable. While we agree that the use of the word “interest” in section 214 of the Act is not decisive of the question whether that amount is refund of tax or a remission in tax, we are of the view that the original character of the amount paid or the interest paid under s. 214 of the Act could not be ignored. Once the payment originally was not referable to income chargeable, the liability to pay advance tax being only on income chargeable, it could not be treated as tax paid. We are unable to discern any distinction between the interest paid under s. 237 read with s. 243 of the Act and that paid under s. 214 of the Act either, as both take note of the fact that certain amount had been paid by the assessee which is not referable to tax on income chargeable and, therefore, liable to be refunded with interest. But Parliament in its wisdom thought that in one case interest will have to be paid from the end of the financial year to the date of assessment and in the other after three months from the date of assessment. We are also unable to see any support for the argument of the learned counsel for the assessee in s. 214(1 A) of the Act. In the case of an excessive payment of interest to the assessee, by a fiction, s. 214(1 A) of the Act deemed the excess as tax and recoverable as such from the assessee. But this provision could not be construed as implying that the original repayment of interest itself was by way of a remission or reduction in tax. On a plain reading of the provisions of the Act, we are unable to hold that the interest paid under s. 214(1 A) is a remission in tax or a refund of tax.

6. The Supreme Court considered a somewhat similar question in P.S Subramanyan, ITO v. Simplex Mills Ltd., [1963] 48 ITR (SC) 182 under the old Act. In that case, in the original assessment of the assessee for the assessment year 1952–53, a part of the tax paid by it in advance for that year was found refundable. The ITO allowed interest under s. 18A(5) on the amount of the advance tax paid by it in accordance with the law as it stood then. Section 18A(5) was amended by the I.T (Amend.) Act, 1953, with retrospective effect. By reason of such amendment, the ITO found that the interest allowed was excessive. He sought to recover by reassessment proceedings under s. 34(1)(b) of the Act the excess of interest so allowed on the ground that the income for that year has been underassessed, and has been made the subject of excessive relief. The Supreme Court held (p. 184):

“It is a ease where tax had been paid in advance and upon subsequent regular assessment for the period for which the tax had been paid it was found that what had been paid was in excess of what was actually due. This is really a case of over-assessment though only provisional and not of under-assessment at all. The payment of interest was in no sense a relief granted in computing income.”

7. Again in a later portion, the Supreme Court observed (p. 186):

“It cannot obviously be suggested that the interest payable by the Government to the assessee for amounts paid by the assessee as tax in advance is a tax paid by the assessee.”

8. Though the decision related to the provisions under s. 18A of the Act and the language used in s. 34 of the old Act and those provisions were not in pari materia with the present Act, the ratio of the judgment is clear that payment of interest was in no sense a relief granted in computing the income. Nor could it be said that the excess amount paid by the assessee is a tax paid by the assessee. We are, therefore, unable to agree with this part of the contentions of the learned counsel.

9. It was then contended by the learned counsel that the amounts in question were paid on capital account, though estimated in terms of interest and that they were not income assessable to tax. The payment of interest relates to the amounts of advance tax paid in excess by the assessee and retained by the department. It is in the nature of a compensation for depriving the assessee of the use of her money by a statutory compulsion. Since the return of the money itself is return of capital, the interest paid also is capital and not income. He referred in this connection to a decision of the Kerala High Court in P.V Kurien v. Commissioner Of Income-Tax, Kerala., [1962] 46 ITR 288. In that case, a piece of land belonging to the assessee was acquired by the State under the provisions of the Travancore Land Acquisition Act. The compensation awarded was enhanced first by the District Court and then by the High Court and on the enhanced amount interest was directed to be paid at 6 per cent, per annum from the date on which the assessee was dispossessed by the State. The interest paid amounted to Rs. 16,477. The question for consideration was whether the amount concerned was an income or a capital sum estimated in terms of interest. The Kerala High Court held that it represented capital and not income liable to tax under the Indian I.T Act. In coming to this conclusion, the decision of the Allahabad High Court in Behari Lal Bhargava…(Applicant); v. Commissioner Of Income-Tax…(Opposite Party).*, [1941] 9 ITR 9 was referred to and followed.

10. The Supreme Court in Dr. Shamlal Narula v. CIT, [1964] 53 ITR 151 considered the nature of interest paid under s. 34 of the Land Acquisition Act, 1894, corresponding to s. 31 of the Travancore Act which was considered in the Kerala High Court's judgment. After referring to a decision of the House of Lords in Westminster Bank Ltd. v. Riches, [1947] 28 TC 159 : 15 ITR (Supp) 86 and quoting a passage from it, the Supreme Court observed (p. 156):

“This passage indicates that interest, whether it is statutory or contractual, represents the profits 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.

11. 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.”

12. While so holding, the Supreme Court referred to the decision of the Allahabad High Court in Behari Lal Bhargava…(Applicant); v. Commissioner Of Income-Tax…(Opposite Party).*, [1941] 9 ITR 9 and held that that decision was wrongly decided. But the learned counsel for the assessee contended that though the Allahabad decision was expressly overruled, the ratio of the decision of the Kerala High Court in P.V Kurien v. Commissioner Of Income-Tax, Kerala., [1962] 46 ITR 288 had not been overruled and in fact the Kerala decision was distinguished by the Supreme Court on the ground that the interest paid referred to a period between the date of dispossession and the, date on which’ the title of the property acquired vested in the State. Though apparently the Kerala High Court's judgment was distinguished, it is seen from a later judgment of the Supreme Court in T.N.K Govinda raju Chetty v. CIT, [1967] 66 ITR 465 that Shamlal Narula's case, [1964] 53 ITR 151 (SC) is an authority for the proposition that (p. 471):

“…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.”

13. Thus, if the obligation arises under the statute or agreement, express or implied, by reason of the claimant being kept out of the money, it is income and not capital. The decision in Shamlal Narula's case, [1964] 53 ITR 151 (SC) was also followed in Chandroji Rao v. CIT, [1970] 77 ITR 743 (SC) in the case of interest paid to a jagirdar under s. 8(2) of the Madhya Bharat Abolition of Jagirs Act, 1951, on the compensation pay-able to him by the Government for resumption of his jagir lands and held that the interest paid was a revenue receipt liable to tax under the Indian I.T Act, 1922. Westminster Bank Ltd. v. Riches, [1947] 28 TC 159 : 15 ITR (Supp) 86 (HL), which was referred to with approval by the Supreme Court in Dr. Shamlal Narula v. CIT, [1964] 53 ITR 151 was sought to be distinguished by the learned counsel for the assessee on the ground that the interest directed to be paid under the decree of a court was on profits which the plaintiff was entitled to and the nature of the profit being assessable as income, interest on such profit was also held to be assessable as income. But in a case where the principal amount is capital as in this case, the interest also partakes the same nature as capital. The argument is attractive but not acceptable. The Supreme, Court specifically in the passage extracted above held that the interest paid is something in addition to the capital amount, though it arises out of it and it represents the profits the creditor might have made if he had the use of the money or the loss he suffered because he had not had that use. There is thus no distinction whether the interest is paid in addition to the capital amount or it is paid in respect of an amount recoverable as profit. The distinction arises only on the fact whether the interest arises under a statute or under an agreement, express or implied, by reason of the delay in payment or deprivation of the use of the money or whether it arises de hors the same and is paid as compensation. Interest under s. 214(1) is paid only by reason of the deprivation of the use of the money to the assessee. We are, therefore, unable to agree with the learned counsel that the interest received by the assessee is in the nature of a capital receipt. It was then contended by the learned counsel for the assessee that the, question whether interest received is an income or not would depend on the subject-matter of the receipt. Income-tax means a personal tax. The character of the interest paid on the excess amount of the advance tax is in the nature of a personal compensation, like compensation paid for an injury by the insurance company or compensation paid for any inconvenience in travelling in a plane, etc. It is not an interest received as a result of any income earning activity, business or investment. In this connection, he referred to ss. 216 and 217 of the Act and the decision in Balmer Lawrie & Co. Ltd. v. CIT, [1960] 39 ITR 751 (Cal). Sections 216 and 217 of the Act relate to payment of interest by the assessee in the case of underestimate, etc. The decision of the Calcutta High Court in Balmer Lawrie & Co. Ltd. v. CIT, [1960] 39 ITR 751 relied on by the learned counsel for the assessee related to the question whether the interest paid on such underestimate was allowable expenditure. In that case, the assessee submitted its own estimate under s. 18A(6) of the Indian I.T Act, 1922, and paid a sum of Rs. 4,47,125 as advance tax. When the assessment for 1948–49 was made, tax paid by the assessee on its own estimate was less than 80 per cent, of the tax determined on such assessment and the assessee was charged with interest amounting to Rs. 92,301 under s. 18A(8) of the Act which the assessee paid in the accounting year relevant to the assessment year 1951–52. The assessee claimed that amount as an allowable deduction in arriving at its taxable profits for the assessment year 11951–52. It was held that the interest paid by the assessee was neither interest in respect of any capital borrowed coming under s. 10(2)(iii), nor was it incurred for the purpose of business nor the payment was incidental to the business within the meaning of s. 10(2)(xv). On the question whether it was allowable as a trading loss it was held (p. 752):

“Assuming that the expenditure was a loss, it was not possible to say that the loss was a trading loss. The loss did not spring directly from the carrying on of the business and was not incidental to the business. The liability for the interest was not incurred in the running of the business, but was one to which all assessees were exposed whether they did business or not.”

14. Relying on this passage, the learned counsel argued that even in the case of a receipt of interest, it should be held as not an income. If payment of interest is not an expenditure and not related to any trading activity, according to the learned counsel, receipt of interest also will not be an income. We have already seen that the Supreme Court in the three decisions in Dr. Shamlal Narula v. CIT, [1964] 53 ITR 151, T.N.K Govindaraju Chetty v. CIT, [1967] 66 ITR 465 and Chandroji Rao v. CIT, [1970] 77 ITR 743, had clearly held that if interest was payable under a statute or under an agreement, express or implied, on any amount which has been withheld or liable to be refunded, it would be income and not a capital receipt irrespective of the fact whether the interest paid is on a capital amount or profit. The interest paid under s. 214 of the Act being a statutory obligation with respect to an amount found refundable, we have to hold that though it may not be an income arising from an activity, business or investment, it would come under the head “Other sources”. The interest is not paid as personal compensation, but it is paid for deprivation of the use of the money. We have, accordingly, to hold that the Tribunal was right in holding that the respective interests received during the three assessment years were income liable to be assessed. We answer the three questions referred to us in the affirmative and against the assessee. In the circumstances, there will be no order as to costs.