Commissioner Of Income-Tax v. A.B.V Gowda (Deceased)(By L/R. Yeshoda Gowda)

Jagannatha Shexty, J.:— The question referred in I.T.R.C Nos. 158 & 159 of 1978, and 11 & 12 of 1979, at the instance of the Department, under section 256(1) of the Income-tax Act, 1961, is common and it runs as follows:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that only interest at 5 per cent, on a sum of Rs. 82,500 forming the balance of compensation receivable by the assessee was assessable for the assessment years 1972-73, 1973-74, 1974-75 and 1975-76?”

2. The question referred in I.T.R.C No. 18 of 1982 for the assessment year 1976-77 is slightly different, but the substance is the same as above. The facts behind the legal formulation are as follows:

3. The assessee is a Hindu undivided family of which Sri A.B.V Gowda was the karta and other members being his wife and children. A plot of land measuring 16·20 acres belonging to the assessee was acquired by the State Government. On October 11, 1967, the preliminary notification was issued and on September 1, 1969, the final notification was issued. On February 11, 1971, the possession of the land was taken. On December 6, 1971, the assessee was paid advance compensation of Rs. 1,48,500. On July 10, 1974, the Land Acquisition Officer passed an award determining the compensation payable to the assessee at Rs. 2,65,650 with interest at 5 per cent, from February 11, 1971. The award was at the rate of Rs. 14,000 per acre as against Rs. 75,000 claimed by the assessee.

4. The assessee being not satisfied with the award, got the matter referred to the civil court for enhanced compensation. On July 22, 1981, the civil court disposed of the matter awarding compensation at Rs. 23,000 per acre.

5. On August 31, 1974, the Income-tax Officer completed the assessment for the assessment year 1972-73. He worked out the compensation receivable by the assessee at Rs. 12,56,250 at the rate of Rs. 75,000 per acre as per the claim. He deducted therefrom Rs. 1,48,500 received by the assessee and on the balance, he computed interest at 5 per cent, receivable by the assessee and brought to tax that amount as the assessee's income under section 5(1)(b) of the Income-tax Act, 1961, from other sources.

6. The assessee took up the matter in appeal before the Appellate Assistant Commissioner contending, inter alia, that he was entitled to interest at 5 per cent, only on the balance amount of Rs. 82,500 out of the amount awarded by the Land Acquisition Officer and that that alone should be assessed by way of interest. The Appellate Assistant Commissioner accepted that contention and directed the Income-tax Officer to assess the interest on Rs. 82,500 only for the assessment year 1972-73. He also gave similar directions in respect of the subsequent assessment years.

7. Aggrieved by the order of the Appellate Assistant Commissioner, the Department took up the matter in second appeal before the Tribunal. It was urged before the Tribunal that since the assessee was claiming a higher amount of compensation, his claim alone should be the basis for calculating the interest for the purpose of assessment. The Tribunal, however, did not accept that contention. It held that so long as the award of the Land Acquisition Officer stood, the assessee could not be said to be entitled to anything more than the amount awarded thereunder. The Tribunal thus upheld the order of the Appellate Assistant Commissioner.

8. Hence, these references at the instance of the Department.

9. Mr. Sarangan, learned counsel for the Department, firstly contended that since the assessee has not accepted the award of the Land Acquisition Officer and since his claim for higher compensation was before the court, then his claim alone during the relevant assessment years should be the basis for accrual of interest under section 5(1)(b) of the Income-tax Act, 1961. He alternatively urged that in a case like this where the Department has no means to know whether the land of the assessee has been acquired and, if so, how much compensation has been paid and whether the compensation awarded is in dispute in any court of law, the entire interest accrued after the termination of the proceedings in the court, should be included in the total income of the previous year relevant to the assessment year, and it could not be distributed proportionately over the period commencing from the date of dispossession till the date of payment. The learned counsel also submitted that the decision of this court in Commissioner Of Income-Tax, Mysore v. V. Sampangiramaiah.*, [1968] 69 ITR 159 (Mys) has been understood in that sense at least by three High Courts, namely, the Andhra Pradesh High Court in Commissioner Of Income-Tax, A.P v. Smt. Sankari Manickyamma., [1976] 105 ITR 172 (AP), the Gujarat High Court in Topandas Kundanmal v. CIT, [1978] 114 ITR 237 (Guj) and the Kerala High Court in M. Tairam v. CIT, [1979] 117 ITR 638 (Ker).

10. Before we examine these contentions, it is first convenient to set out the statutory provisions under the Land Acquisition Act, 1894, relevant to the case.

11. Section 4 of the Land Acquisition Act provides for issuing a preliminary notification for acquiring land. Section 6 provides for declaration that the land is required for public purpose. Sections 11 and 12 provide for enquiry and for making of an award. The award must contain the determination of compensation payable in respect of the land as on the date of the preliminary notification. Section 18 provides for a reference to court for adjudication of the claim as to compensation if the claimant does not accept the award. Section 23 provides for determining the amount of compensation by the court. Section 31 provides for payment of compensation or deposit of the same by the Deputy Commissioner in court. Section 34 provides for payment of interest.

12. When the amount of such compensation is not paid or deposited on or before taking possession of the land, the Deputy Commissioner shall pay the amount awarded with interest thereon at the rate of 5 per cent, per annum from the time of so taking possession until it shall have been so paid or deposited.

13. Likewise section 28 empowers the court to award interest on the excess amount of compensation if it so determines at the rate of 5 per cent, per annum from the date of taking possession of the land to the date of payment of such excess into court. Though this section confers a discretion to the court to award interest) it is invariably granted, if the compensation is enhanced by the court. If we read closely sections 28 and 34, it will be clear that the interest awarded under section 28 is not quite different from the interest awarded under section 34. The purpose of granting interest under both the sections appears to be the same, that is, if the State wants to take possession of the land without simultaneously paying compensation to the owner, then the State must pay interest on the amount of compensation due to the owner. That is, perhaps, on the general principle that if one has the benefit of the use of money due to the other, the interest at a reasonable rate must be paid. This aspect of the matter has been made clear by the Supreme Court in Dr. Shamlal Narula v. CIT, [1964] 53 ITR 151, 156 (SC), wherein it was observed:

“As soon as the Collector has taken possession of the land either before or after the award, the title absolutely vests in the Government and thereafter the owner of the land so acquired ceases to have any title or right of possession to the land acquired. Under the award, he gets compensation for both the rights. Therefore, the interest awarded under section 28 of the Act, just like under section 34 thereof, cannot be a compensation or damages for the loss of the right to retain possession but only compensation payable by the State for keeping back the amount payable to the owner.”

(Underlining* supplied)

14. It is necessary to remember that there is only one compensation to be awarded in respect of the land acquired and there are no two separate rights thereto. The right to receive compensation and the right to receive enhanced compensation are not two different rights. Both relate to the right to receive proper compensation in respect of the land acquired. The Land Acquisition Officer is required to make an award determining the compensation and if that is not accepted by the claimant on the ground that it is inadequate or insufficient, then the court upon reference has to determine the proper compensation for the land acquired by the State. This compensation is required to be determined by both the authorities on the basis of the market value of the land with reference to the date of publication of the preliminary notification under section 4 of the Act. The Supreme Court in Khorshed Shapoor Chenai v. Asst. CED, [1980] 122 ITR 21 (SC), at p. 31, observed:

“Upon acquisition of his lands under the Land Acquisition Act, the claimant has only one right which is to receive compensation for the lands at their market value on the date of the relevant notification and it is this right which is quantified by the Collector under section 11 and by the Civil Court under section 26 of the Land Acquisition Act. It is true that under section 11, the Collector after holding the necessary inquiry determines the quantum of compensation by fixing the market value of the land and in doing so is guided by the provisions contained in sections 23 and 24 of the Act—the very provisions by reference to which the Civil Court fixes the valuation”

15. It was further observed (at p. 32);

“It is impossible to accept the contention that no sooner the Collector has made his award under section 11, the right to compensation is destroyed or ceases to exist or is merged in the award, or what is left with the claimant is a mere right to litigate the correctness of the award. The claimant can litigate the correctness of the award because his right to compensation is not fully redeemed but remains alive which he prosecutes in a civil court”

16. With these principles under the Land Acquisition Act, we may now examine section 5(1)(a) and (b) of the Income-tax Act, 1961:

“5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which—

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or”

17. Income is liable to be taxed under the Income-tax Act on the basis of its accruing or arising to the assessee, or on the basis of its receipt by the assessee, during the relevant previous year. The words “accrue”, “arise” and “is received” do not appear to be synonymous and indeed cannot be synonymous. So far as the expression “is received” is concerned, it presents no problem. It conveys a clear and definite meaning. But the other two words are not free from difficulty. Those words depend upon the rights of the assessee to secure the income though the actual receipt of the income may not be there. Ordinarily, the income is said to have accrued to a person when he has acquired a right to the income. He must have acquired an enforceable right in regard to that income, though actual quantification and receipt may follow in due course.

18. The scope of these words came up for consideration before the Supreme Court in E.D Sassoon & Company Ltd. v. CIT, [1954] 26 ITR 27 (SC). Therein, the S Company (the E.D Sassoon & Company Ltd.) was the managing agents of the U Company. It was entitled to receive as remuneration a commission of certain per cent, per annum on the annual net profits of the U Company, which was due to them on 31st March of every year. On December 1, 1943, the S Company assigned to A their office as managing agents and all their rights and benefits under the managing agency agreement and the consideration received by them was transferred by them to the capital reserve account. The accounts of the managing agency commission payable to the managing agents for the calendar year 1943 were made up in 1944 and paid to A in 1944. The question was whether in the assessment year 1944-45, A was liable to pay tax on accrual basis on the whole of the commission or whether the tax was payable by A and the S Company on proper apportionment being made between them of the amount received by A. The majority judgment held that A was liable to pay tax on the whole commission and that the commission was not liable to be apportioned between S and A in proportion to the service rendered by each of them as managing agents. In discussing the question, the Supreme Court examined as to when income can be said to have accrued as used in the Income-tax Act. The position was summarised thus (p. 51):

“It is clear, therefore, that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti, solvendum in futuro: See W.S Try Ltd. v. Johnson (Inspector of Taxes), [1946] 1 All ER 532, 539 (CA) and Webb v. Stenton, [1883] 11 QBD 518, 522, 527 (CA). Unless and until there is created in favour of the assessee a debt due by somebody, it cannot be said that he has acquired a right to receive the income or that income has accrued to him.”

(Underlining supplied)

19. It was further stated (at pp. 51-52)

“But in order that the income can be said to have accrued to or earned by the assessee, it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words a debitum in praesenti, solvendum in futuro, it cannot be said that any income has accrued to him.”

20. A mere claim to income without an enforceable right thereto cannot, therefore, be regarded as an accrued income for the purpose of the Income-tax Act. Likewise, a mere claim to a profit or to a liability is itself not sufficient to make the profit to be accrued or the liability to be incurred for taxing purposes. It goes without saying that the mere claim of the assessee in these cases for higher compensation cannot be the basis for determining the interest accrued for taxing purpose. It is only when such a claim for higher compensation is adjudicated by the court and followed by an undisputed enforceable decree that it can be the basis for calculating the interest “accrued” within the scope of section 5(1)(b) of the Income-tax Act. But when such proceedings are pending, the disputed award made by the Land Acquisition Officer could, however, be the basis for determining the interest “accrued since it is not permissible for any court to award compensation less than that awarded.

21. However, the alternate contention urged by Mr. Sarangan should not go unnoticed. The learned counsel submitted that the interest accrued on the compensation finally determined should at least be brought to tax in the relevant year in which it is awarded or received by the assessee and it should not be spread over the years from the date of taking possession up to the date of payment. If that is not permitted, the counsel argued that the Department would lose a substantial portion of the tax on interest on compensation by the bar of limitation as it has no means to keep track of the assessee's litigation in courts of law.

22. We do not think that we could accept this submission since it stands concluded by the decision of this court in Sampangiramaiah's case, [1968] 69 ITR 159. In that case, the Department insisted that the interest accrued should be brought to tax in the year in which it was received. But this court negatived that contention, firstly, on the ground that the accrual of interest was not arrested in each year by mere pendency of the proceedings in the various forms and, secondly, that the omission by the assessee to include the interest which had so accrued to him in the returns of the earlier years cannot be understood to mean that he has a choice to treat the interest as the income of the year in which he received it. This court specifically observed (p. 162, 133):

“When the Land Acquisition Officer made his award and possession was taken, he became liable under section 34 of the Land Acquisition Act to pay interest on the amount awarded if it was not paid when possession was taken. Similarly, when the compensation was enhanced by the District Judge and again by the High Court and there were directions for payment of interest under section 28, such interest became payable when those directions were made.”

“So, the premise that the right to no part of the interest was born until the Land Acquisition Officer made his arithmetic after the Supreme Court disposed of the appeals, cannot have the support of reason.

There was thus a complete acquisition of the right to recover the accumulated interest on the amount awarded by the Land Acquisition Officer when possession was taken, and on the enhancement, when the appropriate decree made such enhancement and to subsequent interest so long as it ran but was not paid. Such interest became income which accrued in the year in which it became so recoverable within the meaning of section 4(1)(b)(i) of the Indian Income-tax Act, 1922, so long as that Act was in force, and of section 5(1)(b) of the Income-tax Act, 1961, when that Act commenced to operate. The attribution of the whole of that interest to the year of receipt is manifestly impossible.”

23. The decision in Sampangiramaiah's case, [1968] 69 ITR 159 (Mys) has been followed by the High Court of Punjab and Haryana in CIT v. Dr. Sham Lai Narula, [1972] 84 ITR 625; the Madras High Court in T.N.K Govindarajulu Chetty v. Commissioner Of Income-Tax, Madras., [1973] 87 ITR 22; the Orissa High Court in Joyanarayan Panigrahi v. Commissioner Of Income-Tax, Bhubaneswar., [1974] 93 ITR 102; the Allahabad High Court in Addl. CIT v. Virendra Singh, [1979] 118 ITR 923; the Delhi High Court in CIT v. Deoki Nandcm & Sons, [1982] 138 ITR 225 and the Calcutta High Court in CIT v. Santi Devi, [1983] 139 ITR 489.

24. The Rajasthan High Court in CIT v. Sri Ram Gopal, [1980] 123 ITR 388 without reference to Sampangiramaiah's case, [1968] 69 ITR 159 (Mys), has also taken the view that the amount of interest awarded should be spread over for the relevant years and the total amount should not be brought to tax in the year in which it is received.

25. The Kerala High Court, however, even relying upon the decision of this court in Sampangiramaiah's case, [1968] 69 ITR 159 (Mys) has taken a contrary view in Jairam v. CIT, [1979] 117 ITR 638 (Ker). It was observed therein that the right to interest on the excess amount of compensation arises only on the date when the court awards the interest and it becomes due to the assessee only on that date and not on the prior date. Similar was the view taken by the Andhra Pradesh High Court in Khan Bahadur Ahmed Alladin & Sons v. Commissioner Of Income-Tax.*, [1969] 74 ITR 651; Commissioner Of Income-Tax, A.P v. Smt. Sankari Manickyamma., [1976] 105 ITR 172; CIT v. Syed Khadruddin Alt Khan, [1983] 144 ITR 266 and Sadasiva Krishna Rao v. CIT, [1983] 144 ITR 270. But the same High Court in the recent decision in CIT v. Janardhan Reddy, [1983] 145 ITR 303, without reference to the earlier three decisions of that court, has held to the contrary. It was observed that the interest that is awarded on the compensation will have to be assessed from year to year right from the date on which the assessee was dispossessed of the land.

26. With respect, if we may say so, the Kerala and Andhra Pradesh High Courts have not properly appreciated the ratio of the decision of this court in Sampangiramaiah's case, [1968] 69 ITR 159 (Mys). In view of our earlier enunciation as to the right to compensation for acquisition of the land and the nature of the interest to be awarded under sections 28 and 34, we do not think that the attribution of the whole of the interest to the year of receipt is possible. As rightly observed by this court in Sampangiramaiah's case, [1968] 69 ITR 159, it is manifestly impossible. When once the interest is awarded, it is payable to the assessee like any other interest on debt. Such an interest does not accrue from the date of the decree of the court. It falls to be calculated and paid from the date of dispossession till payment. It is payable in each successive year and is liable to be assessed in that year itself. The assessment of that accrued interest cannot be postponed till it is actually paid to the assessee. The Income-tax Act does not confer upon the Income-tax Officer the power to assess an income accrued in one year as the income of an earlier or subsequent year.

27. In this view, our answer to the question in each case is in the affirmative and against the Department. In the circumstances of the case, we make no order as to costs.

28. Rajasekhara Murthy J.—I agree with the conclusion reached by my learned brother and the opinion recorded on the questions referred. I would only like to add the following reasons as a supplement.

29. Interest is deemed to accrue to a claimant retrospectively under the Land Acquisition Act from the date of taking possession, though its determination/enhancement and the consequent valuation of the compensation may take place at a later point of time. The question of bringing to tax such interest income under the Income-tax Act, therefore, involves two aspects:

(1) Legal, and (2) Fiscal.

30. The first aspect being one of interpretation is legal in character and relates to the assessee's right.

31. The second aspect is fiscal and involves an application of the law and subjecting the said income to tax within the framework of the Income-tax Act.

32. The Income-tax Officer brought to tax the proportionate interest attributable to each assessment year, calculated on the basis of the claim made by the assessee.

33. The Tribunal has held, on facts, that only the interest on the amount of compensation as awarded by the Land Acquisition Officer should be brought to tax in the assessments for the several years in question since the assessee cannot be said to be entitled to anything more than the amount as fixed by the the Land Acquisition Officer in his award.

34. In these references, at the instance of the Department, the question that arises for our consideration is, whether the assessment of the interest income as computed by the Income-tax Officer is valid in law?

35. Under the Land Acquisition Act, the claimant gets a right to recover the interest on the amount of compensation as per the award passed by the Land Acquisition Officer. The said interest becomes payable to the owner under section 34 of the Land Acquisition Act from the date of taking possession. Similar would be the consequence when the compensation gets enhanced by a decree of the civil court in further appeals.

36. This court has laid down in Sampangiramaiah's case, [1968] 69 ITR 159 (Mys), that the interest accrues on the award amount from the date of dispossession and the same would become recoverable when it is quantified by the Land Acquisition Officer and enhanced by the civil court in further appeal/appeals. On this premise, it was held by this court that the right to the interest on the amount of compensation as finally determined, did not accrue only when it was paid, but the interest accrued from the date on which possession was taken by the Land Acquisition Officer under the Land Acquisition Act and continues to run until it is paid. The said decision of this court is binding on the Department.

37. The assessee gets a right to receive/recover the interest on the enhanced amount from time to time as and when there is an order or decree for enhancement of the compensation but the said accrual is to be reckoned for purposes of bringing to charge that income under the Income-tax Act, from the date of dispossession.

38. I may now refer to the scheme of the Income-tax Act so far as it relates to assessment of interest income under the Act. The concept of income is not “in vacuo”. Income is either received or accrued or arisen to the assessee. The income bears its quality as income, if it is received by the assessee or it is accrued or arisen to the assessee or if fictionally deemed to be received or deemed to have accrued or arisen to him.

39. Under section 4 of the Income-tax Act, which is the charging section, the total income of every person of the previous year is brought to charge in accordance with the provisions of the Act. Total income is defined under section 5 of the Act, to include all income actually received or accrues or arises or is deemed to accrue or deemed to arise to the assessee during any previous year/years.

40. The two words “accrue” and “arise” are used to contradistinguish the word “receive”. Income is said to be received when it reaches the assessee; when the right to receive the income becomes vested in the assessee, it is said to accrue or arise. Such accrual may depend upon the provisions of certain statutes or agreements which may give rise to such a right. Receipt is not the only test of chargeability to tax; if income accrues or arises, it may become liable to tax.

41. Under the Land Acquisition Act, the assessee gets a right to receive the interest on the compensation from the date the possession is taken, though its quantification may take place long after the dispossession, when the Land Acquisition Officer makes an award or the civil court passes a decree enhancing the compensation.

42. Thus, the interest that becomes due on the amount of compensation paid/deposited under the Act varies as and when it is enhanced or reduced. The question that arises then, in land acquisition cases, is, when does the interest on such compensation accrue to the assessee?

43. Under section 28 of the Land Acquisition Act, the court is empowered to award the interest on the excess amount of compensation at the rate of 5 per cent, or 6 per cent, per annum, as the case may be, from the date of taking possession up to the date of payment of such excess amount into the court.

44. Under section 34 of the Act, the claimant is entitled to interest on the amount of compensation fixed by the Land Acquisition Officer in the award, from the date of taking possession until it is so paid or deposited.

45. This interest is deemed to have accrued to the assessee year after year as held by this court in Sampangiramaiah's case, [1968] 69 ITR 159. This accrual of intersst which dates back to the date of dispossession and any interest on further compensation also becomes payable to the assessee from the date of dispossession up to the date of payment or deposit. This concept is peculiar to land acquisition cases. The right to the interest on the award amount/increased compensation under the Land Acquisition Act accrues to the assessee from the date of taking possession and not from the date of a decree.

46. These cases are, therefore, governed by the provisions of section 5 of the Income-tax Act read with the relevant provisions under the Land Acquisition Act so far as the accrual of interest to the assessee is concerned. The relevant provisions of both the enactments will have to be harmoniously interpreted and simultaneously applied in order to find out what is the interest income that accrues to the assessee from the date of dispossession and what portion of it would be exigible to tax in each year starting from the date of dispossession up to the date of payment. Sri Sarangan appearing for the Department submitted that we may lay down guidelines so as to meet different situations in similar cases. But having regard to the facts of these references, what amount of interest should be subjected to tax in each assessment year in question, is not in issue and does not arise out of the order of the Tribunal. This is really a hypothetical issue since the compensation in the present case was enhanced by the civil court in the year 1981 and in none of the assessments from which the references arise, the interest on the enhanced compensation is the subject-matter of assessment.

47. No other question arises for decision and we answer the question in each of the references in the affirmative and against the Department.