Collister and Bajpal, JJ.:— This is a reference under section 66(2) of the Income-tax Act (XI of 1922).
The assessee is Behari Lal Bhargava, proprietor of the Central Book Depot at Allahabad. For the assessment year 1937–1938 the Income-tax Officer assessed him to tax upon an income of Rs. 11,607. The account of profits and loss was as follows:
Rs.
(1) Property … … …
425
(2) Interest … … …
12,708
(3) Dividends … … …
24
(4) Royalty … … …
250
13,407
(5) Business loss … … …
1,800
11,607
It will be observed that one of the items of profit is a sum of Rs. 12,708 under the head of “Interest”, nd it is with this sum of money that the reference now before us is concerned. It appears that two houses belonging to the assessee's father, Ramji Das Bhargava, were acquired by the Improvement Trust under the Land Acquisition Act in 1927, and possession was taken on the 11th November, 1927. The amount awarded by the Land Acquisition Officer was Rs. 13,225; but Ramji Das Bhargava did not accept this as adequate and referred his claim to the Tribunal which has seisin of such matters, and the Tribunal on 6th April, 1931, increased the amount of compensation to the high figure of Rs. 97,640. The Tribunal also directed the Improvement Trust under the provisions of section 28 of the Land Acquisition Act to pay interest at 6 per cent, per annum from the date of taking possession of the property to the date of payment of Rs. 97,640.
The Improvement Trust appealed against this order to the High Court, but the appeal was dismissed; and thereafter the sum of Rs. 97,640, plus Rs. 49,660 as interest, was paid to the four sons of Ramji Das Bhargava, who had meanwhile died. The assessee's share of the interest money was Rs. 12,415.
The Income-tax Officer was of opinion that this money was taxable, and income-tax was accordingly assessed upon it. The assessee appealed to the Assistant Commissioner, but his appeal was dismissed. The view taken by that officer is expressed in the following words: “…. interest paid is the return on that money which was the appellant's, on the date the Improvement Trust took possession of the property. The return on money being nothing but income is clearly liable to tax.”
The Assistant Commissioner not only dismissed the appeal, but he enhanced the amount of income under the head of “business” and accordingly the assessee appealed to the Commissioner under section 32 of the Act; but that appeal also was dismissed so far as the interest awarded under the Land Acquisition Act was concerned. In his order the Commissioner says: “If the appellant had been left in the possession of his property till the question, between the Improvement Trust and his father was decided by the Tribunal, he would certainly have earned income in the shape of rent and it was to compensate him for this loss of income that the interest was awarded by the Tribunal. The appellant's capital stood at the amount awarded by the Tribunal and the amount of interest was certainly a thing quite apart from it and clearly represented the appellant's income on that capital, for the period during which the appellant was kept out of its possession.”
The assessee then applied to the Commissioner to refer certain questions of law to this Court under section 66(2) of the Act, and the Commissioner has stated a case and has referred the following question: “Whether the sum of Rs. 12,415 received by the petitioner as interest from the Improvement Trust was part of his income, profits or gains within the meaning of the Act?”
Learned counsel for the assessee contends that this sum of Rs. 12,415 was compensation on account of his having been deprived of his property from 11th November, 1927, to 6th April, 1931, without receiving its monetary value, and the granting of interest under section 28 of the Land Acquisition Act was merely a convenient way of assessing such compensation; the interest so granted is part of the principal sum awarded as compensation. He pleads that the money in question is either no income at all or, if it is income, it is a “windfall” and is exempt from taxation under section 4(3)(vii), being of a casual and non-recurring nature. That clause provides that the Act shall not apply to “Any receipts not being receipts arising from business or the exercise of a profession, vocation or occupation, which are of a casual and non-recurring nature, or are not by way of addition to the remuneration of an employee.”
The decision on which the taxing authorities have relied is Commissioner of Income-tax v. Jagmohan Das(1). In that case one of the parties to a partition suit put his decree into execution. The other party applied for stay pending the hearing of an appeal which he had preferred in the Privy Council, and a stay order was passed which was conditional upon his Riving security to the extent of Rs. 95,000 and paying interest thereon into court at 6 per cent, per annum at regular intervals. The interest was so paid and was received by the party who had taken out execution. The question before the Chief Court was whether this interest was income to which the Income-tax Act applied, and the learned Judges answered it in the affirmative. At page 126, column 1, they say: “Owing to Indar Prasad taking the case to their Lordships of the Judicial Committee the enjoyment of Jagmohan Das over the property was postponed; but in lieu of this enjoyment he obtained interest at 6 per cent, on the amount calculated as security. This was clearly his income.” Further on they say: “He (counsel for the assessee) asks us to apply the provisions of section 4, clause (3)(vii). The receipts in question were certainly not receipts arising from business or the exercise of a profession, vocation or occupation, nor were they by way of addition to the remuneration of an employee. But they were not of a casual and nonrecurring nature. In these circumstances the exception does not apply and they are assessable to income-tax.”
A few years later the well known decision of the Judicial Committee in the Commissioner of Income-tax v. Shaw Wallace & Co. was pronounced. This is one of the authorities on which learned counsel for the assessee mainly relies. In that case the respondents had received a large sum of money as compensation for the termination of certain agencies of the Burma Oil Co. and the Anglo-Persian Oil Co. Their Lordships of the Privy Council held that the amount of compensation so given was not taxable under the Indian Income-tax Act. At page 1349 their Lordships, after discarding “the case law which has been so painfully evolved in the construction of the English Income-tax Statutes—both the cases upon which the High Court relied and the flood of other decisions which has been let loose in this Board,” observe at page 1350: “The object of the Indian Act is to tax ‘income’, a term which it does not define. It is expanded, no doubt, into ‘income, profits and gains’, but the expansion is more a matter of words than of substance. Income, their Lordships think, in this Act connotes a periodical monetary return ‘coming in’ with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree or the crop of a field.” The Taxing Officers claimed in that case that the compensation fell under the head of “business” within the meaning of section 6(iv) of the Act, but their Lordships say at pages 1352-3:“…the sums which the appellant seeks to charge can, in their Lordships' opinion, only be taxable if they are the produce, or the result, of carrying on the agencies of the oil companies in the year in which they were received by the respondents. But when once it is admitted that they were sums received, not for carrying on this business, but as some sort of solatium for its compulsory cessation, the answer seems fairly plain.” Further on we have this observation: “Their Lordships will only add that the reasoning of this judgment would apply equally if the appellant based his claim on head (vi) ‘other sources’ and the corresponding provisions of section 12.”
The next authority to which we are referred is the Commissioner of Income-tax v. Fletcher. In that case the question before their Lordships was whether a bonus which had been paid to the employee of a company on retirement from a fund which the company had constituted was liable to income-tax. Under the rules governing the constitution of the fund, allotments were made from time to time by the company to the credit of this fund and were invested and accumulated. Allotments so made were neither part of the employee's current salary, nor was it a part of his original contract of service that he should have benefit of this fund; on the other hand, unless the company chose to put an employee on the list he could have no interest whatever in it, and even when so listed he would have no rights until he had served continuously and satisfactorily for a prescribed period. At page 10 their Lordships, after setting out the constitution of the fund and the rules governing it, say: “The consideration of these factors leads their Lordships to the conclusion that the allotments made to the fund in the name of an officer of the company were not in the nature of salary for current services, but were merely the measure of a sum which the company volunteered to pay to him on the termination of his service, and that this sum when paid was not ‘income’ and therefore not taxable.” Further on they say that “they agree with Cornish, J., (one of the learned Judges from whose decision the appeal was preferred) in thinking that such a payment is just as much a capital receipt in the hands of an employee as would be the payment of a lump sum from a provident fund on the employee's retirement.” In this connection they refer to the Board's decision in the case of Shaw Wallace and Co., already referred to.
In John v. Commissioner of Income-tax(2) a certain mill at Agra was put to auction by the debenture, holders. A gentleman named Major John held most of the debentures and he was appointed auctioneer by the court. After the sale he moved the court to be allowed to retain a percentage of 5 per cent, of the sale proceeds as commission, and this was granted. The Income-tax authorities assessed this commission to income-tax; but it was held by a Full Bench of this Court that it was not so assessable. At page 696 the learned Judges say: “In our opinion it cannot be maintained that the auctioneer's commission in the present instance was a receipt arising from the business or the exercise of a profession, vacation or occupation, or that it was not of a casual or (and?) non-recurring nature, or was by way of addition to the remuneration 3 of an employee. Major A.U John, who sold the debentures belonging to himself and his brother, is not an auctioneer and the commission which was earned—if it can be said in the circumstances that he earned commission—did not arise out of the business in which he was engaged nor was it in any way connected therewith.” The learned Judges considered the decision of their Lordships in Commissioner of Income-tax v. Shaw Wallace & Co., and they disagreed with the view which was taken by a Bench of this Court in Gaya Prasad Chhotey Lal v. Commissioner of Income-tax to the effect that “the observations of the Privy Council…. should be taken in conjunction with the facts of the particular case and that the Board did not intend to lay down any general principle.” The Judges of the Full Bench say: “In our opinion, the intention of the Board was to enunciate a working definition of income for the guidance of the courts in India.”
Learned counsel for the assessee has next drawn our attention to some English decisions, and we shall proceed to consider them—while at the same time bearing in mind the warning which was issued by the Judicial Committee in the case of Shaw Wallace and Co.. The first of these cases is In re National Bank of Wales, Limited. In that case, in the winding up of a company it was found that an ex-director of the company had improperly paid out certain dividends. At page 645 Lord Wright held that the respondent must be held liable to repay the amount of dividends plus interest “as in cases of fraud” at 5 per cent, from the dates on which the dividends were paid. Subsequently the question arose as to whether from the amount payable by the respondent there should be deducted income-tax on the interest mentioned in the judgment, and Lord Wright at pages 650-651 said that he did not see his way to allowing such deduction. He observed: “If the company has suffered those damages, I can see no reason why it should not get the whole of the damages back. It is called ‘interest’, but it is really damages for withholding its capital rom the company.”
We are then referred to the Commissioners of Inland Revenue v. Baliantine and Simpson v. Executors of Bonner Maurice, in support of the contention that as regards the sum of money with which we are concerned in the present case it is really nothing more than compensation measured in terms of interest. We may also mention the case of Schulze v. S.W Bensted(3), which is not before us, but from which certain observations have been cited in the judgment of a Full Bench of the Patna High Court, to which we shall presently refer. One paragraph from those observations made by Lord Johnston may be usefully quoted here. It is as follows: “The question is whether a sum, paid under decree eo nomine as interest on a principal sum recovered by the pursuers in an action, was interest in their hands which fell to be assessed to income-tax. Where a pursuer recovers damages with interest from the date of decree I do not think that interest is chargeable. It is part of the damages. But where a sum is due on a definite, date, with interest from the date of advance, and decree goes out, the case is different. The interest ought to have been in the creditor's hands on the stipulated date, and is none the less interest when it is recovered along with the principal under the decree. Between these two cases there may be many, some partaking more of the characteristics of the one, some more of those of the other.”
In Commissioners of Inland Revenue v. Ballantine. “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 a certain date in 1918. At page 611 the Lord President observes:
“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 III of schedule D.”
In Simpson v. Executors of Bonner Maurice, Mr. Kay, a naturalised British subject domiciled and ordinarily resident in the United Kingdom, had at various dates deposited securities, stocks and shares in banks in Germany with instructions to collect interest thereon. Before the termination of the Great war the interest and dividends in respect of the securities were collected by the bank, but owing to the legal position: created by the war the owner or his representatives could not deal with his accounts in the German bank; but as a result of the Peace Treaty and by virtue of an award by the mixed Arbitral Tribunal the sums due to Mr. Kay—who had meanwhile died—were paid over to his representatives along with compensation, the compensation being the sum calculated upon the basis of interest in respect of that sum. At page 593 Rowlatt, J., observes: “The Treaty did not give Mr. Kay any right to interest, nor did it declare the Treuhander a trustee so as to found any consequential claim for interest; it did not empower the Tribunal to give interest as such, or to make any declaration as to the character of the purpose for which the Treuhander had held the money. The Treaty gave compensation, and the Tribunal which assessed the principal sum has assessed it on the basis of interest. I think this sum first came into existence by the award, and no previous history or anterior character can be attributed to it. It is exactly like damages for detention of a chattel, and unless it can be said that damages for detention of a chattel can be called rent or hire for the chattel during the period of detention, I do not think this compensation can be called interest.” In appeal Lord Hanworth, M.R, said: “But is it interest? Is that its quality, or is it compensation estimated and measured in terms of interest?” Further on he says: “For withholding this sum, for preventing Mr. Kay or his executors exercising the power of disposition over his property, the Germans have been compelled to pay compensation. The way to estimate that compensation or damages—the sensible way no doubt—would be by calculating a sum in terms of what interest it would have earned. That has been done, but the sum that was paid has not been turned Into interest so as to attach income-tax to it”.
In Commissioners of Inland Revenue v. Barnato, Slesser, L.J, observes that: “Where, on the consideration of the realities of the case, it emerges that the money is paid as interest and not paid merely as a means of measuring damages, there it can properly be said that it satisfies the requirement of Case III, Rule 1 of schedule D that the tax shall extend to ‘any interest of money’.”
These and other English authorities were considered by a Full Bench of the Patna High Court in Commissioner of Income-tax v. Rani Prayag Kumari. Manohar Lal, J., who delivered the judgment of the Court, classified the various decisions of the English Courts, the two main groups of his classification being (1) cases where interest is payable either under a contract or under a rule of law, and (2) cases where damages have been awarded. In that case a widow had instituted a suit for possession of movable and immovable properties left by her husband. She claimed the properties as her husband's heir and pleaded wrongful possession on the part of the defendant. The latter claimed to be the rightful owner, but the suit was decreed in favour of the widow. She was awarded certain movable properties and also certain sums of money as damages for wrongful detention. It was held by the Full Bench of the Patna High Court that the sum received by the widow by way of damages was not an income assessable to income-tax.
None of the authorities to which we have been referred is directly in point in the case with which we are now dealing, but some of the observations which have been made afford material from which we may receive some guidance. The border line between a case where interest is chargeable to tax and a case where it is not so chargeable appears at times to be extremely fine, as has been recognized in the courts in England. In Renfrew Town Council v. Commissioners of Inland Revenue, the Lord President observed that:…. “the question is never more embarrassing than when it is concerned with payments in the nature of compensation or damages. The Income-tax rules are of little assistance when it becomes necessary to distinguish between a capital receipt and a revenue one.”
Learned counsel for the assessee contends that there is no difference in principle between the case which is now before us and the case which was decided by the Full Bench at Patna; and as we have already said, he strongly relies upon the decision of the Judicial Committee in the case of Shaw Wallace & Co.. In the last named case we do not know for certain how the compensation was assessed, but presumably it was assessed by capitalising the profits which the respondent might have been expected to receive over a period of years if the agencies had not been terminated; and in the Patna case damages were awarded for wrongful detention of movables belonging to the plaintiff. It cannot be said that the facts of either of these cases are on all fours with the facts of the case which is now before us; but from them and from the other authorities to which we have referred and certain authorities to which we shall now refer, as well as from a consideration of the principles applicable to the Indian Income-tax Act, we think that we shall be able to arrive at a decision.
In Revenue Divisional Officer v. Venkatarama Ayyar it was held that where Government has taken urgent possession of certain lands before the award under the Land Acquisition Act was made, interest on the amount awarded can be given to the person entitled, for the period between the date of taking possession by Government and the payment of compensation money, even in a case which does not exactly fall under sections 16 and 17 of the Land Acquisition Act, on the principle that the right to receive interest takes the place of the right to retain possession. This view was in accordance with the decision in Inglewood Pulp & Paper Co. v. New Brunswick Electric Power Commission, where their Lordships of the Privy Council at page 498 say: “It is now well established that on a contract for sale and purchase of land it is the practice to require the purchaser to pay interest on his purchase money from the date when he took possession.” They go on to say that the law on the point has also been extended to cases under the Lands Clauses Consolidation Act, 1845, and they observe: “It is true that the expropriation under the Act in question is not effected for private gain, but for the good of the public at large, but for all that, the owner is deprived of his property in this case as much as in the other, and the rule has long been accepted in the interpretation of statutes that they are not to be held to deprive individuals of property without compensation unless the intention to do so is made quite clear. The statute in the present case contains nothing which indicates such an intention. The right to receive interest takes the place of the right to retain possession and is within the rule.”.
From these authorities it follows that interest awarded under section 28 of the Land Acquisition Act is in the nature of compensation for the loss of the late owner's right to retain possession of the property acquired. In other words, it is damages assessed in terms of interest for loss of possession of property up to the date of receipt of its consideration. From another point of view it might be said that the interest so calculated represents the profits which the ex-owner might have made if he had retained the property, and on this view of the matter counsel for the Department contends that profits so calculated are chargeable with income-tax. But the assessee had lost both possession and title on the 11th November, 1927, and so it is difficult to see how this money can be treated as profits when the assessee neither owned nor possessed what was—on this view of the matter—the only possible source of such profits. Nor can it very well be said that the money in question represents the interest which the assessee might have received investing the principal sum, and this for two reasons. In the first place the principal sum which was ultimately found due as at 11th November, 1927, as compensation for the acquisition was not determined and so did not exist until the 6th April, 1931, the date of the Tribunal's order; and in the second place, as we have already said, the interest awarded is compensation for the loss of the late owners' right to retain the property. If the interest awarded under section 28 of the Land Acquisition Act is income, it must have a source. It seems to us that there are only two possible sources, either the property or its equivalent in money, and as we have already said, we do not think that this interest can be said to have arisen from either of these. It is not the “fruit of a tree” — to borrow the simile used in Shaw Wallace & Co.'s case—but was compensation or damages for loss of the right to retain possession; and it seems to us that section 28 was designed as a convenient method of measuring such damages in terms of interest. Under section 28 the awarding of interest is not mandatory but is discretionary with the court; and so the claimant is not entitled to it as of right under any rule of law. Our conclusion is that this sum of Rs. 12,415 is not income and is not assessable as such to tax. It is not without consideration, doubt and hesitation, that we have arrived at this decision, for there is much to be said on the other side; but upon the whole matter we think that this is the correct view to take and we also bear in mind that where the interpretation of a fiscal enactment is open to doubt it should be construed favourably to the subject.
Our answer to the question referred to us is therefore in the negative.
The assessee is entitled to the costs of this reference. Counsel for the Department is entitled to a fee of Rs. 200.