Commissioner Of Income Tax, Madras v. Ct. Rm. N. Narayanan Chettiar.

JUDGMENT OF APPELLATE TRIBUNAL "This appeal refers to the assessment year 1939-40 and is in respect of an item of Rs. 21,153. The appellant claims that out of the total income of Rs. 28,396 assessed by the Income-tax Officer and confirmed by the Appellate Assistant Commissioner a sum of Rs. 21,153 should be deducted on the ground that this item is not income.

2. The facts are that the appellants father had a share in M. S. M. M. firm at Ipoh and Sithiwan. The firms property included certain lands known as Chengkat Meranti Estate at Sithiwan and Hill Rise Estate at Batukajah. The appellants father died in 1921 and on his death the partnership came to an end. It is said that a Panchayat was set up in 1928 which appears to have determined the amount to be paid to the appellant and his brother on account of their fathers share of capital, surplus capital and profits in the firm. The award is not available to us nor any proceedings of the said Panchayat. The Income-tax Officer however examined Mr. M. S. S. Chidambaram Chettiar one of the Panchayatdars in this award and found from him that a sum of 1,55,900 Panchayatdars in this award and found from him that a sum of $ 1,55,900 was awarded to be paid to the appellant and his brother. This sum thus arrived at in favour of the appellant and his brother was not paid to them on account of their minority till the year 1938, when all of them became majors. Another Panchayat again went into the question and in addition to the original sum a further sum of $ 27,294 was awarded by way of interest. It is not agreed between the parties that this sum was awarded as interest and we shall have to consider this question a little later.

3. The partner thereafter gave a hundi on the 2nd April 1938 on his poh shop for a sum of $ 1,82,900 and a deed of release was executed by he appellant, his brother, and their adoptive mother in favour of M. S. M. M. Firm. The hundi was sent to Ipoh for collection and it was ashed on the 9th May, 1938, and a further sum of $ 294 in interest from the date of the hundi to the date of encashment was also realised. The total amount of interest realised was $ 27,294 and the half share of he appellant came to $ 13,647 equivalent to Rs. 21,153 which is the sum in dispute before us.

4. The Income-tax Officer treated this sum as interest received in he previous year and the following two contentions are urged before us :-

(1) This sum of Rs. 21,153 is not interest. It is a part of the capital.

(2) If it is to be treated as interest, it was not received on the date encashment of the hundi 9th May 1938, but the amount should be seemed to have been received on 2nd April 1938, the date on which the hundi was handed over to the appellant and the release deed was executed favour of the debtors.

5. If we hold that the date of cashing of the hundi is to be ta ken as he date of the receipt, then it is within the year of account as the date the closing of the "previous year" in 2nd April 1938.

6. The representative of the appellant who appeared before us this case relied on L. C. T. S. P. Subramanyam Chettiar v. Commissioner of Income-tax, Madras, in support of the argument at the debt should be deemed to be discharged on the date on which he hundi was executed and not on the date on which it was cashed had also on V Income-tax Reports p. 534, the case of Ar. Pl. Sp. Manickam Chettiar v. Commissioner of Income-tax, Madras. In V come-tax Reports at page 534 it was laid down that when the assessee accepted the jewels and took an assigned decree, the debt to the Penang business was completely discharged and the assets of their business were diminished by the amount the equivalent of which was taken in kind and there was a corresponding increase in the assessees assets in British India and that the transaction in the face of the facts of the case must be held to be a remittance into British India. We do not think that these cases apply to the facts of the case before us and we have a decision of their Lordships of the Privy Council in the case of the Maharaja of Dharbanga v. Commissioner of Income-tax, reported in 6 I.T.C. at p. 401, and at pages 409-10 their Lordships have considered the question. It was held in this case that where a liability is discharged by the debtors own promissory notes it cannot be said to be equivalent to cash. A debtor who gives his creditor a promissory note for the sum he owes can in no sense be said to pay his creditor but merely gives him a voucher or voucher of debt possessing certain legal attributes. In this case merely a hundi was given payable outside British India on demand. The hundi will not mature into a payable debt until a demand was made and was in fact an inchoate liability maturing only on demand being made from the person of whom the hundi was drawn and is only discharged when the amount is paid It cannot, therefore, be said that on the day the appellant received the hundi he received a right to make a demand on the person on whom the hundi was drawn and who was liable to pay the amount. We think therefore that the date of payment is the actual date on which the money can be said to have been received by the appellant and was rightly treated as received on the date of the amount in cash.

7. The representative appearing for the appellant also argued that the amount received was by way of damages but he was not able to support his case with any authority. The mere argument that the sum is of capital nature does not find favour with us. The appellant should not suffer for want of presentation of his case or for the erroneous view he takes the amount being capital but we think that on the view of law expressed in decided cases it will not be just to the appellant if we do not refer to the relevant cases which are within our knowledge and which make the sum in question not liable to tax.

8. We think that the amount of Rs. 21,153 received by the appellant was in the nature of damages for wrongful detention of the money in the hands of the partner of the appellants father. If he had paid the amount in 1928 he would not have been liable for this extra sum which the Panchayatdars decided to awarded as damages has been held in several cases as not liable to income-tax. We may refer here to the case of Commissioner of Income-tax, Bihar and Orissa v. Rani Prayag Kumari Debi reported in 7 I.T.R. 25. The widow of a deceased holder of an impartable Raj instituted a suit for the recovery of all the movables and immovables left by the deceased holder against a collateral of the latter, who had taken possession of them. In 1933 a decree was passed a warding to the widow :-

(1) a number of movables; (2) the value of movables as could not be returned; (3) damages to the extent of 22 lakhs for wrongful detention of them. The question arose when in the accounting year the Rani received Rs. 62,500 out of the damages awarded, and it was held that the damages were received for wrongful detention of the moveale properties and there was not any contract to pay interest and it was not, therefore, within Section 3 of the Indian Income-tax Act read with Section 4 (3)(vii). We think that this case is fully applicable to the facts of the case before us and here also the sum of Rs. 21,153 was paid for wrongful detention of the money and the amount is of a casual and non-recurring nature and not liable to tax.

9. There is also the latest case reported in 1941 I.T.R., at page 9 in the case of Behari Lal Bhargava v. Commissioner of Income-tax, C.P. & U.P., where a Full Bench of the Allahabad High Court decided that the interest awarded under Section 28 of the Land Acquisition Act was in the nature of compensation for the loss of the assessees fathers right to retain possession of the property acquired. It was held to be damages assessed in terms of interest for the loss of possession of property up to the date of the receipt of its consideration and it was held not to be an income and was not assessable to tax. In the case before us it cannot be said that this interest was income made in the course of business. It was not contractual interest but merely damages the measure of which was the amount awarded and though it may be called interest, as damages it is not liable to assessment.

10. We, therefore, allow this appeal and set aside the assessment of the sum of Rs. 21,153."

On the application of the Commissioner under Section 66(1) of the Income-tax Act, the Income-tax Appellate Tribunal referred the case to the Madras High Court.

(Judgment of the Court was delivered by the Honble the Chief Justice.) This is a reference by the Income-tax Appellate Tribunal, Calcutta Bench, under Section 66(1) of the Income-tax Act, and has been made at the instance of the Commissioner of Income-tax, Madras. The assessees father, who died in 1921, was a partner in a money-lending firm carried on in the Federated Malay States. Notwithstanding the death of the assessees father, the business of the firm was carried on until 1928 when a panchayat met to decide what was payable to the assessee and his brother on account of their fathers share, and the amount was fixed at $ 1,55,900. The assessee and his brother were minors, and so was Mevyappa. Ten years later, another panchayat was formed for the purpose of deciding what interest should be paid on the $ 1,55,900 and the panchayatdars fixed the amount at $ 27,000. A sum of $ 1,82,900 representing principal and interest, was paid to the assessee and his brother by way of a hundi on the April 2, 1938, the hundi being cashed on the May 9, 1938. The assessees share of the interest came to Rs. 21,153. The Income-tax Officer included this sum as income of the assessee for the year 1939-40 and the assessee objected. He contended that the Rs. 21,153 represented damages paid to him for the wrongful detention of the principal sum to which he was entitled under the award of the first panchayat. This contention was accepted by the Income-tax Appellate Tribunal, but as the decision involved a question of law, it has referred to this Court for decision of the following question :-

"Whether, having regard to the circumstances of the case, the conclusion of the Bench, viz., that the amount of Rs. 21,153 received by the appellant was in the nature of damages for wrongful detention of the money in the hands of the partner of the appellants father and therefore, not assessable, is correct in law ?"

In accepting the assessees contention that this sum represented damages for the wrongful detention of the principal, the Tribunal relied on two cases, Commissioner of Income-tax, Bihar & Orissa v. Rani Prayag Kumari Debi and Behari Lal Bhargava v. Commissioner of Income-tax In our judgment, these cases are not in point, and in any event the correctness of the decision in the second case is open to doubt. The first case had reference to a sum which had been awarded to the assessee in a civil suit as damages for the wrongful detention of her movable property. The Patna High Court held that as the amount was decreed as damages, it was not a source of income within the contemplation of the Act. The second case was decided by the Allahabad High Court. There an amount awarded as compensation in land acquisition proceedings carried interest, and the question was whether the interest represented assessable income. The Allahabad High Court held that it did not, but with great respect we find ourselves unable to follow the reasoning. Certainly we are not prepared to accept the judgment as guide to the decisions in the present case.

There are two cases which we consider have bearing here, namely, Schulze v. S. W. Bensted and commissioners of Inland Revenue v. Barnato. In Schulze v. S. W. Bensted the appellant, who was the trustee of an estate, sued the representatives of a deceased trustee for damages to the state caused by his negligence, and a decree was passes directing the defendants to pay a sum of money with interest thereon at the rate of 3 1/2 per cent. per annum from the date on which the sum should have belonged to the estate. The Surveyor of Taxes claimed that the interest represented income, but this claim was resisted. The Court of Session held that the Surveyor of Taxes was right. In Commissioners of Inland Revenue v. Barnato, the decision in Schulze v. S. W. Bensted was approved by the Court of Appeal in England. In that case, the respondent inherited certain sum sin a business which vested in him on attaining majority. After he had attained majority, he became a partner in the firm, but soon afterwards the partnership was dissolved, and it was agreed that certain securities should be transferred to the respondent and certain sums of money paid over to him. He was in fact paid three sums of money. On the April 1, 1925, he was paid Pound 2,00,000, on the April 2, 1926, Pound 3,50,000, and between the April 26 and June 23, 1927, Pound 3,27,250. It was found as a fact that these sums, although described as capital sums, did represent interest in part. The question was whether the respondent was liable to be taxed in respect of the interest portion. It was held that he was. In his judgment Romer, L.J., said :-

"If the (respondent) had elected to take profits I cannot see how it could be suggested for a moment that any profits he so recovered could be regarded in any shape or form as damages. As we know, in the end he elected to take interest in lieu of profits. But any interest that the trustees were directed to pay him in addition to the principal sum would not be damages. As pointed out by James. L.J., in Vyse v. Foster, the Court of equity did not punish trustees who had failed to perform their trust; the trustees would be ordered to pay the interest because in the eyes of equity that interest belonged to the plaintiff; it was interest which had been earned, or must be deemed to have been earned, by the trustees by the use of the Plaintiffs money."

We hold that the sum of Rs. 21,153 represented interest and not damages for the wrongful detention of money. Accordingly the answer to the question referred is that the Appellant Tribunal erred in holding that the sum represented damages. The Commissioner succeeds and he will have his costs Rs. 250.

Reference answered accordingly.