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TMI Blog1961 (5) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... is that the interest for the whole year plus a part of the principal is paid every year. As the interest goes on decreasing due to the part payment of the principal every year, the amount of principal included in the instalment goes on increasing. The petitioner, as required by the rules, presented his bonds for realization of instalments before the Treasury Officer, Faizabad. The latter under the directions of the Income Tax authorities deducted large sums by way of Income Tax from the amount of interest which was included in the instalment due to be paid to the petitioner. The petitioner objected to the realization of this amount, and made an application to the Income Tax Officer stating therein that the deduction made was illegal . The Income Tax Officer on 23rd of July, 1958, passed the following order on that application : Treasury Officers have general instructions on the subject direct front the Central Government and I regret I cannot issue a certificate as desired. Sd/- M. P. Srivastava. I. T. O. Faizabad. According to the petitioner the Income Tax Officer, Faizabad had made an assessment order on the petitioner on 30th October. 1957. The Petitioner filed a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat is being paid to him over the compensation amount is really not interest or income but is additional compensation. The case of the respondents. On the other hand, is that it is income from securities or from other sources' and as such a revenue receipt which is liable to be taxed. In order to understand the exact nature of the payment over which there is controversy between the parties, it is necessary to consider some of the provisions of the U. P. Zamindari Abolition and Land Reforms Act (hereinafter referred to as the Act). Section 27 of the Act reads as follows:- Every intermediary whose rights, title or interest in any estate are acquired under the provisions of this Act shall be entitled to receive and be paid compensation as hereinafter Provided. 4. The substance of this section is that every landlord who has been called by the name of intermediary in the Act would be entitled to receive compensation for the acquisition of his estate. Section 28 of the Act clearly provides that compensation for acquisition o estates shall be due from the date of vesting subject to determination of the amount thereof, and Sub-section (2) of that section provides that in ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... py of the compensation assessment roll to the intermediary concerned and shall cause a copy thereof to be fixed on the notice board of the office of the Assistant Collector in charge of the Sub-Division. Section 54 provide that the compensation shall be eight times the net assets of an intermediary, and reads as follows: 54. The amount Payable as compensation to an intermediary in respect of his interest in the mahals to which the compensation assessment roll relates shall, except where the interest of the intermediary therein is held by a thekedar, be eight times the net assets mentioned in the Roll. 6. Section 60 provides that the amount determined under Section 54 as compensation payable to an intermediary shall be declared by the Compensation Officer as the compensation payable to him in respect of his interest in the mahals to which the compensation assessment roll relates and the Compensation Officer shall record it in the roll in his own writing. Section 61 provides that except bona fide mistakes o a clerical or arithmetical nature the compensation assessment roll shall not be changed and shall become final. Section 65 of the Act reads as follows : 65, There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Rehabilitation Grant This additional sum which is made payable under the provisions occurring in Ch. V has been described by the name of rehabilitation grant The learned Advocate General contends that even though those amounts have been described as rehabilitation grants, they are in fact nothing but compensation, and relies upon the Full Bench case of Suryapalsingh v. U. P. Government AIR1951All674 where it has been held to be so. The submission is that it is the pith and substance of a payment which matters, and not the nomenclature, and even though the additional sums which are made payable on a bond may have been described as interest, that description will not be conclusive of the matter and the Court will have to carefully investigate their real nature in order to determine whether or not they can be treated to be interest on securities as is the case of the respondents. It is true that a Full Bench of this Court has in the case mentioned above held that rehabilitation grant is compensation. It is also true that not the name, but the pith and substance of a payment can alone be conclusive about its essential nature. We are, therefore, called upon to decide as to wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itional payment? Is it interest or is it compensation estimated and measured in terms of interest? We may mention that there is authority in support of the view that even though damages for withholding its capital from the company may have been described as interest the same may be damages and not interest (see In re, National Bank of Wales Ltd., (1899) 2 Ch 629. Similarly compensation can be measured in terms of interest, and even though the word interest may have been used, it may in substance be compensation (see Commissioners of Inland Revenue v. Ballantine (1924) 8 Tax Cas 595, and Simpson v. Maurice's Executors, (1929) 14 Tax Cas 580. In order to find out the real pith and substance of the additional payments we have to look into the scheme of the Act. Under the provisions of Section 28 of the Act compensation was due to She petitioner from the date of vesting. In as much as compensation could not be paid before the same was determined and the determination of the amount would necessarily have taken some time, Section 28 of the Act further provided that interest shall be paid on the amount of compensation determined from the date of vesting to the date of paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground that that amount is being paid as compensation or damages for loss of the right of the owner to retain possession. But because of the special nature of the provisions in the Act, neither this consideration nor the consideration that actual value of the Property must be paid can govern the matter of compensation under the Act. Apart from it, the scheme of the Act also warrants the conclusion that the rights of an intermediary in an estate after the vesting of the same in the Government are converted into a right to receive money on the date of vesting or as from the date of vesting, but inasmuch as the payment of money is not immediately made, but is temporarily withheld from him and the amounts are paid gradually, 2 1/2 Per cent interest is paid. In other words the legal effect of the issuing of the bonds is that zamindari rights are converted into compensation and compensation into a promise to pay (through bonds). Thus the scheme of the Act reveals that the payment of interest is not related to the acquisition of the property but to the promise to pay or to the temporary use of the money by the Government. It has got to be conceded that the position under the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er any law nor demandable by virtue of any contractual obligation incurred by the parties. In these cases Income Tax is not payable on the amounts paid even though called by the name of interest. The third group consists of cases which deal with the receipt of damages or compensation in the course of business or trade carried on by a trade. Such amounts have been held to be liable to be assessed to Income Tax. As we have already said above the provisions of our Act (Z. A. Act) are peculiar and it is not possible to find any close parallel in any of the decided cases. 14. Learned counsel for the Petitioner has placed reliance upon the case of Behari Lal Bhargava v. Commissioner of Income Tax, C. P. and U. P. [1941]9ITR9(All) . In that case what happened was that two houses belonging to Ramji Das Bhargava, father of Behari Lal Bhargava, were acquired by the Improvement Trust under the Land Acquisition Act and possession was taken over the same on 11th of November, 1927. The amount awarded by the Land Acquisition officer was ₹ 13,225/- which Ramji Das Bhargava did not accept as adequate, and referred his claim to the Tribunal who increased the amount of compensation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by 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 owner's 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's, case but was compensation or damages for loss of the right to retain possession; and it seems to us that Section 28 was de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest which is not provided for by the compensation roll never merges in the compensation amount. In the Land Acquisition Act there is no provision similar to Section 28 of the Act, In a case under the Land Acquisition Act the right to receive compensation does not date back to the date of dispossession but accrues only after the compensation has been determined and the award made. Thus in those cases whatever amount is payable till the date of award, be it named as interest or compensation amount, may be considered as compensation. For the reasons mentioned above it appears to us that the case of Behari Lal Bhargava [1941]9ITR9(All) is distinguishable. We may also state that the Madras High Court in the case of Commissioner of Income Tax, Madras v. Narayanan Chettiar [1943]11ITR470(Mad) , the Nagpur High Court in the case of Gopaldas v. Commissioner of Income tax and the Patna High Court in the case of Commissioner of Income Tax v. Kameshwar Singh [1953]23ITR212(Patna) did not accept the decision in Behari Lal Bhargava's case [1941]9ITR9(All) as correct. In view of the fact that we consider that case to be distinguishable it is really not necessary for us to consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitutional Limitation by Cooley as also from the book Eminent Domain by Nichols which were considered by their Lordships of the Supreme Court in the case of State of Bihar v. Kameshwar Singh [1952]1SCR1020 . Those passages only indicate that acquisition of money can only amount to compulsory loan and generally such compulsory loans are not resorted to by a State except in emergencies like war. The law contained in those passages relates to the general law as applied in America and other countries and has nothing to do with the interpretation of the provisions of our Act. Even those passages, clearly indicate that compulsory loans are levied or can be levied in cases of emergency. Therefore notions of compulsory loans are not unknown to the civilized world. In our Act in substance by issuing compensation bonds the State raises a compulsory loan and its validity has got to be decided on the basis of our own Constitution and not with reference to the statement of law contained in the book of either Cooley or Nichols. The Supreme Court in Kameshwar Singh's case [1952]1SCR1020 has already held that the payment of compensation by means of bonds is not unconstitutional. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or context, -- (2) 'Government security' means- (a) a security, created and issued by the Government for the purpose of raising a Public loan, and having one of the following forms, namely:- (i) stock transferable! by registration in the books of the Bank; or (ii) a promissory note payable to order; or (iii) a bearer bond payable to bearer; or (iv) a form prescribed in this behalf; (b) any other security created--and issued by the Government in such form and for such of the purposes of this Act as may be prescribed, In our opinion the present bonds which are in the form of promissory notes are fully covered by the definition given in Sub-section (2) of Section 2 of the Public Debt Act. It is not necessary to go into this question in great detail because the argument on behalf of the petitioner has proceeded on the assumption that the sums paid by way of interest on the compensation bonds if not held to be additional compensation would be liable to Income Tax. 20. Even if there was some difficulty (though, we do not see any) in holding that the interest on compensation bonds issued to the petitioner is not interest on securities it would yet be taxable as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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