# DR. SHAMLAL NARULA v. COMMISSIONER OF INCOME-TAX, PUNJAB

- **Citation:** [1964] 7 S.C.R. 668
- **Court:** Supreme Court of India
- **Decided:** 1964-04-09
- **Case number:** Civil Appeal No. 503 of 1963
- **Bench:** K. Subba Rao, J.C. Shah Ands. M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/dr-shamlal-narula-v-commissioner-of-income-tax-punjab-3099
- **Pages:** 8

## Headnote

Income Tax-Land acquired-Award made. by CollectorInterest on compensation awarded-If interest amounted to a
part of compensation-Indian Income-tax Act, 1922 (11 o.f 1922),
ss. 3, 4-Land Acquisition Act, 1894, s. 34.
The State acquired the land of the appellant. Tne Collector
made an award under the Land Acquisition Act as a result of
which the appellant received Rs. 2,81,822/c, which included a
sum of Rs. 48,660/- as interest upto the date of the award. The
Income-tax Officer included Rs. 48,660/- (the said interest) in
the total income of the appellant on the ground that the said
amount was not a capital receipt. The matter went upto the
Income-tax Appellate Tribunal. The Tribunal excluded the
said interest from the total income of the assessee (appellant)
on the ground that it was a capital receipt. On a reference the
High Court held that the said interest was not a capital but a
revenue receipt and as such liable to tax under the Indian Income-tax Act. The High Court granted a certificate to the appellant to file an appeal to the Supreme Court. Hence the appeal.
Held: (i) The scheme of the Land Acquis'tion Act and
the express provisions thereof establish that the statutory interest payable under s. 34 is not compensation paid to the owner
for depriving him of his right to possession of the land acquir-
·ed, but that given to him for the deprivation of the use of the
money representing the compensation for the land acquired.
In other words the statutory interest paid under s. 34 of the
Act is interest paid for the delayed payment of the compensation amount and, therefore, is a revenue receipt liable to tax
under the Income-tax Act.
Behari Lal Bhargava v. Commissioner of Income-tax .. C.P .
.and U.P., (1941), 9 I,T.R. and P. V. Kurien v. Commissioner of
Income-tax, Kerala, (1962), 46 I.T.R. 288, overruled.
Westminister Bank Vtd. v. Riches, (1947), 28 T.C. 159. Commissioner of Income-tax, Madras
v. CT. BM. N. Narayanan
Chettiar, (1943), 11 I.T.R. 470 and Commissioner of Income-tax
Bihar and Orissa v. Maharajadhiraj
Sir !(ameshwar
Singh~
(1953), 23 I.TR. 212, approved.
·
Inglewood Pulp and Paper Co. Ltd. v. New Brunswaick
Electric Power Commission, A.LR. 1928 P.C. 287 and Revenue
Divisiqnal Officer, Trichinopoly v. Venkatarama Ayyar, A.LR.
1936 Mad. 199, distinguished.
Shaw
Wallace's
case, A.LR. 1932 P.C. 138,
Schulze v.
Bensted, (1915), 7 T.C. 30, and Commissioner of Inland Revenue
v. Barnato, (1934--36), 20 T.C. 455, referred to.
(ii) The interest under s. 34 of the Land Acquisition Act
shall be paid on the amount awarded from the time the Collector take possession until the amount is paid or deposited. It
'7 S.C.R.
SUPREl\IE COURT REPORTS
669
makes no difference in the legal position between a case where
1964
possession has been taken before and that where possession Dr Shamlal Nanda
has been taken after the award, for in either case the title vests ·
T.
in the Government only after possession has been taken.
Oommi88ioner of
In no sense of the term can it (interest) be described as lncome-Taz, Punjah
<iamages or compensation for the owner's right to retain possession, for as he has no right to retain possession after possession was taken under s. 16 or s. 17 of the Act.

## Text

1964
.April 9
668
SUPREME COURT REPORTS
(1964]
DR. SHAMLAL NARULA
v.
COMMISSIONER OF INCOME-TAX, PUNJAB
(K. SUBBA RAO, J.C. SHAH ANDS. M. SIKRI, JJ.J
Income Tax-Land acquired-Award made. by CollectorInterest on compensation awarded-If interest amounted to a
part of compensation-Indian Income-tax Act, 1922 (11 o.f 1922),
ss. 3, 4-Land Acquisition Act, 1894, s. 34.
The State acquired the land of the appellant. Tne Collector
made an award under the Land Acquisition Act as a result of
which the appellant received Rs. 2,81,822/c, which included a
sum of Rs. 48,660/- as interest upto the date of the award. The
Income-tax Officer included Rs. 48,660/- (the said interest) in
the total income of the appellant on the ground that the said
amount was not a capital receipt. The matter went upto the
Income-tax Appellate Tribunal. The Tribunal excluded the
said interest from the total income of the assessee (appellant)
on the ground that it was a capital receipt. On a reference the
High Court held that the said interest was not a capital but a
revenue receipt and as such liable to tax under the Indian Income-tax Act. The High Court granted a certificate to the appellant to file an appeal to the Supreme Court. Hence the appeal.
Held: (i) The scheme of the Land Acquis'tion Act and
the express provisions thereof establish that the statutory interest payable under s. 34 is not compensation paid to the owner
for depriving him of his right to possession of the land acquir-
·ed, but that given to him for the deprivation of the use of the
money representing the compensation for the land acquired.
In other words the statutory interest paid under s. 34 of the
Act is interest paid for the delayed payment of the compensation amount and, therefore, is a revenue receipt liable to tax
under the Income-tax Act.
Behari Lal Bhargava v. Commissioner of Income-tax .. C.P .
.and U.P., (1941), 9 I,T.R. and P. V. Kurien v. Commissioner of
Income-tax, Kerala, (1962), 46 I.T.R. 288, overruled.
Westminister Bank Vtd. v. Riches, (1947), 28 T.C. 159. Commissioner of Income-tax, Madras
v. CT. BM. N. Narayanan
Chettiar, (1943), 11 I.T.R. 470 and Commissioner of Income-tax
Bihar and Orissa v. Maharajadhiraj
Sir !(ameshwar
Singh~
(1953), 23 I.TR. 212, approved.
·
Inglewood Pulp and Paper Co. Ltd. v. New Brunswaick
Electric Power Commission, A.LR. 1928 P.C. 287 and Revenue
Divisiqnal Officer, Trichinopoly v. Venkatarama Ayyar, A.LR.
1936 Mad. 199, distinguished.
Shaw
Wallace's
case, A.LR. 1932 P.C. 138,
Schulze v.
Bensted, (1915), 7 T.C. 30, and Commissioner of Inland Revenue
v. Barnato, (1934--36), 20 T.C. 455, referred to.
(ii) The interest under s. 34 of the Land Acquisition Act
shall be paid on the amount awarded from the time the Collector take possession until the amount is paid or deposited. It
'7 S.C.R.
SUPREl\IE COURT REPORTS
669
makes no difference in the legal position between a case where
1964
possession has been taken before and that where possession Dr Shamlal Nanda
has been taken after the award, for in either case the title vests ·
T.
in the Government only after possession has been taken.
Oommi88ioner of
In no sense of the term can it (interest) be described as lncome-Taz, Punjah
<iamages or compensation for the owner's right to retain possession, for as he has no right to retain possession after possession was taken under s. 16 or s. 17 of the Act.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 503
of 1963. Appeal from the judgment and order dated January
JI, 1962, of the Punjab High Court in I.T.R. No. 28 of 1960.
B. N. Kripal and A. N. Kripal, for the appellant.
Gopal Singh and R. N. Sachthey, for the respondent.
April 9, 1964. The judgment of the Court was delivered •
SuBBA RAO, J .-This appeal by certificate granted by the
Su!Jba Rao, J.
High Court of Punjab raises the question whether interest
paid under s. 34 of the Land Acquisition Act, 1894, hereinafter called the Act, is of the nature of a capital receipt or of
a revenue receipt.
The relevant facts are not in dispute and they may be
briefly stated. The appellant, Dr. Shamlal Narula, is the
Manager of a Hindu uncH.vided family, which owned·, inter
alia, 40 bighas and 11 biswas of land in the town of PatiaJa.
The Patiala State Government initiated land acquisition proceedings for acquiring the said land under Regulation then
prevailing in the Patiala State. It is common case that the
.State Regulations are in pari materia with the provisions of
the Act. The State of Patiala first merged into the Union of
Pepsu and later the Union of Pepsu merged into the State of
Punjab. It is also common case that there was a Land Acquisition Act in the Union of Pepsu containing provisions similar to those obtaining in the Act. On October 6, 1953, the
Act was extended to the Union of Pepsu. On September 30,
1955, the Collector of Patiala made an award under the Act
as a result of which the appellant received on December 1,
1955, a sum of Rs. 2,81,822 I-, which included a sum of
48,660 /- as interest up to the date of the award. For the year
1956-57, the Income-tax Officer included the said interest in
the inc~me of the Hindu undivided family of which the appellant is the manager, and assessed the same to income-tax,
after overruling the appellant's contention that the said interest was a capital receipt and, therefore, not liable to tax.
On June 14, 1957, the Appellate Assistant Commissioner
confirmed the order of the Income-tax Officer. The Appellant
preferr~d an appeal to the Income-tax Appellate Tribunal.
The said Tribunal by its order dated July 9, 1957, held that ·
670
SUPREME COURT REPORTS
[1964]
1964
the said amount representing the interest was a capital reDr. Shamlal Narula ceipt and. on that finding the said amou~t was excluded from
v.
the total mcome of the assessee. At the mstance of the ComCommissioner of missioner of Income-tax the said Tribunal referred the followIncome-1'""· Pnnjab ing question tcr the High Court of Punjab under s. 66-(1) of
Subba Rao, J. the Income-tax Act, 1922:
"Whether on a tr~e interpretation of section 34 of the
Land Acquisition Act and the Award given by
the Collector of Pepsu on the 30th September,
1955, the sum of Rs. 48,660/-, was captital receipt not liable to tax under the Indian lncometax Act?"
The said reference was heard by a Division Bench of the
High Court and it held that the said amount was not a capital but a revenue receipt and as such liable to tax under the
Indian Income-tax Act. Hence the present appeal.
Learned counsel for the appellant raised before us two
contentions, namely, (i) the sum of Rs. 48.660/- received by
the appellant under the award was compensation for deprivinr; him of his right to possession of his property and was
therefore, a capital receipt not liable to tax; and (ii) whatever
may b~ the character of the amount awarded under s. 34
of the .Act by way of interest in a case where possession of
the land has been taken by the State after the award, in a
case where possession of the land acquired has been taken
before the award, it would be a capital receipt, for it is said
that in the latter the interest necessarily t<:kes the character
of compensation for
depriving the owner of the land his
right to possession.
bn behalf of the Revenue the order of the High Court
is sought to be sustained for the reasons stated therein.
The question raised turns upon the true meaning of the·
provisions of s. 34 of the Act. It reads:
"When the amount of such compensation is not paid
or deposited on or before taking possession of the·
land. the Collector shall pay the amount awarded
with interest thereon at the rate of six per centum
per annum from the time ,Jf s.1 taking possession
until it should have been so paid or deposited".
The section itself makes a distinction between the amtmnt
awarded as compensation and the interest payable on the·
amount so awarded. The interest shall be paid on the amount
awarded from the time the Collector takes possession until
the amount is paid or deposited. To appreciate the scope of
the section it is necessary to notice brietly the scope of an
award and the manner in which possession is taken under
the Act. After the statutory notifications are issued and the
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;i SUPRE:\IE COURT REPORTS
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requisite notice is given to the perso~s interested in the land
· 1964
· :so . acquired, ·the Collector, afte.r holding· ~h_e . necessary en- /Jr. Shaffllal Narula
. qmry, makes an award, inter aba. · determmmg the amount
v.
· ·of compensation payable for the land so acquired. Section 15
Oommi .. irmer 0/.
f th A
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Income·Tax Punjab
o
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ct says·t at m etermmmg t e amount o compensa_'
tion the Collector shall be guided by the provisions contained
Subba Rao, J .
in ss. 23 and. 24. Section 23 provides for the matters to be
·considered dn determining compensation; s. 24 describes the
matters to be neglected in determining the compensation. A
perusal of the provisions of s. • 23 shows that interest is not
an item included in the compensation for any of the matters
mentioned therein; nor is it mentioned as a consideration for
the acquisition of the land. Under cl .. (2) of s. 23, the Legislature in express terms states that in addition to the market
·value of the land the court shall in every case award a sum
of 15 per cent. of such market value in . consideration of
the compulsory. nature of the acquisition. If interest on the
amount of compensation determined under s. 23 is consider-
·ed to be a part of the compensation or given consideration
of the compulsory nature of the acquisition, the Legislature
would have. provided for it in s. 23 itself. But instead, payment of interest is provided for separately under s. :14 in
Part V of the Act under the heading "Payment". It is so
done, because interest pertains to the domain of payment
·after the compensation has been ascertained. It is a conside-
-ration paid either for the use of the money or forbearance
from demanding it after it has fallen due. Therefore, the Act
itself makes a clear distinction between the compensation payable for the land acquired and the interest payable on. the
.compensation awarded.
Another approach to the· problem leads to the same
:result. Under s. 16 of the Act when the Collector has made
an award under s. 11 he may take possession of the land
which shall thereupon vest absolutely iii the
Government
:free from all encumbrances. Under s. 17 thereof:
"In cases of urgency, whenever the appropriate
Government so directs, the Collector, though no
such award has been made, may, on the expiration of fifteen days from the publication·· of the
notice mentioned in section 9, sub-section • (1),
take possession of any waste land or arable land
needed for public purposes or for a Company.
Such land shall thereupon vest absolutely in the
Government, free from all encumbrances".
Under both the sections the land acquired vests absolutely in
1he Government after the Collector has taken possession-in
•One case after the making of the award and in the other, even
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672 --._' --_---__ -.. SUPREl\IE -COURT REPORIS
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[1931}
1961
before -the making of the award. _In either case. some time:
llr. 8,,,,-;;;;;J Narula may lapse between the taking of possession of. the -acquired
-
..-.
_ land by the Collector and the payment or deposit of the comOommissianer oJ. pensation to -the person interested in the land -acquired. As.
1•come·Tax, Pun;ab the land acquired vests absolutely in the Government only
S"1iba Rao, J.
after the Collector has taken possession of it. no interest
- therein will be outstanding in the claimant after the taking.
-of such possession: he is divested of his title to the land
and his right to possession thereof. and both of them vest
thereafter· in -the Government. Thereafter he will be entitled
only to be paid compensation that has been or will be awarded to him. He will be entitled to compensation, though the
ascertainment thereof may be postponed, from the date his.
title to the land and the right to possession thereof have been
divested and vested in the Government. It is as it were that
from that date the Government .withheld the compensation
amount· which the . claimant would be entitled- to under the
provisions of the Act.
Therefore. a statutory liability has.
been irilposed upon the Collector_ to pay interest on the
amount awarded ·from the time of the-taking possession until
the ainoun( is paid or deposited. This amount is not •. therefore, compensation for the land acquired or for depriving theclaimant of his right to possession. -but is that paid to the
claimant for the use of his money by the State. In this view
there cannot be any difference in the legal position betweerr
a case where possession has been taken before and that wherepossession has been taken after the award. for in either case
-the title vests in the Government only after possession has
been taken.
The Legislature expressly used the word "interest" with
its well konwn connotation under s. 34 of the Act. It is.
therefore. ·reasonable to give that expression the · naturar
meaning it bears. There is an illuminating exposition of the:
expression '.'interest .. by· the House of Lords in WestminsterBank. Ltd. v. -Riches('). The question there was whether
where in an action for recovery of any debt or damages thecourt exercises: its discretionary power under a statute and
orders that there shall be included in the suin for which the
judgment is given interest on -the debt -or· damages. the sum
of interest so included is taxable under the Income-tax -Acts.
If the said amount was "interest of money" within Schedule
D and the General Rule 21 of the All Schedules Rules of the
Income Tax. Act. 1918,-income-tax was payable thereon. lnthat context it was contended that .money awarded as <lama~
· ges for- the detention of money was not interest and had not
the quality of interest: Lord Wright observed:
_"The general idea is that he is entitled to compensation for _the deprivation. From- that point of view
(') (1947) 28 T~C. 159,-189. --
'1 S.C.R.
SUPREME COURT REPORTS
673
it would seem immaterial whether the money was
1964
due to him under a contract express or implied, •/Jr. s~am/al N....i..
or a statute, or whether the money was due for
v.
any other reason in law. In either case the money
Commiuioner 0f
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h
Income-Tax, Punjab
was
ue to
1m an
was not pa1
or, m ot er
_
words, was withheld from him by the debtor after
Subba R<UJ, J.
the time when payment should have been made,
in breach of his legal rights, and interest was a
compensation, whether
the
compensation was
liquidated under an agreement or statute, as for
instance under section 57 of the Bills of Exchange Act, 1882, or was unliquidated and claimable under the Act as in the present case. The
essential quality of the claim for compensation is
the same, and the compensation is properly described as interest".
This passage indicates that interest, whether it is statutory or
.,;ontractual, represents the profit 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 s. 34 of the
Act when the Legislature designedly used the wbrd "interest"
in contradistinction to the amount awarded, we do not see
any reason why the expression should not be given the naturnl meaning it bears.
The scheme of the Act and the express provisions thereof establish that the statutory interest payable under s. 34 is
nbt 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.
We shall now proceed to consider the case law cited at
the Bar. Where a Tribunal directed the Improvement Trust,
under the provisions of s. 28 of the Land Acquisition Act, to
pay interest to the assessee from the date of taking possession
of the prbperty to the date of payment, a Division Bench of
the Allahabad High Court held, in Behari Lal Bhargava '"
Commissioner of Income-tax, C. P. and U. P. ('), that the
interest so awarded was in the nature of compensation for
the loss of the assessee's right to retain possession of the property acquired and, therefore, was no income liable to tax.
The reason for the said conclusion is stated thus:
"It ls not the "fruit of a tree"-to borrow the simile
used in Shaw Wal/ace's case (')-but was compensation or damages for loss of the right to re-
('l (1941) 9 l.T.R. 9, 24.
1') A.LR. 1932 P.C. 138.
L P(D)i8C-"'J
1964
Dr. Shamlal Naro/a
. v.
674
SUPREME COURT REPORTS
[1964}
tain possession; and it seems to us that Section
28 was designed as a convenient method of measuring such damages in terms of interest" .
Commiuioner of
11!!'-0me.Tax, Punjab
.
,
As we have pointed out earlier, as soon as the Collector has
B.V,ba Rao, J,
taken possession of the land either before or after the award
the title absolutely vests in the Government and thereafter
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 s. 28 of the Act, just like under s. 34 thereof.
cannot be a compensation or damages for the less of the right
to retain possession but only compensation payable by the
State for keeping back the amount payable to the owner.
Adverting to the said decision a Division Bench of the Madras
High Court in Commissioner of Income-tax, Madras v. CT.
RM. N. Narayanan Chettiar(') observed:
" ......... with great respect we find ourselves unable to
follow the reasoning. Certainly we are not prepared to accept the judgment as a guide to the
decision in the present case".
So was the interest granted to an assessee under s. I SA of
the Income-tax Act on the advance payment of tax by him
under the provision of that section held to be incame taxable
in his hand: see Commissioner of Income-tax,
Bilwr and
Orissa v. Mahara}μdhi~aj Sir Kameshwar Singh('). There.
when the decision of the Allahabad High Court in Behari
Lal Bhargava's case(') was relied upon, the learned Judges,
refusing to follow it, observed thus i
"It is not a matter of discussion for the Central Government but the duty to pay interest is imposed by
statute. Apart from this I think (with gr~at respect) that the Allahabad decision is of doubtful
authority. The decision is not consistent with the
principle laid down in Schulze v. Bensted(') and
Commissioners of Inland Revenue v. Barnato(').
The Madras High Court expressly declined to
follow the Allahabad case in Commissioner of
Income-tax v. Nm•ayanan Chettiar(')."
The Kerala High Court in P. V. Kurien v. Commissioner
of !11co111e-tax, Kera/a(") held that interest paid on the enhancl'd amount of compensation directed to be paid by an appellate
(') (1943) 11 I.T.R. 470, 477.
(') (1953) 23 I.T.R. 212, 225.
(') 9 I.T.R. 9.
i') (1915) 7 T.C. 30.
(') (1934-36) 20 T.C. 455.
(') (1962) 46 I.T.R. 288.
7 S.C.R.
SUPREME COURT REPORTS
675
court in an appeal against an award of compensation for
196'
compulsory acquisition of land under the Land Acquisi- Dr. SlwmJal Narul~
tion Act represented capital and was not income liable to he
_v..
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h I d.
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d h
Oommts"""'' o,
taxed un er t e n ian ncome-tax
ct. t was argue t ere, Imome-Tax Puniab
as is argued before us, that the interest awarded was a capital
'
·
sum estimated in terms of interest. In coming to the concluSuhba R''°• J.
sion which they did, the learned Judges relied upon the decision of the Judicial Committee in Inglewood Pulp and Paper
Co., Ltd. v. New Burmwick Electric Power Commission(')
and that of the Madras High Court in Re•'enue Dh·isional
Officer, Trichinopoly v.
Venkatarama Ayyar(").
In the
former, the Judicial Committee directed the purchaser who
had taken delivery and possession of the property he had
purchased before the sale to pay interest to the vendor on the
purchase money from the date he had taken possession on
the ground that "the right to receive interest takes the place of
the right to retain possession and is within the rule"; and
in the latter, though it arose under the Land Acquisition Act.
possession was taken by the Government under circumstances
falling outside the scope of ss. 16 and 17 of the said Act. In
both the cases the title did not pass to the vendee in one case
and to the State in the other when possession was taken by them
and, therefore, it may be said that the owner was given interest in place of his right to retain possession of the property.
But in a case where title passes to the State. the statutory
interest provided thereafter can only be regarded either as
representing the profit which owner of the land might have
made if he had the use of the money or the loss he suffered
because he had not that use. In no sense of the term can it
be described as damages or compensation for
the owner's
right to retain possession, for he has no right to retain possession after possession was taken under s. J 6 or s. J 7 of the
Act. We, therefore, hold that the statutory interest paid under
s. 34 of the Act is interest paid for the delayed payment of
the compensation amount and, therefore, is a revenue receipt
~
liable to tax under the Income-tax Act.
The order of the·
~
High Court is, therefore, correct.
In the result, the appeal fails and is dismissed with
costs.
Appeal dismissed.
<') A.LR. 1928 P.C. 287.
(') A.LR. 1936 Mad. 199.
J4P{D)ISCI-·22~n).