# S. R. Y. SIV ARAM PRASAD BAHADUR v. THE COMMISSIONER OF INCOME TAX HYDERABAD

- **Citation:** [1972] 1 S.C.R. 320
- **Court:** Supreme Court of India
- **Decided:** 1971-08-19
- **Bench:** Hegde, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/s-r-y-siv-aram-prasad-bahadur-v-the-commissioner-of-income-tax-hyderabad-5359
- **Pages:** 14

## Headnote

hicome-Tax-Capital and Revenue-Interim payment received under
s. 50(2) of Madras Estates (Abolition of Conversion into Ryotwari)
A.ct, 28 of 1948 whether capital receipt-Whether in lieu of interest on
f'OnJpensation.
The assessee was a Hindu Undivided Family. Its estate vested in the
State Government of Madras under the Madras Estates (Abolition and
Conversion into Ryotwari) Act 1948. It received interim payments under
s. 50(2) -0f the Act. The question in the Income-tax proceedings
was
whether the payment S-O received was a capital or a revenue receipt. The
Income-tax Officer and the Appellate Assistant Commissioner held that it
was revenue.
The Tribunal held that the payments were made to
the
assessee as compensation for destroying its income producing assets
and
therefore must be considered as capital receipts. The High Court decided
that question in fawur of the Department. The assessee appealed to this
Court bv certificate.
HELD : While it is true that the terminology used by the legislature in
respect of a payment is not conclusive of the true character of the payment, it would be proper to proceed on the basis that the legislature knew
what it was saying. The Word compensation must be given its
normal and natural meaning. In cl. (e) of s. (3) of the Act the legislature definitely says that the holder or holders of the Estate falling within
cl. (b) and (c) of s. 3 "shall be entitled only to compensation from the
Government as provided in this Act". From this it follows that all payments made to them under the Act are compensation payable to them for
taking over their Estates. [325 D-F]
·
Moreover the final determination oi the compensation under s. 39 was
made years after the Estate vested in the Government, though some
advance compensation was paid. Hence there was force in the contention
of the assessee that the interim payments made were given as compensatio.n for depriving the assessees of the income that they would have got
from their agricultural lands, which income would not have been assessable to tax under the Act. The quantum of interim payments payable to
the former holders of those estates was determined by taking into consideration the income that the former oV(ners would have received had they continued to be the owner of those Estates. This prbna fc.cie showed that the
G-Ovemment was compensating the former holders for taking away their
income producing assets. [325 H-326 CJ
A
B
c
D
E
F
G
The contention that the interim payment was in lieu of interest on the
compensation payable overlooked the fact that the liability of the Government to pay the compensation excepting to the extent provided in
s. 54A arose only after the compensation payable was finally determined
under s. 39. The interim payment< were not fixed on the basis of estimated compensation. They were fixed on the basis of loss of income to
the former owners.
Under these circumstances it was not possible to
H
accept the contention that the interim payments were paid in lieu of interest or even that thev represented compensation for los.s of interest (326
D-E]
, .
f
I~
I
!
A
B
c
D
E
S.R.Y. SIVARAM PRASAD BAHADUR V. C.I.T., HYDERABAD
321
(Hegde, /.)
Sub-section ( 8) of s~ 50 instead of assisting the Department supports
the case of the assessee.
All that the provision says is that the interim
payn1ents 1nade under s. 50(2) are not to be considered as compensation
\vhich t;!ie Government is required to. deposit under s. 41 ( 1) or to any extent 8 to be in lieu of such compensation. That section does not say .that
the interim payn1ents arc not compensation. It only says that it is nO part
of the con1pensation required to be deposited under s~ 41 or to any extent
in lieu of compensation. That does not mean ,that it cannot be con1pensation for the ret:urring loss caused to the owner because of the taking
a\\.'ay .of an incon1c producing asset without payment of compen~ation. [327
D-EJ
Dr. Shain Lal v. Co1n111issi9ner of lnconze-tax, Punjab, 53 I.T.R. 1

## Text

320
S. R. Y. SIV ARAM PRASAD BAHADUR
v.
THE COMMISSIONER OF INCOME TAX HYDERABAD
August 19, 1971
[K. S, HEGDE AND A. N. GROVER, JJ.]
hicome-Tax-Capital and Revenue-Interim payment received under
s. 50(2) of Madras Estates (Abolition of Conversion into Ryotwari)
A.ct, 28 of 1948 whether capital receipt-Whether in lieu of interest on
f'OnJpensation.
The assessee was a Hindu Undivided Family. Its estate vested in the
State Government of Madras under the Madras Estates (Abolition and
Conversion into Ryotwari) Act 1948. It received interim payments under
s. 50(2) -0f the Act. The question in the Income-tax proceedings
was
whether the payment S-O received was a capital or a revenue receipt. The
Income-tax Officer and the Appellate Assistant Commissioner held that it
was revenue.
The Tribunal held that the payments were made to
the
assessee as compensation for destroying its income producing assets
and
therefore must be considered as capital receipts. The High Court decided
that question in fawur of the Department. The assessee appealed to this
Court bv certificate.
HELD : While it is true that the terminology used by the legislature in
respect of a payment is not conclusive of the true character of the payment, it would be proper to proceed on the basis that the legislature knew
what it was saying. The Word compensation must be given its
normal and natural meaning. In cl. (e) of s. (3) of the Act the legislature definitely says that the holder or holders of the Estate falling within
cl. (b) and (c) of s. 3 "shall be entitled only to compensation from the
Government as provided in this Act". From this it follows that all payments made to them under the Act are compensation payable to them for
taking over their Estates. [325 D-F]
·
Moreover the final determination oi the compensation under s. 39 was
made years after the Estate vested in the Government, though some
advance compensation was paid. Hence there was force in the contention
of the assessee that the interim payments made were given as compensatio.n for depriving the assessees of the income that they would have got
from their agricultural lands, which income would not have been assessable to tax under the Act. The quantum of interim payments payable to
the former holders of those estates was determined by taking into consideration the income that the former oV(ners would have received had they continued to be the owner of those Estates. This prbna fc.cie showed that the
G-Ovemment was compensating the former holders for taking away their
income producing assets. [325 H-326 CJ
A
B
c
D
E
F
G
The contention that the interim payment was in lieu of interest on the
compensation payable overlooked the fact that the liability of the Government to pay the compensation excepting to the extent provided in
s. 54A arose only after the compensation payable was finally determined
under s. 39. The interim payment< were not fixed on the basis of estimated compensation. They were fixed on the basis of loss of income to
the former owners.
Under these circumstances it was not possible to
H
accept the contention that the interim payments were paid in lieu of interest or even that thev represented compensation for los.s of interest (326
D-E]
, .
f
I~
I
!
A
B
c
D
E
S.R.Y. SIVARAM PRASAD BAHADUR V. C.I.T., HYDERABAD
321
(Hegde, /.)
Sub-section ( 8) of s~ 50 instead of assisting the Department supports
the case of the assessee.
All that the provision says is that the interim
payn1ents 1nade under s. 50(2) are not to be considered as compensation
\vhich t;!ie Government is required to. deposit under s. 41 ( 1) or to any extent 8 to be in lieu of such compensation. That section does not say .that
the interim payn1ents arc not compensation. It only says that it is nO part
of the con1pensation required to be deposited under s~ 41 or to any extent
in lieu of compensation. That does not mean ,that it cannot be con1pensation for the ret:urring loss caused to the owner because of the taking
a\\.'ay .of an incon1c producing asset without payment of compen~ation. [327
D-EJ
Dr. Shain Lal v. Co1n111issi9ner of lnconze-tax, Punjab, 53 I.T.R. 151,
Senairan1 Doongannnll v. Co1n!nissioner
of
Tnron1e
Tax,
Assani,
42
l.T.R. 392 nnli Si111pson (H.M. Inspector of Taxes)
v.
Executors
oJ'
Bonner Maurh:e as Exec11fo/' of Edward Kay, (!929) 14 T.C. 580, relied
on.
Raja Ra111esliwara Rao v. C7i1n111issioncr of Income-tax,
Hyderabad,
[1964] 2 S.C.R. 847 and Chandroii Rao·v. Commissioner of Income-I«.'·
Madhya Pradesh, 77 I. T. R. 743, distinguished.
/
Ku111ara Rajah of Venkatagiri & Ors. v. /nc:ome-tcix OfficeT,
A-Ward,
Nellore & Ors. 64 T.T.R. 264, disapproved.
----.:--
CIVIL APPELLATE JURlSDICTJON : Civil Appeals Nos. 1309
to 1312 9f 1968 .
• Appeals from the judgment and order dated August 2, 1967
of the Andhra Pradesh High Court in Case Referred No. 35 of
1963; and
·
Civil Appeals Nos. 1257, 1260, 1262, 1313, 1314 and 1374
of 1968.
Appeals fr6m the judgment and order dated August 2, 1967 of
of the Andhra Pradesh High Court in Writ Appeals Nos. 34 of
1966 etc. etc.
V. Vedantha Chari, K. C. Rajappa and A. Subba R.ao, for the
F
appellant (in C.As. Nos. 1409 to 1312 of 1968).
G
H
B. Sen, P. L. Juneja, R. N. Sachthey and B. D. Sharma, for
the respondent ('in C.As. Nos. 1309 to 1312 of 1968).
V. Vedqntha Chari, K. C. Rajappa, K. Rajendra Chawdhary
and Hari Singh, for the appellants (in C.As. Nos. 1257, 1260,
1262. 1313, 1314 and 1374 of 1968).
R. N. Sachthey, for the responl!ents (in C.As. Nos.
1257,
1260, 1262, 1313 and 1314 ana 1374 of 1968).
P. Ram Reddy, T. A .. Ramachandran and A. V. V. Nair, for
the interveners.
·
,
The Judgment of the Court was delivered by
Hegde, J.
The common question of law which arises for
decision in these appeals by certificate, is whether the interim
payment received by a former holder of an estate under s. 50(2)
322
SUPREME COURT REPORTS
(1972] 1 S.C.R.
of the Madras Estates (Abolition and Conversion into Ryotwari)
Act 1948- (Madras Act 26 of 1948) (to be hereinafter referred
to as 'the Act') whose Estate vested in the Govermnent under s.
3 of the Act was of capi1tal nature and not liable to tax.
A
The material facts bearing on the point in issue are id·~ntical
in all these appeals.
Hence it .would be sufficient if we set out B
the facts of Civil Appeals Nos. 1309 to 1312 of 1968
which
were filed by the same assessee.
The assessee in those appeals
is a Hindu Undivided Family and ithat family was the holder of
the Estate of Devarkota and Challappal!i.
This Estate vested
in the Government under the Act. During the assessment years
1953-54, 1954-55, 1956-57 and 1958-59, the assessee received c
some interim payments.
The Income-tax Officer sought to
include those payments in the assessmeni of the assessee in those
years. The assessee contended thait those receipts were not
Revenue receipts and hence not taxable.
He based his. plea
firstly on the ground that those receipts represented agricultural
income or alternatively they were «01pital receipts and lastly on
D
the ground that the income having been apportioned among the
principal landholder and the other persons referred to in subs. (2) of s. 50 of the Act, the entire amount did not fall
to
be assessed in his hands. All these contentions were rejected by
the Income-tax Officer.
Before the Appdlate Assistant Commissioner, the assessee repeated those· contentions; but the Appellate Assistant Commissioner rejected them and upheld the order E
of the Income-tax Officer.
On a further appeal to the Incometax Appellate Tribunal, the Tribunal held that as those payments
were made- to the assessee as compensation for destroying his
income producing assets they should be considered ·'!is capital receipts and hence not liable to be taxed. Thereafter, at the instance
of the Commissioner of income-tax, the Tribunal referred the F
question-
"Where on the facts and in the circumstances of the
case, the interim compensation of Rs.
81,843; Rs.
40,422, Rs. 1,21,146 and Rs. 80,391 received by the
assessee under section 50 of the Madras Estates {Abolition and Conversion into Ryotwari) Act, 1948 was
of a capital nature and not liable to tax."
'
G
under s. 66 (1) of the Act for the opinion of the High Court.
The High Court answered that question in favour of the Department.
Following that decision, the High Court dismissed
the
Writ Petitions filed by Shri V. V. V. R. K. Yachendra Kumar H
Raja raising the very qu·~tion that was the subject matter of the
References. The other appeals in this batch of appeals arise from
the decision in those Writ Petitions.
A
B
c
D
E
F
S.R.Y. S!VARAM PRASAD BAHADUR V. C.I.T., HYDERABAD
323
(Hegde, !.)
For deciding the question whether the receipts with which
we are concerned in these appeals are capital receipts,
it is
necessary to make a survey of the relevant provisions of the
Act.
But before doing so, it is necessary to mention that the
former holders of Estates that had vested in the Government
under th~ Act were entitled to receive four different kinds of
payments. They are: ( 1) advance compensation under s. 54-A;
12) in:erim payments under s. 50(2);
(3) total compensation
under s. 41; and ( 4) additional compensation
und·~r s.
54-B.
Now let us turn to the relevant provisions of the Act.
Section 3 of the Act provides in cl. (b) thereof that the entire Estate, including all interests detail·~d therein, shall
stand
transferred to the Government and vest in them free from all
encumbrances wih effect on and from the notified date. Clause
( c) of that section put an end to all rights and interests created
in or over the Estate before the notified date by the principal or
any other land-holder. Clause ( e) of •that section is
important.
It reads :
"That principal or any other landholder and any
other person whose rights
stand transferred under
clause (b) or cease and determine under clause ( c),
shall be entitled only to compensation from the Government as provided in 1this Act."
Section 21 provides for the survey and settlement of Estates
for effecting R yotwari settlement. The manner of effecting the
Ryotwari Settlement of the Estate vested in 'the Government is
prescribed in sub-sections 2, 3, and 4 of s. 22. &ctions 24 to
27 prescribe the manner of determining •the compensation payable for the Estates taken over. The scale of compensation is
laid down in s. 37.
Section 39 provides for determination of
basic annual sum and of total compensation.
Section
4 lays
down that the Government sha!l deposit in the office of the
Tribunal, the amount of compensation in respect of each Estate
as finally determined under s. 39, in such form and manner and
at such time or times and in one or more instalments as may
G be prescribed by the rules made under s. 40.
Then, we come
to s. 50.
Two clauses of that seCJtion relevant for our present
purpose are: sub-section (2) and (8) of that section. Sub-section
(2) says:
H
"After the notified date and until the compensation
is finally determined and deposited in pursuance of
this Act, interim payments shall be made by the Government
every fasli year prior 1to the fasli year in
324
SUPREME COURT REPORTS
[1972] 1 S.C.R.
which the said deposit is made, to the principal landholder and to the other persons referred to in section
44, sub-section (1), as follows ...... "
Sub-section ( 8) of s. 50 reads :
"No interim payment made under this section shall
be deemed to constitute any part of. the compensation
which the Government are. liable to deposit under section 41, sub-section ( 1), or to any extent to be in lieu
of such compensation."
A
B
Section 54-A provides for advance payment of compensation
·and its apportionment etc. That section provides that "in the case
C
of every estate not governed by section 38, the Government shall
e~timate roughly the amount of the compensation payable
in
respect of the estate, and deposit, one-half of that amount within
six months from the notified da:te in the office of the Tribunal.
as advance payment on account of compensation."
D
Section 54-B, provides for the payment of additional compensation and its apportionment.
Evidently
the Government
had estimated the total compensation payable to the holders of all
Estates tha'l vested in it at 12t crores of rupees.
S.~ction 54-B
provides that if the total compensation paid to ·the holders falls
short of tha!t sum, the balance will be distributed between the
E
holders of the Estates abolished, in proportion to the amount of
compensation as finally determined in respect of each of them
μnder s. 39. Tue only other provision to which reference may
be made is sub-section (7) of s. 50 which in one of its clauses
provides for-payment of interest under certain circumstances.
From the provisions of the Act, it is clear that 'the legislature must have been satisfied that the enquiries relating to the
F
determination of the compensation of the Estll'tes abolished was
bound to take considerable time.
In the very nature of things,
those enquiries were bound to be prolonged.
We have earlier
seen that the Estates abolished vested in the Government as soon
as the notification contemplated in section 3 was issued.
But
the compensation payable to the Estate holders became due only
G
when the same was finally detern1ined under section 39. In other
words, the liability of the Government to pay the compensation
finally determined arose only after the same
was
deitermined
under s. 39 though the Act provided for payment of half the
amount of, compensation on the basis of a rough estimate within six
months from the date of vesting.
It may also be
noted that
there is no provision in the Act providing for payment of inteH
rest on the compensation payable as from the date of vesting.
A
B
c
D
E
F
G
H
S.R.Y. SIVARAM PRASAD BAHADUR I'. C.J.T., JlYDERABAV 325
(Hegde, !.)
Now we shall proceed to consider the ,question. whether the
interim payments made under the Act under s. 50(2) are revenue receipts or capital receipts: It was urged on behalf of the
assessee that those receipts were capital receipts.
In support of
that contention, reliance. was placed on claluse (e }' of section 3
as well as on the circumstance that though the Estate abolished
vested in the Government OI) the notified dale, compensation
beca;ne payable to them only after the same
was
determined
under s. 39.
On "):he other ·hand, it was urged on behalf of •the
Department that {}je legislature deliberately made a
distinction
between the compensation and interim paym'ent; the compensation for abolishe~I Estate were firstly paid as advance compensation, .ncxlly t'!S- tot~\ compensation and lastly as additional compensation; die interiln payments had nothing to do with compen&ation; they were recu1ring payments and they were made !n
lieu of the interest payable on the total compensation.
'
While it is tm~ that the tt!rminology us~d by the legislature
in respect of a payment is no! conclusive of t~:e .::tr!!.".-.i:haract~r
of that payment, it would be proper to proceed on the basis ~hat
the legislature knew what it was saying.
The word 'compensation' is· a well known expression in law.
When the legislature
says that all payments made under the Act are in respect of the·
compensation payable to ,the former holders, unless
there are
cle~r and convincing circumstances to show that one or more
items of payment do not form part of the compensation payable,
we must hold that 1hose payments are .what they are said to be by
the'statute. We must give the word "compensation" its normal and
.natural meaning.
As seen earlier, in clause (e) of section 3 of
the .Act the legislature d·~finitely says that the holder or holders
of the fata•te fa!ling within clauses (b) and (c) of section 3
"shall. be entitled only to compensation from the Government as
provided in tnis Act".
From this it follows that al! payments
made to them under the Act aP~ compensation payable, to them·
for taking over •their Estates., StatJ!tes which take away others
property, by and large. provide for payment
of compensation
as from the date of taking.
In the_ generality of those statutes,
~f immediate payment is not made at' the time of taking, provision
1s made for payment of/interest on the compensation payable as
from th'.! date of taking.
In the Act, there is no provision for
payment of compensa\.ien at the
time of the vesting
of the
Estates in the Governnient.
Nor is there any provision fclr payment of interest on the compensation payable, as from the dacte·
of taking.
The compensation determined has to be deposited
only after the enquiry under s. 39 was over.
We are rtold at
the bar that -the final determination of the compensation under
s. 39 was made years after the Estacte vested in the Government.
though some advance compensation was paid.
Hence there is
326
SUPREME COURT REPORTS
. [1972] 1 S.C.R.
· force in the contention advanced on behalf of the assessee that
the in•terim payments made were given as compensation for depriving the assessees of the income that they would have got from
their agricultural lands, an income which would not have been
assessable to tax under the Aot if it had _been received as agricultural income. The quantum of interim paym~nts payable to the
former holders of those Estates was determined by •taking into
consideration the income that the former owners
would have
received had they continued to be the owners of those Estates. This
prima facie shows that the Govermnent was
compensating the
former holders for taking away their income producing assets.
The interim payments do not appear to have any relationship
with the compensation ultimately payable.
On the other hand,
it takes note of the loss of income incurr·~d by the former owners
due to the abolition of the Estates.
The contention that it was
in lieu of interest on the compensation payable overlooks the
fact that the liability of the Government to pay the compensation
.excepting to the extent provided in section 54-A, arose only after
the compensation payable was finally determined under s. 39.
The interim payments were not fixed on the basis
of the estimated compensation.
They were fixed on the basis of the loss
of income to the former owners. Under these circumstances, it is
nClt possible to accept the contentio_n that interim payments were
paid in lieu of interest or even that they represented compensation
for loss of interest. If the legislatut>~ intended thart the interim
payments were to be mad.e in lieu of the payment of interest on
the compenswtion payable, nothing would have been easier than
to say so in the Act.
The term 'interest' is a familiar term in
law.
In this very Act, the fogislature had prescribed payment
of interest under certain circumstances.
As observed by this
Court in Dr. Sham Lal v. Commissioner of Income-tax, Punjab (1), the interest is a payment to be made by the d'ebtor to
the creditor when money was due to the creditor but was not
paid or in other :words was withheld from the creditor by the
debtor after the time when rthe payment should have been made.
Proceeding further, this Court observed in that case that interest
whether it was statutory or contractual represented the profit
the creditor would have made if he had the use of the money to
which he was entitled to.
In the cases before us, the assessees
were not entitled to any compensation till the same was determi~ed under s. 39.
Therefore, no amount, to which they were
entitled to, were, withheld from them.
Hence on that account
they w~re not entitled to any compensation in lieu of interes't.
It is true that while the Act calls the payments made under
s. 54-A, 54-B and 41 as compensation, the payments made under
I 5J. LT.R. p. 151
'
A
B
c
D
E
F
G
H
A
B
c
D
S.R.Y. SIVARAM PRASAD BAHADUR V. C.I.1'., HYDERABAD
327
(Hegde, J.)
section 50 ( 2) is called interim payments. This circumstance by
itself will not be of much significance because, as seen earlier,
s. 3 proceeds on the basis that all payments made under the Act
are in the nature of compensation. Possibly the legislature want·
ed to make a distinction between compensation paid for the loss
of income and that for the loss of assets.
Much reliance was
placed on behalf of the Department on sub-section ( 8) of s. 50
which as seen earlier, says :
"No interim payment made under this section
shall be deemed to constitute any part of the compensation which the Government are liable to deposit under
section 41, sub-section ( 1), or to any extent to be in
lieu of such compensation."
In our opinion, this sub-section, instead of assisting the De·
partment, support the case of the assessws.
All that that provision says is that 1the fo.terim payments made under s. 50(2)
are not to be considered as compensation which the Government
is required to deposit under s. 41 (1) or to any extent to be
in lieu of such compensation.
That section does not say that
the interim payments are not compensation. It only says that it is
no part of the compensation required to be deposited under s. 41
or in lieu of such compensation. That does not mean that it cannot be compensation for ·the recurring loss caused to the owner
because of the taking away of an income producing asset with·
E
out payment of compensation.
It is not the contention of the
assessees that the interim payments made are part of the total compensation payable for the acquisition of the Estates. According
to them, it is a compensation for the destruction or taking away
of an income producing ·asset of theirs till the assets taken from
F
them are compensated.
Now we shall proceed to consider the decided cases. We shall
first take up the cases relied on by the appellants.
The appel-
· lants placed great deal of P~liance on the decision of the Madras
High Court in Shanmugha Rajeswara Sethupathi v.
Income-tax
Officer, Karakudi. (') The question that arose for decision therein
was· the very question that we are considering in· these appeals.
G
As a result of Madras amendment after Reorganiza!tion of States
on November 1, 1956, cl. (e) of s. 3 as in force in Madras
reads : ·
H
"The principal or any other landholder and any
other person ·whose rights stand transferred under
clause (b) or cease and determine under clause ( c)
shall be entitled only to such rights and privileges as are
recognised or conferred on him by or under 1this Act."
(I) 44,J.T.R. P. 8'.1:
328
SUPREME COURT REPORTS·
[19 72J 1 S.C.R.
Despiite this ch~ the Madras High Court _came to the
conclusion that an interim payment made, under section 50(2)
was compensation -and as such was a capital receipt.
The same
view was taken by the Madras ·High Court in M. s; Chockalinga
Chettiar and Ors. v. Navaneetlu!ikrishna Sivasubramania Hirudalaya Marudappa P.andayan and Ors. (1) as well as in Ramachandran
v. A. N. Krishnamoorthy Iyer.(') The Andhra Pradesh High
Court. has taken a contrary_view in the judgments under appeal
and in cmo•ther judgment to whlch·-we shall refer presently.
. '
B
In Senairam Doongarmall v. Cdmmissioner of Income-tax,
Assam ( 3 ) this Court was called upon to consjder the nature of th~
payment made to 1he assessee which owned a t·~a estate con_sist-
.Cing of tea gardens, factories and oth·~r buildings, for the purpose -
oj growing and manufacturing tea.
The factory and other buildings on the estate were requisitioned for defence purposes by ihe
military authorities. The asses1ee was paid compensation for the
years i944·and 1945 under the Defence of India Rules calculated on the basis of the out-turn of tea. that would
have been
manufactured by'the assessee during that period.
The· question
Dwas whether the amouqts of comp.~nsation were revenue receipts
taxable in the hands of the assessee.
The Court held that. •the
receipts were capital receipts and hence not liable to be taired.
fit is true that in 'tP,at case the questipn for decision was whether
the assessees carried on business or not in the years 1944 and
1945 and not whether the. receipts in question were taxable inE
come.
But all the same, some of the observations made therein are of assistance in deciding the point in issue in these appeals.
ln that case this 'Court ruled that the amounts of compensation
received by the assessee were not revenue receipts and did· not
comprise any element of income. In the course of the judgment
Mr. Justice Hic:l•.yatullah, J. (as he then was) sp~aking for the
F
Court observed :
"The compensatioU'which was'paid_in the two-years.
was no doubt paid as an equivalent of the likely profits in those years; but, as pointed put by LOrd Buckmaster in ·Glenboig Union Fireclay 'Co. Ltd. v. Commissioner of Inland Revenue and ajfirmed by Lord Macmillan in Van den Berghs Ltd. v. Clark :
"there is
no relation
between the measure that
is used for the pm:pose of calculating a particular
resu~t and the quality of the figure that is arrived
at by means of the application of that test."
.
. .
'
(I) (1964] I. Ma1ras Law Journal p. 340;
(2) [!964] I, M1dras Law Journal p, 153;
CJ} 42, LT.R. P. 392
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S.R.Y. S!VARAM PRASAD BAHADUR V. C.l.T., HYDERABAD
329
(Hegd(!, J.)
This proposition is as sound as it is
well-expressed,
and has been followed in numerous cases under the
Indian Income-tax Act and also by this Court. It is
quality of the payment that is decisive of rthe characters of the payment and nD't the method of the payment
or its measure, and makes it fall
withi11 capital or
revenue."
Again at pages 407 and 408 of the Report, the learned Judge
observed :
"Now, when the payment was made 'to compensate
the assessee, no doubt the measure was the out-turn of
tea which would have been manufactured; but 'that has
little relevance. The assessee was not compensated ~or
loss or destruction of or injury to a capital asset. The
buildings were taken for the time being, but the injury
was not so much to the fixed capital as to the business
as a whole."
Now reference may be made to some of the observations of
Rowlatt J. in Simpson (H.M. Inspector of Taxes) v. Executors of
Bonner Maurice as Executor of Edward Kay('). In that case a
naturalised British subjo~ct had at various dates deposited securities, stocks and shares in banks in Germany. He died during the
war. After the Peace Treaty was signed claims of his representatives were admited by the Mixed Arbitral Tribunal in respect of
amounts representing partly capital of s·~curities realised by sale
or redemption, partly interest and dividends and interest thereon,
partly compensation under the Treaty computed on the basis of
interest on certain amounts. The question was whether the compensation computed on the basis of interest was not income for
the purposes of incomeJtax. The award of the Tribunal was made
in respect of these claims and part of the compensation was a
sum calculated on the basis of interest in respect of funds consisting of dividends which had been held as an alien property
under the German law.
Dealing with the question whether the
compensation computed on the basis of interest was or was nat
income for the purposes of income-tax,· the learned judge observed :
"The question is whether it is income ait all.
It is
called compensation, but the mere word in the Award
"compensation", does not decide the matter, one must
look at the substance of what it was, and if it is annual profits and gains or income. . . . . . arising from
a foreign possession, then it is to be taxed. The foreign
possession must have been the fund in the hands of the
Treuhander, and the Crown's case is that this has been
(11 (1929114, l.C. 580.
.
330
SUPREME COURT REPORTS
[1972] 1 S.C.R.
transmuted into sterling at the pre-war rate of exchange
and awarded with annual interest ab injitio. The Treuhander did not receive this money subject to any liability
to hold it at interest. No doubt the German law recognised it as remaining the property of Mr. Kay, but
not so as to bear interest. The trea'ty did not give Mr.
Kay any right to interest, nor did i't 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 purpos-~ for which the Treuhander had
held the money.
The Treaty gave compensation, and
the tribunal which assessed the principal sum has ass·~ss
ed it on the basis of the interest. I think this sum first
came into existance by the Award, and no previous
history or anterior character can be attributed to it.
It is exactly like damages for deitention of a chattl·~ 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. I therefore think the Crown fails
on this point."
In the appeal court Lord Hanworth, M. R. while confirming
the judgment of Rowlattt J., observed :
"The duty to pay compensation was imposed upon
them by the Treaty.
The Statute does not apply rt,
and the root of the payment is the duty 'to pay compensation ........ 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 bP...en turned into interest
so as to attach Income-tax to it. It remains compensation and, for these reasons, it appears 'to me that it is
not a sum which attracts or attaches Income Tax to
it."
The above observations undoubtedly suppovt the case of the
appellants.
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On the side of the Department reliance was placed on the
decision of this Court in Raja Ramashwam Rao v. Com·missioner H
of Income-tax . . Hyderabad. (1')
Therein this Court was called
(I) [1964) 2, S.C.R. 847.
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S.R.Y. SIVARAM PRASAD BAHADUR V. C.l.T., HYDERABAD
331
(Hegde, /.)
upon to decide the nature of the payment made under s. 14 of
The Hyderabad (Abolition of Jagirs) Regulation, 1358F under
which the management of Estates was taken over. Section 14 of
that Regulation provided that the amount payable to Jagirdars
and Hissedars under that Regulation "shall be deemed to be interim maintenance allowances payable until such time as the terms
for the commutation of Jagirs are determined". Section 3 of The
Hyderabad Jagirs (Commutation) Regulation, 1359F laid down
that commutation sum for a J agir would be a certain multiple of
its basic annual revenue. Section 6 of that Regulation provided
that the commutation sum for each Jagir would be distributable
betwe·~n the Jagirdar and Hissedars in certain proportions. Subsection (2) of s. 7 of that Regulation stated that payment to a
Jagirdar of the commutation sum of the J agir shall constitute the
final commutation as from the !st April 1950 of his rights in the
Jagir and if any payment by way of an interim maintenance
allowance under the said Regulation, that is, the former Regulation, is made in respect of a period subsequent to the said date,
the amount of such payment shall be recol'ered from the recipient
thereof by deduction from his share in the commutation sum for
the Jagir. On an interpretation of s. 14 of the Regulation of
1358 F, this Court held that the interim maintenance allowances
paid under that section were rr,venue receipts on which incometax can be imposed. Some of the observations found in that judgment undoubtedly support the case of the Department. But we
must see under what circumstances those observations were made.
In order to understand the ratio of that decision, we must
bear in mind the provisions of the two Regulations referred to
hereinbefore.
The first Regulation provided for the taking over
of the management of the Estates and the second Regulation
F
prescribed the mode of determining the commutation sum in respect of each jagir and for its payment. The character of the
receipt which this Court was called upon to consider was the
maintenance allowance paid under s. 14 of the first of the two
Regulations. Under that Regulation, the Administra!tor of Jagirs
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took ov>~r the management of the Estates pending making provision for determination of the commutation amount. Provision in
that regard was made under the second Regulation. Till the payment of the commutation sum, the Administrator merely managed
1the Estates on behalf of the former owners of those Estates. This
is clear from ss. 5, 8, 11, 12, B and 14 of the first Regulation.
Under s. 5 thereof the quandum Jagirdars were required to hand·
over the possession of their Estates to the Jagir Administrator.
Section 8 required the former Jagirdars to pay to the Government
1the administration expenses of their Estates. Section 11 provided
for distribution of net income of an Estate between the J agirdar
:332
SUPREME COURT REPORTS
[1972] 1 S.C.ll.
A
and his Hissedars who were entitled to a share in the income of
the Estwte. Section 12 ( 1) says :
"From the amount payable to any person under
section 11, there shall be deducted the amount of any
maintenance allowance which under sub15ection (2 J
is debitable 'to the share of that person."
B
Section 13 required the Jagir Administrator to maintain separate
account in respect of each Jagir and afford the concerned Jagirdar and Hissedar reasonable facilities for the inspeotion of the
same. Section 14 reads :
"The amounts payable to Jagirdars and Hissedars
under the Regulation shall be deemed to be
int·~rim
C
maintenance allowances payable until such time as the
terms for the commutation of jagjrs are determined."
It is the character ofthe payments made under s.
14 that
came up for consid·~ration before this Court in Rameshwar Rao's
case (1). . Quite clearly the maintenance a!lolwances paid were
0
revenue receipts.
Hence 1hat decision has no bearing on
the
question of law under consideration in the present case. The
observations made by this Court in that decision must be read in·
the light of the faC'ts of that case.
The decision of Mr. Justice· P. Jaganmohan Reddy (as he
then was) in Kumara Rajah of Venkatagiri and ors. v. IncomeE
wx Officer, A-Ward-Ne/lore and anr.(') sitting singly proceeded
on the basis 'that the ratio of the d·~cision of this Court in Raja
Rameshwar Rao's case is equally applicable to payments under s.
50(2) of the Act.
The same view was taken by the judges of
the High Court who rendered the decisions under appeal. For the
reasons mentioned earlier both 'those decisions must be held to F
have proceeded on an erroneous view of the decision of this
Court.
On behalf of the Revenue, reliance was placed on the decision
of this Court in Chandroji Rao v. Commissioner of Income-tax,
Madhya Pradesh('). To tha't decision both of us were parties.
The question for decision in that case was whether the payments
of interest made under s. 8 (2) of the Madhya Bharat Abolition
of Jagirs .Act, 19~ 1 was a Revenue receipt or a capital receipt.
That sectton provided for the payment of interest on the compensation payable to the Jagirdars by the Government under s.
G
- (1 ) for resumption of their Jagir lands. This Court held that
the receipt of interest under s. 8 (2) of that Act was a taxable H
0) [1964] 2 S. C.R. 847.
(2) 64, I.T.R. 264.
(3) 77, I.T.R. 743.
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S.B.,Y. SIVARAM PRASAD BAHADUR I', C.J.T., HYDERABAD
333
(Hegde, J.)
income.
The Court observed that there was a clear distinction
between the comp.ensa1ion payable under s. 8 ( 1) and the interest
payable under sub-s. (2) of s. 8. The payment under s.
8(2)
was given to the Jagirdar for his being kept out of the compensation amount to which he was entitled for a period of ten years
and •that i1 was not a payment for the acquisition of the Jagir.
Therein the Court explained the distinction betwe~n the payment
made for depriving the use of a money to which a person is entitled and that made for 1he destruction or taking away his property, the former being a revenue receipt and the latter a capital
receipt.
For the reason~ mentioned above these app.~als are allowed.
In those cases where the question of law men'tioned earlier was
referred to the High Court for its opinion, the answer given by
the High Court is discharged and in its place we answer the question in favour of the assessee.
So far as the writ petitions are
concerned, the order of the High Court is ~~t aside, the writ petitions are allowed and the concerned Income-tax Officers are proD hibited from including the in1terim payments received by the petitioner under s. 50 ( 2) of the Act in his assessment. The appellants shall be entitled to their costs in these appeals both in this
Court as well as in the High Court. In this Court only one hearing fee is allowed.
G.C.
Appeals allowed.
3-Ll340Sup CI/71