# T. N. K. GOVINDARAJULU CHETTY v. COMMISSIONER OF INCOME· TAX, MADRAS

- **Citation:** [1967] 3 S.C.R. 653
- **Court:** Supreme Court of India
- **Decided:** 1967-04-17
- **Case number:** Civil Appeals Nos. 1425 and 1426 of 1966
- **Bench:** J. C. Shah, S. M. Sikri, V. R.AMAsWAMI
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/t-n-k-govindarajulu-chetty-v-commissioner-of-income-tax-madras-3984
- **Pages:** 8

## Headnote

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Income-tax Act, 1922(11 of 1922)-Interest on
compensatwn for
property acquired-If taxable.
The assessees were offered compensation and interest on the ainount
of compensation in respect of their property which was first requisitioned
under r, 75A of the Defence of India Act, 1939 and later acquired by
the State under. s. S of the Requisitioned Land (Continuance of Powers)
Act. The Requisition Act provided that compensation payable shall be
determined in accordance with the provisions of s. 19 of the Defence
of India Act and the rules thereunder, but neither s. 19 nor the Rules.
provided that interes1 shall be paid on the amount of compensation. The
assessee demanded· more compensation and interest, and, the High Court
in appeal enhanced the compensation and awarded interest on it. The
Revenue assessed to income-tax the amount of interest, which was upheld, in reference, by the High Court. In appeal, this Court.
HELD : Interest received by tho asscssee was taxable.
If the source of the obligation imposed by the statute to pay interest
arises became the claimant is kept out of his money, the interest received
is chargeable to tax as income. The same principle would apply if intere~t is payable under. the terms of an agreemenr and the court or the
arbitrator gives efiect to the terms of the agreement-express or impliedand awards interest which has been agreed to be paid. Clauses (a) to.
(fl of s. 19(1) of the Defence of India Act are a Code relatin~ to a
arbitration in determinin(! the compensation payable to a pel'SOll deprived
of his property. Provisions relating
to payment of interest, are not,
however, part of the law relating tc> arbitration and there is nothing in
cl. (g) which excludes the application of the suootantive Jaw relating to·
payment of interest when the arbitration is determining the amount of
compensatron.
In this case, the right to interest arose by virtue of the
provisions of Ss. 28 and 34 of the Land Acquisition Act, 1894, and the
arbitrator and the High Court merely gave effect to that right in awarding interest on the account of compensation. (658 E-F; 660 D-Hl
Dr. Shamlal Narula v. Commisslon•r of Income-tax, Punjab, Jamnu1.
and Kashmir, Himachal Pradesh and Patiala, 53 I.T.R. 151, and Satlnd•r
Singh & Ors. v. Amrao Singh & Ors" JI961] 3 S.C.R, 676, followed.
The Cominissioners of Inland Rev•nu• v. B•llantine, 8 T.C. 595, and
Simpson (H. M. Inspector of Taxes) v. Executors of Bonner Maaric• as
Executor of Edward Kay, 14 T.C. 580, distinguished,
Crv!L APPELLATE JURISDICTION: Civil Appeals Nos. 1425
and 1426 of 1966.
Appeals by special leave from the judgment and order dated
October 29, 1962 of the Madras High Court in Tax Case No. 195
of 1960.
S. Swaminathan and R. Gopalokr/shnan, for the appellant (ino
both the appeals).
654
SUPll.IMll COU1T UPOJlTS
(1967) 3 s.c.R.
T. V. Yiswanatha Iyer, T. A. Ramachandran, S. P. Nayyar
for R. N. Sachthey, for the respondent (in both the appeals).
The J.udgment of the Court was delivered by
Shah, J, The Income-tax Appellate Tribunal submitted two
, questions for the opinion of the High Court of Madras :
"1. Whether the sum of Rs. 1,28,716/- is assessable
as income under any of the provisions of the. Act 1
2. If the answer is in the affirmative, the assessment
years in which' the amount falls to be assessed by suitable
apportionment."
The first question was answered by the High Court in the affirma·
tive.
The High Court declined to answer the second question
because it did l;IOt, in their view, arise out of the order of the
Tribunal. The assessees have appealed to this Court.
, .By order dated January 30, 1944, the Cgllector of Madras,
exercising power under r. 75A of the Defence of India Rules, 1939,
requisitioned a property known as "Lutterals Gardens" belonging
to tr; assessees. The property continued to remain under requisi·
tiojlill it vested in the Government of Madras absolutely in conseqitence of an order made on May 24, 1949 by the Collector of
.Madr

## Text

T. N. K. GOVINDARAJULU CHETTY
v.
COMMISSIONER OF INCOME· TAX, MADRAS
April 17, 1967
B
[J. C. SHAH, S. M. SIKRI AND V. R.AMAsWAMI, JJ.)
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Income-tax Act, 1922(11 of 1922)-Interest on
compensatwn for
property acquired-If taxable.
The assessees were offered compensation and interest on the ainount
of compensation in respect of their property which was first requisitioned
under r, 75A of the Defence of India Act, 1939 and later acquired by
the State under. s. S of the Requisitioned Land (Continuance of Powers)
Act. The Requisition Act provided that compensation payable shall be
determined in accordance with the provisions of s. 19 of the Defence
of India Act and the rules thereunder, but neither s. 19 nor the Rules.
provided that interes1 shall be paid on the amount of compensation. The
assessee demanded· more compensation and interest, and, the High Court
in appeal enhanced the compensation and awarded interest on it. The
Revenue assessed to income-tax the amount of interest, which was upheld, in reference, by the High Court. In appeal, this Court.
HELD : Interest received by tho asscssee was taxable.
If the source of the obligation imposed by the statute to pay interest
arises became the claimant is kept out of his money, the interest received
is chargeable to tax as income. The same principle would apply if intere~t is payable under. the terms of an agreemenr and the court or the
arbitrator gives efiect to the terms of the agreement-express or impliedand awards interest which has been agreed to be paid. Clauses (a) to.
(fl of s. 19(1) of the Defence of India Act are a Code relatin~ to a
arbitration in determinin(! the compensation payable to a pel'SOll deprived
of his property. Provisions relating
to payment of interest, are not,
however, part of the law relating tc> arbitration and there is nothing in
cl. (g) which excludes the application of the suootantive Jaw relating to·
payment of interest when the arbitration is determining the amount of
compensatron.
In this case, the right to interest arose by virtue of the
provisions of Ss. 28 and 34 of the Land Acquisition Act, 1894, and the
arbitrator and the High Court merely gave effect to that right in awarding interest on the account of compensation. (658 E-F; 660 D-Hl
Dr. Shamlal Narula v. Commisslon•r of Income-tax, Punjab, Jamnu1.
and Kashmir, Himachal Pradesh and Patiala, 53 I.T.R. 151, and Satlnd•r
Singh & Ors. v. Amrao Singh & Ors" JI961] 3 S.C.R, 676, followed.
The Cominissioners of Inland Rev•nu• v. B•llantine, 8 T.C. 595, and
Simpson (H. M. Inspector of Taxes) v. Executors of Bonner Maaric• as
Executor of Edward Kay, 14 T.C. 580, distinguished,
Crv!L APPELLATE JURISDICTION: Civil Appeals Nos. 1425
and 1426 of 1966.
Appeals by special leave from the judgment and order dated
October 29, 1962 of the Madras High Court in Tax Case No. 195
of 1960.
S. Swaminathan and R. Gopalokr/shnan, for the appellant (ino
both the appeals).
654
SUPll.IMll COU1T UPOJlTS
(1967) 3 s.c.R.
T. V. Yiswanatha Iyer, T. A. Ramachandran, S. P. Nayyar
for R. N. Sachthey, for the respondent (in both the appeals).
The J.udgment of the Court was delivered by
Shah, J, The Income-tax Appellate Tribunal submitted two
, questions for the opinion of the High Court of Madras :
"1. Whether the sum of Rs. 1,28,716/- is assessable
as income under any of the provisions of the. Act 1
2. If the answer is in the affirmative, the assessment
years in which' the amount falls to be assessed by suitable
apportionment."
The first question was answered by the High Court in the affirma·
tive.
The High Court declined to answer the second question
because it did l;IOt, in their view, arise out of the order of the
Tribunal. The assessees have appealed to this Court.
, .By order dated January 30, 1944, the Cgllector of Madras,
exercising power under r. 75A of the Defence of India Rules, 1939,
requisitioned a property known as "Lutterals Gardens" belonging
to tr; assessees. The property continued to remain under requisi·
tiojlill it vested in the Government of Madras absolutely in conseqitence of an order made on May 24, 1949 by the Collector of
.Madras under s. 5 of the Requisitioned Land (Continuance of
Powers) Act, 194 7, declaring the intention of the Government of
Madras to acquire that property. The assessees declined the offer
made by the Collector to pay Rs. 2,40,000/- as compensation for
acquisition of the property and interest.at the rate of 6% thereon
. from the date of notification for acquisition, and the dispute relating
. to compensation payable to the assessees was referred to the Chief
Judge of .the Court of Small Causes,, Madras. By order of the
High Court of Madras in appeal from the order of the Chief Judge
it was adjudged that the assessees be paid Rs. 5,00,000/- as compensation for the property. The High Court also awarded interest
at the rate of 6% on the amount of compensation from the date of
notification for acquisition.
During the two previous years corresponding to the assessment
years 1955-56 and 1956-57 the assessees received, pursuant to the
order of the High Court, a total sum of Rs. 6,28,716/-. In ptoceedings for assessment of tax for the assessment years 1955-56
and 1956-57, the Income-tax Officer apportioned the amount of
Rs. 1,28,716/- on the basis of actual receipts in the two previous
years and assessed the amounts so apportioned to income-tax, The
Appellate Assistant Commissioner held that the apportioned
amounts were of the nature of revenue and not capital receipts. but
in his view the income received was liable to be calculated on accrual basis year after year from the date of the notification for ·acA
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GOVINDARA.JULU v. C.I.T. (Shah, /,)
655
quisition and on that account the assessments of the previous
years f~ 1950·51 to 1954·55 should be reopened and the inte·
rest which accrued in those years should be assessed.
The Commissioner of Income-tax and the assessees appealed
to the Appellate Tribunal against the ord~r of the Appellate Assis·
tant Commissioner. The assessees submitted that Rs. 1,28,716/·
received as interest being part of compensation were not assessable
to tax whereas the Commissioner claimed that the Income-tax
Office; was justified in assessing the amounts in the years in which
they were received. The Income-tax Appellate Tribunal accepted
the contention of the assessees that the receipts were not assessable
to tax because they were of the nature of capital receipts. At the
instance of the Commissioner, the Tribunal referred the two ques·
tions set out here-in-before.
Section 5 of the Requisitioned Land (Continuance of Powers)
Act, 1947 authorises the Government by which or under the autho·
rity of which land has been requisitioned, to acquire the land
subject to requisition, by publishing a notice to the effect that the
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Government has decided ·to acquire such land. Section 6 of the
Act provides, inter alla, that compensation payable to the owner
of the land shall be determined in accordance with the provisions
of s. 19 of the Defence of India Act, 1939, and the rules made there·
under. Section 19 of the Defence of India Act, 1939, sets out
the principles for determining the compensation payable to a
claimant. The amount of compensation may be fixed by agreement between the owner and the Government : where no such agreeE
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ment is reached the Central Government is enjoined to appoint
an arbitrator having the qualifications ~rescribed therein. Under
s. 19 (1) ( e) the arbitrator in making his award must have regard,
inter a/ia, to the provisiop.s of sub-s. ( 1) of s. 23 of the I.and Acquisition Act, 1894 in so far as the same can be made applicable.
An appeal lies against the award of the arbitrator to the High
Court. Sub-sections (2) and (3) of s. 19 confer upon the Cen·.
tral Government authority to frame rules for the purpose of carrying into effect the provisions of s. 19. In exercise of that power,
the Government of India framed "The Defence of India (Payment
of Compensation and Arbitration) Rules, 1943" which amongst
G · other provisions directed that the Collector shall pay compensation as soon as may be practicable. But neither s. 19 ( 1) of the
Defence of India Act, nor the Rules framed under s. 19(2 ). and
(3) provide that intetest shall be paid on the amount of compen•
sation. In the present case, interest was, however offered to be
paid by the Collector; .and the High Court also a~arded interest
on the amount of compensation from the date of the notification
of acquisition.
H
It was held by this Court in Dr. Shamlal Narula v. Commissioner of Income-tax, Punjab, Jammu and Kashmir, Himachal
656
SUPREME COURT REPORTS
(1967] 3 S:C.R·
Pradesh and Patiala(') that the statutory interest paid under s. 34
of the Land Acquisition Act, 1894, on the amount of compensa•
tion awarded from. the date on which the Collector has taken possession of land compulsorily acquired under the Land Acquisition
Act, 1894, is interest paid for delayed payment of the compensation and is a revenue receipt liable to tax under the Income-tax Act.
It was observed in that case at p. 156 :
". . . . . interest, whether it is statutory or contractual, 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 section 34 of the Act when the legislature designedly used
the word "interest" in contradistinction to the amount
awarded, we do npt see any reason why the expression
should not be given the natural meaning it bears.
The scheme of the Act and the express provisions
thereof establish that the statutory interest payable under
section 34 is not 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."
Counsel for the assessee however contended that the principle of
Dr. Shamkll Narula's case(') is not applicable to this case, since
there is no provision in the Requisitioned Land (Continuance of
Powers) Act, 1947 and the Defence of India Act, 1939, and the
rules framed thereunder for payment of interest on the amount
of compensation. Counsel said that under the Act, the owner is
paid not the market value of the property, but compensation determined in accordance with a highly artificia I scheme, and that the
interest paid, in truth, bears the same quality as oompensation for
deprivation of property and is on that account a caoital receint not
exigible to tax. In suooort of his contention, counsel invited our
attention to two decisions : The Commissioners of lnla11d Reve,.ue
v. Ballantine(") and Simpson (H.M. Inspector of Taxes) v. Exe- ·
cutors of Bonner Maurice as Executor of Edward Kay(8).
Jn Baltantine's case(2 ) a claim of a firm of contractors against
a railway company for "additional costs, loss ·and damage" was
referred to arbitration. The arbitrator awarded to the claimant a
sum of money mainly as damages, together with interest thereon at
5 per cent. per annum from the date of lod1?111ent of claim until
payment. The Revenue sought to charge the interest paid bv the
(l) 531.T.lt. ISi.
(2) 8 T.C. S9S.
(3l 14 T,C, S8 '.
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GOVINDARAJULU v. C.I.T. (Shah, J.)
657
A . railway company to tax under Case Ill of Sch. D of the Income·
tax Act, 1918. It was held that the sum added in the name of
interest was part of damages, and was not "interest of m~ney"
chargeable to income-tax under Case Ill of Sch. D. Lord President
Clyde observed :
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"Now it is familiar that an assessment of the kind may
contain as one of its constituent elements an allowance in
respect that the claimant has lain for a long time out of
his remedy.
The propriety of such an allowance may
depend on the character of the claim, and its amount may
depend on many considerations of which time is only one.
But an interest calculation is a natural and legitimate
guide to be used by an arbiter in arriving at what he
thinks would be a fair amount. In most cases in which
such an allowance is a constituent of an award it does
not separately appear, but is slumped along with other
elements in the gross sum decetned for; but there is nothing to prevent an arbiter, if he thinks it just and reasonable in a particular case, to make the allowance in the
form of an actual interest calculation from a past date
until the sum fixed as at· that date is paid. In all such
cases, however-whether the allowance is wrapped up in
a slump award or is separately stated in the decree-the
interest calculation is used in modum aestimationis only
The interest is such merely in name, for it truly constitutes
tlJitt part of the compensation decerned for which is attributable to the fact that the claimant has been kept out
of his due for a long period of time. It is not therefore
"interest of money" chargeable under Case III of
Schedule D."
In Simpson v. Executors of Bonner Maurice as Executor of
Edward Kay(') the executors of Kay, a naturalised British subject,
who died during the First World War received, as the result of
the peace treaty claims, amounts representing partly capital of
securities, st?cks and sha!e.s in Banks in Germany deposited by
Kay; partly mterest and d1v1dends; and partly compensation under
the Peace Treaty. In a proceeding for assessment of the receipt
~o tax it was held. that the compensation computed on the basis of
mterest was not mcome for the purposes of income-tax.
Lord
Hanworth, M. R., observed at p. 601 :
"I want to add now one more word in reference to
the sum which has been paid· by way of compensation
under Article 297. It is said in reference to that 'that,
at least, arose at the time when it was paid under the
order of the Mixed Arbitral Tribunal'.
It was a sum
(1) 14 T.C. 580.
L7Sup.CJ/67-12
H58
SUPREME OOUJ.T llEPOllTS
[1967] 3 s.c.~
which was calculated as interest"-.
.
. 'and it is
interest, and therefore it is within the words of the Schedule, which undoubtedly impose a tax upon interest
which arises or accrues to a person liable to tax.' But is
it interest 'I Is that its quality, or is it compensation estimated and measured in terms of interest? It appears to
me quite clear that, apart from Article 297, no such sum
could have been recovered."
L:1wrence, L.J., observed at p. 605 :
"Neither the fact that the compensation was mea·
sured by the amount of the interest, which but for the
embargo placed upon the money by the German Government could have been earned by the Respondents,
nor the fact that part of the compensation was described
as "interest" in the decision of the Mixed Arbitral Tribunal, in my judgment, has the effect of altering the
character of the compensation paid to the Respondents."
But it must be noticed that liability to pay interest arose in
lla/lantine's case(') under the award of the arbitrator and in the
Executors of Bonner Maurlce as Executor of Edwa~d Kay's case( 2 )
under the order of the Mixed Arbitra\ Tribunal, and in each case
it was he.Id that what was paid, though called "interest'', wa~ in
truth compensation for loss suffered on account of deprivation of
property.
According to the view taken by this Court in Dr.
Sham/al Namla's case( 8), if the course of the obligation imposed
by the statute to pay interest arises because the claimant i~ kept
out of his money, the interest received is chargeable to ta'!; as
income.
The same principle would apply if interest is payable
under the tenns of an agreement and the Court or the arbitrator
gives effect to the terms of the agreement-express or implied--
and awards interest which has been agreed to be paid.
It is therefore necessary to determine whether the obligation to
pay interest awarded under the order of the High Court of Madras
arose out of the statute or out of the award. In Satinder Singh &
Ors. v. A mrao Singh and Ors.(') lands forming part of Cis..Sutlej
Jagir were compulsorily acquired under the East Punjab Acquisition and Requisition of Immovable Property (Temporary Powers)
Act, 1948.
The claimants to the lands claimed in addition to
statutory compensation interest from the date from which they
were dispossessed and till the date of payment of compensation.
The arbitrator appointed under the Act awarded interest on the
amount of compensation and the Hi,l!h Court of Punjab in appeal
confirmed the order. This Court held that the claimants were
··-. ~· -·· .....
(ll 8 T.C. 595.
(2) 14 T.C. 580.
(3) 53 l.T.R. 151
(4) (1961] 3 S.C R. 676.
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GOVINDARAJULU V. C.I.T. (Shah, J.)
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entitled to interest on the compensation amount from the date of
dispossession till the date on which 'the amount of compensation
was paid to the claimants. Section 5 of the East funjab Acquisition and Requisition of Immovable Property (Temporary Powers)
Act, 1948, set out the principles according to which compensation
was to be paid in regard to the acquired property, and by cl. ( e)
thereof it was provided that the arbitrator in making the award
shall have regard to the provisions of sub-s. ( 1) of s. 23 of the
Land Acquisition Act, 1894 in so far as the same may be applicable.
The Act contained no express provision for payment of
interest on compensation determined by the arbitrator. This Court
rejected the contention of the State of Punjab, tha.t ss. 28 and 34
of the Land Acquisition Act which dealt with the payment of
interest were not intended to apply to the proceedings before !he
arbitrator.
It was observed :
"Stated broadly the act of taking possession of immovable property generally implied an agreement to pay interest on the value of the property and it is on this prin·
ciple that a claim for interest is made against the State."
The Court further observed :
"It would thus be noticed that the claim for interest
proceeds on the assumption that when the owner of immovable property loses possession of it he is entitled to
claim interest in place of right to retain possession. The
question which we have to consider is whether the application of this rule is intended to be excluded by the Act
of 1948, and as we have already observed, the mere fact
that s. 5(e) of the· Act makes s. 23(1) of the Land Acquisition Act of 1894 applicable we cannot reasonably
infer that the Act intends to exclude the application of
this general rule in the matter of the payment of interesr."
The Court also observed :
"When a claim for payment of interest is made by
a person whose immovable property has been acquired
compulsorily he is not making claim for damages properly or technically so called; he is basing his claim on
the general rule that if he is deprived of his land he should
~e put in possess.ion of compensation immediately; if not,
m lieu of possession taken by compulsory acquisition interest- should be paid to him on the said amount of compensation."
The scheme of the East Punjab Acquisition and Requisition of
Immovable Property (Temporary Powers) Act, 1948 is similar to
the scheme of the Requisitioned Land (Continuance of Powers)
}\ct, 194 7. The Court in Satinder Singh' s case(') held that he-
(1)(1961] 3 S.C.R. 676 .. ·-
660
SUPRBMB COURT RBPORTS
(1967] 3 s.c.R.
cause of the injunction expressly to apply the provisions of s. 23(1)
of the Land Acquisition Act, 1894, in the determination of compensation, the application of ss. 28 and 34 dealing with the payment of interest on the amount awarded as compensation cannot
be deemed excluded. The Court also held that when the owner of
property is dispossessed pursuant to an order for compulsory acquisition, an agreement that the acquiring authority will pay interest on the amount of compensation is implied.
The reasoning on which the right of the owner of the lands
acquired to interest was affirmed in Satinder Singh's case(1), prima
facie, applies in this case. Counsel for the assessees contended that
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the application of ss. 28 and 34 of the Land Acquisition Act in
proceedings for arbitration under the Requisitioned Lands (Con-
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tinuance Powers) Act, 1947, was expressly excluded bys .. 19(l)(g)
of the Defence of India Act which enacted that :
"Save as provided. in this section and in any rules
made thereunder, nothing in any law for the time being
in force shall apply to arbitration under this section."
But cl. (g) is not susceptible of any such interpretation. Clauses
(a) to (f) of s. 19(1) are a Code relating to arbitration in determining the compensation payable to a person deprived of his property.
Provisions relating to payment of interest are not, however, part of the law relating to arbitration and there is nothing in
cl. (g) which excludes the application of the substantive law relating to payment of interest when the arbitration is determining the
amount of compensation.
We are therefore i;>f the view that the principle on which The
Commissioners of Inland Revenue v. Ballantine(') and Simpson
(H.M. Inspector of Taxes) v. Executors of Bonner Maurice as
Executor of Edward Kay(8 ) were based has no application to this
case. It may be recalled that in those cases the arbitrator and the
Arbitral Tribunal were, in awarding interest, not seeking to give
effect to, or to recognize a right to interest, conferred by statute or
contract. The source of the right to interest in both the cases did
not arise from the statute or agreement. In the case on hand, the
right to interest arose by virtue of the provisions of ss. 28 and 34
of the Land Acquisition Act, 1894, and the arbitrator and the
High Court merely gave effect to that right in awarding interest
on the amount of compensation. Interest received by the assessee
was therefore properly held taxable.
The appeals fail and are dismissed with costs. One hearing
fee.
y,p,
Appeals dismissed.
(!) 11961] 3 S.C.R. 676.
(2) 8 T.C. S95.
(3) 14 T.C. 580.
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