Andhra Pradesh H.C : The interest received by the assessee from November 1, 1988 (the date of taking over possession of the assessee’s land) to March 29, 1992 (the date of passing an award under the Land Acquisition Act, 1894) is liable to be treated as a capital receipt

High Court Of Andhra Pradesh

CIT vs. V. Subbaraju

Section : 4

Madan B. Lokur, CJ.And Sanjay Kumar, J.

ITA No. 72 Of 2000

January 3, 2012

JUDGMENT

Madan B. Lokur, CJ. – A substantial question of law was not framed while admitting this appeal filed under section 260A of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). Accordingly, after hearing the learned counsel for the parties, we frame the following substantial question of law :

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the interest received by the assessee from November 1, 1988 (the date of taking over possession of the assessee’s land) to March 29, 1992 (the date of passing an award under the Land Acquisition Act, 1894) is liable to be treated as a capital receipt ?”

2. The assessee is an individual doing business of trading in cycles and cycle parts. He also derives income from agricultural land owned by him.

3. A part of the assessee’s agricultural land was taken possession of by the Government on October 31, 1988, with his consent. While taking over possession, an agreement was entered into between the assessee and the Government that interest would not be payable to the assessee up to October 30, 1988, or till the date of the award, whichever is earlier. At that time, although proceedings under the Land Acquisition Act, 1894 (hereinafter referred to as “the LA Act”) were contemplated, no proceedings had yet been initiated.

4. The Government then issued notifications under the provisions of the LA Act acquiring a part of the assessee’s agricultural land and an award under the LA Act was passed on March 29, 1992. In terms of the agreement between the assessee and the Government, interest was paid to the assessee for the period November 1, 1988, up to March 29, 1992.

5. When the assessee filed his returns, the question that arose before the Assessing Officer was whether the interest received by the assessee was a capital receipt or a revenue receipt. The Assessing Officer took the view that the interest received was a revenue receipt. In an appeal filed by the assessee, the Commissioner of Income-tax (Appeals) took the view that the interest received was a capital receipt. This view was upheld by the Income-tax Appellate Tribunal (for short “the Tribunal”) by relying upon a decision of the Kerala High Court in CIT v. Periyar and Pareekanni Rubbers Ltd. [1973] 87 ITR 666 (Ker).

6. Feeling aggrieved, the Revenue is in appeal before us.

7. The Government may take possession of a person’s land either under the provisions of the LA Act (or another statute) or by agreement with the land owner. When possession of the land is taken over by the Government under the provisions of section 16 or 17 of the LA Act, the property vests absolutely in the Government. Any compensation received by a person for such compulsory acquisition of land amounts to compensation paid for the deprivation of the property, while the interest paid is given to him for deprivation of the use of money representing compensation for the land acquired. This is the view taken by the Supreme Court in Dr. Shamlal Narula v. CIT [1964] 53 ITR 151 (SC) wherein it was held (page 158) :

” . . . in a case where title passes to the State, the statutory interest provided thereafter can only be regarded either as representing the profit which the 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 section 16 or section 17 of the Act.”

8. Under these circumstances, it was held that such interest on compensation would be a revenue receipt.

9. On the other hand, while dealing with Inglewood Pulp and Paper Co. Ltd. v. New Brunswick Electric Power Commission, AIR 1928 PC 287 and Revenue Divisional Officer, Trichinopoly v. Venkatarama Ayyar , AIR 1936 Mad 199 the Supreme Court observed that title in the property had not passed on to the vendee (in the first case) or to the Government (in the second case), “it may be said that the owner was given interest in place of his right to retain possession of the property”. In such a case, the interest received would be a capital receipt.

10. Noting this distinction, the Kerala High Court held in Periyar and Pareekanni Rubber Ltd. (following Dr. Shamlal Narula and T. N. K. Govindaraju Chetty v. CIT [1967] 66 ITR 465 (SC)) that interest received by the land owner till the date of the award is a capital receipt. In that case, possession of land was taken on agreement between the assessee and the Government on November 29, 1961. The award under the LA Act was passed on August 31, 1962, and compensation with interest was paid on September 6, 1962. The Kerala High Court held for the period November 29, 1961, to August 31, 1962, the interest was a capital receipt in the hands of the assessee and for the period September 1, 1962, to September 6, 1962, it was revenue receipt.

11. We do not see any reason to express a different opinion particularly in view of the decisions of the Supreme Court. In the case that we are concerned with, possession of the assessee’s land was taken by the agreement on October 31, 1988, and the award was passed on March 29, 1992. Therefore, for the period November 1, 1988, up to March 29, 1992, the interest given to the assessee must be treated as a capital receipt.

12. In the circumstances, we answer the substantial question of law in the affirmative, in favour of the assessee and against the Revenue.

[Citation : 341 ITR 584]

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