Punjab And Haryana H.C : Whether, on the facts and in the circumstances of the case, the Tribunal has been in error in deleting the addition of Rs. 13,871 ?

Counsel Appeared

Ashok Bhan & Ajay Mittal, for the Revenue : R.S. Aulakh, for the Assessee

GOKAL CHAND MITAL J. :

The assessee made a security deposit of Rs. 34,250 with the Central Government pursuant to a contract for the supply of 1,820 tonnes of wheat. Later on, disputes arose between the assessee and the Central Government and the security deposit was for-feited. The ITO allowed the deduction in computing the profits for the year in which the forfeiture occurred.

2. The assessee challenged the action of the Central Government in forfeiting the amount by filing a civil suit. The High Court, by judgment and decree dated December 4, 1970, decreed the suit for return of the security and allowed interest at the rate of 3 per cent. per annum from the date of filing of the suit till realisation.

3. In pursuance of the High Court decree, the assessee got back the security amount as also interest amounting to Rs. 13,871 and in the relevant assessment year, namely, 1972-73, filed a return in which the refund of the security amount was included in the income and claimed that the amount of Rs. 13,871 received as interest was a casual receipt, which was in the discretion of the Court and hence not subject to tax. The ITO did not agree and included the amount of interest as income of the assessee from other sources. On the assessee’s appeal, the AAC allowed the deduction of interest keeping in view the ratio of IRC vs Ballantine’s case (1924) 8 TC 595 (C. Sess). The CIT remained unsuccessful before the Tribunal and has got the following question referred for the opinion of this Court :

“Whether, on the facts and in the circumstances of the case, the Tribunal has been in error in deleting the addition of Rs. 13,871 ?”

4. So far as the position of law is concerned, the matter is concluded by the decision of the Supreme Court in T. N. K. Govindaraju Chetty vs. CIT (1967) 66 ITR 465. The relevant observations are as follows (at p. 471) : “But it must be noticed that liability to pay interest arose in Ballantine’s case (supra) under the award of the arbitrator and in the Executors of Bonner Maurice as Executor of Edward Kay’s case (1929) 14 TC 580(CA), under the order of the Mixed Arbitral Tribunal, and in each case it was held that what was paid, though called ‘interest’, was in truth compensation for loss suffered on account of deprivation of property. According to the view taken by this Court in Dr. Shamlal Narula’s case (1964) 53 ITR 151 (SC), if the source of the obligation imposed by the statute to pay interest arises because the claimant is kept out of his money, the interest received is chargeable to tax as income. The same principle would apply if interest is payable under the terms 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.”

5. On the principles laid down in the quotation, the facts of the case were examined and the following conclusion was drawn (at p. 473) “We are, therefore, of the view that the principle on which IRC vs. Ballantine (supra) and Simpson vs. Executors of Bonner Maurice as Executor of Edward Kay’s case (supra) 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 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.”

6. From the aforesaid decision, it is clear that if interest is received on the basis of a contract or under a statute the same is taxable, but if interest is awarded by the Court for loss suffered on account of deprivation of property, it amounts to compensation, though called interest, and would not be taxable. Learned counsel for the Revenue urged that the interest has been allowed by virtue of s. 34 of the CPC and, therefore, is allowed under a statute and has to be included in the income and cannot be treated as a casual receipt. Before the Supreme Court, the interest was allowed under ss. 28 and 34 of the Land Acquisition Act, 1894, where there is no discretion with the Court to grant more or less than what is provided by the statute, whereas under s. 34 of the CPC, it is discretionary for the Court, on the facts and circumstances of the case, to allow interest not exceeding 6 per cent. The Delhi High Court awarded interest at the rate of 3 per cent. in its discretion for wrongful deprivation of the security deposit. This case clearly falls in line with Ballantine’s case (supra), which was noticed by the Supreme Court in the aforesaid decision and was distinguished because there the interest was awarded by way of compensation for loss suffered on account of deprivation of property under the orders of the Court and not under any statute like the Land Acquisition Act. Accordingly, we are of the view that the amount of interest received by the assessee was by way of compensation and was a casual receipt and could not be included in the income of the assessee in the relevant assessment year. However, the Tribunal was not right in observing that the awarding of Rs. 13,871 as interest was in the nature of ex gratia payment. The payment was under the discretion of the Court but not ex gratia.

4. For the reasons recorded above, we answer the question in favour of the assessee, that is, in the negative, with costs quantified at Rs. 500.

[Citation : 179 ITR 157]