Interest on sale proceeds and statutory interest under Sec.18A of the Income-tax Act are taxable as income if they have the essential quality of recurrence and are not damages for wrongful retention of money.

Ramaswami, J.

1. This reference is made at the instance of the assessee by the Income-tax Appellate Tribunal under Sec. 66(1) of the Indian Income-tax Act.

2. The first objection relates to a sum off Rs. 10,497 which the Income-tax authorities included as taxable income for the assessment year 1947-48. The assessee owned textile mills known as Navsarj Mills which had closed down several years past Babu Gokhulchand who was the proprietor of the firm Sital Prasad Kharag Prasad managed the textile mills on behalf of the assessee. Gokhulchand. sold away the machinery of the mills and a sum of Rs. 13,363 was due from Gokulchand to the Maharaja on this account. During the accounting year the Maharaja realised as a result of litigation between him and Gokulchand. a sum of Rs. 25,530 which included the principal, law charges expenses as also interest. Out of the amount of Rs. 25,530 realised by the assessee the Income-tax Officer calculated the interest to be Rs. 10,497. The assessee claimed that this amount should be treated as accretion to capital because the mill business having been closed : the sale proceeds of the machinery could not be profits arising from that business. The contention was rejected by the Income-tax Appellate Tribunal who held that the price of the machinery was only Rs. 13,000 and odd, which was deducted from the amount decreed to the Maharaja. After making other deductions, the interest was computed to be Rs. 10,497 which the Income-tax Appellate Tribunal held, was taxable in the hands of the assesses

3. A second objection was also preferred by the Maharaja with respect to the 1947-48 assessment. It appears that the Maharaja had made advance payment of tax under Sec.18A of the Indian Income-tax Act. Under the provisions of this section, the Maharaja was entitled to interest at the rate of 2 per cent on the amount deposited. A sum of Rs. 41,813/6/- was thus due to the Maharaja as statutory interest on the amount of tax he had paid in advance. It was claimed by the Maharaja that this amount was not taxable but the objection was overruled by the Income-tax Appellate Tribunal.

4. The questions of law referred are

(1) "whether in the facts and circumstances of this case the amount of Rs. 10,497 which was realised from Gokulchand being a part of Rs. 25,530 has been rightly taxed as income in the hands of the assessee?" and

(2) "whether the sum of Rs. 41813/6/- received by the assessee as statutory interest under Sec.18A has been rightly taxed as income under the Indian Income-tax Act?"

5. As regards the first question the argument presented by Mr. S.K. Majumdar on behalf of the assessee is that the amount of Rs. 10,497 was awarded as damages against Gokulchand for detention of the amount of sale proceeds. It was argued that the amount though called as interest in the decree was not really interest but was in the nature of damages for retention of money. The contention of the learned counsel is that there is a distinction between the quality of interest which is awarded by way of damages and the quality of interest proper which arises out of a contract or agreement. It was said that in the present case the amount of Rs. 10,497 was not interest in proper sense but was compensation estimated and measured in terms of interest and was not therefore taxable under the Income-tax Act. In my opinion the argument of the learned counsel proceeds upon a misconception. It is true enough to state that there is a difference between interest which accrues as a result of an express contract and interest which is granted by way of damages for wrongful retention of money. To put it differently the distinction is between the conception of interest as a reward for the use of money and the conception of interest as compensation for the deprivation of money.

For instance, Section 73 of the Indian Contract Act has been construed to mean that in the absence of any contract, express or implied, or of any provision of law to justify