1991 Supreme(P&H) 1188

PUNJAB & HARYANA HIGH COURT
B.C.Varma and Ashok Bhan JJ.
Tuhi Ram
Versus
Land Acquisition Collector And Anr.
Civil Writ Petition No. 10749 of 1991,
Decided On : DECEMBER 13, 1991

Interest received as a consequence of compulsory acquisition of land/agricultural land is income exigible to tax.

Headnote:

INCOME TAX - Capital gains - Agricultural land - Whether amount received as compensation on compulsory acquisition of agricultural land is a capital asset and, if so, whether the profits and gains arising therefrom are exigible to income tax - Whether interest paid on the amount of compensation for compulsory acquisition of land is "income" and, therefore, taxable under the Act.

Fact of the Case:

Extensive agricultural land was acquired under the Land Acquisition Act after due process of law. The Land Acquisition Collector gave his award assessing the market value of the land. On a reference under Section 18 of the Land Acquisition Act, the District Judge enhanced the compensation. The claimants/landholders were awarded solatium and also interest calculated in terms of Sections 23(1A) and 28A, as inserted by Amending Act No. 68 of 1984. The award made by the District Judge was challenged in appeal before this court and the compensation and interest payable to the claimants have been finally determined by the various judgments passed in Letters Patent appeals. The claimants received compensation. They were, however, not required to pay any income-tax on the amount so received as market value of their land as also on the interest. Now, notices like annexure P4 have been issued to those landowners whose lands were acquired as aforesaid. By such notices, they have all been informed that a certain amount was required to be deducted on account of income-tax on the amount of interest so received by them. All such persons/claimants were required to deposit the amount mentioned in such cases towards the amount of income-tax chargeable on the amount of interest so received by them. These notices apparently have been issued in terms of Section 194A of the Income-tax Act, 1961 (Act No. 43 of 1961) (for short "the Act"), as amended by the Finance (No. 2) Act, 1967, effective from April 1, 1967. All the petitioners in these writ petitions have challenged these notices on the grounds which we shall presently consider and have prayed that these notices be quashed. They also pray that Clause (iii) in Sub-section (14) of Section 2 of the Act be declared ultra vires. A further prayer is to declare that they are not liable to pay any tax on the amount received as compensation as capital gains on the acquisition of agricultural land and if any amount has been deducted at source on that account, it be refunded.

Finding of the Court:

1. Parliament is competent to enact Section 2(14)(iii) of the Act so as to provide for tax on capital gains arising from agricultural land. 2. The amount received as compensation on account of compulsory acquisition of agricultural land specified in Section 2(14)(iii) of the Act, either under the Land Acquisition Act or under the Requisition and Acquisition of Immovable Property Act, 1952 (No. 30 of 1952), is a capital asset and not agricultural income and the profits and gains arising therefrom are exigible to income-tax. 3. Interest received as a consequence of compulsory acquisition of land/agricultural land is income exigible to tax. 4. By force of Section 194A, at the time of credit of such income to the account of the payee or at the time of payment either in cash or by issue of cheque or draft or other mode, the payer is entitled to deduct income-tax thereon at the rates in force.

Issues: 1. Whether Parliament is competent to enact Section 2(14)(iii) of the Act so as to provide for tax on capital gains arising from agricultural land. 2. Whether the amount received as compensation on account of compulsory acquisition of agricultural land specified in Section 2(14)(iii) of the Act, either under the Land Acquisition Act or under the Requisition and Acquisition of Immovable Property Act, 1952 (No. 30 of 1952), is a capital asset and not agricultural income and the profits and gains arising therefrom are exigible to income-tax. 3. Whether interest received as a consequence of compulsory acquisition of land/agricultural land is income exigible to tax.

Ratio Decidendi: 1. The legislative intent often becomes a fiction representing the attitude of judges in arriving at a solution by striking a balance between the letter and spirit of the statute without acknowledging that they have in any way supplemented the statute. 2. The various entries in the three Lists of Schedule VII to the Constitution are not powers of legislation but fields of legislation. The power to legislate may be found in other articles of the Constitution. The entries have only an enabling character and specific legislative heads. Since such entries set up the machinery of the Government, they are entitled to be given the widest scope. At the same time, entries in different Lists should be read together without giving a narrow meaning to any one of them. It would, therefore, be not just to import any limitation on any other entry in the same List. 3. The scope of the entries under consideration, namely, entry 46 in List II and entry 82 in List I of the Seventh Schedule to the Constitution, shall have to be construed in the light of the above principles. 4. Parliament has, by virtue of entry 82 in List I of the Seventh Schedule, the power to enact a law relating to tax on capital gains and, therefore, also to amend the law relating to tax on capital gains. Such a tax would be a tax on income. Parliament has the power to define what is meant by "agricultural income" and, by virtue of entry 82, it has the power to levy tax on income other than agricultural income thus defined. 5. When a capital asset is sold, what is realised is a capital receipt and not a revenue receipt. If profit or gain results from such a sale, it is chargeable, not because it is revenue, but because the statute specifically charges the resulting capital gain by including it as income. Although land is the source of income, income is derived not by the use of the land, but by the sale of the land, that is, by conversion of the land into cash. The resultant income is not agricultural income. 6. Interest has to be paid on the amount awarded from the time the Collector takes possession until the amount is paid or deposited. Interest is not an item of compensation. Nor is it consideration for acquisition of land. Payment of interest has been provided for separately under Section 34 of the Land Acquisition Act. This is so because interest is paid after the compensation has been determined. It is something in addition to the capital amount though it arises out of it. It has expressly been held that interest under Section 34 of the Land Acquisition Act is not compensation paid to the owner for depriving him of his right to possession of the land acquired, but is given to him for the deprivation of the use of the money representing the compensation for the land acquired. This interest under Section 34 of the Land Acquisition Act is thus paid for the delayed payment of the compensation amount and, therefore, a revenue receipt liable to tax under the Income-tax Act.

Final Decision: The petitions are dismissed subject, of course, to our observations made above. The income so accrued or accruing as interest shall be spread over for the purpose of assessment of income-tax for the relevant accounting years. There shall be no order as to costs.