T.V. RAJAGOPALA RAO, J.M. ORDER Common points are involved in these appeals. appellants are brothers and are commonly interested in some lands acquired by Government under Requisitioning and Acquisition of Immovable Property Act, 1952 ('the said Act'). point at issue in all these appeals is whether interest awarded by arbitrator appointed under provisions of said Act is taxable as income earned, in year in which award is passed. facts may be briefly stated as under. 2 . appellants herein, viz., Shri K. Ravi, Shri K. Prakash and Shri K. Padmabhushan are sons of Shri Kolluru Ramaiah son of Shri Seshagirirao. Shri K. Ramaiah, inter alia, appeared to have held following extents at Marripalem village comprised in survey numbers shown against each of them : Name of Extent village S. No. land owner Ac. Cts. Kolluru Marripalem 145 1Ai 98 Ramaiah 141 1A 3 73 146 3B 77 146 3C 02 Total 5 50 3. Government acquired 73.38 cents for Boys Training Establishment. particulars in Form No. 'J' were published in AP Gazette dt. 11th Jan., 1973. By its letter dt. 26th Feb., 1977, Government of India accorded sanction for payment of Rs. 33,93,875.73 towards payment of compensation for acquired land. In abovesaid notification published in AP Gazette it is clearly noted that,inter alia, above lands were also sought to be acquired under s. 7(1) of said Act. Out of tentative value fixed as compensation assessee received payment in two installments. In first installment they received 20 per cent of compensation fixed whereas in seconds instalment they received 30 per cent of compensation fixed. Government tentatively fixed rate of acquisition of above extents at Rs. 10 per sq. yd. and said fixation was informed,inter alia, to assessee under r. 5(3) of Requisitioning and Acquisition of Immovable Property Rules, 1953. Objections were invited over tentative value fixed from assessees and other claimants. However, assessees did not communicate either their willingness or otherwise to offer of compensation made. assessees filed Writ Petition Nos. 498 and 658 of 1978 on file of Andhra Pradesh High Court and during pendancy of writ petitions they received Rs. 50,000 and Rs. 31,000 as per directions of Hon'ble High Court. Excluding amounts already paid balance amount or compensation found payable as per rates fixed tentatively by Government was found to be Rs. 12,909. However, assessee claimants refused to accept offer and so Government appointed Shri G. Radhakrishna Rao at that time working as District and Session Judge Visakhapatnam as arbitrator under said Act. Before arbitrator assessees claimed compensation at rate of Rs. 35 per sq. yd. besides claiming solatiumn as well as interest at 15 per cent per annum from date of notification till date of payment. learned arbitrator passed his award dt. 28th March, 1981. copy of award was made available to us by learned counsel for assessee. As can be seen from it at close of para 21 of his order arbitrator fixed compensation at Rs. 15 per sq. yard as reasonable. He also granted solatium at 15 per cent and interest at 6 per cent per annum. He summarised all reliefs granted by him in para 25 of his order which is as follows : "In result, award is passed fixing rate of compensation at Rs. 15 per sq. yd. and claimant is entitled to draw solatium at 15 per cent and interest 6 per cent per annum on compensation and solatium from date of notification, i. e., 14th Dec., 1972 till payment." Giving reasons for awarding interest learned arbitrator had stated reasons at para 23 of his award as follows : reasons at para 23 of his award as follows : "The claimant claimed interest at 16 per cent from date of notification. notification was made in December 1972. Had competent authority fixed compensation and paid same, claimant would have invested same for better purposes. claimant was derived out utilising amount from December 1972. So far as claim for interest no provision has been made in Act. Sec. 1 of Interest Act (33 of 1979) vest in every Court discretion to allow interest on all sums certain which are payable by one part to other. amount of Composition payable by government to land owner under Act becomes sum certain as soon as it is ascertained by passing award by arbitrator. arbitrator has, therefore, jurisdiction to award interest under s. 1 of Interest Act even in absence of any specific provision under RAIP Act. proviso to s. 1 is also significant. That shows that liability to pay interest created by purview of that section is intended to fill in gap in that respect which has been left in s. 8 of Act which creates liability of State to pay amount of compensation to owner. claim of interest at rate of 16 per cent per annum is highly excessive and claimant is entitled to draw interest at 6 per cent per annum from date of notification." 4. We had already seen that assessee received piecemeal payments of compensation. However, assessees adjusted following amounts as interest amounts received as against each of assessment years shown in table below : Asst. yr. Amount of interest Rs. 1975-76 14,872 1978-79 12,500 1979-80 5,037 1981-82 3,305 assessees did not show interest receipts in their income-tax returns filed for first three assessment years. So assessments for first three assessment years in table given above were completed without including interest income. However, they were reopened now. But for asst. yr. 1981-82 assessees no doubt had shown interest but put in part III of return and claimed it except on ground that it is capital receipt. They contended that compensation received on land acquisition is capital receipt and interest received on said capital receipt should also partake nature of capital receipt. This contention was negatived by ITO and in each case of assessees amount of Rs. 3,305 was added in assessment for asst. yr. 1981-82 by ITO while completing their assessments for said assessment year. Two contentions were raised before learned AAC on behalf of each of these assessees. They are (i) interest being capital receipt it is not taxable, and (ii) even if it is held to be assessable it should be assessed yearwise on accrual basis. In support of plea regarding non-taxability of interest amount assessees mainly relied upon Orissa High Court decision in Govinda Choudhary & Sons vs. CIT 1977 CTR (Ori) 190 : (1977) 109 ITR 497. learned AAC took Commentary of Kanga and Palkhivala into consideration and he found them to have held that sum which is received by way of interest under contract, award, decree or other order is interest proper. It is clearly income. But on other hand, where sum received is not interest proper but is interest by way of damages case would fall within two categories : (i) interest which is in reality damages may still be income in nature and, therefore, taxable. (ii) calculation of interest may be used merely as means of arriving at capital sum of damages in which event it would not be exigible to tax. AAC held that in case before him compensation has been fixed separately at fixed sum and interest is awarded thereon. Therefore, he deduced that it is not case where compensation is computed through medium of interest. He had distinguished Orissa High Court decision in Govinda Choudhury & Sons' case (supra) by stating that in said case interest was not awarded under any statute or contract whereas in case before us interest was awarded by learned arbitrator by invoking provisions of s. 1 of Interest Act, 1979. It was argued before AAC that if interest can be granted under said Act then only it is taxable but if interest is allowed by invoking provisions of Interest Act then it is not taxable and principle in Orissa High Court in Govinda Choudhury & Sons' case (supra) cannot but be applied. AAC held that following decision of Hon'ble Supreme Court in case of Dr. Shamala Narula vs. CIT (1964) 53 ITR 151 (SC) term interest should be given its ordinary meaning and term should not mean compensation and simply because main Act under consideration is said Act this would not change ledgal position since interest awarded is under some other statute. It was also contended before AAC that learned arbitrator wrongly referred to s. 1 to award interest. It was pointed out before him that unless there is prior demand notice issued to debtor to effect that interest also would be realised from date of demand till date of payment interest would not be payable under clear provisions of s. 1. In this case no such notice was ever issued by assessees to Government. Sec. 1 was quoted in impugned orders of AAC and after closely scrutinising words used in said section AAC held that interpretation of learned representative of assessee that interest cannot be awarded without satisfying primary condition as argued appears to be correct. However, AAC held that this section does not help assessee inasmuch as fact remains that interest was granted under s. 1 and, therefore, he held summarising his conclusion that what is awarded by Court is under Interest Act and, therefore, is under statute. He distinguished Orissa High Court saying that said high Court held that if interest is awarded under statute or under contract it would be regarded as revenue receipt and, therefore, following said decision itself it can be held that this being payment under statue is taxable. It is also argued before AAC that inasmuch as compensation money was unreasonable withheld, chances of using whole of compensation money in profitable pursuit was deprived to assessee and, therefore, interest now granted by arbitrator should be taken to be part of compensation for deprivation of money to assessee at appropriate time. This is repelled by citing decision of Andhra Pradesh High Court in CIT vs. Visakhapatnam Port Trust (1984) 38 CTR (AP) 1 : (1983) 144 ITR 146 where it is held as follows : "... Therefore, when interest is paid not as part of compensation but is given for deprivation of use of money, it is independent source of income and is taxable. Dr. Shamlal Narula vs. CIT (supra), and similarly if right to interest arises because person is kept out of his money, interest received is chargeable to tax as income. (p. 16 9)" 5 . alternative contention that entire amount of interest should be spread over entire period beginning December 1972 to March 1980 was negatived by following decision in case of CIT vs. Smt. Sankari Manickyamma (1976) 105 ITR 172 (AP). It was contended before AAC that decision in case of Smt. Sankari Manickyamma (supra) was rendered with reference to provisions of s. 28 of Land Acquisition Act, under which award of interest on additional compensation is discretionary and it arises only from discretion exercised in favour of claimant. However, in this case said Act does not contain any provision for grant of interest and so decision in Smt. Sankari Manickyamma's case (supra) does not apply to facts of case. However, AAC did not appreciate distinction thus drawn between two cases and he held as follows : "In my opinion this much of distinction will not decide issue. In case of CIT vs. Smt. Sankari Manickyamma (supra) decision is based upon reasoning that award of interest being discretionary, it does not accrue till discretion is utilised in favour of assessee and assessee gets right by way of award for grant of interest. decision is not based upon whether interest is awarded under statute or not (if it is not under statute, all more it should be considered as discretionary)." He further held that in this case amount of interest was clearly discerning and, therefore, till award is passed granting interest, interest does not accrue. Lastly, it was submitted before AAC that award did not become final but appeal was pending over it in High Court and still it is not disposed of. Unless grant of interest becomes final after it receives approval of Andhra Pradesh high Court then only in any event interest becomes taxable. However, when appeal is still pending there is no question of interest becoming taxable either in lump sum or on accrual basis year after year. In support of said contention, learned counsel for assessee relied upon decision of Gujarat High Court in case of Topandaas Kundanmalvs. CIT 1976 CTR (Guj) 507 : (1978) 114 ITR 237 and decision of Andhra Pradesh high Court in case of CIT vs. Syed Khadruddin Ali Khan (1983) 35 CTR (AP) 344 : (1983) 144 ITR 266. AAC in his impugned order clearly stated that he had elicited from counsel for assessee that award of interest by arbitrator was not point of dispute before High Court. AAC found that Government is merely contesting enhancement allowed by arbitrator. He further found that arbitrator awarded interest both on original compensation as well as enhanced compensation. When award of interest is not contested specifically before High Court that point has become final. However, he agreed with contention advanced on behalf of assessee that there is possibility of Hon'ble High Court altogether deleting enhanced compensation and, therefore, till date of High Court's Judgment interest on enhanced compensation does not accrue. But he is of opinion that interest awarded on original compensation has become final on date of award of arbitrator since original compensation is not contested in appeal and, therefore, ultimately he concluded that interest at rate of 6 per cent on quantum of original compensation fixed by competent authority from date of notification i. e., from 14th Dec., 1972 till 31st March, 1981 is held to have accrued to assessee during financial year 1980-81 in which year arbitrator has passed his award and, therefore, it became assessable in asst. yr. 1981-82. He also directed ITO to find out basis of calculation made by Government while quantifying interest in terms of arbitrator's award and following same basis he directed ITO to recalculate as to accrual of interest to assessee on quantum of original compensation at rate of 6 per cent as fixed by arbitrator and, accordingly, he should arrive at quantum of interest. Aggrieved against impugned order of AAC, assessee came up in second appeals before this Tribunal and this matters stand for our disposal. 6 . Before this Tribunal it is contended firstly by Shri M. J. Swamy, learned advocate for assessees, that there is no provision for grant of interest in said Act. Under s. 7, property which is under requisition already can be acquired by Government. Under s. 7(2) when notice of acquisition is put in Official Gazette property which is already requisitioned by Government vest absolutely in Central Government free of all encumbrances and period of requisition should also end. It is next contended that when we compare provisions of said Act with provisions of Land Acquisition Act, two striking differences would be apparent to us. In latter Act at least there are two clear provisions dealing with grant of interest. Out of them s. 34 of Land Acquisition Act empowers grant of statutory interest. It automatically follows grant of compensation, whenever there is time lag between date of taking over possession and date of payment of compensation. So also s. 28 would empower civil Court to grant discretionary interest on award of additional compensation. grant of interest under said provision is purely discretionary and dependent upon facts and circumstances of each case. However, discretion is to be exercised judiciously. Another striking difference between above-said two Acts is that under latter Act there was provision for granting solatium, i. e., compensation for compulsory acquisition of land. However, neither provisions enabling grant of solatium nor grant of statutory interest or discretionary interest were present in said Act. When acquisition itself is made under said Act there is no question of going out in search of provision which may be present in any contract between Government and claimant. It is no doubt true that under s. 8(1) (a) of said Act, amount of compensation can be fixed by agreement. However, it is not case of either party that there was such agreement and so we need not go in search of stipulations under any agreement. Shri Swamy contended that under s. 8(3) compensation payable for acquisition of and property under s. 7 shall be price which requisitioned property would have fetched in open market, if it had remained in same condition as it was at time of requisition and been sold on dated of acquisition. Under s. 8(1) (b) where no agreement could be reached with claimant, Central Government shall appoint and arbitrator person who is or has been or is qualified for appointment as Judge of High Court. Shri Swamy contended that in spite of fact that there is no specific provision for grant of interest under said Act some High Courts took view that interest can be granted when properties were acquired under said Act. But he is quick to add that High Courts considered interest thus granted only as part of compensation or as part of costs awarded by arbitrator. 7 . learned Departmental Representative, on other hand, relied upon orders of lower authorities and he contended that cogent reasons were given for coming to conclusion, firstly that interest is revenue receipt and secondly that it is taxable in lump sum in asst. yr. 1981-82. 8. Thus we have considered arguments and we are inclined to agree with learned advocate for assessee. Firstly, we have to hold that unlike in Land Acquisition Act, in said Act, there is no provision empowering either competent authority or arbitrator to grant either solatium or statutory interest or discretionary interest. Despite absence of any such provision Courts were in habit of granting interest. In order to substantiate this point we may refer to decision in Binu Nalufar Haq vs. Collector and Land Acquisition Officer AIR 1984 Gauhati 81. While dealing with claim for interest made by claimant High Court held as follows : "... But in this case we find that learned arbitrator has not only not awarded any interest but he has not even applied his mind to claim made on this count in petition on which he was adjudicating. Accordingly, claimant in this case is entitled to interest for period from date of acquisition, as claimed in petition, for reason that on and from that date she lost her right to recurring compensation and she became, instead, entitled to full compensation for property in which she lost all manner of rights of right which got vested in Government on and from that date." (p. 85) But real question would be when neither statute nor any contract empowers grant of interest, however, when interest was granted ex gratia, what is exact nature of such interest received falls for our consideration. In this connection we may first consider two leading English decisions on this subject. first being IRC vs. Ballantine (1924) 8 TC 595. In said decision Lord President Clyde observed as follows : "But interest calculation is natural and legitimate guide to be used by arbiter in arriving at what he thinks would be fair amount. In most cases in which such allowance is constituent of award it does not separately appear, but is slumped along with other elements in gross sum discerned for; but there is nothing to prevent arbiter, if he thinks it just and reasonable in particular case, to make allowance in form of actual interest calculation from past date until sum fixed as at that date is paid. In all such cases, however, whether allowance is wrapped up in slump award or is separately stated in decree-the interest calculation is used in modum aestimationis only. interest is such merely in name, for it truly constitutes that part of compensation discerned for which is attributable to fact that claimant has been kept out of his due for long period of time. It is not, therefore, 'interest of money' chargeable under Case III of Schedule D." (p. 611) second English case worth to be examined is Simpson vs. Executors of Bonner Maurice as Executor of Edward Kay (1929) 14 TC 580 (CA). In that case also it was held that what was paid though called interest was in truth compensation for loss suffered on account of deprivation of property. These two cases were approved as having been correctly decided by Hon'ble Supreme Court in T. N. K. Govindaraju Chetty vs. CIT (1967) 66 ITR 465 (SC). Referring to these two English decisions it is observed by Supreme Court as follows : ".... It may be recalled that in those cases arbitrator and Arbitral Tribunal, were, in awarding interest, not seeking to give effect to or to recognise right to interest, conferred by statute or contract...." (p. 473) "The Orissa High Court had occasion to consider correct ratio of Hon'ble Supreme Court in T. N. K. Govindaraju Chetty's case (supra) in Govinda Choudhury & Sons' case (supra). High Court held ratio of Supreme Court in T. N. K. Govindaraju Chetty's case (supra) as follows : "The Supreme Court in Govindarajulu Chetty's case (supra) laid down clear rule that where interest has been awarded under statute or under contract, same is income exigible to tax and where it is not attributable to either statute or contract, but has been awarded on ex gratia basis, it would partake character of compensation. This principle has been adopted by Kerala High Court in case of CIT vs. Periyar & Pareekanni Rubbers Ltd. (1973) 87 ITR 666 (Ker)." (p. 508) facts in case of Orissa High Court are as follows : assessee was firm engaged in execution of Government contracts. During course of execution of these contractual works certain disputes relating to value of works executed by contractor were referred to arbitrator. arbitrator awarded sum of Rs. 4 lakhs representing interest. Out of Rs. 4 lakhs Tribunal found that Rs. 2,77,962 related to year of account and, therefore, it had ruled that same should be held to be income liable to tax in that year. However, it was found as fact that there was no stipulation in contract for payment of interest. When matter came to High Court it was found as fact that interest was not payable under statute or under contract. Under circumstances, Orissa High Court held that though termed as interest it was ex gratia payment by way of compensation worked out through medium of interest and, therefore, it had held that Rs. 2,77,962 awarded to it was not revenue receipt and not liable to tax. Now in case before us also, said Act did not contain any provision for grant of interest. There is no contract between Government and any of these assessees empowering assessees to claim interest under terms of any contract. arbitrator appointed, however, granted interest as ex gratia measure and, therefore, case now before us, in our considered opinion, is squarely governed by Orissa High Court decision and, therefore, we have to hold that interest payment which is granted ex gratia should be considered as part of compensation and, hence, it is not revenue in character. It should be considered as capital receipt and hence not taxable. Our conclusion is strengthened by decision of Gauhati High Court in Dy. CIT vs. Mamat Kaibarta AIR 1984 Gauhati 25. This is case in which provisions of said Act were considered and acquisition also was made under said Act only. Division Bench of Gauhati High Court states as follows : "In respect of interest we have held in Naren Kailta's case that' Act' does not provide for awarding any interest. Rule 10(4) of Rules framed under 'the Act', empowers authority to award costs. However, competent 'the Act', empowers authority to award costs. However, competent authority can direct payment to be made within specified period and in certain manner. We have held that arbitrator has power to award costs and payment of interest can be made as one of elements of costs..." (p. 29) Therefore, it can be seen that interest granted under said Act if considered as part of cost cannot be taxed as revenue receipt. Therefore, viewed from any angle orders of lower authorities that interest amounts are revenue receipts and, therefore, taxable do not appear to be supportable under law or on facts. Therefore, impugned orders are set aside and appeals are allowed. *** KOLLURU RAVI v. INCOME TAX OFFICER