Commissioner of Income Tax vs B. Rai

V.K. Bali, J.—The following question of law has been referred to us for adjudication by the Income Tax Appellate Tribunal, Amritsar Bench, u/s 256(1) of the Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that interest amounting to Rs. 1,17,975 received on arrears of salary after grant of higher pay scale by the Punjab and Haryana High Court is not taxable ?"

The question of law as reproduced above emanates from the facts that the assessee, an individual, who was at the relevant time District and Sessions Judge, for the assessment year under consideration, had claimed higher pay scale than what was being allowed to him. The matter pertaining to higher pay scale was meted out by this court in civil writ petition, wherein the claim of the assessee for higher pay scale was allowed. This court while passing order for grant of higher pay scale also ordered payment of interest at the rate of 12 per cent. per annum from the date of accrual of amount till the date of actual payment. The amount of interest thus payable worked out to Rs. 1,17,975, which was claimed by the assessee as interest not in the nature of income.

The Deputy Commissioner of Income Tax, Range-I, Jalandhar, on a reference made by the assessee u/s 144A of the Income Tax Act, 1961 (in short "the Act"), did not accept the assessee''s contention and observed that the interest allowed to the assessee by virtue of section 34 of the CPC was statutory at fixed rate whereas section 34 of the Code of Civil Procedure, permits under discretionary power to allow interest as the authority deems fit with the condition that it should not exceed more than six per cent. per annum but in the case of the assessee, interest at the rate of 12 per cent. per annum, was allowed considering the prevalent rate of interest. Accordingly, the Assessing Officer assessed the amount of Rs. 1,17,975 as the income of the assessee. This order of the assessing authority was challenged by the assessee in an appeal before the Commissioner of Income Tax (Appeals) but the order passed by the Assessing Officer was upheld primarily relying upon the decisions of the Kerala High Court in the case of Commissioner of Income Tax Vs. Mrs. Annamma Alexander and Others, and the Supreme Court in the case of Rm. Ar. Ar. Rm. Ar. Ramanathan Chettiar Vs. Commissioner of Income Tax, Madras, . It was thus held that the interest paid on arrears of salary was a taxable receipt.

The order of the Commissioner of Income Tax (Appeals) on a further appeal by the assessee has since been reversed by the Tribunal vide order dated October 9, 1995. For setting aside the orders of the authorities below, the Tribunal relied upon the Division Bench judgment of this court in Commissioner of Income Tax Vs. Chiranji Lal Multani Mal Rai Bahadur (P.) Ltd., as also the decision of the Supreme Court in Dr. Shamlal Narula Vs. Commissioner of Income Tax, Punjab, . The Tribunal held that the interest was awarded by the court for loss of arrears of salary, which was property and the element of interest was determined by way of estimating the compensation to be granted for such loss of capital and as such the receipt was a capital receipt in the hands of the assessee.

We have heard learned counsel representing the parties and perused the records of the case.

All that needs to be decided in the context of the contentions that have been raised by learned counsel for the parties is as to whether in the facts and circumstances of the case, a Division Bench judgment of this court in Commissioner of Income Tax Vs. Chiranji Lal Multani Mal Rai Bahadur (P.) Ltd., which in turn placed reliance upon the judgment of the Supreme Court in Dr. Shamlal Narula Vs. Commissioner of Income Tax, Punjab, has to be upheld.

f 7. A careful reading of the decision of this court in Commissioner of Income Tax Vs. Chiranji Lal Multani Mal Rai Bahadur (P.) Ltd., and that of the Supreme Court in Dr. Shamlal Narula Vs. Commissioner of Income Tax, Punjab, as compared to the decision of the Supreme Court in Rm. Ar. Ar. Rm. Ar. Ramanathan Chettiar Vs. Commissioner of Income Tax, Madras, would clearly reveal that when interest is paid to an assessee under a statute, like section 34 of the Code of Civil Procedure, and we may mention here that interest as such was paid to the assessee in Rm. Ar. Ar. Rm. Ar. Ramanathan Chettiar Vs. Commissioner of Income Tax, Madras, the same has to be calculated as income for the purpose of the Income Tax. Where, however, interest to be paid, is in the discretion of the court, as is in the present case, the said payment would not amount to income for the purpose of the Income Tax. It may be mentioned here that when the matter was decided against the assessee by the Assessing Officer and the Commissioner of Income Tax (Appeals), it was primarily on the ground that interest awarded by this court on the arrears of salary consequent upon grant of higher scale of pay was not within the definition of property and, therefore, the award of interest by the court was not a payment ordered in the discretion of the court on account of delayed payment of salary to be deposited. This contention apparently appears to be incorrect inasmuch as the present is not a case where the assessee might have been awarded interest under a statute consequent upon grant of arrears of salary on account of higher pay scale, but was in fact paid interest in the discretion of this court vested in it under article 226 of the Constitution of India. The grant of interest was in the absolute discretion of the court and so would be the rate of interest in a case of this kind. In such an event, as mentioned above, the Division Bench of this court in Commissioner of Income Tax Vs. Chiranji Lal Multani Mal Rai Bahadur (P.) Ltd., which is based upon Dr. Shamlal Narula Vs. Commissioner of Income Tax, Punjab, would apply. In view of the discussion made above, the question, as referred by the Tribunal and as extracted above is answered in favour of the assessee and against the Department. No costs.