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Petitioner: Assessee VS Respondent: Department
Court Name: Income Tax Appellate Tribunal Judge(s): A. A. Zuberi, Abrar Hussain Naqvi, Qadeer Ahmad Siddiqui Title: Assessee vs Department Case No.:ITA No, 330 to 339/PB/1987-88 for assessment years 1955-56 to 1964-65
respectively, 317 to 322 for the Assessments years 1965-66 to 1970-71 and 324 to 336/PB/1986-87 for Assessm ent years 1971-72 to 1983-84 respectively Date of Judgment:1989-01-16 Reported As: PTCL 1990 CL. 227 Result: As per majority decision appeals accepted Judgment ORDER: A.A. ZUBERI, A.M.-- 1. These twenty nine appeals have been filed at the instance of an "individual" who is said to derive income from interest. The appeals impugned consolidated order dated 30th June, 1987 for the assessm ent years 1955-56 to 1964-65 passed by the learned AAC., Peshawar Range and order dated 15th November, 1985 for the assessment years 1965-66 to 1983-84 passed by the learned CIT (A), Peshawar. 2. In order to summarise the controversy it would be of advantage to set out the facts which form the background of the present appeals. The Appellant held 50% share in a property in the Peshawar City (near Hasht Nagri) which was acquired by the Government for construction of new GTS Bus Stand for which purpose the Collector of the District acquired the property on 6th September, 1954 through two Gazette Notifications issued on 27th February, 1954 and 19th December, 1954. Some portion in the revenue record in respect of this land had such entries on the basis of which the Collector held that the Appellant was not the owner and consequently not entitled to compensation. The Appellant, therefore, preferred appeals, both in respect of ownership of the entire land and also the rate at which compensation was fixed by the Collector. The matter dragged on through various legal forums and was finally settled by the Supreme Court of Pakistan in judgment reported as: Government of West Pakistan (now NWFP) and two others Vs. Mst. Asmatun Nisha (and six others) PLD 1983-SC-109. In their judgment the Supreme Court-- "(i)sealed the dispute pertaining to the ownership of the property;
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(ii)determined the rate of compensation; and (in addition) (iii)ordered that the Appellant was "entitled to compound interest @ 8% per annum on the excess amount of compensation awarded...over and above the rate determined by the Collector from the date on which the possession of land was taken up to the date of payment." When this final award came to the knowledge of the Income Tax Department, assessment proceedings were initiated for the years 1973-74 to 1982-83 on 20th August, 1983. When these were set aside in appeal, re-assessm ents were made adopting the amount of interest pertaining to each income year. These, assessm ents were upheld by the first appellate authority vide order dated 15th November, 1986 which is now impugned before us. Subsequently, proceedings for the assessm ent years 1955-56 to 1972-73 also were initiated on 15th May, 1984 through notice under section 56 in response to which returns were filed declaring "nil" income but the assessing officer framed the assessm ents on 20th October, 1985 by adopting the amount of interest (relatable to each year) as income. These too were upheld by the first appellate authority vide order dated 30th June, 1987 which also is impugned before us. Assessment for the year 1983-84 was framed on 22nd June, 1985 for which proceedings -re initiated through notice under section 56 in response to which return was filed but the figure of income as declared, was not accepted by the assessing officer who adhered to the method of subjecting to tax the amount of interest pertaining to each income year. This was confirmed by the learned CIT (A) vide consolidated order dated 15th November, 1986. 3. The learned counsel for the Appellant attempted a two pronged attack on the treatment meted out. One: the liability to 'tax of the quantum of income received as interest; Two: the initiation of proceedings through issuance of notice under section 56 for the years 1955-56 to 1972-73, and through notice under section 65 for the assessment years 1973-74 to 1982-83. We would first take up the illegality of the assessm ents and the alleged deficiency therein which has been raised by way of `additional grounds' for the reasons that these were not urged before the two authorities below nor formed part of the "grounds of appeal" initially filed before us. 4. Detailed arguments were addressed to contend that notice under section 56 of the Income Tax Ordinance can be issued only when the relevant assessment year is running as,, held by this Tribunal in decisions reported as (1987) 56-Tax-19 (Trib), (1986) 54-Tax-105-Trib. However, in (1988) 56-Tax-123 (Trib) it was held that though a notice under section 56 could be issued for earlier years it could not go beyond the assessm ent year 1979-80. The learned counsel built up the argument that in yet another decision reported as (1986) 55- Tax-105 (Trib) it was held that though a notice under section 56 could be issued for earlier years yet the period of limitation as prescribed under section 65 was to be adhered to and therefore, no such notice could be issued beyond 10 years from the end of the assessm ent year in which the income was first assessable. On this criterion it was asserted, assessm ent for the years 1955-56 to 1972-73 could not be taken up through issuance of notice under section 56 and thus the preceding years were beset with illegality ab-initio with the result that the entire super-structure must fall. As respects assessment years 1973-74 to 1982-83, in which .proceedings were initiated through issuance of notice under section 65, it was asserted that the returns of income were not filed in response to these notices and the assessing officer initially framed ex-parte assessm ent on 27th August, 1983 which were set aside whereafter fresh notices under section 65 (or 56) were not issued and the assessments were made on the basis of earlier notices (issued on 20th August, 1983) which were allegedly served on 21st August, 1983 but in fact no service was made as is evident from the fact that no returns were filed. For 1983-84, return was filed on 12th October, 1983 but it was alleged that notice issued under section 65 was never served but assessm ent was framed on 22nd June, 1985 hence this also was beset with illegality although a return of income was filed on 12th October, 1983. 5. The learned L.A. for the Department, Malik Muhammad Nawaz refuted the arguments by the learned counsel for the Appellant by submitting that notices under section 56 could be issued for
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earlier years as well, because no time limit is prescribed in this behalf nor has the legislature inserted such words as "subject to limitation under section 65 (etc.) so as to limit its operation to a number of years. In fact, the expression 'at any time' as obtaining in section 56 makes it perenial in operation by authorising issuance of notice under this section to 'any person' who is chargeable to tax but has not filed return of income and has not been assessed to tax for that `.year. For this assertion, the learned L.A. placed reliance on this Tribunal's decision reported as 1987 PTD-(Trib)-1. The learned L.A., Malik Muhammad Nawaz was at pains to submit that even the issuance of a wrong notice did not vitiate the proceedings so long as the assessing officer had the authority and the jurisdiction, over the Appellant, who knew the purpose and consequences which flew from initiation of proceedings. In the present case" the learned L.A. emphasized, there is no dispute as to the jurisdiction of the assessing officer over the Appellant. In fact for certain years, voluntarily returns were filed with the same assessing officer and the Appellant joined the proceedings at the assessm ent stage which establishes that he consciously attempted to protect his interest and rights and, therefore, no invalidity can be said to have crept into the proceedings. It was prayed that in these circumstances even if notice under section 56 was not proper and (more appropriately) a notice under section 65 should have been issued (or vice versa), the notice should be deemed to have been issued under the proper section. 6. We have given our earnest consideration to the rival arguments addressed to us and are of the view that to properly understand the facts in this case it is necessary to keep in mind section 66(3) of the Income Tax Ordinance which is reproduced below for ready reference; "Notwithstanding anything contained in this Ordinance, where the ownership of any property the income from which is chargeable under this Ordinance is in dispute in any Civil Court in Pakistan, the assessm ent on any person in respect of such income may be made at any time within one year of the end of the financial year in which the decision of such Court is brought, or otherwise comes, to the notice of the Income Tax Officer." It is manifest from the record that the Appellant's case inter alia involved a dispute about the ownership of the property. This was finally settled by the Supreme Court on 4th October, 1982 vide decision reported as PLD 1983 Supreme Court-109. Therefore, proceedings could validly be initiated on (or before) 30th June, 1984 i,e, within one year of the end of the financial year in which the decision came to the notice of the assessing officer. Again, the proceedings initiated under section 56 were to be completed before the expiration of two years from the end of the financial year in which such notice was served i,e, by 30th June, 1985 or 30th June, 1986. As respects notice under section 65 the consequential assessme nts were to be made within one year of the end of financial year in which such notice was served. Even if the Appellant's case was to fall under Clause (b) to ,sub-section (1) of section 66, the assessment could be completed on (or before) 30th June, 1986. Therefore, whichever way we look the assessments were framed within the prescribed time. It also is important that in respect of all the assessments, the assessment order clearly indicate, the Appellant (sooner or later) did file the returns of income. Therefore, by operation of the provisions of Section 154(6) of the Ordinance, the right to challenge the validity of notices does no longer exist as has already been held by this Tribunal in a decision reported as (1987) 55-Tax-7 (Trib) especially when (and it is important) the jurisdiction of the assessing officer, who completed the assessment, is not at all in controversy. The appeals on this issue thus stands rejected. 7. Now we turn to other limb of the argument relating to the liability to tax of the amount received as compound interest. It was argued by the learned Counsel that the assessments have been framed on accrual basis meaning thereby that interest pertaining to an income year has been adopted as the ,income for the relevant assessment year. The learned Counsel repeatedly referred to the Land Acquisition Act, particularly sections 28 and 34 thereof which deal with compensation and interest. It was emphatically pointed out that the Supreme Court had clearly ordered that the
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compound interest @ 8% was under section 28. This distinction, according to the learned Counsel, was necessary, to be kept in mind because under section 34 the payment of interest, is mandatory but under section 28 it is at the discretion of the Court. Therefore, the amount of interest was in the nature of a casual and non-recurring income which is not liable to tax. For this assertion the learned Counsel relied upon cases reported as (1941) 9-ITR-9 (Allahabad); (1978) 37-ITR-10 (Orisa); (1962) 46-ITR-288 (Kerala) and AIR 1975 Delhi 188. With the help of these cases the learned Counsel canvassed that interest order by the Supreme Court has the character of damages and compensation as against 'income' and, at best, it could be called an ex-gracia payment not liable to tax. It was further pleaded that interest in the present circumstances of the ease represented capital and not income liable to tax. The learned Counsel admitted that in a decision relied upon by the Department, which is reported as (1964) 10 - Tax 235 (SCI), the compensation by way of interest was held to be taxable but the set of circumstances there were materially different than those obtaining in the Appellant's case where the interest represents fall in the value of money which was with-held by the Government hence it could be called an accretion on capital. The learned Counsel drew our attention to the preamble of the Land Acquisition Act which proclaims that compensation is to be determined in respect of the land acquired. Thus whatever is paid under the Land Acquisition Act is compensation not liable to tax. Another novel argument advanced by the learned Counsel was that the interest, as was received, could not be classified under any of the 'heads of Income' mentioned in section 15 of the Income Tax Ordinance and, therefore, could not be brought to charge of tax. 8. The learned Legal Adviser Malik Muhammad Nawaz appearing for the Department contended that section 23 of the 'Land Acquisition Act deals with determination of compensation but does not include "interest". The interest awarded by the Court on the amount of compensation is thus interest simpliciter in addition to compensation. It was asserted, with vehemence, that nothing was brought on record by the Appellant to show as to when the compensation (or interest) was paid which was vital to calculate the amount of interest from the date of acquisition to the date of payment. It was, however, to be assessed on 'receipt basis' in the year in which it was received in accumulated form and bifurcation or splitting up over respective years was not called for. The learned Legal Adviser pointed out contradiction, in the stand taken by the Appellant at various stages of the assessm ent proceedings in different years of assessment, by submitting that at one stage. It was pleaded that interest was ex-gracia payment and could not be charged to tax and at the other was characterized as casual or non-recurring receipt. The learned Legal Adviser, contended that out of cases relied upon by the learned counsel for the Appellant the one reported as (1978) 31-Tax-64 was not applicable while in (1964)-10-Tax-235 (Allahabad) interest on deferred bonds were held to be revenue receipts. Malik Mohammad Nawaz was vemenous in his attack on Bihari Lal's case (1941) 9-ITR-9 (Allahabad) on which reliance was placed by the Appellant's counsel. He emphasized that this decision was dissented by the learned Judges of the Punjab High Court in Dr. Sham Lal Narula's case (1963) 50-ITR-513 which on its turn was affirmed by the Supreme Court of India in (1964) 53-ITR 151 (SC) = (1964) 10-Tax - 235 with the result that Bihari Lal's case was over-ruled by a specific mention and can no longer be called a correct annunciation of law hence reliance by the Appellant on this case was thoroughly misplaced. The learned Legal Adviser concluded by submitting that if the interest as awarded to compensate loss of income (or profit) arising out of the awarded amount for the period of delay in making the award, the same would still be a revenue receipt in the hand of the .Appellant. 9. We have given out earnest and industrious consideration to the arguments advanced by the two sides. It is a notorious fact that whenever there is a compulsory acquisition of assets under the Land Acquisition Act, the award of compensation (made in the first instance) is too meagre compelling the person whose asset is acquired to dispute its quantum. Very often the final
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arbitrator dealing with the dispute enhances the award considerably but the decision in this regard always comes years after the date of acquisition. This gives rise to the problem of capital gain (at the Provincial level) and of tax treatment on interest ( at the Federal level), if awarded on the enhanced value. An exhaustive survey of the case-law brings out that the judicial opinion on this issue is fairly divided, depending on the substitutely and circumstances in each case. With the foregoing realities obtaining on the ground we now examine the relevant provisions of the Land Acquisition Act and consequential effect as respects the taxation of income. 10. Three sections (viz: 11, 12 and 31) of the Land. Acquisition Act pertain to owner's right of payment immediately on making of the award. section 11 speaks of the making of the award. section 12 enjoys that it should be entered in the official record and immediate notice given to the owner. Under section 31, it is the duty of the Collector to tender payment of compensation to the person entitled to it. As is obvious from the scheme of the Land Acquisition Act, compensation for acquisition of property becomes payable to the owner after he is divested of the right and title in the property by the act of the Government. It is, therefore, clear that the owner is entitled to the compensation money immediately on making of the award which is either paid to the owners or is deposited in the Court which is deemed to be payment to the owner. Thus compensation for damages due to delay in making of the award cannot be said to be loss of interest accruing (or deemed to be accruing) on the amount of compensation. Such compensation may be measured, in a rough and ready manner, on the basis of loss of interest on the ultimate amount of compensation but this is merely a means adopted for the purposes of determining the compensation. It is true that in a case of Indian jurisdiction, having relied upon by Malik Muhammad Nawaz, the learned Legal Adviser, reported as (1964) 10-Tax-235 Dr. Sham Lal Narula, the learned Judges ruled that interest is a revenue receipt liable to tax but in our view two significant factors make it distinguishable from the Appellant's case; First; decision in Narula's case related to statutory interest awarded under section 34 which forms part of Part-V of the Land Acquisition Act, under the head "payment" of which the learned judges took special cognizance. The facts in the case before us are distinguishable inasmuch as the interest here was awarded under section 28 at the `discretion of the Court' which falls in Chapter III under the head "Reference to Court and Procedure thereon". The reference to Court here is relatable to the holding of an enquiry into measurements, value and claims as awarded by the Collector in Part II of the Land Acquisition Act. It is beyond dispute that compensation under section 28 is at the 'discretion of the Court' who may (or may not) award the same being under no mandatory obligation, in contrast to section 34 where the interest is awarded statutorily. In fact according to the pronouncement of the Lahore High Court reported as PLD-1978-Lah. 393 (at para 10, page 405), the award of interest under section 28 is due to the failure of the Land Acquisition Collector and the Civil Court to award "proper compensation". Be as it may, under section 28 the claim remains in the realm of uncertainty as the claimant is not entitled to it as of right under any rule of law. Second; The learned Judges distinguished the finding of the Kerala High Court in re. P. V. Kurien (1962)46-ITR-288 where relying upon AIR 1928 PC-287 and AIR 1936Mad-199, it was ruled that interest on the enhanced amount of compensation directed to be paid by an appellate court is not liable to tax under the Income Tax law. It is important that the learned Judges of the Supreme Court in their wisdom and sagacity drew a fine line of distinction to deviate from the Kerala High Court decision because they had in mind that no right to retain possession remains with the owner after the Collector takes possession of the acquired land under section 16 (or 17) of the Land Acquisition Act. The learned Judges highlighted the fact that in the cases relied upon in Kurien's case, the possession was taken by the Government in circumstances falling outside the scope of sections 16 and 17 of the Land Acquisition Act, as the title did not pass to the State when possession was taken
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over by it. On these subtilities Dr. Narula's case was distinguished from Kurien's decision to finally hold that the owner was given interest in lieu of his right to retain possession of the property. In the case of the Appellant before us, possession was taken over by the Collector on 6th September, 1954 after a notice under section 9 of the Land Acquisition Act while the award by the Land Acquisition Collector was given on 14th November, 1955. This was due to pendency of litigation regarding the title of the land. 11.The effect of the foregoing is that the distinguishing features which prompted the Indian Supreme Court to deviate from the ruling by the [Karachi] High Court no longer exist. On the contrary, the facts are more in line with those obtaining in the case relied upon by the learned Judges of the Kerala High Court in Kurien's case, to arrive at the conclusion that the interest paid on the enhanced amount of compensation ordered to be paid by the appellate court is not liable to tax under the provisions of the Income Tax law. 12.With the aforementioned analysis in mind, as also the fact that provisions of section 28 are discretionary and those of section 34 mandatory, we have reached the conclusion that hypothetical loss of interest on the amount of compensation might be a good measure for determination of compensation but the same cannot be said to have assumed the nature (or character) of a revenue receipt on the hands of the Appellant.Thus, like the amount of compensation, the amount of discre tionary interest also, being neither a loss of profit nor a loss of interest does not have the character of a revenue receipt. This amount, in our opinion, represents a casual receipt of non-recurring nature arising out of the discretion exercised at the violation of a statutory authority. Even otherwise, such like windfalls are more in the nature of capital receipt not having the character of income liable to tax. It would be appropriate here to refer to a decision of the Supreme Court of Pakistan in a judgment reported as PLD 1976-SC-531 where the learned Judges observed (page: 537 of the report refers): " interest awarded under section 28 is in the nature of compensation for damages, assessed in terms of interest, for loss of possession of property upto the date of the receipt of its consideration." (here underlined for emphasis) It is well-settled that even an obiter of the Supreme Court is binding on all lower judicial forums. 13. To conclude, we have formed the view that interest awarded to the Appellant at the rate fixed by the Supreme Court of Pakistan was a measure to work-out the quantum which was paid as compensation for the acquisition of his land by a competent authority, hence it is a casual (or. a capital) receipt having non-recurring nature thus not liable to tax. A However, after the date of the payment, whatever yield is obtained on the consolidated amount of compensation, would be interest income liable to tax in subsequent years but no tax is leviable upto the date of payment of compensation. The appeals succeed in consequence. QADEER AHMAD SIDDIQUI, J.M.--1. Before I pro-ceed with the disposal of these appeals I must express my gratitude to my learned brother Mr. A.A. Zuberi for making available his judgment. I have the advantage of seeing the judgment and benefitting from the varied experience and subtle legal acuman of my learned brother. Although, I am in agreement with the ultimate conclusion drawn by my learned brother, yet I feel that since I have examined these appeals in certain details I should give my findings on various issues. 2. Briefly stated the facts of the case are that the assesse was a co-owner of certain piece of immovable property bearing Khasra Nos, 672-min/618/127/673/227/1617/127/128/129/ 120- min/665/668/116/858/669/118 measuring 34 Kanals and 10 marlas situated at Mahal Tukkra No, 1, Peshawar City. By Notification dated 19th December, 1954 and 27th December, 1954 issued under sections 4 and 6 of the Land Acquisition Act, 1894 the Government acquired the possession of the aforesaid land abandoning 5 marlas only. The Collector by his award dated 14th December, 1955 determined the compen-sation payable at the rate of Rs, 3/- per sq.ft. for 7 Kanals and at the rate1
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of Rs, 1.25 per sq.ft for the remaining 27 Kanals and 5 marlas. The assessee made a reference under section 18 of the Land Acquisition Act, 1894 and the learned Senior Civil Judge, Peshawar, by his judgment dated 30th June, 1975 held that the owners were entitled to compensation at the rate of Rs, 7/- per sq.ft. plus Rs, 25,900 for super-structure in addition to interest @ 6% from 6th…
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