Interest on wrongfully retained sale proceeds and statutory interest payable as of right can be taxed as income.

Interest received on sale proceeds wrongfully retained was treated as income, not as capital receipt or damages, because the real test is the character of the receipt in income-tax law. The distinction between contractual interest and interest awarded by way of damages was considered immaterial where the amount retained the quality of recurring interest. Statutory interest payable as of right under advance tax provisions was also treated as income, because it operated as a surrogatum for income that should have been received and was not a discretionary or compensatory payment.

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Issues: (i) Whether the sum of Rs. 10,497 realised as interest on the sale proceeds of the mills was taxable as income. (ii) Whether the sum of Rs. 41,813-6-0 received as statutory interest under Section 18A was taxable as income.

Issue (i): Whether the sum of Rs. 10,497 realised as interest on the sale proceeds of the mills was taxable as income.

Analysis: The amount represented interest on sale proceeds which ought to have been paid over to the assessee and was not a mere capital receipt or damages. The distinction between contractual interest and interest awarded by way of damages was held to be irrelevant in income-tax law where the real question is whether the receipt is of income character. The receipt was also not casual or non-recurring, since interest accrues from day to day and has the quality of recurrence.

Conclusion: The sum of Rs. 10,497 was rightly taxed as income and the answer was against the assessee.

Issue (ii): Whether the sum of Rs. 41,813-6-0 received as statutory interest under Section 18A was taxable as income.

Analysis: The statutory interest was payable as of right under the Act on advance tax deposits and was not a discretionary or compensatory payment. It was a surrogatum for income that should have reached the assessee and possessed the character of recurring interest. The receipt was therefore income liable to tax.

Conclusion: The sum of Rs. 41,813-6-0 was rightly taxed as income and the answer was against the assessee.

Final Conclusion: Both receipts were held to be taxable income, and the reference was answered in favour of the Revenue.

Ratio Decidendi: Interest received on money wrongfully retained, or as statutory interest payable as of right, is taxable as income where it retains the character of interest and is not merely an estimated capital compensation.

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