Interest on wrongly retained money is taxable income, and expected litigation recoveries are not casual receipts

Interest awarded by decree on refund of estate duty wrongly collected was treated as income because its taxability depended on its real character, not on the label attached to it, and interest on money wrongfully retained is an accretion to capital. The receipt was also not exempt as a casual and non-recurring receipt under section 4(3)(vii) of the Income-tax Act, 1922, because although it was non-recurring, it was not casual: it was a foreseeable result of successful litigation for refund and interest. The receipt was therefore taxable as income and did not qualify for exemption.

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Issues: (i) Whether interest received on refund of estate duty wrongly collected constituted income chargeable to tax; (ii) whether such receipt was exempt as a casual and non-recurring receipt under section 4(3)(vii) of the Income-tax Act, 1922.

Issue (i): Whether interest received on refund of estate duty wrongly collected constituted income chargeable to tax.

Analysis: The receipt was awarded by decree as interest on money wrongfully retained by the estate duty authorities. Its taxability depended not on the label attached to it, but on its real character as capital or income. Interest paid under a decree, even where arising out of wrongful detention of money, is an ordinary accretion to a debt and is received as a product of capital. The nature of the underlying claim as compensation or damages did not alter the character of the decretal payment.

Conclusion: The receipt constituted income chargeable to tax.

Issue (ii): Whether such receipt was exempt as a casual and non-recurring receipt under section 4(3)(vii) of the Income-tax Act, 1922.

Analysis: The exemption applies only when a receipt is both casual and non-recurring. Although the payment was non-recurring, it was not casual because it was a foreseeable and anticipated result of successful litigation for refund of wrongly collected duty, together with interest on that amount. A receipt expected as part of the legal remedy cannot be treated as one depending on chance or accident.

Conclusion: The receipt was not exempt under section 4(3)(vii) of the Income-tax Act, 1922.

Final Conclusion: The interest receipt was taxable as income and did not qualify for exemption as a casual receipt, so the questions were answered against the assessee.

Ratio Decidendi: For income-tax purposes, the true character of a receipt governs its taxability, and interest awarded on refund of money wrongfully retained is income unless it is both casual and non-recurring.

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