Capital receipt treatment of land acquisition interest where possession preceded the award and later statutory regularisation followed

Interest awarded under the Land Acquisition Act for the period between pre-award possession by the Government and later statutory regularisation is treated as compensation for deprivation of property, because the payment substitutes for the owner's lost possession rather than for the use of compensation money after vesting. By contrast, interest payable after vesting and withholding of compensation is revenue in character under the statutory scheme. On that reasoning, the interest in question was characterised as a capital receipt and treated as not taxable, with the corresponding addition deleted.

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Issues: Whether interest awarded under the Land Acquisition Act, 1894 on compensation for land taken into possession before the award, and later regularised, is a capital receipt or a revenue receipt.

Analysis: The interest was paid for the period during which the Government had taken possession before the acquisition award and before the land legally vested under the statutory process. In such circumstances, the source of the payment is the deprivation of the owner's property and the substitution of interest for the right to retain possession, not the use of compensation money after vesting. The distinction drawn in the authorities is between cases where possession follows the award and vesting under section 16, in which statutory interest under section 34 is taxable as payment for withholding compensation, and cases where possession is taken otherwise and is later regularised, in which the amount bears the character of compensation for deprivation of property.

Conclusion: The interest of Rs. 9,927 was a capital receipt and was not taxable.

Final Conclusion: The assessee's appeal succeeded and the addition made on account of interest was deleted.

Ratio Decidendi: Interest paid for the period between unauthorized or pre-award possession and later statutory regularisation of the acquisition is compensation for deprivation of property and not taxable income, whereas interest payable after vesting under the acquisition statute is revenue in character.

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