1993 (1) TMI 11 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of Rs. 2 lakhs received as mesne profits.
2. Determination of cost of acquisition for capital gains calculation.

Summary:

Issue 1: Taxability of Rs. 2 lakhs received as mesne profits
The core issue was whether the Rs. 2 lakhs received by the assessee as mesne profits was a capital asset and if the profit on its transfer was taxable under the head "Capital gains." The Tribunal held that mesne profits are in the nature of damages and thus a capital receipt, not a revenue receipt. This view was supported by precedents such as CIT v. Rani Prayag Kumari Debi [1940] 8 ITR 25 (Patna), CIT v. Periyar and Pareekanni Rubbers Ltd. [1973] 87 ITR 666 (Ker), and CIT v. J. D. Italia [1983] 141 ITR 948 (AP), which established that damages for wrongful detention of property are not revenue receipts. The High Court agreed with the Tribunal, rejecting the contrary view of the Madras High Court in CIT v. P. Mariappa Gounder [1984] 147 ITR 676, and concluded that the Rs. 2 lakhs received by the assessee were capital in nature and not taxable as income.

Issue 2: Determination of cost of acquisition for capital gains calculation
The Tribunal had held that the cost of acquisition of the capital asset (right to receive mesne profits) could be determined by the amount spent on stamp duty and legal expenses. However, the High Court disagreed, citing CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC), which established that legal expenses incurred to obtain a decree do not constitute the cost of acquisition of the right itself. The High Court concluded that no part of the Rs. 2 lakhs could be charged to capital gains tax as there was no cost of acquisition involved. Additionally, the High Court noted that no final decree for mesne profits was passed, and the preliminary decree became infructuous after the property was acquired by the State Government, further supporting the conclusion that no capital gains tax was applicable.

Conclusion:
1. The Rs. 2 lakhs received as mesne profits were capital receipts and not taxable as income.
2. No capital gains tax was applicable as there was no cost of acquisition for the right to receive mesne profits.

Both questions raised by the Revenue were answered in the negative, and both questions raised by the assessee were answered in favor of the assessee. There was no order as to costs.