TMI Blog2020 (11) TMI 145X X X X Extracts X X X X X X X X Extracts X X X X ..... ank. The capital asset of the appellant i.e. the property in question was earning revenue for the appellant by way of rent till so long as the lease subsisted. After the termination of the lease, the erstwhile tenant continued to occupy the premises unauthorisedly. It is in lieu of the rent which the appellant would have otherwise derived from the tenant, that the mesne profits and interest thereon have been awarded. So far as the capital asset of the assesse is concerned, the same has remained intact. It is not the appellants case that there was any damage to the property/ capital asset inasmuch, as, the building structure was damaged by the bank, and that damages have been awarded by the Court on account of such physical damage. Even the title of the appellant in respect of the capital asset remained intact. Had it been a case where the capital asset would have been subjected to physical damage, or of diminution of the title to the capital asset, and damages would have been awarded under the head, there would have been merit in the appellant s claim that damages received for harm and injury to the capital asset, or on account of its diminution, would be a capital receipt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 143(1)(a), but was taken up for scrutiny and statutory notices were issued to the assesse. Apart from other issues raised by the assesse with which we are not concerned in the present appeal, the assesse claimed that mesne profits amounting to ₹ 77,87,303/- received during the previous year, relevant to the assessment year in question, was not liable to be taxed as income. This claim was made by the assesse in the background that it had let out its property in the year 1980 for a period of five years, and the monthly rent was liable to be increased by 20 per cent after expiry of the first three years. The lessee did not comply with the terms, and increased the rent by only 10 per cent. The assesse terminated the lease agreement with effect from 31.01.1990 by serving a notice upon the lessee. Since the lessee failed to vacate the premises, the assesse filed a suit for damages/ Mesne Profit and for restoration of the premises to itself. The said suit of the assesse was decreed vide judgment/ decree dated 27.07.1998. The decree included award of mesne profits and damages with interest. In compliance of the Court s decree, the lessee i.e. Indian Overseas Bank paid ₹ 77,87 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceipts, and were liable to be taxed as income. As far as the alternate plea premised upon Section 25B of the Act is concerned, the CIT(A) observed that under the scheme of the said Section, the same does not bring about any change in law. It only sets at rest, doubts regarding taxability of income relating to earlier years, in the financial year/ previous year. 10. The assesse then preferred an appeal before the ITAT, wherein the thrust of the appellant s argument was on the point of taxability of mesne profits as income under the Act. The assesse canvassed the same proposition, namely, that mesne profits are capital receipts and, therefore, not liable to be taxed. 11. The ITAT rejected the assesses claim with regard to non-taxability of mesne profits as income under the Act on the ground that it is a capital receipt. Consequently, the assesse has assailed the impugned order passed by the ITAT before us. 12. The submission of Mr. Jagia, learned counsel for the appellant, firstly, is that incomes falling under the specific heads enumerated in the Income Tax Act as being taxable income, alone are liable to tax. He submits that not all income can be subjected to tax, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest on Securities. (c) Income from house property. (d) Profits and gains of business or profession. (e) Capital gains. (f) Income from other sources. x x x x x x x x x 11. The computation of income under each of the above six heads will have to be made independently and separately. There are specific rules of deduction and allowances under each head. No deduction or adjustment on account of any expenditure can be can made except as provided by the Act. 16. Mr. Jagia has then relied upon the decision of this Court in CIT vs. Ansal Housing and Construction Ltd, (2013) 354 ITR 180 . In this case, the Court was dealing with a situation where the assessee was engaged in building activity. It was argued on behalf of the assessee that flats are held by it as part of its inventory as stock-in-trade, and are not let out. It was argued that unlike in other instances where builders let out flats, in the case of the assessee, there is not letting out and that the deemed income which is the basis for assessment under the annual letting value method, could not be applied to the assessee. This Court, however, rejected the submission of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the former tenant remains in possession against the will of the rightful owner, the former tenant is a trespasser from the date of the determination of the tenancy. There is no longer the relationship of landlord and tenant. The amount received from the erstwhile tenant cannot be regarded as rent under the rent agreement, which ceases to exist. 20. As to what is the nature of mesne profits, Mr. Jagia has relied upon a decision of this Court in Phiraya Lal @ Piara Lal Another Vs. Jia Rani Another, ILR (1972) II Delhi 205 . The Division Bench in this decision held that: ... ... ... When damages are claimed in respect of wrongful occupation of immovable property on the basis of the loss caused by the wrongful possession of the trespasser to the person entitled to the possession of the immovable property, these damages are called mesne profits . The measure of mesne profits according to the definition in section 2(12) of the Code of Civil Procedure is those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received there from, together with interest on such profits . It is to be noted that thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be rendered. This was upheld by the High Court leading to the consequent appeal by the Assessee to the Supreme Court. 23.2 The Supreme Court in Parimisetti Seetharamamma (supra) noted that it was not the case of the Assessee that the receipts were income that was exempted from taxation. Her case was that the receipt does not fall within the taxing provisions at all. It was explained by the Supreme Court as under: In all cases in which a receipt is sought to be taxed as income, the burden lies upon the Department to prove that it is within the taxing, provision. Where however a receipt is of the nature of income, the burden of proving, that it is not taxable because it falls within in exemption provided by the Act lies upon the assessee. 23.3 It was further observed as under: Whether a receipt is liable to be treated as income depends very largely upon the facts and circumstances of each case; it is open to the income-tax authorities to raise an inference that a receipt by an assembly (assesse sic) is assessable income where he fails to disclose satisfactorily the source and the nature of the receipt. But here the source of income was disclosed by the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t all only under Item E of Section 14. That being so, it cannot be treated as a casual or non recurring receipt under Section 10(3) and be subjected to tax under Section 56 . If the income cannot be taxed under Section 45 it cannot be taxed at all . 29.2 The Supreme Court in D.P. Sandu Bros. (supra) again reiterated the dictum in B.C. Srinivasa Setty (supra) to the effect that if the computation as provided under Section 48 could not be applied to a particular transaction, it must be regarded as never intended by Section 45 to be the subject of the charge . 30.1 In CIT v. Saurashtra Cement Ltd., 325 ITR 422 (SC), the Assessee had entered into an agreement for supply of a cement plant with a condition that in the event of delay caused in delivery of the machinery, the Assessee would be compensated at 5% of the price of the respective portion of the machinery without proof of actual loss. With the supplier failing to supply the machinery within the stipulated time, the Assessee received ₹ 8,50,000 by way of liquidated damages, whereby the ITAT held this to be a capital receipt and the High Court answered in favour of the Assessee, the Revenue went in appeal befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d equipment to which the items were delivered (sic), for each month of delay in delivery completion. It is further agreed that the total amount of such agreed liquidated damages shall not exceed 5% of the total price of the plant and machinery. 26. The supplier failed to supply the plant machinery in scheduled time and, therefore, as per the terms of the contract, the assessee received an amount of ₹ 8,50,000/- from the supplier by way of liquidated damages. The question arose whether this receipt of ₹ 8,50,000/- by the assessee was a revenue receipt or a capital receipt. The Assessing Officer included the said amount in the total income of the assessee. The appeal preferred by the assessee before the CIT (Appeals) failed. The matter was carried by the assessee to the Tribunal which referred the question to the High Court for its opinion. The High Court opined in favour of the assessee. The Supreme Court agreed with the opinion of the High Court. The relevant discussion found in the said decision, relied upon by Mr. Jagia, reads as follows: 14. The question whether a particular receipt is capital or revenue has frequently engaged the attention of the Courts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from the contract terminated) the receipt is revenue : Where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee s income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. 17. We have considered the matter in the light of the aforenoted broad principle. It is clear from clause No.6 of the agreement dated 1st September 1967, extracted above, that the liquidated damages were to be calculated at 0.5% of the price of the respective machinery and equipment to which the items were delivered late, for each month of delay in delivery completion, without proof of the actual damages the assessee would have suffered on account of the delay. The delay in supply could be of the whole plant or a part thereof but the determination of damages was not based upon the calculation made in respect of loss of profit on account of supply of a particular part of the plant. 18. It is evident that the damages to the assessee was directly and intimately linked with the procurement of a capital asset i.e. the cement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a total amount of ₹ 27,76,045/- as mesne profit towards arrears of rent. The decree for mesne profits/ damages against the tenant was @ ₹ 75,000/- per month, from the date of filing of suit to the date of vacation, with costs. The AO sought to reopen the assessment proceedings for assessment years 1992-93 to 1998-99, on the premise that the assessee knew of the higher amount that was payable as rent in respect of the premises. The additions were sought to be made for these years. In assessee s appeal, the CIT (A) held that the action of the AO in adding the arrears of rent to the assessee's income from house property (by taking annual value @ ₹ 75,000/- per month for each of the assessment years), was not justified. The additions were deleted. The Revenue s appeal to the ITAT was rejected. Reliance was placed by the Revenue on Section 25 B which was introduced later after the assessment years in question. The Division Bench referred to and relied upon the decision of the Madras High Court in P. Mariappa Gounder (supra) which explained the precise nature of the right of a landlord seeking possession of the residential premises through a civil suit, which also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessed as taxable income in the hands of the present assessee. To say that we do not know how much is the mesne profits but nevertheless assert that mesne profits have accrued at a given moment of time, out of ignorance, is very much like an Irish Bull, an example of which was found in the description of an escaped convict from an Irish prison: Age not known but looks older than he really is . If we do not know how much the mesne profits are, how can we say, with any modicum of confidence, that the mesne profits have already accrued? The question of accrual, like the question of receipt, cannot be based on any theory but must rest on the solid rock of actualities. We cannot say that whenever the amount of mesne profits are quantified, that amount must relate back to an earlier point of time when the right to mesne profits itself was declared by a competent court. Relation back theory cannot work and would be quite inappropriate for settling the question of accrual of income, when both the accrual and income are unknown quantities. The assessee did not know how much was the income. The proceedings had, therefore, to go t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id decisions, it appears to us that the decree dated April 22, 1958, passed by this court only created an inchoate right in favour of the appellant. It is only when the trial court determined the amount of mesne profits that the right to receive the same accrued in favour of the appellant. In other words, the liability became ascertained only with the order of the trial court on December 22, 1962, and not earlier. Following the mercantile system of accounting, the mesne profits awarded by order dated December 22, 1962, were rightly taxed in the assessment year 1963-64 and it was wholly irrelevant as to when the amount awarded was in fact realised by the assessee. In our opinion, therefore, the High Court was right in deciding the reference in favour of the Department. We accordingly dismiss the appeals but in the circumstances of this case award no costs. (emphasis supplied) 30. The Division Bench then referred to its decision in CIT Vs. R.J. Wood, 334 ITR 358, wherein the Court had noticed the newly introduced Section 25B, and observed that it was clarificatory in nature as it encapsulated the law existing, namely, that the receipts towards mesne profits should be taxed in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the erstwhile tenant constitute revenue receipt, or capital receipt. Thus, Uberoi Sons (Machines) Limited (supra) cannot be regarded as a precedent to determine the said issue. Therefore, he submits Uberoi Sons (Machines) Limited (supra) cannot be pressed into service to determine the issue arising in the present case. 33. So far as the decision of the Madras High Court in P. Mariappa Gounder (supra) is concerned, Mr. Jagia has submitted that the said decision has not been followed by the Calcutta High Court in a subsequent decision reported as Smt. Lila Ghosh (supra). In fact, the Calcutta High Court has expressed doubts on the correctness of the decision of the Madras High Court in P. Mariappa Gounder (supra). Mr. Jagia has further submitted that the facts of P. Mariappa Gounder (supra) are also different from the facts of the present case. In that case, the assessee entered into an agreement to purchase a tile factory. In pursuance of the agreement, he made certain advance payment to the vendor under a written agreement. The vender, however, did not convey the property, as promised, and in breach of the agreement, sold it to a third party viz. Kochu Vareed, and put him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Act, and compensation was to be paid to the assessee therefor. A sum of ₹ 11 Lakhs was advanced on account of compensation for acquisition by the State of West Bengal. Apart from the compensation for acquisition of the said premises, the assessee received a sum of ₹ 2 Lakhs from the State of West Bengal, on account of mesne profits for the use and occupation of the said property by the erstwhile tenant. It was clarified that the amount of ₹ 2 Lakhs had been paid to the assessee by the State Government on account of mesne profits for the period from May 1970 to February 1980. While making the assessment, the Income Tax Officer assessed the said ₹ 2 Lakhs representing mesne profits, as a revenue receipt in the hands of the assessee under the head Income from other sources . On appeal, the Commissioner of Income Tax (Appeals) rejected the assessee s submission that the amount of ₹ 2 Lakhs received by the assessee was a capital receipt not chargeable to income tax. The Income Tax Tribunal, however, held that the mesne profits of ₹ 2 Lakhs arose as a result of transfer of the capital asset, and the same were assessable under the head Capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits awarded by the court for wrongful possession are liable to be assessed as income. Neither the decision of the Privy Council in Girish Chunder Lahiri, [1900] 27 I.A. 110 , nor the decision of the Supreme Court in Lucy Kochuvareed, (1979) 3 SCC 150 : AIR 1979 SC 1214 , were either cited or noticed by the learned judges of the Madras High Court. In fact, even the decision of the Patna High Court in CIT v. Rani Prayag Kumari Debi, [1940] 8 ITR 25 , and that of the Kerala High in CIT v. Periyar and Pareekanni Rubbers Ltd., [1973] 87 ITR 666 , were neither noticed nor considered by the Madras High Court. 36. Mr. Jagia, therefore, submits that it is the view of the Calcutta High Court which is the correct view, and should be followed by this Court. 37. Mr. Jagia has also placed reliance on the decision of the Mumbai Bench of the ITAT in Narang Overseas Pvt. Ltd. Vs. ACIT decided on 28.02.2007, reported as MANU/IU/0005/2008. The Tribunal after a detailed analysis observed in paragraph 48 as follows: 48. The above analysis clearly reveals that there is cleavage of opinion between High Courts. The Hon'ble Madras High Court has held that mesne profits is recomp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk as per the agreement, therefore, assessee terminated the tenancy, as the bank did not comply with the contract. Assessee was entitled to enhance rate of rent after expiry of certain period, which was not complied with by the banker. Same facts were pleaded before Civil Courts in suit by assessee. Had the banker enhanced the rate of rent as per rent agreement, then probably assessee would not have filed the suit for possession and for Mesne Profit. Assessee was entitled for higher income as per contract with the bank but the bank did not obey the terms of the contract. Therefore, assessee terminated the contract and filed the suit for possession and Mesne ProfIt. The suit was thus filed by the assessee in respect of the relief claimed for entitlement of the income, which was denied by the lessee bank. Mesne Profit is calculated with reference to the loss of rent suffered by assessee. Therefore, clearly it is a case of earning of income from house property by the assessee, which was received in the name of Mesne Profit/damages . 37. According to section 22, the annual value of the property shall be chargeable to income tax under the head 'income from house property'. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urvive for any further consideration. 40. The real issue that needs consideration in the present appeal is whether the mesne profits, and interest on mesne profits, received by the appellant constituted revenue receipt, or capital receipt, in the hands of the appellant/assessee, in the facts and circumstances of the case. 41. Having heard the submissions of learned counsels for the parties and having given our due consideration to them in the light of the decisions relied upon by the learned counsels, we are of the view that the mesne profits, and interest on mesne profits, received by the appellant in pursuance of the court decree, in the facts of the present case, constitute revenue receipt. 42. Reliance placed by Mr. Jagia on Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) and Ansal Housing and Construction Ltd. (supra) is of no assistance in answering the said question. The decision of this Court in Phiraya Lal @ Piara Lal (supra) also does not assist us in finding an answer to the aforesaid question. The statement of law contained in Girish Bansal (supra) is all too well settled, and does not throw light on the issue arising for our consideration in this appeal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a capital receipt, or a revenue receipt, must ultimately depend on the facts of a particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a conclusion. It is not possible to lay down any single test as infallible, or any single criterion as decisive, in the determination of this question, which must ultimately depend on the facts of the particular case. The Supreme Court in this decision relied upon Kettlewell Bullen and Co. Ltd. (supra), wherein a broad principle had been laid down in para 36. We have extracted the same in para 26 herein above. Applying the said broad principle, the Supreme Court held that the damage to the assessee was directly and intimately linked with the procurement of a capital asset i.e. the cement plant, which would obviously lead to delay in coming into existence of the profit making apparatus, rather than a receipt in the course of profit earning process. Compensation paid for the delay in procurement of capital asset amounted to sterilization of the capital asset of the assessee, as supplier had failed to supply the plant within the time as stipulated in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the premises of the assessee, did not vacate the premises and the assessee filed a civil suit claiming a decree for possession by way of eviction. The suit was decreed by the High Court in October 1998. The assessee was paid a sum of ₹ 27,76,045/- as mesne profits. The decree for mesne profits against the tenant was @ ₹ 75,000/- per month. Pertinently, during pendency of the suit, the tenant was paying ₹ 45,900/- per month towards rent/ occupation charges. The submission of Mr. Jagia that in this case, the Court awarded/ decreed only arrears of rent, and not mesne profits, is incorrect. It is evident that ₹ 75,000/- per month was not the agreed rent, but the assessment of mesne profits made by the Court. The agreed rent, it appears, was ₹ 45,900/-. Moreover, the relationship of landlord and tenant having ended, what was assessed and paid was only damages, and not rent. 48. When the matter travelled to this Court, this Court relied upon P. Mariappa Gounder (supra) decided by the Madras High Court. We have already extracted the relevant portion of the decision in Uberoi Sons (Machines) Limited (supra) in 29 herein above. This Court not only held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erseas Pvt. Ltd. (supra) a decision of the Mumbai Bench of the ITAT, is also misplaced. That is a decision rendered on 28.02.2007. The decision of this Court in Uberoi Sons (Machines) Limited (supra) was rendered on 31.08.2012. The ITAT did not had the benefit of the decision of this Court. Even otherwise, the Tribunal proceeded on the basis that since there was cleavage of opinion between High Courts, where there are two views, the one favourable to the subject should be preferred. That cannot be said to be the position so far as this Court is concerned. We, therefore, reject the reliance placed by Mr. Jagia on Narang Overseas Pvt. Ltd. (supra). 52. Accordingly, we answer the question of law set out in paragraph 2 hereinabove in favour of the revenue, and against the appellant. We hold that the ITAT was right in holding that mesne profits and interest on mesne profits received under the direction of the Civil Court for unauthorised occupation of the immovable property of the assessee by Indian Overseas Bank the erstwhile tenant of the appellant, was liable to tax under Section 23(1) of the Act, since mesne profits, and interest on mesne profits, in the facts of the present ..... X X X X Extracts X X X X X X X X Extracts X X X X
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