TMI Blog1983 (1) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... and contested the assessee's claim. The trial court decreed specific performance. Kochu Vareed, however, appealed against the decree. The Kerala High Court allowed his appeal. The assessee took the matter in further appeal to the Supreme Court. By judgment dated April 22, 1958, the Supreme Court allowed the assessee's appeal and restored the trial court's decree for specific performance. The court also sustained the assessee's claim for mesne profits against Kochu Vareed, and remitted the case to the trial court for inquiry and determination of the mesne profits. The trial court went into the matter and determined the quantum of mesne profits by order dated October 22, 1962. The mesne profits fixed by the court, after certain adjustments, came to Rs. 67,093. This amount actually reached the assessee's hands some time during the next financial year ended March 31, 1964. On these facts, two issues cropped up in the assessee's income-tax assessments. One was whether the amount of mesne profits in the sum of Rs. 67,093 constituted taxable income in the assessee's hands. The other problem was as to which year's income should this amount be brought to charge for income-tax. On the firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom enjoying the income or the usufruct of the property in question. When, therefore, the court decrees mesne profits, that decree is in recognition of the position that the true owner is entitled to the income from the property and the person in wrongful possession is to compensate the true owner in that regard by paying either the actual income from the property or a reasonable estimate of that income. Having regard to these characteristics of mesne profits, there can be no doubt that they are also a species of taxable income. Under the scheme of the I.T. Act, anything which can properly be regarded as income and which is not expressly exempted from taxation under a specific provision of the statute must be regarded as taxable income. We are, therefore, satisfied that the Tribunal and the other authorities were right in their view that mesne profits has to be assessed as taxable income in the hands of the present assessee. Although some decisions were cited at the Bar during the hearing, we do not think it is necessary to dwell at length on all the cases referred to. We may, however, refer to the assessee's own case for certain earlier assessment years, in which a similar, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Procedure makes clear, is the income which the person in wrongful possession derives from the property or might with due diligence have obtained from the property. Mesne profits are, therefore, a substitute for actual returns from investment. In this category must be included any sum awarded by a court in restitution of interest, dividends or any other yield out of property, in contrast to awarding compensation, recompense or damages for any loss, sterilisation or damage to capital assets as such. As illustration of courts upholding the assessment of compensation for deprivation of the taxpayer's income, may be cited a decision or two. In Spence v. IRC [1941] 24 TC 311 (C Sess), a seller of shares obtained decree against the purchaser. The decree set aside the sale on the ground of fraudulent misrepresentation by the purchaser. Under the decree the shares were retransferred to the seller. The purchaser was also directed to pay to the seller a lump sum which included the amount of the dividends received by the purchaser while the shares stood in his name. It was held that the amount of dividends recovered from the purchaser was assessable as income of the decree-holder. It was poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in terms of the method of accounting followed by an assessee in a given case. Broadly speaking, the mercantile system of accounting treats as receipts all amounts which the taxpayer would be entitled to receive in the same way as items of expenditure, under the mercantile system, would relate to amounts which have not actually gone out of the hands of the assessee, but which are subject to a claim or demand of an instant kind. In the cash system of accounting, only cash receipts and cash disbursements would enter into the reckoning. In this sense alone, it may be appropriate to regard the mercantile method of accounting as being devised on the accrual basis. Greater significance, from the fiscal point of view, cannot be given to the system of accounts pursued by the assessee. The question of accrual or non-accrual of income and the subsidiary question of the time of accrual of income have got to be decided only on fiscal principles and not on the basis of any given accounting method which is in vogue or which might be practised by the assessees. The concept of accrual of income for purposes of income-tax is a concrete concept. Indeed, the I.T. Act does not deal with abstractions. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Mr. K. Srinivasan, the assessee's learned counsel, relied on the decision of the Supreme Court in CIT v. Chunilal V. Mehta and Sons P. Ltd. [1971] 82 ITR 54. This decision, in our opinion, does not assist the assessee's claim that mesne profits, although not known at the time of the Supreme Court's judgment in his favour, must nevertheless be held to have accrued as on that date. In Chunilal V. Mehta's case [1971] 82 ITR 54 (SC), the assessee was acting as the managing agent of a company under a managing agency agreement stipulated to last for a term of 21 years. Under the terms of the agreement, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is unexceptionable. Where the amount of compensation or liquidated damages is not only a definite sum, but is already clearly known to the true owner also, the moment the right to compensation is admitted, or declared by a competent court, the amount of compensation as a liquidated sum, would accrue. If it is a periodical amount, it would accrue every year. Where liquidated damages accrues in this manner, considerations such as postponement of actual receipt or the leisurely crediting Of the amount in the books of account will not derogate from the assessment of the amount on the basis of accrual. By way of contrast, however, where the income of the person in unlawful possession is not known to the true owner, mesne profits cannot be liquidated sum. The present case falls' under the latter category. For, mesne profits which are not known to the true owner must invariably be the subject of an inquiry, either as to the actual income or as to a reasonable estimate thereof, as is contemplated under 0. 20, r. 12 of the Code of Civil Procedure. In this case, until the trial court worked out the remand order of the Supreme Court and determined the amount by its order dated December 22, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be regarded as a certain amount. All that was required was to calculate interest at 6% on the amount of compensation awarded, but withheld. The compensation already awarded was a known quantity and, therefore, 6% on that amount must also be regarded as a sum certain. In this sense, therefore, it may be correct to hold that the accrual of interest is not postponed to the date of payment, but is a yearly phenomenon in terms of the law relating to compensation. In the two decisions, therefore, the concept of accrual of income had been applied only to cases where there was an ascertained sum and also a given period with reference to which the character of income was considered from the point of view of accrual. In neither case, was the court engaged in a philosophic discussion about accrual of income in the abstract. The decision in T. N. K. Govindarajulu Chetty's case [1973] 87 ITR 22 (Mad), is not alone among cases dealing with interest payable on compensation for compulsory acquisition of land. There are other decisions too in which the interest on compensation was held properly assessable in the year to which they relate and, therefore, in the year in which they may be said ..... X X X X Extracts X X X X X X X X Extracts X X X X
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