Disputed mesne profits do not accrue as taxable income until crystallised into an enforceable debt.

A disputed claim for mesne profits or damages after valid termination of a tenancy is not contractual rent and does not create accrued income until the claim is adjudicated or crystallised into an enforceable debt. The Delhi High Court analysis applies the distinction between an admitted right to receive payment and a contested claim requiring determination, holding that such unascertained amounts do not fall within accrual under sections 4 and 5 of the Income-tax Act, 1961. Section 194-I was treated as irrelevant to the accrual question. The post-termination mesne profits and related amounts were therefore not taxable in the relevant assessment years.

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Issues: Whether mesne profits or damages claimed for illegal occupation of premises accrued as taxable income before final adjudication of the claim, and whether the amount received under an interim court order was taxable on a month-to-month basis for the relevant assessment years.

Analysis: Rent is payable only so long as the lease subsists. After valid termination of the tenancy, the occupant becomes a trespasser and the claim thereafter is for mesne profits or damages, not contractual rent. A claim for mesne profits pending adjudication is an unascertained and disputed claim; it does not create an enforceable debt and does not amount to accrued income under sections 4 and 5 of the Income-tax Act, 1961. The distinction between an admitted right to receive an amount and a disputed claim requiring adjudication was applied. Section 194-I, dealing with deduction at source on rent, was held to be irrelevant to the question of accrual of income. The cases relied upon confirm that only income which has really accrued, or a payment whose right has been accepted, can be taxed, whereas a mere claim for enhanced compensation or mesne profits does not become taxable until the claim is determined.

Conclusion: The disputed mesne profits and the related amount claimed for the post-termination period did not accrue as taxable income in the relevant assessment years. The questions were answered in favour of the assessee and against the Revenue.

Ratio Decidendi: A disputed claim for mesne profits or damages, pending adjudication and not yet accepted or crystallised into an enforceable debt, does not constitute accrued income for taxation on accrual basis under sections 4 and 5 of the Income-tax Act, 1961.

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