Mesne Profits as Capital Receipt: wrongful-possession compensation was held not taxable, with pre-decree interest also treated as capital.

Mesne profits paid for wrongful deprivation of possession and enjoyment of immovable property were treated as compensation for injury to capital, not as revenue income from use of property, and therefore not chargeable to tax. The note also states that where competing judicial views exist, the interpretation favourable to the assessee prevails. On the precedent issue, the Supreme Court decision in P. Mariappa Gounder was confined to the year of taxability and did not decide the character of mesne profits as capital or revenue; a judgment binds only on the precise issue actually decided. Interest up to the date of decree was treated as part of the capital compensation, while later interest was revenue in nature.

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Issues: (i) Whether the Supreme Court decision in P. Mariappa Gounder determined the taxability character of mesne profits or was confined to the year of taxability; (ii) whether mesne profits received for wrongful use and occupation of property are capital receipt or revenue receipt chargeable to tax.

Issue (i): Whether the Supreme Court decision in P. Mariappa Gounder determined the taxability character of mesne profits or was confined to the year of taxability.

Analysis: The binding force of a judgment extends only to the actually decided on the questions before the Court and the arguments addressed. The Supreme Court in that case was concerned with the assessment year in which mesne profits accrued, not with whether such receipt was capital or revenue. The earlier High Court finding on character of receipt, not having been the subject of the appeal, did not merge in the Supreme Court decision.

Conclusion: The Supreme Court decision did not decide that mesne profits are revenue income chargeable to tax.

Issue (ii): Whether mesne profits received for wrongful use and occupation of property are capital receipt or revenue receipt chargeable to tax.

Analysis: Mesne profits within section 2(12) of the Code of Civil Procedure, 1908 are compensation for wrongful possession and deprivation of use and occupation of property. There was divergence of judicial opinion on whether such receipts are capital or revenue. Applying the rule that, where two views are possible, the view favourable to the assessee must prevail, the receipt was treated as compensation for injury to capital rather than income from use of property. The related interest awarded up to the date of decree was also treated as part of the capital compensation, while any interest beyond that point would be revenue in nature.

Conclusion: Mesne profits received in the facts of the case were capital receipt not chargeable to tax.

Final Conclusion: The addition on account of mesne profits was deleted, the enhancement did not survive, and the levy of consequential interest required recomputation.

Ratio Decidendi: A receipt paid as mesne profits for wrongful deprivation of possession and enjoyment of immovable property is compensation for injury to capital and, where competing judicial views exist, is to be treated as capital receipt not chargeable to tax; a judgment is binding only on the precise issue actually decided.

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