Mesne profits for wrongful possession were held to be capital receipt and not taxable as revenue income or capital gains.

Mesne profits received for wrongful possession were treated as damages for deprivation of property use and, on the facts, as a capital receipt rather than revenue income. The amount was therefore not taxable as ordinary income. The same sum also could not be assessed as capital gains because capital gains taxation requires a transfer of a capital asset and a computable cost of acquisition; expenses incurred to secure judicial recognition of rights, such as stamp duty and legal fees, did not constitute such cost. The receipt was accordingly outside capital gains taxation.

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Issues: (i) Whether mesne profits of Rs. 2 lakhs received by the assessee were taxable as revenue income or were a capital receipt. (ii) Whether the said amount could be brought to tax as capital gains notwithstanding the absence of a real cost of acquisition and the absence of a transfer of a capital asset.

Issue (i): Whether mesne profits of Rs. 2 lakhs received by the assessee were taxable as revenue income or were a capital receipt.

Analysis: Mesne profits are damages for wrongful possession and represent recompense for deprivation of property or its use. On the facts, the amount received under the court order was referable to the use and occupation of the premises during wrongful possession and not to an ordinary recurring source of income. The receipt was, therefore, not income in the revenue sense.

Conclusion: The amount of Rs. 2 lakhs was a capital receipt and not taxable as revenue income.

Issue (ii): Whether the said amount could be brought to tax as capital gains notwithstanding the absence of a real cost of acquisition and the absence of a transfer of a capital asset.

Analysis: Capital gains taxation presupposes a transfer of a capital asset and a cost of acquisition capable of computation. The expenses incurred in securing judicial recognition of rights, such as stamp duty and legal expenses for obtaining a decree, do not constitute the cost of acquisition of the underlying right. In addition, on the facts, there was no effective transfer of a capital asset giving rise to capital gains, particularly after the acquisition proceedings rendered the mesne profits claim infructuous.

Conclusion: The sum of Rs. 2 lakhs could not be assessed as capital gains.

Final Conclusion: Both the Revenue's references and the assessee's references were answered in favour of the assessee, and the mesne profits receipt was held to be outside capital gains taxation as well.

Ratio Decidendi: Mesne profits awarded for wrongful possession are capital in nature, and amounts spent to obtain judicial recognition of rights do not amount to cost of acquisition for capital gains purposes unless there is a computable transfer of a capital asset.

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