Mesne profits interest is not taxable income when it forms part of compensatory damages and retains capital character.

Interest received on mesne profits was held not to be income taxable as a revenue receipt. Mesne profits were treated as compensation for wrongful deprivation of property and therefore as damages, not a return on capital or an income stream. The interest component was regarded as an integral part of the mesne profits under the Code of Civil Procedure, not a separate taxable receipt. Because the underlying amount retained its capital character, the attached interest did not acquire the character of taxable income merely by being described as interest.

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Issues: Whether interest received on mesne profits is income and therefore a revenue receipt taxable under the Income-tax Act.

Analysis: Mesne profits are compensation for wrongful deprivation of property and, by their nature, are in the category of damages and not income. Section 2(12) of the Code of Civil Procedure treats mesne profits as including interest on such profits, and the interest awarded in this case was held to be an integral part of the mesne profits rather than a separate return on money. Since the underlying receipt is capital in character, the interest element attached to it does not acquire the character of taxable income merely because it is described as interest.

Conclusion: The receipt of interest on mesne profits is not income and is not taxable as a revenue receipt; the issue is decided in favour of the assessee.

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