Mesne profits and decree interest treated as capital compensation, not taxable revenue, where wrongful possession was the source.
The article explains that a Supreme Court ruling binds only on the issue actually decided, so the decision in P. Mariappa Gounder did not determine whether mesne profits were capital or revenue receipts. It then states that mesne profits awarded for wrongful possession and deprivation of use and occupation of immovable property are compensation in nature and, on the facts discussed, were treated as capital receipts not chargeable to tax. Interest awarded up to the date of the decree was also treated as part of that compensation and not as taxable income to that extent. The discussion relies on the view favourable to the assessee where no binding jurisdictional authority existed.
Issues: (i) Whether the Supreme Court decision in P. Mariappa Gounder concluded the taxability character of mesne profits so as to bind the present dispute. (ii) Whether mesne profits and the related interest received under the consent decree were capital receipts or revenue receipts chargeable to tax.
Issue (i): Whether the Supreme Court decision in P. Mariappa Gounder concluded the taxability character of mesne profits so as to bind the present dispute.
Analysis: The question before the Supreme Court in that case was confined to the year of taxability of mesne profits. The nature of the receipt, namely whether mesne profits were capital or revenue in character, was neither raised nor decided. A judgment binds only on the issue actually decided, and the theory of merger extends only to the matter directly considered. Accordingly, the earlier High Court finding on the character of the receipt did not merge in the Supreme Court decision.
Conclusion: The Supreme Court decision did not decide that mesne profits were revenue receipts chargeable to tax.
Issue (ii): Whether mesne profits and the related interest received under the consent decree were capital receipts or revenue receipts chargeable to tax.
Analysis: Mesne profits, within the meaning of the Code of Civil Procedure, are compensation for wrongful possession and deprivation of use and occupation of property. The Tribunal found that the amount arose after termination of the license arrangement and represented damages for unlawful occupation, not consideration under the original business arrangement. In the presence of conflicting High Court views, and in the absence of jurisdictional authority, the view favourable to the assessee was preferred. On the same reasoning, interest awarded up to the date of decree was treated as part of the compensation for deprivation of property, not as income from use of money.
Conclusion: Mesne profits were capital receipts not chargeable to tax, and interest up to the date of decree was also capital in nature.
Final Conclusion: The addition made on account of mesne profits was deleted, the related interest was held not taxable to the extent covered by the decree period, and the assessee's appeal succeeded.
Ratio Decidendi: Where compensation is awarded for wrongful possession and deprivation of the use and occupation of immovable property, the receipt is capital in nature unless a binding decision directly holds otherwise on that issue.
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