Excess lease receipts under mistaken liability were not income after civil adjudication confirmed no legal right to retain them.

Excess local fund cess collected under a lease was not taxable income when a competent civil court later held the assessee had no legal right to recover more than the amount actually payable and ordered refund of the excess. The binding adjudication established that the receipts had been obtained under a mistaken belief of contractual liability, and that finding related back to the time of receipt. As a result, the excess amounts never acquired the character of income in the relevant assessment years. An earlier Supreme Court ruling on similar receipts did not govern this issue because it did not consider the later decree and refund.

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Issues: Whether excess amounts of local fund cess collected by the assessee under the lease and later refunded under a civil court decree constituted taxable income in the relevant assessment years.

Analysis: The amounts had earlier been treated as income on the footing that they were received under the lease in the same manner as rent and royalty. However, a competent civil court and the Gujarat High Court subsequently determined that the assessee had no legal right to recover local fund cess beyond the actual amount payable and that the excess had been received under a mistaken belief of contractual liability. That determination was binding between the parties and related back to the time of receipt. The earlier Supreme Court decision on similar receipts for earlier assessment years did not conclude the present controversy because it did not consider the effect of the later adjudication and refund decree. The receipts therefore lacked the character of income when received.

Conclusion: The excess local fund cess refunded by the assessee did not constitute his income for the assessment years in question; the answer to the reference was in the negative and in favour of the assessee.

Ratio Decidendi: Where competent civil adjudication establishes that amounts received under a contract were never legally recoverable and were received only under mistake, such receipts are not income in the hands of the recipient for the relevant years, because the judicial determination relates back to the time of receipt.

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