Mesne profits as capital receipt: compensation for wrongful occupation was treated as non-taxable, and the appellate claim was entertained.

A legal claim concerning the taxability of mesne profits can be raised at the appellate stage even if it was not claimed in the return, provided it was already raised before the Assessing Officer; the appellate forum may still adjudicate it. Mesne profits received for wrongful occupation of immovable property are treated as compensation for deprivation of property use, not as rent or recurring income. On the facts stated, the receipts retained their compensatory character despite being paid in stages, and were regarded as capital receipts not chargeable to tax.

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Issues: (i) Whether a claim that mesne profits received by the assessee were capital receipts could be entertained at the appellate stage despite not being claimed in the return as originally filed. (ii) Whether mesne profits received for wrongful occupation of immovable property constituted capital receipt not chargeable to tax, including the sums received in the relevant assessment years.

Issue (i): Whether a claim that mesne profits received by the assessee were capital receipts could be entertained at the appellate stage despite not being claimed in the return as originally filed.

Analysis: The claim regarding taxability of mesne profits had already been raised before the Assessing Officer before completion of assessment. A legal claim can be considered at the appellate stage even if not made in the return, and the restriction on making a fresh claim in the assessment proceedings does not bar appellate adjudication of such a claim.

Conclusion: The claim was rightly entertained at the appellate stage and the revenue's objection failed.

Issue (ii): Whether mesne profits received for wrongful occupation of immovable property constituted capital receipt not chargeable to tax, including the sums received in the relevant assessment years.

Analysis: Mesne profits represent compensation or damages for wrongful possession and deprivation of the use of property. On the facts found, the court orders treated the amounts as mesne profits for illegal occupation and rejected arrears of rent. The receipt was not in the nature of rent or recurring income, and the split payments, including the lump sum and the later calculated amount, retained the same compensatory character. The view treating the receipt as taxable rent-like income under the provision dealing with arrears of rent was therefore not accepted.

Conclusion: The mesne profits were capital receipts and were not chargeable to tax.

Final Conclusion: The assessee succeeded on the substantive taxability issue, and the revenue's challenge failed.

Ratio Decidendi: Compensation received as mesne profits for wrongful occupation and deprivation of property is a capital receipt when it is awarded as damages for loss of use of the property and not as rent or income from the property.

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