Mesne profits as compensation for wrongful occupation held capital receipt, with assessee-favourable interpretation applied on conflicting High Court views.

Mesne profits received as compensation for wrongful occupation of property were held to be capital receipt, not revenue income, because they represent damages for deprivation of a capital asset or source of income rather than arrear rent or ordinary income. The Tribunal also applied the principle that, where two divergent High Court views exist, the interpretation favourable to the assessee should be adopted. On that basis, the additions made in respect of mesne profits for both assessment years were unsustainable.

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Issues: Whether mesne profits received for wrongful occupation of property are capital receipt or revenue receipt and therefore chargeable to tax.

Analysis: Mesne profits, as understood under section 2(12) of the Code of Civil Procedure, 1908, represent compensation for wrongful possession and deprivation of the use and occupation of property. The receipt was examined in the context of prior judicial views, including decisions treating such receipts as damages for loss of property or source of income and therefore capital in nature. The Tribunal preferred the view that mesne profits arising from wrongful occupation are not in the nature of arrear rent or ordinary income, and that where two divergent High Court views exist, the view favourable to the assessee should be adopted.

Conclusion: Mesne profits received in the present facts are capital receipt and not taxable as revenue income.

Final Conclusion: The additions made on account of mesne profits for both assessment years could not be sustained, and the assessee succeeded in full.

Ratio Decidendi: Mesne profits received as compensation for wrongful occupation of property are capital receipts where they represent damages for deprivation of a capital asset or source of income, and in case of conflicting High Court views the interpretation favourable to the assessee is to be followed.

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