2026 (2) TMI 251 - AT - Income Tax

Mesne profits characterization as revenue receipts where monthtomonth tenancy overstay produced compensatory benefit; appeal dismissed.

Mesne profits were held to be revenue receipts because they compensated the landlord for benefit derived by the tenant from overstaying on a monthtomonth ... Characterization of receipts - Addition of amount received as mesne profits - revenue or capital receipt - Mesne profits - revenue authority have primarily assumed it to be taxable for the reason that TDS was deducted by the assessee - assessee submits that TDS deducted at the instance directions of Hon’ble High Court. DR submitted that mesne profits are merely rents in disguise so are taxable. HELD THAT:- Once assessee has claimed enhancement of rent which was denied by the tenant and the assessee as landlord pleaded that in the absence of lease deed the tenancy is nothing but a month to month tenancy which was terminated by notice u/s 106 of the Transfer of Property Act, on 16.06.2010 then the mesne profit granted in the civil suit decree, is not by way of any damages to the capital asset or restitution to the property, but by way of compensation of benefit derived by the tenant bank, by over staying the tenancy, on lower rent, as against higher claimed by the landlord assessee. In the light of the aforesaid facts and discussion of law we are of the considered view that reliance on the decision of Amrut Enterprises [[2023 (1) TMI 1514 - ITAT MUMBAI]] and M/s Trans Freight Containers Ltd. [2020 (2) TMI 785 - ITAT MUMBAI] and Ville Parle Prarthna Co-op. Hsg. [2025 (5) TMI 1652 - ITAT MUMBAI] are not applicable in the case of assessee and Hon’ble jurisdictional High Court decision in the case of Skyland Builder (P) Ltd. [2020 (11) TMI 145 - DELHI HIGH COURT] being the binding precedent has to be relied We hold that in the case of assessee the receipt in the nature of mesne profits are rightly held to be not of capital nature but revenue. Appeal of the assessee is dismissed. Issues: Whether the mesne profits received by the assessee pursuant to a civil court decree for unauthorised occupation of immovable property constitute a capital receipt not chargeable to tax or a revenue receipt taxable under the Income-tax Act, 1961.Analysis: The receipt characterised as mesne profits falls within the Civil Procedure definition of restitutionary compensation for wrongful possession. The nature of mesne profits depends on the factual matrix: where the award compensates for deprivation of income that the asset would have generated (replacement of rent), it is akin to revenue; where it compensates for loss/damage to the capital asset itself (diminution of the asset or harm to title), it may be capital. Authoritative precedents and factual features considered include whether the award merely substitutes for rent the assessee would have received, whether the capital asset remained intact, and whether the award was granted as restitution for unauthorized occupation rather than damages for injury to the capital asset. Applying these tests to the facts-lease history, claims for enhanced rent, continuation of unauthorised occupation and the court decree awarding mesne profits computed as an amount in lieu of rent-the receipt is directed to replace rental income and not to compensate for loss or diminution of the capital asset.Conclusion: The mesne profits received by the assessee constitute a revenue receipt and are taxable under the Income-tax Act, 1961; the assessee's appeal is dismissed.