TaxTMI 
TaxTMI 
2020 (11) TMI 145
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.... was right in taxing mesne profit and interest on mesne profit received at the discretion/ directions of Hon'ble Civil Court in suit No. 814/90 for unauthorized occupation of immovable property by Indian Overseas Bank, under Section 23(1) of Act" 3. The background facts are not in dispute, and have been noticed by the ITAT in the impugned order. Insofar as they are relevant, we reproduce the same hereinunder. 4. The assesse filed the original return of income declaring income of Rs. 21,79,770/-. The original return was filed on 29.12.1999. Subsequently, the return was revised on 11.04.2000 declaring income of Rs. 11,55,450/- under Section 115JA. In the original return, mesne profits of Rs. 77,87,303/- was declared as taxable income, whereas in the revised return, the assesse claimed it as a capital receipt, and excluded it from its taxable income. The original return was processed under Section 143(1)(a), but was taken up for scrutiny and statutory notices were issued to the assesse. Apart from other issues raised by the assesse - with which we are not concerned in the present appeal, the assesse claimed that mesne profits amounting to Rs. 77,87,303/- received during the prev....
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....decision of the Calcutta High Court in CIT Vs. Smt. Leela Ghosh, 205 ITR 9, which had dissented from the decision of the Madras High Court in P. Mariappa Gounder (supra). The Calcutta High Court in Smt. Leela Ghosh (supra) held that mesne profits received by the assesse in that case were in the nature of damages and, therefore, a capital receipt. 8. The assesse also raised an alternate prayer before the CIT(A) that, even if the amount received in the form of mesne profits is treated as arrears of rent and income, the same could not be treated as income derived in the previous year in question merely because they had been realized in the previous year, because Section 25B was inserted into the Act subsequently. 9. The CIT(A) rejected the claim of the assesse that mesne profits received by it were capital receipts. It held that mesne profits received by the assessee were revenue receipts, and were liable to be taxed as income. As far as the alternate plea - premised upon Section 25B of the Act is concerned, the CIT(A) observed that under the scheme of the said Section, the same does not bring about any change in law. It only sets at rest, doubts regarding taxability of income r....
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....nbsp;x x x (b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable." 15. Mr. Jagia has referred to the decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd., Madras vs. Commissioner of Income Tax, Madras, (1997) 227 ITR 172 (SC). The Supreme Court in paragraphs 9 and 11 of this decision observed as follows: "9. In our judgment neither of the two factors can affect taxability of the income earned by the Company. Under the Income Tax Act, 1961, the total income of the company is chargeable to tax under Section 4. The total income has to be computed in accordance with the provisions of the Act. Section 14 lays down that for the purpose of computation, income of an assessee has to be classified under six heads: (a) Salaries. (b) Interest on Securities. (c) Income from house property. (d) Profits and gains of business or profession. (e) Capital gains. (f) Income from other sources. x x x ....
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....herefore, such damages which are awarded for deprivation of the right to use the capital asset, constitute capital receipt. 18. Another submission advanced by Mr. Jagia is in relation to the invocation of Section 25 B of the Act. The consequence thereof has been to treat the mesne profit, and interest thereon received by the assessee in the previous year relevant to the assessment year in question, as the income from house property in respect of the said previous year, even though, the said receipt pertains to earlier financial years. The argument of Mr. Jagia is that Section 25 B was introduced in the Act vide Finance Act, 2001 w.e.f. 01.04.2001 and, therefore, the same could not be attracted and applied for the assessment year 1999-2000 (previous year 1998-1999), with which we are concerned. Thus, the mesne profits could not be taxed as income for the assessment year in question. 19. Mr. Jagia has adverted to the Halsbury Laws of England to submit that if a tenancy determines by effluxion of time, or otherwise, and the former tenant remains in possession against the will of the rightful owner, the former tenant is a trespasser from the date of the determination of the tenan....
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..... 22. Mr. Jagia has then relied upon the decision of this Court in Girish Bansal Vs. Union of India & Others, (2016) 384 ITR 161. This Court in this decision observed that every receipt does not constitute income. For a receipt sought to be taxed as income, the burden lies on the Revenue to prove that it is within taxing provision. The Division Bench, inter alia, observed as follows: "23.1 The settled legal position is that all receipts do not constitute income. For a receipt sought to be taxed as income, the burden lies upon the Revenue to prove that it is within the taxing provision. Among the earlier decisions of the Supreme Court is Parimisetti Seetharamamma v. CIT (1965) 57 ITR 532 (SC). There the Assessee explained that the jewellery and the money received by her were the gifts made by the Maharani of Baroda. Disbelieving the Assessee on the ground that she had failed to produce documents in support of her contention, the ITAT held that what was given to her was remuneration for services rendered or to be rendered. This was upheld by the High Court leading to the consequent appeal by the Assessee to the Supreme Court. 23.2 The Supreme Court in Parimisetti....
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....ns to Section 10(3). That capital receipts do not fall under Section 10(3)." 29.1 The decision of the Bombay High Court was carried in appeal by the Revenue and the said appeal was decided by the Supreme Court along with the appeal of D.P. Sandu Bros. (supra). A three-judge bench of the Supreme Court in D P Sandu Bros. (supra) upheld the judgement of the Bombay High Court holding that a tenancy right is a capital asset and the sum received on the surrender of the tenancy right is a capital receipt within the meaning of Section 45. It was further held that it was not open to the Revenue to impose tax on such capital receipt by the Assessee under any other Section since "income derived from different sources falling under a specific head has to be computed for the purposes of taxation in the manner provided by the appropriate Section and no other". The amount received on surrender of the tenancy right would attract Section 45 and the amounts derived if at all would be taxable only under the head "capital receipt and assessable if at all only under Item E of Section 14. That being so, it cannot be treated as a casual or non recurring receipt under Section 10(3) and be subject....
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.... in law? (iii) Whether the assessee is entitled to the addition made to the machinery during the year thus determining the capital employed for the purpose of claim under Section 80-J of the Income Tax Act, 1961?" 25. The factual background of this case was that the assessee was engaged in the manufacture of cement, etc. It entered into an agreement with the supplier for purchase of an additional cement plant. The consideration amount was payable in four instalments by the assessee. The agreement contained a clause with regard to the manner in which the machinery was to be delivered and the consequence of delay in delivery. Clause 6 of the agreement is relevant and the same reads as follows: "6. * * * Delayed deliveries - In the event of delays in deliveries except the reason of force majeure at Para 5 mentioned above, the suppliers shall pay the purchasers an agreed amount by way of liquidated damages without proof of damages actually suffered at the rate of 0.5% of the price of the respective machinery and equipment to which the items were delivered (sic), for each month of delay in deliv....
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....952) 22 I.T.R. (Suppl.) 1, "these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend no doubt to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts." 16. In Kettlewell Bullen and Co. Ltd. (supra), dealing with the question whether compensation received by an agent for premature determination of the contract of agency is a capital or a revenue receipt, echoing the views expressed in Rai Bahadur Jairam Valji (supra) and analysing numerous judgments on the point, this Court laid down the following broad principle, which may be taken into account in reaching a decision on the issue : "36. ... ... Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue : Where b....
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.... the said appeal was: Whether the ITAT was correct in law in holding that the excess amount payable to the assessee towards mesne profits/ compensation for unauthorized use and occupation of the premises accrued to the assessee only upon the passing of the decree by the Civil Court on 14.10.1998? 29. The relevant facts in which the said question arose were that the assessee - a private limited company, was engaged in the real estate business and derived rental income from its commercial building which was a multi-storied complex let out to various tenants. During the financial year, relevant to assessment year 1992-93, the lease agreement between the assessee and the tenant Oriental Bank of Commerce expired on 31.03.1991. The premises were not vacated by the tenant and the assessee filed a civil suit before the High Court claiming a decree for possession by way of eviction. During the pendency of the suit, the tenant Oriental Bank of Commerce was paying rent regularly @ Rs. 45,900/- per month. This was charged to tax, on due basis. The suit was decreed by the High Court in October, 1998. The assessee was paid a total amount of Rs. 27,76,045/- as mesne profit towards arrears of r....
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....her than on what the true nature of mesne profits is. As we earlier stated, the rationale of awarding mesne profits is that the trespasser or the person in wrongful possession not only defies the title of the true owner, but also prevents the true owner from enjoying the income or the usufruct of the property in question. When, therefore, the court decrees mesne profits, that decree is in recognition of the position that the true owner is entitled to the income from the property and the person in wrongful possession is to compensate the true owner in that regard by paying either the actual income from the property or a reasonable estimate of that income. Having regard to these characteristics of mesne profits, there can be no doubt that they are also a species of taxable income. Under the scheme of the I.T. Act, anything which can properly be regarded as income and which is not expressly exempted from taxation under a specific provision of the statute must be regarded as taxable income. We are, therefore, satisfied that the Tribunal and the other authorities were right in their view that mesne profits has to be assessed as taxable income in the hands of the present assessee. ....
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....o such mesne profits". In the present case, from the portion of the decree extracted hereinabove, it is clear that this court passed an order directing an enquiry as to the mesne profits which would be payable by the judgment-debtor to the decree-holder. As on the day when this court decreed the appellant's suit, there was only an inchoate right which arose in his favour. The trial court was directed to hold an enquiry and then to determine the amount of mesne profits which was payable. XXXX XXXX XXXX XXXX XXXX XXXX The aforesaid passage was quoted with approval by this court in CIT v. Hindustan Housing and Land Development Trust Ltd. [1986] 161 ITR 524, in which case also this court was called upon to deal with a question as to when the additional compensation awarded was liable to be taxed. In that case the amount of compensation awarded by the arbitrator was in dispute. On an appeal having been filed by the State Government it was held that the said amount could be taxed only when the dispute was resolved because if the appeal had been allowed in its entirety, the right of payment of enhanced compensation would have fallen altogether. Applying the ....
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....that of income, as is evident from the ruling of the Madras High Court in P. Mariyappa Gounder which was later affirmed by the Supreme Court - a fact recognized by this Court in R.J. Wood. The revenue had not however, re-opened the assessment in respect of the year of receipt of the amounts, in this case. As a result, this Court holds that though the amount received by the assessee was liable to tax, in accordance with the law declared by the Supreme Court - in the year of its receipt- there is no infirmity with the findings and conclusions of the Tribunal. The questions of law framed are accordingly answered against the revenue, and in favour of the asseseee, subject to the above observations and findings. The appeals are consequently dismissed." (emphasis supplied) 32. The submission of Mr. Jagia is that in Uberoi Sons (Machines) Limited (supra), the assessee received arrears of rent, and not mesne profits/ damages. He further submits that the real issue before the High Court in Uberoi Sons (Machines) Limited (supra) was: in which previous year the arrears of rent received by the assesse (as mesne profits) could be brought to tax? The issue was not whether mesne profits receiv....
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....(supra), it was not a case of grant of mesne profits against the erstwhile tenant who continued to occupy the premises, despite termination of the tenancy. It was a case where the subsequent agreement purchaser held on to the possession of the property, after facing of the decree for specific performance, and while the matter was pending adjudication by the higher Court. 34. Mr. Jagia has elaborately referred to the decision of the Calcutta High Court in Smt. Lila Ghosh (supra). In Smt. Lila Ghosh (supra), the asseessee had inherited a property which was under lease. Despite the lease expiring, the lessee did not handover the possession of the same to the assessee. The assessee filed a suit for eviction and mesne profits. The suit was decreed in favour of the assessee, right up to Supreme Court. While the assessee's execution proceedings were pending, the Government of West Bengal requisitioned the property. The requisition was challenged by the assessee before the High Court in a writ petition. A settlement was arrived at between the assessee and the State of West Bengal. Under the terms of settlement, the property in question was to be acquired by the State of West Bengal unde....
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....against one who has deprived the true owner from possession of his property and who has thereby prevented the true owner from enjoying the income therefrom or usufruct of the property. When, in such a suit or proceeding, the court awards mesne profits to the true owner, it represents a just recompense to the true owner for the deprivation of the income which ought to have come to his hands but for the interference of the person in wrongful possession of the property. It is in recognition of this principle that the true owner is entitled to the income from the property and the person who is in wrongful possession is to compensate the true owner by paying either the actual income from the property or a reasonable estimate of that income. Consequently, the mesne profits are also a species of taxable income." 35. In paragraph 21 of the decision, the High Court recorded its disagreement view expressed by the Madras High Court in P. Mariappa Gounder (supra) by observing as follows: "21. With great respect to the learned judges, we could not persuade ourselves to agree with the views expressed by the Madras High Court in the aforesaid decision so far as it holds that mesne pro....
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....r deprivation of use and occupation of property would be capital receipt not chargeable to tax. We hold accordingly. Consequently, the decision of the Special Bench of the Tribunal in the case of Sushil Kumar fit Co. (supra), holding to the extent that mesne profit is taxable as revenue receipt is overruled." 38. Mr. Deepak Anand, learned counsel for the revenue has advanced his submission in opposition to the appeal. Mr. Anand submits that the damages/mesne profits received by the appellant are in the nature of revenue receipts. He submits that the tribunal has correctly answered the said issue. He has drawn our attention to paras 33 and 37 of the impugned order, which read as follows: "33. Hon'ble Madras High Court in the matter of P. Mariappa Gounder [supra] also held that: "The true principle to be applied is that where compensation is paid for deprivation of a capital asset or for restrain on trading or conduct of the business undertaking as such, it would be a capital receipt in the hands of the recipient of the compensation". In this case, no loss to the capital asset is stated. When the assessee did not get the enhanced rent from the lessee bank as ....
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....upon the decision of the Madras High Court in P. Mariappa Gounder (supra), which has been affirmed by the Supreme Court, and relied upon para 7 of the said decision in particular. He further submits that in Uberoi Sons (Machines) Limited (supra), this Court relied upon P. Mariappa Gounder (supra) and held that the arrears of rent received as mesne profits are taxable in the year of receipt, and that section 25B of the Act, which was introduced vide amendment in 2000 with effect from assessment year 2001-02 is only clarificatory in nature. The High Court also referred to and relied upon CIT v. Sadhna Chadha, (2004) 270 ITR 534 Del. He submits that the decision of the Calcutta High Court in Smt. Lila Ghosh (supra) was a decision rendered prior to the Supreme Court deciding the appeal in the case of P. Mariappa Gounder (supra). He further submits that even subsequently, the Madras High Court has reiterated its view taken in P. Mariappa Gounder (supra), in S. Kempadevamma v. CIT, 251 ITR 871 (2000). The submission of Mr. Anand is that the question raised by the appellant, in fact, has already been answered by this Court in Uberoi Sons (Machines) Limited (supra), and does not survive fo....
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....and interest thereon under the courts decree. The income was generated in the hands of the landlord/assessee, and not in the hands of the tenant/ Indian Overseas Bank. Thus, reliance placed by Mr. Jagia on Girish Bansal (supra), which refers to Cadell Weaving Mill Co. Pvt. Ltd. (supra), is misplaced. 45. Mr. Jagia has also placed reliance on Saurashtra Cement Ltd. (supra). We have noticed the factual background in which the said decision was rendered. This was a case where the assessee, who was already engaged in the manufacture of cement, had entered into an agreement with the supplier for purchase of an additional cement plant i.e. a capital asset. There was delay on the part of the supplier in supplying the plant and machinery and in terms of clause 6 of the agreement, the supplier became liable to pay liquidated damages. The supplier paid an amount of Rs. 8,50,000/- on account of liquidated damages to the assessee. It was this receipt which was a matter of debate i.e. whether it was a revenue receipt, or a capital receipt. The Supreme Court held the same to be a capital receipt. The Supreme Court held that the answer to the question: whether a receipt/income is a capital rec....
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.... damage. Even the title of the appellant in respect of the capital asset remained intact. Had it been a case where the capital asset would have been subjected to physical damage, or of diminution of the title to the capital asset, and damages would have been awarded under the head, there would have been merit in the appellant's claim that damages received for harm and injury to the capital asset, or on account of its diminution, would be a capital receipt. 47. We also find merit in the submission of Mr. Anand that the issue is no longer res intergra. The issue stands concluded not only by the decision of the Supreme Court in P. Mariappa Gounder (supra) but also by this Court in Uberoi Sons (Machines) Limited (supra). In Uberoi Sons (Machines) Limited (supra), this Court has followed the decision of the Madras High Court in P. Mariappa Gounder (supra) as affirmed by the Supreme Court. The facts of Uberoi Sons (Machines) Limited (supra) have been taken note of in 29 herein above. They are more or less identical with the facts of the present case. Like in the present case, in Uberoi Sons (Machines) Limited (supra), the Oriental Bank of Commerce - which was a tenant in the premises ....
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....r. Jagia on Smt. Leela Ghosh (supra) is of no avail for two reasons. Firstly, when Smt. Leela Ghosh (supra) was decided and the Calcutta High Court dissented from the view of the Madras High Court in P. Mariappa Gounder (supra), the decision of the Supreme Court in P. Mariappa Gounder (supra), was not available. P. Mariappa Gounder (supra), was decided by the Supreme Court much later i.e. 21.01.1998, whereas Smt. Leela Ghosh (supra) was decided on 18.01.1993. In the light of the Supreme Court having affirmed the decision of the Madras High Court in P. Mariappa Gounder (supra), the dissent in Smt. Leela Ghosh (supra) loses its force. Secondly, this Court has already followed the decision of the Madras High Court in P. Mariappa Gounder (supra), and taken note of that decision being affirmed by the Supreme Court, while deciding Uberoi Sons (Machines) Limited (supra). The same is a decision of a co-ordinate bench of this Court, and we are bound by that decision. We have not been persuaded by the submissions of Mr. Jagia to take a contrary view. Therefore, we reject the appellant's reliance on Smt. Leela Ghosh (supra). 51. Reliance placed on Narang Overseas Pvt. Ltd. (supra) - a deci....