Skyland Builders (P) Ltd. v. ITO [ITA No.
106/2005, dt. 3-11-2020] : 2020 TaxPub(DT) 4579 (Del-HC)
Taxability of Mesne profits
Facts:
Assessee had let out their premises to Indian overseas bank
who was supposed to pay an increased rent of 20% after expiry of first 3 years
of their lease. They did not comply and paid only a 10% increased rent.
Assessee landlord sued the bank for compensation and eviction and assessee was
paid Mesne profit compensation for the loss of rental income and interest for
Rs. 77.87 lakhs. This Mesne profit was claimed to be a capital receipt not
taxable under the Act. Revenue held the same as income from other sources and
taxed it after allowing the legal expenses which was upheld by the Commissioner
(Appeals) and then by ITAT. On higher appeal to the High Court --
Held against the assessee that the Mesne profits were in
lieu of the rental income and thus was a compensation for loss in earnings and
interest on the same. It was not a compensation for an income earning apparatus
thus cannot be called a capital receipt.
Applied:
CIT v. P. Mariappa Gounder (1984) 147 ITR 676 (Mad-HC) :
1984 TaxPub(DT) 0422 (Mad-HC) affirmed by SC in
P. Mariappa Gounder v. Commissioner of Income Tax (1998) 232 ITR 2 (SC) : 1998
TaxPub(DT) 1133 (SC)
S. Kempadevamma v. CIT, (2000) 251 ITR 871 (Mad-HC) :
2001 TaxPub(DT) 0846 (Mad-HC)
Commissioner of Income Tax-VI v. M/s. Uberoi Sons
(Machines) Limited, (2012) 193 DLT 148 (DB) : 2013 TaxPub(DT) 0164
(Del-HC)
Dissented:
CIT v. Smt. Leela Ghosh, (1994) 205 ITR 9 (Kol-HC) :
1994 TaxPub(DT) 0228 (Cal-HC)
Another plea of the assessee was that section 25B was
inserted only with effect from assessment year 2000-01 and since it did not
exist in the said assessment year the said Mesne profits cannot be taxed. It
was held by the ITAT/affirmed by the High Court that the said section was only
clarificatory as held in CIT v. R.J. Wood, (2011) 334 ITR 358 (Delhi) : 2011
TaxPub(DT) 1492 (Del-HC) where in it was confirmed that Mesne profits will
be taxable in the year of receipt.
What is Mesne profit?
A claim for mesne profits is usually directed against
one who has deprived the true owner of possession of his property and who has
thereby prevented the true owner from enjoying the income or usufruct of the
property. When, in such a suit or proceeding, the court awards mesne profits to
the true owner, that represents a just recompense to him for the deprivation of
the income which ought properly to have come into his hands but for the
interference of the person in wrongful possession of the property.
The Code of Civil Procedure defines mesne profits as
that which a person in wrongful possession of property has actually received or
might with ordinary diligence have received therefrom. The accent of the
definition in section 2(12) of the Code concentrates more on the methodology of
calculation of mesne profits rather 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.
..........To say that we do not know how much is the
mesne profits but nevertheless assert that mesne profits have accrued at a
given moment of time, out of ignorance, is very much like an Irish Bull, an
example of which was found in the description of an escaped convict from an
Irish prison: "Age not known but looks older than he really is". If
we do not know how much the mesne profits are, how can we say, with any modicum
of confidence, that the mesne profits have already accrued? The question of
accrual, like the question of receipt, cannot be based on any theory but must
rest on the solid rock of actualities. We cannot say that whenever the amount
of mesne profits are quantified, that amount must relate back to an earlier
point of time when the right to mesne profits itself was declared by a
competent court. "Relation back" theory cannot work and would be
quite inappropriate for settling the question of accrual of income, when both
the accrual and income are unknown quantities.
"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 per the agreement, therefore, assessee
terminated the tenancy, as the bank did not comply with the contract. Assessee
was entitled to enhance rate of rent after expiry of certain period, which was
not complied with by the banker. Same facts were pleaded before Civil Courts in
suit by assessee. Had the banker enhanced the rate of rent as per rent
agreement, then probably assessee would not have filed the suit for possession
and for Mesne Profit. Assessee was entitled for higher income as per contract
with the bank but the bank did not obey the terms of the contract. Therefore,
assessee terminated the contract and filed the suit for possession and Mesne
ProfIt. The suit was thus filed by the assessee in respect of the relief
claimed for entitlement of the income, which was denied by the lessee bank.
Mesne Profit is calculated with reference to the loss of rent suffered by
assessee. Therefore, clearly it is a case of earning of income from house
property by the assessee, which was received in the name of Mesne
Profit/damages".
Editorial Note: The
test is whether the compensation was for an income earning apparatus or in lieu
of income. In the earlier case it would be a capital receipt and in the latter
case it would be a revenue receipt. It was thus held in Kettlewell Bullen
and Co. Ltd. v. Commissioner of Income Tax, Calcutta, AIR 1965 SC 65 : 1964
TaxPub(DT) 0345 (SC) the said case is also referred to in this decision.