2001 (12) TMI 66 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal was right in law in holding that the damages or any part thereof for illegal occupation of the premises accrued to the appellant though the claim therefor was yet to be adjudicated finally and was pending disposal before the High Court?
2. Whether the Tribunal is right in law in holding that the amount received by the appellant under interim order of the High Court dated January 6, 1993, relevant to the assessment year 1993-94 is taxable on month to month basis in the assessment years 1990-91 and 1991-92 as relatable thereto?

Issue-wise Detailed Analysis:

Issue 1: Accrual of Damages for Illegal Occupation
The primary question was whether the damages for illegal occupation of the premises accrued to the appellant even though the claim was pending adjudication before the High Court. The facts reveal that the appellant had entered into a lease agreement, which was later sub-leased to a bank. Upon the expiry of the sub-lease and subsequent non-payment of rent, the appellant terminated the tenancy and filed a suit for possession and recovery of rent and compensation. The Assessing Officer included the rental income for the disputed period in the appellant's total income, which was contested by the appellant on the grounds that the right to receive such rent was in dispute and thus could not be taxed.

The court referred to the distinction between rent and mesne profits, noting that mesne profits are unascertained amounts and do not constitute a debt until determined by a court. The court emphasized that mesne profits are not taxable until they are quantified and become a debt payable. The Tribunal's decision to tax the amount attributable to rent was based on the assumption that the appellant was following the mercantile system of accounting, which the court accepted for the purpose of the appeal.

The court concluded that mesne profits, which are yet to be determined, do not constitute accrued income for the purpose of taxation under sections 4 and 5 of the Income-tax Act. Therefore, the Tribunal's decision to tax the disputed amount was incorrect.

Issue 2: Taxability of Interim Amount Received
The second question addressed whether the interim amount received by the appellant under a High Court order, relevant to the assessment year 1993-94, was taxable on a month-to-month basis in the assessment years 1990-91 and 1991-92. The appellant argued that the amount received was not taxable as it was received under an interim order and was shown in the return without prejudice to its rights and contentions.

The court reiterated that the claim for mesne profits was pending adjudication and the fate of the claim was unknown. It was noted that the Tribunal's approach to divide the claim into rent and damages was flawed as mesne profits are a composite sum and not a debt until determined. The court referred to precedents, including the apex court's decision in CIT v. Hindustan Housing and Land Development Trust Ltd., which distinguished between cases where the right to receive payment is in dispute and those where only the quantification is pending.

The court held that since the claim for mesne profits was not determined, it could not be considered accrued income for the relevant assessment years. Consequently, the interim amount received under the High Court order was not taxable on a month-to-month basis for the assessment years 1990-91 and 1991-92.

Conclusion:
Both questions were answered in favor of the appellant and against the Revenue. The court concluded that the mesne profits, which are yet to be determined, do not constitute accrued income for taxation purposes. The appeal was disposed of accordingly, with the court noting that the interim amount received by the appellant was shown in the return without prejudice to its rights and contentions.