2012 (9) TMI 98 - HC - Income Tax

Reopening of assessment - assessment was completed on the basis of enhanced annual letting value - decree was for mesne profits - Held that - The right of a plaintiff/owner seeking possession and mesne profits (which were to be calculated and decreed after an enquiry) as only an inchoate right . Such being the case, the assessee could not be faulted in not quantifying the potential mesne profits likely to accrue in the future - the newly introduced Section 25-B was clarificatory in nature, as it encapsulated the law existing (i.e. that receipts towards mesne profits should be taxed in the year of their receipt). There is no infirmity in the findings of the Tribunal that even on merits, the arrears of rent received by the assessee (as mesne profits) could not be brought to tax for the previous years, when they fell due. They could be brought to tax only during the year of receipt - as during the year of receipt, the assessee had shown the amount so received as capital because character was clearly as that of income, as is evident from the ruling as decided in P. Mariappa Gounder Versus Commissioner of Income-Tax 1998 (1) TMI 3 - SUPREME COURT liability became ascertained only with the order of the trial court comes and not earlier - thus as the revenue had not however, re-opened the assessment in respect of the year of receipt of the amounts the reopening of assessment is not warranted - in favour of assessee.

Summary

Issues Involved:
1. Validity of the re-assessment order under Section 147(1) of the Income Tax Act, 1961.
2. Accrual of mesne profits/compensation for unauthorized use and occupation of the premises.

Detailed Analysis:

Issue 1: Validity of the Re-assessment Order under Section 147(1)

The High Court examined whether the Income Tax Appellate Tribunal (ITAT) was correct in law in quashing the re-assessment order passed by the Assessing Officer (AO) under Section 147(1) of the Income Tax Act, 1961. The AO had reopened assessments for the years 1992-93 to 1998-99, alleging that the assessee knew higher amounts were payable as rent but did not disclose this in their returns. The ITAT upheld the assessee's contention that there was no failure to disclose material facts necessary for assessment, making the invocation of Section 147 unsustainable.

The Tribunal noted that the AO could not reassess income beyond the expiry of limitation unless the income had escaped assessment due to the assessee's failure to disclose material facts. The Tribunal found that the right to arrears of rent was contingent and inchoate until the decree was passed. Therefore, the assessee had no obligation to disclose such amounts in earlier returns, and the AO's re-assessment was invalid.

Issue 2: Accrual of Mesne Profits/Compensation

The High Court considered whether the ITAT was correct in holding that the excess amount payable to the assessee towards mesne profits accrued only upon the passing of the decree by the Civil Court on 14.10.1998. The ITAT found that the mesne profits were not real income until the decree was passed. The decree crystallized the right to receive mesne profits, making it taxable only in the year of receipt.

The High Court referenced the Supreme Court judgment in P. Mariappa Gounder, which described the right to mesne profits as an "inchoate right" until the amount was determined by a decree. The Court also cited the case of Sadhna Chadha, which supported the view that mesne profits could not be taxed in the years they were claimed but only when they became receivable.

Conclusion:

The High Court upheld the ITAT's decision, agreeing that the re-assessment under Section 147 was invalid due to the lack of failure on the part of the assessee to disclose material facts. The Court also confirmed that mesne profits accrued only upon the passing of the decree and could not be taxed in earlier years. The appeals by the revenue were dismissed, and the questions of law were answered against the revenue and in favor of the assessee.