1983 (1) TMI 35 - HC - Income Tax

Summary

Issues Involved:
1. Whether mesne profits decreed by a court of law can be held to be taxable income in the hands of the decree holder.
2. The relevant year in which mesne profits are to be charged to income-tax.

Summary:

Issue 1: Taxability of Mesne Profits
The court addressed whether mesne profits decreed by a court of law constitute taxable income. The judgment clarified that mesne profits are awarded to compensate the true owner for the deprivation of income due to wrongful possession of property. The court held that mesne profits represent a just recompense for the income the true owner would have received but for the interference. The definition of mesne profits u/s 2(12) of the Code of Civil Procedure emphasizes the calculation methodology rather than the nature of mesne profits. The court concluded that mesne profits are a species of taxable income, as they substitute for actual returns from investment and are not exempted under any specific provision of the I.T. Act. Therefore, mesne profits must be assessed as taxable income in the hands of the assessee.

Issue 2: Relevant Year for Charging Mesne Profits to Income-Tax
The court examined which year's income should include the mesne profits for tax purposes. The ITO, AAC, and Tribunal had differing views on this matter. The ITO considered the year of actual receipt (1964-65), the AAC considered the year of quantification by the trial court (1963-64), and the Tribunal considered the year when the Supreme Court declared the right to mesne profits (1959-60). The court clarified that the assessment of income on an accrual basis is independent of the method of accounting followed by the assessee. The concept of accrual of income must be based on concrete fiscal principles, not abstractions. The court held that mesne profits could not be said to have accrued until their actual determination by the trial court in terms of rupees and paise. Therefore, the mesne profits accrued only when quantified by the trial court on December 22, 1962, making them taxable in the assessment year 1963-64. The assessment of mesne profits in 1964-65 was deemed erroneous.

Conclusion:
The court concluded that mesne profits are taxable income and should be assessed in the year they are quantified by the trial court. The assessee was directed to pay the costs of the Department, with counsel's fee set at Rs. 500.