2007 (2) TMI 709 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of mesne profits received by the assessee.
2. Nature of mesne profits (whether revenue receipt or capital receipt).
3. Impact of the Supreme Court judgment in the case of P. Mariappa Gounder.
4. Enhancement of assessed income by the CIT(A).
5. Levy of interest under Sections 234B and 234C of the Income Tax Act.

Detailed Analysis:

1. Taxability of Mesne Profits Received by the Assessee:
The primary issue was whether the mesne profit of Rs. 34,57,01,137/- received by the assessee pursuant to a consent decree constituted revenue receipt assessable to tax. It was argued that this issue was settled by the Special Bench in the case of Sushil Kumar & Co., which held that mesne profits are taxable as revenue receipts. However, the assessee contended that the issue of taxability was not addressed by the Supreme Court in P. Mariappa Gounder, and therefore, the judgment did not merge with the Supreme Court's decision.

2. Nature of Mesne Profits (Revenue Receipt or Capital Receipt):
The Tribunal examined whether the mesne profits received under the consent decree were capital or revenue in nature. The CIT(A) had held that the mesne profits were revenue receipts, relying on the judgment of the Madras High Court in P. Mariappa Gounder. However, the Tribunal noted that several High Courts, including the Patna, Andhra Pradesh, Calcutta, and Kerala High Courts, had held mesne profits to be capital receipts. The Tribunal concluded that mesne profits received for wrongful possession and deprivation of property are capital receipts and not chargeable to tax. The Tribunal preferred the view favorable to the assessee, following the principle that where two views are possible, the view favorable to the subject should be preferred.

3. Impact of the Supreme Court Judgment in P. Mariappa Gounder:
The Tribunal clarified that the Supreme Court in P. Mariappa Gounder was only concerned with the year of taxability of mesne profits and not their nature. The Supreme Court's decision did not address whether mesne profits were revenue or capital receipts. Therefore, the Tribunal held that the Supreme Court judgment could not be considered an authority for the proposition that mesne profits are revenue receipts chargeable to tax.

4. Enhancement of Assessed Income by the CIT(A):
The CIT(A) had enhanced the assessed income by Rs. 1,18,75,000/-. Since the Tribunal held that the mesne profits were capital receipts and not chargeable to tax, this ground became infructuous and did not require further adjudication.

5. Levy of Interest under Sections 234B and 234C:
The Tribunal noted that the levy of interest under Sections 234B and 234C is consequential and directed the Assessing Officer to recompute the interest after giving effect to the Tribunal's order.

Summary of Legal Position:
1. The Supreme Court in P. Mariappa Gounder did not adjudicate on the nature of mesne profits.
2. Mesne profits received against wrongful possession of property amount to capital receipts, not chargeable to tax.
3. The Tribunal followed the principle that where two views are possible, the view favorable to the assessee should be preferred.
4. The enhancement of assessed income by the CIT(A) was set aside as the mesne profits were held to be capital receipts.
5. The levy of interest under Sections 234B and 234C was to be recomputed based on the Tribunal's findings.

Conclusion:
The appeal of the assessee was allowed, and it was held that the mesne profits received under the consent decree were capital receipts not chargeable to tax. The order of the CIT(A) enhancing the assessed income and confirming the addition was set aside. The Tribunal directed the Assessing Officer to recompute the interest under Sections 234B and 234C accordingly.