2017 (12) TMI 639 - AT - Income Tax

Nature of amount received as compensation towards rent out property - Mense profit - revenue receipt or capital receipt - Whether the receipt was treated as rent from the said premises and accordingly treated as income from house property and was brought to tax? - Held that - Mense profit is not revenue receipt but capital in nature. Identical ratio was laid down in the case of Narang Overseas 2008 (2) TMI 817 - ITAT MUMBAI and M/s Goodwill Theater Pvt. Ltd. 2013 (6) TMI 781 - ITAT MUMBAI thus, on this ground, the appeal of the assessee deserves to be allowed. This order will be applicable to both the years under consideration, being on identical facts.

Summary

Issues Involved:
1. Non-pressing of grounds 1 to 1.3 by the assessee.
2. Confirmation of the amount received as rental income and its taxability.
3. Nature of mesne profits: whether revenue receipt or capital receipt.

Issue-wise Detailed Analysis:

1. Non-pressing of Grounds 1 to 1.3 by the Assessee:
During the hearing, the counsel for the assessee did not press grounds no. 1 to 1.3 of the grounds raised. The Departmental Representative had no objection to this, leading to the dismissal of these grounds as not pressed.

2. Confirmation of the Amount Received as Rental Income and Its Taxability:
The primary issue agitated by the assessee was the confirmation of amounts received in respect of Unit L/40, which were treated by the Revenue as rental income and brought to tax under the head "income from house property." The assessee argued that the amounts received were compensation and claimed them as exempt. The Revenue considered these amounts as arrears of rental income, thus taxable. The First Appellate Authority upheld the Revenue's view, treating the amounts as revenue receipts. The Tribunal reviewed the facts and previous decisions, including the Special Bench decision in Narang Overseas Pvt. Ltd., and concluded that the amounts received were not rental income but compensation for wrongful possession, thus not chargeable to tax.

3. Nature of Mesne Profits: Whether Revenue Receipt or Capital Receipt:
The Tribunal extensively discussed the nature of mesne profits, referring to various judicial precedents. It noted that the Supreme Court in P. Mariappa Gounder was concerned with the year of taxability of mesne profits, not their nature. The Special Bench in Narang Overseas Pvt. Ltd. held that mesne profits for wrongful possession are capital receipts, not chargeable to tax. This view was supported by decisions from other High Courts, although there was a split in opinion among different High Courts. The Tribunal emphasized that in the absence of a jurisdictional High Court decision, the view favorable to the assessee should be preferred. Consequently, the mesne profits received by the assessee were treated as capital receipts, not chargeable to tax. This position was further supported by the Mumbai Bench of the Tribunal in similar cases and affirmed by the jurisdictional High Court.

Conclusion:
The Tribunal concluded that the mesne profits received by the assessee were capital receipts and not chargeable to tax. This decision was consistent with previous rulings and the principle of favoring the taxpayer in cases of judicial uncertainty. The appeals of the assessee were partly allowed, following the established legal precedents.