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2020 (11) TMI 145 - HC - Income TaxRental income or otherwise - Taxing mesne profit and interest on mesne profit received at the discretion/ directions of Hon ble Civil Court - unauthorized occupation of immovable property by Indian Overseas Bank, under Section 23(1) - Revenue OR capital receipt - HELD THAT - Mesne profits, and interest on mesne profits, received by the appellant in pursuance of the court decree, in the facts of the present case, constitute revenue receipt. The tenant, namely, Indian Overseas Bank, did not surrender the tenancy premises despite termination of the tenancy. It is not the Indian Overseas Bank, which received any consideration for surrender of its tenancy. On the contrary, Indian Overseas Bank suffered a decree for its continued use and occupation of the premises of the appellant/assessee, even after the termination of the contractual tenancy. The Indian Overseas Bank was saddled with mesne profits and interest thereon under the courts decree. The income was generated in the hands of the landlord/assessee, and not in the hands of the tenant/ Indian Overseas Bank. The capital asset of the appellant i.e. the property in question was earning revenue for the appellant by way of rent till so long as the lease subsisted. After the termination of the lease, the erstwhile tenant continued to occupy the premises unauthorisedly. It is in lieu of the rent which the appellant would have otherwise derived from the tenant, that the mesne profits and interest thereon have been awarded. So far as the capital asset of the assesse is concerned, the same has remained intact. It is not the appellants case that there was any damage to the property/ capital asset inasmuch, as, the building structure was damaged by the bank, and that damages have been awarded by the Court on account of such physical damage. Even the title of the appellant in respect of the capital asset remained intact. Had it been a case where the capital asset would have been subjected to physical damage, or of diminution of the title to the capital asset, and damages would have been awarded under the head, there would have been merit in the appellant s claim that damages received for harm and injury to the capital asset, or on account of its diminution, would be a capital receipt. We hold that the ITAT was right in holding that mesne profits and interest on mesne profits received under the direction of the Civil Court for unauthorised occupation of the immovable property of the assessee by Indian Overseas Bank the erstwhile tenant of the appellant, was liable to tax under Section 23(1) of the Act, since mesne profits, and interest on mesne profits, in the facts of the present case constitute revenue receipt. - Decided in favour of revenue.
Issues Involved:
1. Taxability of mesne profits as capital receipt or revenue receipt. 2. Applicability of Section 25B of the Income Tax Act. 3. Interpretation of mesne profits under Section 2(12) of the Code of Civil Procedure. 4. Precedents and judicial interpretations relevant to mesne profits. Detailed Analysis: 1. Taxability of Mesne Profits as Capital Receipt or Revenue Receipt: The core issue was whether mesne profits received by the assessee constituted capital receipts, which are not taxable, or revenue receipts, which are taxable. The assessee argued that mesne profits were damages for wrongful possession of property and thus capital receipts. The assessing officer and the ITAT held that mesne profits are recompense for the loss of income due to wrongful possession, making them revenue receipts. The court relied on the definition of mesne profits in Section 2(12) of the Code of Civil Procedure and the decision in CIT Vs. P. Mariappa Gounder, where mesne profits were deemed taxable income. The court concluded that mesne profits and interest thereon, awarded for unauthorized occupation, are revenue receipts as they compensate for the income the owner would have earned if the property had been let out. 2. Applicability of Section 25B of the Income Tax Act: The assessee contended that Section 25B, introduced by the Finance Act, 2001, could not apply retrospectively to the assessment year 1999-2000. The court, however, found that Section 25B was clarificatory in nature and applicable to the relevant assessment year. This section ensures that arrears of rent received are taxed in the year of receipt, aligning with the principle that mesne profits are taxable as revenue receipts. 3. Interpretation of Mesne Profits under Section 2(12) of the Code of Civil Procedure: Mesne profits are defined as profits which the person in wrongful possession actually received or might have received with ordinary diligence. The court emphasized that mesne profits are awarded to compensate the rightful owner for the income lost due to wrongful possession. This interpretation supports the view that mesne profits are revenue receipts, as they represent the income the owner would have earned. 4. Precedents and Judicial Interpretations Relevant to Mesne Profits: The court examined several precedents: - Supreme Court in P. Mariappa Gounder: Affirmed that mesne profits are taxable income. - Calcutta High Court in Smt. Leela Ghosh: Held mesne profits as capital receipts, but this was not followed due to the Supreme Court's decision in P. Mariappa Gounder. - Delhi High Court in Uberoi Sons (Machines) Limited: Held that arrears of rent received as mesne profits are taxable in the year of receipt, reinforcing that mesne profits are revenue receipts. The court also discussed Saurashtra Cement Ltd., where compensation for delay in procurement of a capital asset was deemed a capital receipt. However, it distinguished this from the present case, where mesne profits were for loss of rental income, not damage to the capital asset. Conclusion: The court concluded that mesne profits and interest on mesne profits received by the assessee for unauthorized occupation of its property are revenue receipts and thus taxable under Section 23(1) of the Income Tax Act. The appeal was disposed of in favor of the revenue, affirming the ITAT's decision.
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