Tax Management India. Com
Law and Practice  :  Digital eBook
Research is most exciting & rewarding
  TMI - Tax Management India. Com
Follow us:
  Facebook   Twitter   Linkedin   Telegram

Home Case Index All Cases Income Tax Income Tax + HC Income Tax - 2020 (11) TMI HC This

  • Login
  • Cases Cited
  • Referred In
  • Summary

Forgot password       New User/ Regiser

⇒ Register to get Live Demo



 

2020 (11) TMI 145 - HC - Income Tax


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.

 

 

 

 

Quick Updates:Latest Updates