1986 (3) TMI 117 - AT - Income Tax

Summary

Issues Involved:

1. Taxability of the sum of Rs. 2 lakhs received by the assessee.
2. Nature of the sum received (capital receipt vs. revenue receipt).
3. Assessment year for the sum received.
4. Appropriate head of income for tax assessment.
5. Applicability of capital gains tax.

Issue-wise Detailed Analysis:

1. Taxability of the sum of Rs. 2 lakhs received by the assessee:

The primary issue in this case was whether the sum of Rs. 2 lakhs received by the assessee from the Government of West Bengal was taxable. The ITO initially assessed the entire sum as taxable income under the head 'Income from other sources' for the assessment year 1980-81. The Commissioner (Appeals) upheld this decision, but the assessee contended that the amount was a capital receipt and thus not taxable.

2. Nature of the sum received (capital receipt vs. revenue receipt):

The assessee argued that the Rs. 2 lakhs was a capital receipt as it was mesne profit, essentially in the nature of damages for wrongful retention of property. The assessee cited several case laws to support this contention, including CIT v. Rani Prayag Kumari Debi, CIT v. J. D. Italia, and CIT v. Periyar & Pareekami Pubbers Ltd., which held that damages for wrongful use and occupation were capital receipts. The Tribunal agreed with the assessee, noting that mesne profit is virtually a claim for damages, as supported by Mulla's commentary on the Code of Civil Procedure and various case laws.

3. Assessment year for the sum received:

The assessee alternatively contended that even if the sum was considered a revenue receipt, it should not be taxed entirely in one year, as the mesne profit related to a period from May 1970 to February 1980. The Tribunal, however, held that the sum of Rs. 2 lakhs accrued in full on 28-2-1980 when the High Court order was passed, making it taxable in the assessment year 1980-81.

4. Appropriate head of income for tax assessment:

The assessee argued that the sum should be assessed under 'Income from house property' as it was in the nature of additional rent. The Tribunal disagreed, concluding that the sum was not additional rent but a capital receipt, thus assessable under the head 'Capital gains'.

5. Applicability of capital gains tax:

The assessee argued that no capital gains tax was applicable as the asset transferred had no cost of acquisition, referencing the case of CIT v. B. C. Srinivasa Setty. The Tribunal rejected this argument, distinguishing the present case from B. C. Srinivasa Setty, which involved the transfer of goodwill with no determinable cost of acquisition. The Tribunal noted that the cost of acquisition for the decree could be determined based on the legal expenses incurred. Therefore, the capital gains tax was applicable on the surplus arising from the transfer of the decree.

Conclusion:

The Tribunal concluded that the sum of Rs. 2 lakhs received by the assessee was a capital receipt arising from the transfer of a capital asset (the decree for mesne profit). The surplus from this transfer was assessable under the head 'Capital gains'. The Tribunal directed the ITO to reassess the case in accordance with this conclusion and the relevant laws, after providing the assessee a reasonable opportunity to be heard. The appeal was allowed in part.