Skyland Builders P. Ltd. v. Income-tax Officer
[Citation -2020-LL-1103-39]

Citation 2020-LL-1103-39
Appellant Name Skyland Builders P. Ltd.
Respondent Name Income-tax Officer
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 03/11/2020
Assessment Year 1999-00
Judgment View Judgment
Keyword Tags annual value of property • computation of income • compensation received • enhanced compensation • annual letting value • breach of contract • services rendered • accrual of income • expenses incurred • source of income • arrears of rent • capital receipt • revenue receipt • trading profit • rental income • capital asset • tenancy right • remuneration • mesne profit • no deduction • letting out
Bot Summary: Whether in the facts and circumstances of the case and in law, the ITAT was right in taxing mesne profit and interest on mesne profit received at the discretion/ directions of Hon ble Civil Court in suit No. 814/90 for unauthorized occupation of immovable property by Indian Overseas Bank, under Section 23(1) of Act 3. The A.O. relied upon the definition of mesne profits contained in Section 2(12) of the Code of Civil Procedure, to mean those profits which the person in wrongful possession of the suit property actually received, or might have with ordinary diligence received therefrom, together with interest on such profits, but shall not include profit due to improvements made by the person in wrongful possession. Mr. Jagia has also relied upon the definition of mesne profits contained in Section 2(12) of the Code of Civil Procedure, to mean those profits which the person in wrongful possession of such property actually received, or might with ordinary diligence have received therefrom, together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession. The measure of mesne profits according to the definition in section 2(12) of the Code of Civil Procedure is those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received there from, together with interest on such profits. We cannot say that whenever the amount of mesne profits are quantified, that amount must relate back to an earlier point of time when the right to mesne profits itself was declared by a competent court. 11.2020 18:09 relied upon by the learned counsels, we are of the view that the 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. Applying the said broad principle, the Supreme Court held that the damage to the assessee was directly and intimately linked with the procurement of a capital asset i.e. the cement plant, which would obviously lead to delay in coming into existence of the profit making apparatus, rather than a receipt in the course of profit earning process.


* IN HIGH COURT OF DELHI AT NEW DELHI Judgment reserved on: 09.09.2020 % Judgment delivered on: 03.11.2020 + ITA 106/2005 M/S SKYLAND BUILDERS P. LTD. Appellant Through: Mr. Yogesh Jagia, Advocate versus INCOME TAX OFFICER Respondent Through: Mr. Deepak Anand with Mr. Vipul Agarwal, Advocates. CORAM: HON'BLE MR. JUSTICE VIPIN SANGHI HON'BLE MR. JUSTICE RAJNISH BHATNAGAR JUDGMENT VIPIN SANGHI, J. 1. present appeal under Section 260A of Income Tax Act (the Act) has been preferred by assesse to assail order dated 19.08.2004 passed by Income Tax Appellate Tribunal Bench G , New Delhi (ITAT) in ITA No. 1730/Del/2003 pertaining to assessment year 1999-2000. By impugned order, ITAT has rejected submission of appellant/ assesse that mesne profits received by it constitute capital receipt and, as such, are not taxable as income under Act. Signature Not Verified ITA 106/2005 Page 1 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 2. appeal was admitted on 15.04.2005 when following question of law was framed by Court for its consideration. Whether in facts and circumstances of case and in law, ITAT was right in taxing mesne profit and interest on mesne profit received at discretion/ directions of Hon ble Civil Court in suit No. 814/90 for unauthorized occupation of immovable property by Indian Overseas Bank, under Section 23(1) of Act 3. background facts are not in dispute, and have been noticed by ITAT in impugned order. Insofar as they are relevant, we reproduce same hereinunder. 4. assesse filed original return of income declaring income of Rs. 21,79,770/-. original return was filed on 29.12.1999. Subsequently, return was revised on 11.04.2000 declaring income of Rs.11,55,450/- under Section 115JA. In original return, mesne profits of Rs.77,87,303/- was declared as taxable income, whereas in revised return, assesse claimed it as capital receipt, and excluded it from its taxable income. original return was processed under Section 143(1)(a), but was taken up for scrutiny and statutory notices were issued to assesse. Apart from other issues raised by assesse with which we are not concerned in present appeal, assesse claimed that mesne profits amounting to Rs.77,87,303/- received during previous year, relevant to assessment year in question, was not liable to be taxed as income. This claim was made by assesse in background that it had let out its property in year 1980 for period of five years, and monthly rent was liable to be increased by 20 per cent after expiry of first three years. lessee did not comply with Signature Not Verified ITA 106/2005 Page 2 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 terms, and increased rent by only 10 per cent. assesse terminated lease agreement with effect from 31.01.1990 by serving notice upon lessee. Since lessee failed to vacate premises, assesse filed suit for damages/ Mesne Profit and for restoration of premises to itself. said suit of assesse was decreed vide judgment/ decree dated 27.07.1998. decree included award of mesne profits and damages with interest. In compliance of Court s decree, lessee i.e. Indian Overseas Bank paid Rs.77,87,303/- to assesse, which assesse claimed as capital receipt, not liable to be taxed as income. In support of its submission, assesse placed reliance on certain decisions. 5. assessing officer did not accept contention of assesse and held that mesne profits are recompense granted by Court to landlord for wrongful possession of his property by tenant even after termination of lease. A.O. relied upon definition of mesne profits contained in Section 2(12) of Code of Civil Procedure, to mean those profits which person in wrongful possession of suit property actually received, or might have with ordinary diligence received therefrom, together with interest on such profits, but shall not include profit due to improvements made by person in wrongful possession. A.O. relied upon decision of Madras High Court in CIT Vs. P. Mariappa Gounder, 147 ITR 676, in which Madras High Court held that mesne profits are also species of taxable income. Following decision in P. Mariappa Gounder (supra), A.O. held that Mesne Profits awarded to assessee is revenue receipt and taxable as income. A.O. treated same as income Signature Not Verified ITA 106/2005 Page 3 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 from other sources. However, he allowed deduction of legal expenses incurred in securing mesne profits. 6. assesse challenged assessment order before CIT(A) on aforesaid aspect, apart from others. 7. Before CIT(A) assesse relied upon decision of Calcutta High Court in CIT Vs. Smt. Leela Ghosh, 205 ITR 9, which had dissented from decision of Madras High Court in P. Mariappa Gounder (supra). Calcutta High Court in Smt. Leela Ghosh (supra) held that mesne profits received by assesse in that case were in nature of damages and, therefore, capital receipt. 8. assesse also raised alternate prayer before CIT(A) that, even if amount received in form of mesne profits is treated as arrears of rent and income, same could not be treated as income derived in previous year in question merely because they had been realized in previous year, because Section 25B was inserted into Act subsequently. 9. CIT(A) rejected claim of assesse that mesne profits received by it were capital receipts. It held that mesne profits received by assessee were revenue receipts, and were liable to be taxed as income. As far as alternate plea premised upon Section 25B of Act is concerned, CIT(A) observed that under scheme of said Section, same does not bring about any change in law. It only sets at rest, doubts regarding taxability of income relating to earlier years, in financial year/ previous year. Signature Not Verified ITA 106/2005 Page 4 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 10. assesse then preferred appeal before ITAT, wherein thrust of appellant s argument was on point of taxability of mesne profits as income under Act. assesse canvassed same proposition, namely, that mesne profits are capital receipts and, therefore, not liable to be taxed. 11. ITAT rejected assesses claim with regard to non-taxability of mesne profits as income under Act on ground that it is capital receipt. Consequently, assesse has assailed impugned order passed by ITAT before us. 12. submission of Mr. Jagia, learned counsel for appellant, firstly, is that incomes falling under specific heads enumerated in Income Tax Act as being taxable income, alone are liable to tax. He submits that not all income can be subjected to tax, and income which does not fall within specific heads would not be liable to be taxed under Act. In this regard, he has drawn our attention to Section 14 of Income Tax Act, which enumerates heads of income which would be liable to tax, save as otherwise provided under Act. heads of income enumerated in Section 14 are: (1) Salaries; (2) Income from house property; (3) Profits and gains of business or profession; (4) Capital gains; and (5) Income from other sources. 13. He has also drawn our attention to Section 22 which states as to what is annual value of property consisting of any buildings, or lands appurtenant thereto. Section 22 reads as follows: Signature Not Verified ITA 106/2005 Page 5 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 22. annual value of property consisting of any buildings or lands appurtenant thereto of which assessee is owner, other than such portions of such property as he may occupy for purposes of any business or profession carried on by him profits of which are chargeable to income-tax, shall be chargeable to income-tax under head "Income from house property". 14. Mr. Jagia submits that Section 23 of Act lays down manner in which annual value of property consisting of building, or land appurtenant thereto, are to be computed. said section, inter alia, states that: For purposes of section 22, annual value of any property shall be deemed to be x x x x x x x x x (b) where property or any part of property is let and actual rent received or receivable by owner in respect thereof is in excess of sum referred to in clause (a), amount so received or receivable. 15. Mr. Jagia has referred to decision of Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd., Madras vs. Commissioner of Income Tax, Madras, (1997) 227 ITR 172 (SC). Supreme Court in paragraphs 9 and 11 of this decision observed as follows: 9. In our judgment neither of two factors can affect taxability of income earned by Company. Under Income Tax Act, 1961, total income of company is chargeable to tax under Section 4. total income has to be computed in accordance with provisions of Act. Section 14 lays down that for purpose of computation, income of assessee has to be classified under six heads: Signature Not Verified ITA 106/2005 Page 6 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 (a) Salaries. (b) Interest on Securities. (c) Income from house property. (d) Profits and gains of business or profession. (e) Capital gains. (f) Income from other sources. x x x x x x x x x 11. computation of income under each of above six heads will have to be made independently and separately. There are specific rules of deduction and allowances under each head. No deduction or adjustment on account of any expenditure can be can made except as provided by Act. 16. Mr. Jagia has then relied upon decision of this Court in CIT vs. Ansal Housing and Construction Ltd, (2013) 354 ITR 180. In this case, Court was dealing with situation where assessee was engaged in building activity. It was argued on behalf of assessee that flats are held by it as part of its inventory as stock-in-trade, and are not let out. It was argued that unlike in other instances where builders let out flats, in case of assessee, there is not letting out and that deemed income which is basis for assessment under annual letting value method, could not be applied to assessee. This Court, however, rejected submission of assessee by relying upon East India Housing and Land Development Trust Limited Vs. CIT, (1961) 42 ITR 49 (SC); Sultan Brothers Vs. CIT, (1964) 51 ITR 353 (SC); and Karanpura Development Co. Ltd. Vs. CIT, (1962) 44 ITR 362 (SC); by holding that levy of income tax in case of one holding house property is premised not on whether assessee Signature Not Verified ITA 106/2005 Page 7 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 carries on business , as landlord, but on ownership. incidence of charge is fact of ownership. Court held that one s capacity of being owner was not diminished because assessee carried on business of developing buildings and selling flats in housing estates. 17. Mr. Jagia has also relied upon definition of mesne profits contained in Section 2(12) of Code of Civil Procedure, to mean those profits which person in wrongful possession of such property actually received, or might with ordinary diligence have received therefrom, together with interest on such profits, but shall not include profits due to improvements made by person in wrongful possession. Mr. Jagia submits that mesne profits are kind of damages which owner of property which is capital asset, is entitled to receive on account of deprivation of opportunity to use immovable property/ capital asset on account of wrongful possession thereof by another. He submits that, therefore, such damages which are awarded for deprivation of right to use capital asset, constitute capital receipt. 18. Another submission advanced by Mr. Jagia is in relation to invocation of Section 25 B of Act. consequence thereof has been to treat mesne profit, and interest thereon received by assessee in previous year relevant to assessment year in question, as income from house property in respect of said previous year, even though, said receipt pertains to earlier financial years. argument of Mr. Jagia is that Section 25 B was introduced in Act vide Finance Act, 2001 w.e.f. 01.04.2001 and, therefore, same could not be attracted and applied for assessment year 1999-2000 (previous year 1998-1999), with which we Signature Not Verified ITA 106/2005 Page 8 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 are concerned. Thus, mesne profits could not be taxed as income for assessment year in question. 19. Mr. Jagia has adverted to Halsbury Laws of England to submit that if tenancy determines by effluxion of time, or otherwise, and former tenant remains in possession against will of rightful owner, former tenant is trespasser from date of determination of tenancy. There is no longer relationship of landlord and tenant. amount received from erstwhile tenant cannot be regarded as rent under rent agreement, which ceases to exist. 20. As to what is nature of mesne profits, Mr. Jagia has relied upon decision of this Court in Phiraya Lal @ Piara Lal & Another Vs. Jia Rani & Another, ILR (1972) II Delhi 205. Division Bench in this decision held that: ... ... ... When damages are claimed in respect of wrongful occupation of immovable property on basis of loss caused by wrongful possession of trespasser to person entitled to possession of immovable property, these damages are called "mesne profits". measure of mesne profits according to definition in section 2(12) of Code of Civil Procedure is "those profits which person in wrongful possession of such property actually received or might with ordinary diligence have received there from, together with interest on such profits". It is to be noted that though mesne profits are awarded because rightful claimant is excluded from possession of immovable property by trespasser, it is not what original claimant loses by such exclusion but what person in wrongful possession gets or ought to have got out of property which is measure of calculation of mesne profits. (Rattan Lal v. Girdhari Lal, AIR 1972 Delhi 11). This basis of damages for use and occupation of immovable property Signature Not Verified ITA 106/2005 Page 9 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 which are equivalent to mesne profits is different from that of damages for tort or breach of contract unconnected with possession of immovable property. Section 2(12) and order XX rule 12 of Code of Civil Procedure apply only to claims in respect of mesne profits but not to claims for damages not connected with wrongful occupation of immovable property. measure for determination of damages for use and occupation payable by appellants to respondent Jia Rani is, therefore, profits which appellants actually received or might with ordinary diligence have received from property together with interest on such profits. 21. Mr. Jagia submits that assessee received from bank in present case, damages and not rent, since there was no subsisting relationship of landlord and tenant between assessee and bank, post termination of their tenancy. 22. Mr. Jagia has then relied upon decision of this Court in Girish Bansal Vs. Union of India & Others, (2016) 384 ITR 161. This Court in this decision observed that every receipt does not constitute income. For receipt sought to be taxed as income, burden lies on Revenue to prove that it is within taxing provision. Division Bench, inter alia, observed as follows: 23.1 settled legal position is that all receipts do not constitute income. For receipt sought to be taxed as income, burden lies upon Revenue to prove that it is within taxing provision. Among earlier decisions of Supreme Court is Parimisetti Seetharamamma v. CIT (1965) 57 ITR 532 (SC). There Assessee explained that jewellery and money received by her were gifts made by Maharani of Baroda. Disbelieving Assessee on ground that she had failed to produce documents in support of her contention, ITAT held that what was given to her was remuneration for Signature Not Verified ITA 106/2005 Page 10 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 services rendered or to be rendered. This was upheld by High Court leading to consequent appeal by Assessee to Supreme Court. 23.2 Supreme Court in Parimisetti Seetharamamma (supra) noted that it was not case of Assessee that receipts were income that was exempted from taxation. Her case was that receipt does not fall within taxing provisions at all. It was explained by Supreme Court as under: In all cases in which receipt is sought to be taxed as income, burden lies upon Department to prove that it is within taxing, provision. Where however receipt is of nature of income, burden of proving, that it is not taxable because it falls within in exemption provided by Act lies upon assessee. 23.3 It was further observed as under: Whether receipt is liable to be treated as income depends very largely upon facts and circumstances of each case; it is open to income-tax authorities to raise inference that receipt by assembly (assesse sic) is assessable income where he fails to disclose satisfactorily source and nature of receipt. But here source of income was disclosed by appellant and there was no dispute about truth of disclosure. 23. In paragraph 28.5 of same decision, Division Bench relied upon decision of Bombay High Court in Cadell Weaving Mill Co. Pvt. Ltd. Vs. Commissioner of Income Tax, (2001) 249 ITR 265 : 2001 SCC OnLine Bom 1223, and observed as follows: 28.5 In Cadell Weaving Mill Co. Pvt. Ltd. (supra), Bombay High Court summarized its findings as under: Signature Not Verified ITA 106/2005 Page 11 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 Whenever there is receipt, one has to ascertain its source. If it is business income or salary income or capital gains chargeable under Section 45 and, if so, it is taxable under that head, then no further inquiry has to be made, viz.; whether receipt is casual and non-recurring. Since capital gains are brought within tax net under Section 45, they cannot fall in Section 10(3); If any amount of capital gains is non-taxable for any reason as capital gains, that amount cannot be treated, automatically, as casual and non-recurring receipt under Section 10(3). In order to attract Section 10(3), two conditions are required to be satisfied, viz., that receipt should be casual and non-recurring and that it should not arise by way of business income, salary income or capital gains chargeable under Section 45. Therefore, aforestated three types of incomes constitute exceptions to Section 10(3). That capital receipts do not fall under Section 10(3). 29.1 decision of Bombay High Court was carried in appeal by Revenue and said appeal was decided by Supreme Court along with appeal of D.P. Sandu Bros. (supra). three-judge bench of Supreme Court in D P Sandu Bros. (supra) upheld judgement of Bombay High Court holding that tenancy right is capital asset and sum received on surrender of tenancy right is capital receipt within meaning of Section 45. It was further held that it was not open to Revenue to impose tax on such capital receipt by Assessee under any other Section since income derived from different sources falling under specific head has to be computed for purposes of taxation in manner provided by appropriate Section and no other . amount received on surrender of tenancy right would attract Section 45 and amounts derived if at all would be taxable only under head capital receipt and assessable if at all only under Item E of Section 14. That being so, it cannot be treated as casual or non recurring Signature Not Verified ITA 106/2005 Page 12 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 receipt under Section 10(3) and be subjected to tax under Section 56 . If income cannot be taxed under Section 45 it cannot be taxed at all . 29.2 Supreme Court in D.P. Sandu Bros. (supra) again reiterated dictum in B.C. Srinivasa Setty (supra) to effect that if computation as provided under Section 48 could not be applied to particular transaction, it must be regarded as never intended by Section 45 to be subject of charge . 30.1 In CIT v. Saurashtra Cement Ltd., 325 ITR 422 (SC), Assessee had entered into agreement for supply of cement plant with condition that in event of delay caused in delivery of machinery, Assessee would be compensated at 5% of price of respective portion of machinery without proof of actual loss. With supplier failing to supply machinery within stipulated time, Assessee received Rs. 8,50,000 by way of liquidated damages, whereby ITAT held this to be capital receipt and High Court answered in favour of Assessee, Revenue went in appeal before Supreme Court. 30.2 Affirming decision of High Court, Supreme Court in CIT v. Saurashtra Cement Ltd. (supra) held damages received by Assessee were directly and intimately linked with procurement of capital asset viz., cement plant. amount received by assessee towards compensation for sterilization of profit-earning source, not in ordinary course of business, was capital receipt in hands of assessee. (emphasis supplied) 24. Mr. Jagia has also relied upon decision of Supreme Court in Commissioner of Income Tax, Gujarat Vs. Saurashtra Cement Limited, (2010) 11 SCC 84, relied upon by Bombay High Court in Cadell Weaving Mill Co. Pvt. Ltd. (supra). In this case, High Court had answered following questions referred to it by ITAT, Ahmedabad Signature Not Verified ITA 106/2005 Page 13 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 under Section 256(1) of Income Tax in affirmative, and in favour of assessee: (i) Whether Tribunal has not erred in law on facts in holding that amount of Rs.8,50,000 received by assessee was not taxable as revenue receipt in hands of assessee? (ii) Whether finding of Tribunal that receipt relating to liquidated damages cannot be treated as revenue receipt but must be held to be capital receipt not exigible to tax is correct in law? (iii) Whether assessee is entitled to addition made to machinery during year thus determining capital employed for purpose of claim under Section 80-J of Income Tax Act, 1961? 25. factual background of this case was that assessee was engaged in manufacture of cement, etc. It entered into agreement with supplier for purchase of additional cement plant. consideration amount was payable in four instalments by assessee. agreement contained clause with regard to manner in which machinery was to be delivered and consequence of delay in delivery. Clause 6 of agreement is relevant and same reads as follows: 6. * * * Delayed deliveries In event of delays in deliveries except reason of force majeure at Para 5 mentioned above, suppliers shall pay purchasers agreed amount by way of liquidated damages without proof of damages actually suffered at rate of 0.5% of price of respective machinery and equipment to which items were delivered (sic), for each month of delay in delivery completion. It is further agreed that Signature Not Verified ITA 106/2005 Page 14 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 total amount of such agreed liquidated damages shall not exceed 5% of total price of plant and machinery. 26. supplier failed to supply plant & machinery in scheduled time and, therefore, as per terms of contract, assessee received amount of Rs.8,50,000/- from supplier by way of liquidated damages. question arose whether this receipt of Rs.8,50,000/- by assessee was revenue receipt or capital receipt. Assessing Officer included said amount in total income of assessee. appeal preferred by assessee before CIT (Appeals) failed. matter was carried by assessee to Tribunal which referred question to High Court for its opinion. High Court opined in favour of assessee. Supreme Court agreed with opinion of High Court. relevant discussion found in said decision, relied upon by Mr. Jagia, reads as follows: 14. question whether particular receipt is capital or revenue has frequently engaged attention of Courts but it has not been possible to lay down any single criterion as decisive in determination of question. Time and again, it has been reiterated that answer to question must ultimately depend on facts of particular case, and authorities bearing on question are valuable only as indicating matters that have to be taken into account in reaching conclusion. 15. In Rai Bahadur Jairam Valji (supra), it was observed thus: 2. question whether receipt is capital or income has frequently come up for determination before courts. Various rules have been enunciated as furnishing key to solution of question, but as often observed by highest authorities, it is not possible to lay down any Signature Not Verified ITA 106/2005 Page 15 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 single test as infallible or any single criterion as decisive in determination of question, which must ultimately depend on facts of particular case, and authorities bearing on question are valuable only as indicating matters that have to be taken into account in reaching decision. Vide Van Den Berghs Ltd. v. Clark(1935) 3 I.T.R. (Eng. Cas.) 17. That, however, is not to say that question is one of fact, for, as observed in Davies (H.M. Inspector of Taxes) v. Shell Company of China Ltd. (1952) 22 I.T.R. (Suppl.) 1, these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend no doubt to very great extent on particular facts of each case, do involve conclusion of law to be drawn from those facts. 16. In Kettlewell Bullen and Co. Ltd. (supra), dealing with question whether compensation received by agent for premature determination of contract of agency is capital or revenue receipt, echoing views expressed in Rai Bahadur Jairam Valji (supra) and analysing numerous judgments on point, this Court laid down following broad principle, which may be taken into account in reaching decision on issue : 36. ... ... Where on consideration of circumstances, payment is made to compensate person for cancellation of contract which does not affect trading structure of his business, nor deprive him of what in substance is his source of income, termination of contract being normal incident of business, and such cancellation leaves him free to carry on his trade (freed from contract terminated) receipt is revenue : Signature Not Verified ITA 106/2005 Page 16 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 Where by cancellation of agency trading structure of assessee is impaired, or such cancellation results in loss of what may be regarded as source of assessee s income, payment made to compensate for cancellation of agency agreement is normally capital receipt. 17. We have considered matter in light of aforenoted broad principle. It is clear from clause No.6 of agreement dated 1 st September 1967, extracted above, that liquidated damages were to be calculated at 0.5% of price of respective machinery and equipment to which items were delivered late, for each month of delay in delivery completion, without proof of actual damages assessee would have suffered on account of delay. delay in supply could be of whole plant or part thereof but determination of damages was not based upon calculation made in respect of loss of profit on account of supply of particular part of plant. 18. It is evident that damages to assessee was directly and intimately linked with procurement of capital asset i.e. cement plant, which would obviously lead to delay in coming into existence of profit making apparatus, rather than receipt in course of profit earning process. Compensation paid for delay in procurement of capital asset amounted to sterilization of capital asset of assessee as supplier had failed to supply plant within time as stipulated in agreement and clause No.6 thereof came into play. afore-stated amount received by assessee towards compensation for sterilization of profit earning source, not in ordinary course of their business, in our opinion, was capital receipt in hands of assessee. 19. We are, therefore, in agreement with opinion recorded by High Court on question Nos. (i) and (ii) extracted in Para 1 (supra) and hold that amount of Signature Not Verified ITA 106/2005 Page 17 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 Rs.8,50,000/- received by assessee from suppliers of plant was in nature of capital receipt. 27. Mr. Jagia has then sought to deal with decision rendered by this Court in Commissioner of Income Tax-VI Vs. M/s Uberoi Sons (Machines) Limited, (2012) 193 DLT 148 (DB). We may observe that this decision was relied upon by Mr. Anand, learned counsel for Revenue. 28. second question framed by Court in said appeal was: Whether ITAT was correct in law in holding that excess amount payable to assessee towards mesne profits/ compensation for unauthorized use and occupation of premises accrued to assessee only upon passing of decree by Civil Court on 14.10.1998? 29. relevant facts in which said question arose were that assessee private limited company, was engaged in real estate business and derived rental income from its commercial building which was multi-storied complex let out to various tenants. During financial year, relevant to assessment year 1992-93, lease agreement between assessee and tenant Oriental Bank of Commerce expired on 31.03.1991. premises were not vacated by tenant and assessee filed civil suit before High Court claiming decree for possession by way of eviction. During pendency of suit, tenant Oriental Bank of Commerce was paying rent regularly @ Rs. 45,900/- per month. This was charged to tax, on due basis. suit was decreed by High Court in October, 1998. assessee was paid total amount of Rs. 27,76,045/- as mesne profit towards arrears of rent. decree for mesne profits/ damages against tenant was @ Rs. 75,000/- per month, from date of filing of Signature Not Verified ITA 106/2005 Page 18 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 suit to date of vacation, with costs. AO sought to reopen assessment proceedings for assessment years 1992-93 to 1998-99, on premise that assessee knew of higher amount that was payable as rent in respect of premises. additions were sought to be made for these years. In assessee s appeal, CIT (A) held that action of AO in adding arrears of rent to assessee's income from house property (by taking annual value @ Rs. 75,000/- per month for each of assessment years), was not justified. additions were deleted. Revenue s appeal to ITAT was rejected. Reliance was placed by Revenue on Section 25 B which was introduced later after assessment years in question. Division Bench referred to and relied upon decision of Madras High Court in P. Mariappa Gounder (supra) which explained precise nature of right of landlord seeking possession of residential premises through civil suit, which also includes claim for mesne profits, in following words: 10. ... ... ... Madras High Court, in Commissioner of Income-Tax, Tamil Nadu-V v. P. Mariappa Gounder 1983 (147) ITR 676 (Mad) explained precise nature of right of landlord seeking possession of residential premises, through civil suit which also includes claim for mesne profits: We do not think it should take us long to find correct answer. claim for mesne profits is usually directed against one who has deprived true owner of possession of his property and who has thereby prevented true owner from enjoying income or usufruct of property. When, in such suit or proceeding, court awards mesne profits to true owner, that Signature Not Verified ITA 106/2005 Page 19 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 represents just recompense to him for deprivation of income which ought properly to have come into his hands but for interference of person in wrongful possession of property. Code of Civil Procedure defines mesne profits as that which person in wrongful possession of property has actually received or might with ordinary diligence have received therefrom. accent of definition in section 2(12) of Code concentrates more on methodology of calculation of mesne profits rather than on what true nature of mesne profits is. As we earlier stated, rationale of awarding mesne profits is that trespasser or person in wrongful possession not only defies title of true owner, but also prevents true owner from enjoying income or usufruct of property in question. When, therefore, court decrees mesne profits, that decree is in recognition of position that true owner is entitled to income from property and person in wrongful possession is to compensate true owner in that regard by paying either actual income from property or reasonable estimate of that income. Having regard to these characteristics of mesne profits, there can be no doubt that they are also species of taxable income. Under scheme of I.T. Act, anything which can properly be regarded as income and which is not expressly exempted from taxation under specific provision of statute must be regarded as taxable income. We are, therefore, satisfied that Tribunal and other authorities were right in their view that mesne profits has to be assessed as taxable income in hands of present assessee. Signature Not Verified ITA 106/2005 Page 20 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 To say that we do not know how much is mesne profits but nevertheless assert that mesne profits have accrued at given moment of time, out of ignorance, is very much like Irish Bull, example of which was found in description of escaped convict from Irish prison: Age not known but looks older than he really is . If we do not know how much mesne profits are, how can we say, with any modicum of confidence, that mesne profits have already accrued? question of accrual, like question of receipt, cannot be based on any theory but must rest on solid rock of actualities. We cannot say that whenever amount of mesne profits are quantified, that amount must relate back to earlier point of time when right to mesne profits itself was declared by competent court. Relation back theory cannot work and would be quite inappropriate for settling question of accrual of income, when both accrual and income are unknown quantities. assessee did not know how much was income. proceedings had, therefore, to go through whole hog of judicial inquiry before mesne profits could be ascertained. As it happened, amount was fixed by trial court only on December 22, 1962, during year of account ended March 31, 1963. On principle as well as on authority, therefore, mesne profits as amount of income could be said to have accrued, in income-tax sense of term, only during year ended March 31, 1963. Hence, we must uphold order of AAC bringing to tax entire amount in assessment year 1963-64. Signature Not Verified ITA 106/2005 Page 21 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 assessment of same amount in 1964-65 relevant to account year ended March 31, 1964, must be held to be erroneous. This understanding was endorsed by Supreme Court in appeal against decision of Madras High Court. In P. Mariappa Gounder v. Commissioner of Income Tax 1998 (232) ITR 2 (SC) Court held that: In our opinion, decision of High Court does not call for any interference. It will be seen that under Order XX, rule 12, of Code of Civil Procedure when court passes decree for possession and mesne profits by clause (ba) it may pass decree for mesne profits or directing enquiry as to such mesne profits . In present case, from portion of decree extracted hereinabove, it is clear that this court passed order directing enquiry as to mesne profits which would be payable by judgment-debtor to decree-holder. As on day when this court decreed appellant's suit, there was only inchoate right which arose in his favour. trial court was directed to hold enquiry and then to determine amount of mesne profits which was payable. XXXX XXXX XXXX XXXX XXXX XXXX aforesaid passage was quoted with approval by this court in CIT v. Hindustan Housing and Land Development Trust Ltd. [1986] 161 ITR 524, in which case also this court was called upon to deal with question as to when additional compensation awarded was liable to be taxed. In that case amount of compensation awarded by arbitrator was in dispute. On appeal having been filed by State Government it was held that said amount could be taxed only when Signature Not Verified ITA 106/2005 Page 22 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 dispute was resolved because if appeal had been allowed in its entirety, right of payment of enhanced compensation would have fallen altogether. Applying ratio of aforesaid decisions, it appears to us that decree dated April 22, 1958, passed by this court only created inchoate right in favour of appellant. It is only when trial court determined amount of mesne profits that right to receive same accrued in favour of appellant. In other words, liability became ascertained only with order of trial court on December 22, 1962, and not earlier. Following mercantile system of accounting, mesne profits awarded by order dated December 22, 1962, were rightly taxed in assessment year 1963-64 and it was wholly irrelevant as to when amount awarded was in fact realised by assessee. In our opinion, therefore, High Court was right in deciding reference in favour of Department. We accordingly dismiss appeals but in circumstances of this case award no costs. (emphasis supplied) 30. Division Bench then referred to its decision in CIT Vs. R.J. Wood, 334 ITR 358, wherein Court had noticed newly introduced Section 25B, and observed that it was clarificatory in nature as it encapsulated law existing, namely, that receipts towards mesne profits should be taxed in year of their receipt. Division Bench quoted following extract from R.J. Wood (supra): Once we proceed on this basis, obvious conclusion would be that arrears of rent received in assessment year 2000-01 would not relate to previous years and are to be Signature Not Verified ITA 106/2005 Page 23 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 taxed in that year. For this reason, as far as these assessment years are concerned, Tribunal was right in holding that arrears of rent received in assessment year 2000-01 could not be spread over previous years, i.e., 1996-97 to 1999- 2000. 31. Division Bench further observed as follows: above conclusion is in conformity with law declared by Supreme Court in P. Mariappa Gounder (supra). Therefore, this Court holds that there is no infirmity in findings of Tribunal that even on merits, arrears of rent received by assessee (as mesne profits) could not be brought to tax for previous years, when they fell due. They could be brought to tax only during year of receipt. revenue had further argued that during year of receipt, assessee had shown amount so received as capital. Its character was clearly as that of income, as is evident from ruling of Madras High Court in P. Mariyappa Gounder which was later affirmed by Supreme Court - fact recognized by this Court in R.J. Wood. revenue had not however, re-opened assessment in respect of year of receipt of amounts, in this case. As result, this Court holds that though amount received by assessee was liable to tax, in accordance with law declared by Supreme Court - in year of its receipt- there is no infirmity with findings and conclusions of Tribunal. questions of law framed are accordingly answered against revenue, and in favour of asseseee, subject to above observations and findings. appeals are consequently dismissed. (emphasis supplied) 32. submission of Mr. Jagia is that in Uberoi Sons (Machines) Limited (supra), assessee received arrears of rent, and not mesne profits/ damages. He further submits that real issue before High Court in Uberoi Sons (Machines) Limited (supra) was: in which previous year arrears of rent received by assesse (as mesne profits) could be brought to Signature Not Verified ITA 106/2005 Page 24 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 tax? issue was not whether mesne profits received by landlord/ assesse from erstwhile tenant constitute revenue receipt, or capital receipt. Thus, Uberoi Sons (Machines) Limited (supra) cannot be regarded as precedent to determine said issue. Therefore, he submits Uberoi Sons (Machines) Limited (supra) cannot be pressed into service to determine issue arising in present case. 33. So far as decision of Madras High Court in P. Mariappa Gounder (supra) is concerned, Mr. Jagia has submitted that said decision has not been followed by Calcutta High Court in subsequent decision reported as Smt. Lila Ghosh (supra). In fact, Calcutta High Court has expressed doubts on correctness of decision of Madras High Court in P. Mariappa Gounder (supra). Mr. Jagia has further submitted that facts of P. Mariappa Gounder (supra) are also different from facts of present case. In that case, assessee entered into agreement to purchase tile factory. In pursuance of agreement, he made certain advance payment to vendor under written agreement. vender, however, did not convey property, as promised, and in breach of agreement, sold it to third party viz. Kochu Vareed, and put him in possession. assessee sued vendor for specific performance. Kochu Vareed impleaded himself in said suit and contested suit. Trial Court decreed specific performance of assessee s agreement with original owner. Kochu Vareed, however, appealed against decree. Kerala High Court allowed appeal. Supreme Court, on appeal by assessee, reversed decision of High Court and restored specific performance decree. Court also sustained assessee s claim Signature Not Verified ITA 106/2005 Page 25 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 for mesne profits against Kochu Vareed. matter was remitted to Trial Court for inquiry and determination of mesne profits. Trial Court determined mesne profits vide its order dated 22.10.1962 at Rs.67,093/-. amount was received by assessee during financial year ending 31.03.1964. two questions which arose during income tax assessment of assessee were: Whether amount of mesne profits in sum of Rs.67,093 constitute taxable income in assessee s hands; and other: As to which year s income should this amount be brought to be charged for income tax. Mr. Jagia submits that in P. Mariappa Gounder (supra), it was not case of grant of mesne profits against erstwhile tenant who continued to occupy premises, despite termination of tenancy. It was case where subsequent agreement purchaser held on to possession of property, after facing of decree for specific performance, and while matter was pending adjudication by higher Court. 34. Mr. Jagia has elaborately referred to decision of Calcutta High Court in Smt. Lila Ghosh (supra). In Smt. Lila Ghosh (supra), asseessee had inherited property which was under lease. Despite lease expiring, lessee did not handover possession of same to assessee. assessee filed suit for eviction and mesne profits. suit was decreed in favour of assessee, right up to Supreme Court. While assessee s execution proceedings were pending, Government of West Bengal requisitioned property. requisition was challenged by assessee before High Court in writ petition. settlement was arrived at between assessee and State of West Bengal. Under terms of Signature Not Verified ITA 106/2005 Page 26 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 settlement, property in question was to be acquired by State of West Bengal under Land Acquisition Act, and compensation was to be paid to assessee therefor. sum of Rs.11 Lakhs was advanced on account of compensation for acquisition by State of West Bengal. Apart from compensation for acquisition of said premises, assessee received sum of Rs.2 Lakhs from State of West Bengal, on account of mesne profits for use and occupation of said property by erstwhile tenant. It was clarified that amount of Rs.2 Lakhs had been paid to assessee by State Government on account of mesne profits for period from May 1970 to February 1980. While making assessment, Income Tax Officer assessed said Rs.2 Lakhs representing mesne profits, as revenue receipt in hands of assessee under head Income from other sources . On appeal, Commissioner of Income Tax (Appeals) rejected assessee s submission that amount of Rs. 2 Lakhs received by assessee was capital receipt not chargeable to income tax. Income Tax Tribunal, however, held that mesne profits of Rs. 2 Lakhs arose as result of transfer of capital asset, and same were assessable under head Capital gains . Certain issues were decided against assessee by Income Tax Tribunal. Cross references were sought to be made to High Court. High Court referred to several decisions and thereafter proceeded to hold in paragraph 20 as follows: 20. All aforesaid cases clearly support assessee in this reference. Since mesne profits are only damages for loss of property or goods, these are not in nature of revenue receipts. receipt of Rs. 2 lakhs is clearly capital in nature. Counsel for Revenue, however, invited our attention to decision of Madras High. Court in CIT v. P. Mariappa Signature Not Verified ITA 106/2005 Page 27 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 Gounder, [1984] 147 ITR 676. In that case, assessee agreed to purchase tile factory under agreement dated May 22, 1950. vendor, contrary to agreement and in breach thereof, sold it to another person and put him in possession. assessee sued vendor for specific performance. This suit was decreed in favour of assessee and same was affirmed by Supreme Court. Supreme Court also decreed mesne profits payable to assessee as fixed by trial court. Madras High Court held that claim to mesne profits is usually directed against one who has deprived true owner from possession of his property and who has thereby prevented true owner from enjoying income therefrom or usufruct of property. When, in such suit or proceeding, court awards mesne profits to true owner, it represents just recompense to true owner for deprivation of income which ought to have come to his hands but for interference of person in wrongful possession of property. It is in recognition of this principle that true owner is entitled to income from property and person who is in wrongful possession is to compensate true owner by paying either actual income from property or reasonable estimate of that income. Consequently, mesne profits are also species of taxable income. 35. In paragraph 21 of decision, High Court recorded its disagreement view expressed by Madras High Court in P. Mariappa Gounder (supra) by observing as follows: 21. With great respect to learned judges, we could not persuade ourselves to agree with views expressed by Madras High Court in aforesaid decision so far as it holds that mesne profits awarded by court for wrongful possession are liable to be assessed as income. Neither decision of Privy Council in Girish Chunder Lahiri, [1900] 27 I.A. 110, nor decision of Supreme Court in Lucy Kochuvareed, (1979) 3 SCC 150 : AIR 1979 SC 1214, were either cited or noticed by learned judges of Madras Signature Not Verified ITA 106/2005 Page 28 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 High Court. In fact, even decision of Patna High Court in CIT v. Rani Prayag Kumari Debi, [1940] 8 ITR 25, and that of Kerala High in CIT v. Periyar and Pareekanni Rubbers Ltd., [1973] 87 ITR 666, were neither noticed nor considered by Madras High Court. 36. Mr. Jagia, therefore, submits that it is view of Calcutta High Court which is correct view, and should be followed by this Court. 37. Mr. Jagia has also placed reliance on decision of Mumbai Bench of ITAT in Narang Overseas Pvt. Ltd. Vs. ACIT decided on 28.02.2007, reported as MANU/IU/0005/2008. Tribunal after detailed analysis observed in paragraph 48 as follows: 48. above analysis clearly reveals that there is cleavage of opinion between High Courts. Hon'ble Madras High Court has held that mesne profits is recompense for deprivation of income which owner would have enjoyed but for interference of persons in wrongful possession of property. Consequently, same is revenue receipt chargeable to tax. On other hand Hon'ble High Courts of Andhra Pradesh, Calcutta, Kerala and Patna have held that mesne profit is in nature of damages for deprivation for use and occupation of property and therefore capital receipt not chargeable to tax. There is no judgment of jurisdictional High Court on this issue. In our view, such conflict can be resolved only by Hon'ble Supreme Court in some appropriate case. In absence of judgement of highest court of land or of jurisdictional High Court, legal position is that, where there are two views then view favourable: to subject should be preferred. Reference can be made to various judgements of apex court : CIT v. Vegetable Products 88 ITR 192 (SC), CIT v. Naga Hills Ten Co. Ltd. 89 ITR 236 (SC), CIT v. Madho Prasad Jatia 105 ITR 179 (SC), CIT v. J.K. Hosiery Factory 159 ITR 85, Shashi Gupta v. LIC 84 Comp. Cases 436. Therefore, following same, it has Signature Not Verified ITA 106/2005 Page 29 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 to be held that mesne profit received for deprivation of use and occupation of property would be capital receipt not chargeable to tax. We hold accordingly. Consequently, decision of Special Bench of Tribunal in case of Sushil Kumar fit Co. (supra), holding to extent that mesne profit is taxable as revenue receipt is overruled. 38. Mr. Deepak Anand, learned counsel for revenue has advanced his submission in opposition to appeal. Mr. Anand submits that damages/mesne profits received by appellant are in nature of revenue receipts. He submits that tribunal has correctly answered said issue. He has drawn our attention to paras 33 and 37 of impugned order, which read as follows: 33. Hon'ble Madras High Court in matter of P. Mariappa Gounder [supra] also held that: true principle to be applied is that where compensation is paid for deprivation of capital asset or for restrain on trading or conduct of business undertaking as such, it would be capital receipt in hands of recipient of compensation". In this case, no loss to capital asset is stated. When assessee did not get enhanced rent from lessee bank as per agreement, therefore, assessee terminated tenancy, as bank did not comply with contract. Assessee was entitled to enhance rate of rent after expiry of certain period, which was not complied with by banker. Same facts were pleaded before Civil Courts in suit by assessee. Had banker enhanced rate of rent as per rent agreement, then probably assessee would not have filed suit for possession and for Mesne Profit. Assessee was entitled for higher income as per contract with bank but bank did not Signature Not Verified ITA 106/2005 Page 30 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 obey terms of contract. Therefore, assessee terminated contract and filed suit for possession and Mesne ProfIt. suit was thus filed by assessee in respect of relief claimed for entitlement of income, which was denied by lessee bank. Mesne Profit is calculated with reference to loss of rent suffered by assessee. Therefore, clearly it is case of earning of income from house property by assessee, which was received in name of Mesne Profit/damages . 37. According to section 22, annual value of property shall be chargeable to income tax under head 'income from house property'. Hon'ble Delhi High Court in matter of Ram Prasad and Sons Vs. CIT 81 Taxman 332 considering fact that owner has been occupying property in question and it was not let out held in respect of consideration of annual letting value that:- "The manner of arriving at income as stated in section 22 read with section 23 is to find out annual value of property. Whether property is in direct occupation of owner or leased to tenant, basis to arrive at income is same subject to some variations regarding deductions. Nowhere. different method is provided to arrive at annual value of property when it is under occupation of owner. As per section 23[1][a], annual value of any property shall be deemed to be same for which property might reasonably be accepted to let out from year to year. In other words, reasonable estimate shall have to be made of value as provided under Act." 39. Mr. Anand submits that tribunal has rightly held that section 25B of Act is clarificatory in nature and, therefore, applicable to relevant Signature Not Verified ITA 106/2005 Page 31 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 assessment year. Mr. Anand submits that tribunal has correctly relied upon decision of Madras High Court in P. Mariappa Gounder (supra), which has been affirmed by Supreme Court, and relied upon para 7 of said decision in particular. He further submits that in Uberoi Sons (Machines) Limited (supra), this Court relied upon P. Mariappa Gounder (supra) and held that arrears of rent received as mesne profits are taxable in year of receipt, and that section 25B of Act, which was introduced vide amendment in 2000 with effect from assessment year 2001- 02 is only clarificatory in nature. High Court also referred to and relied upon CIT v. Sadhna Chadha, (2004) 270 ITR 534 Del. He submits that decision of Calcutta High Court in Smt. Lila Ghosh (supra) was decision rendered prior to Supreme Court deciding appeal in case of P. Mariappa Gounder (supra). He further submits that even subsequently, Madras High Court has reiterated its view taken in P. Mariappa Gounder (supra), in S. Kempadevamma v. CIT, 251 ITR 871 (2000). submission of Mr. Anand is that question raised by appellant, in fact, has already been answered by this Court in Uberoi Sons (Machines) Limited (supra), and does not survive for any further consideration. 40. real issue that needs consideration in present appeal is whether mesne profits, and interest on mesne profits, received by appellant constituted revenue receipt, or capital receipt, in hands of appellant/assessee, in facts and circumstances of case. 41. Having heard submissions of learned counsels for parties and having given our due consideration to them in light of decisions Signature Not Verified ITA 106/2005 Page 32 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 relied upon by learned counsels, we are of view that mesne profits, and interest on mesne profits, received by appellant in pursuance of court decree, in facts of present case, constitute revenue receipt. 42. Reliance placed by Mr. Jagia on Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and Ansal Housing and Construction Ltd. (supra) is of no assistance in answering said question. decision of this Court in Phiraya Lal @ Piara Lal (supra) also does not assist us in finding answer to aforesaid question. statement of law contained in Girish Bansal (supra) is all too well settled, and does not throw light on issue arising for our consideration in this appeal. 43. Reference made by Mr. Jagia to Cadell Weaving Mill Co. Pvt. Ltd. (supra), which was relied upon in Girish Bansal (supra), in our view, is of no avail, since fact situation and background in which said decision was rendered was materially different. That was case where tenancy right was surrendered by tenant and, in lieu thereof, tenant had received consideration. issue that cropped up for consideration was whether said receipt was capital receipt, or revenue receipt. Court held same to be capital receipt, since tenancy right is capital asset and consideration received in lieu thereof was held to be capital receipt. 44. factual position before us is markedly different. tenant, namely, Indian Overseas Bank, did not surrender tenancy premises despite termination of tenancy. It is not Indian Overseas Bank, Signature Not Verified ITA 106/2005 Page 33 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 which received any consideration for surrender of its tenancy. On contrary, Indian Overseas Bank suffered decree for its continued use and occupation of premises of appellant/assessee, even after termination of contractual tenancy. Indian Overseas Bank was saddled with mesne profits and interest thereon under courts decree. income was generated in hands of landlord/assessee, and not in hands of tenant/ Indian Overseas Bank. Thus, reliance placed by Mr. Jagia on Girish Bansal (supra), which refers to Cadell Weaving Mill Co. Pvt. Ltd. (supra), is misplaced. 45. Mr. Jagia has also placed reliance on Saurashtra Cement Ltd. (supra). We have noticed factual background in which said decision was rendered. This was case where assessee, who was already engaged in manufacture of cement, had entered into agreement with supplier for purchase of additional cement plant i.e. capital asset. There was delay on part of supplier in supplying plant and machinery and in terms of clause 6 of agreement, supplier became liable to pay liquidated damages. supplier paid amount of Rs.8,50,000/- on account of liquidated damages to assessee. It was this receipt which was matter of debate i.e. whether it was revenue receipt, or capital receipt. Supreme Court held same to be capital receipt. Supreme Court held that answer to question: whether receipt/income is capital receipt, or revenue receipt, must ultimately depend on facts of particular case, and authorities bearing on question are valuable only as indicating matters that have to be taken into account in reaching conclusion. It is not possible to lay down any single test as infallible, or any Signature Not Verified ITA 106/2005 Page 34 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 single criterion as decisive, in determination of this question, which must ultimately depend on facts of particular case. Supreme Court in this decision relied upon Kettlewell Bullen and Co. Ltd. (supra), wherein broad principle had been laid down in para 36. We have extracted same in para 26 herein above. Applying said broad principle, Supreme Court held that damage to assessee was directly and intimately linked with procurement of capital asset i.e. cement plant, which would obviously lead to delay in coming into existence of profit making apparatus, rather than receipt in course of profit earning process. Compensation paid for delay in procurement of capital asset amounted to sterilization of capital asset of assessee, as supplier had failed to supply plant within time as stipulated in agreement, and clause 6 thereof came into play. aforesaid amount received by assessee towards compensation for sterilization of profit earning source, not in ordinary course of their business, was held to be capital receipt in hands of assessee. 46. When we apply said test to facts of present case, only conclusion that we can draw is that receipt of mesne profits and interest thereon by appellant/assessee, was revenue receipt. capital asset of appellant i.e. property in question was earning revenue for appellant by way of rent till so long as lease subsisted. After termination of lease, erstwhile tenant continued to occupy premises unauthorisedly. It is in lieu of rent which appellant would have otherwise derived from tenant, that mesne profits and interest thereon have been awarded. So far as capital asset of assesse is Signature Not Verified ITA 106/2005 Page 35 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 concerned, same has remained intact. It is not appellants case that there was any damage to property/ capital asset inasmuch, as, building structure was damaged by bank, and that damages have been awarded by Court on account of such physical damage. Even title of appellant in respect of capital asset remained intact. Had it been case where capital asset would have been subjected to physical damage, or of diminution of title to capital asset, and damages would have been awarded under head, there would have been merit in appellant s claim that damages received for harm and injury to capital asset, or on account of its diminution, would be capital receipt. 47. We also find merit in submission of Mr. Anand that issue is no longer res intergra. issue stands concluded not only by decision of Supreme Court in P. Mariappa Gounder (supra) but also by this Court in Uberoi Sons (Machines) Limited (supra). In Uberoi Sons (Machines) Limited (supra), this Court has followed decision of Madras High Court in P. Mariappa Gounder (supra) as affirmed by Supreme Court. facts of Uberoi Sons (Machines) Limited (supra) have been taken note of in 29 herein above. They are more or less identical with facts of present case. Like in present case, in Uberoi Sons (Machines) Limited (supra), Oriental Bank of Commerce which was tenant in premises of assessee, did not vacate premises and assessee filed civil suit claiming decree for possession by way of eviction. suit was decreed by High Court in October 1998. assessee was paid sum of Rs.27,76,045/- as mesne profits. decree for mesne profits against tenant was @ Rs.75,000/- per month. Pertinently, during pendency of Signature Not Verified ITA 106/2005 Page 36 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 suit, tenant was paying Rs.45,900/- per month towards rent/ occupation charges. submission of Mr. Jagia that in this case, Court awarded/ decreed only arrears of rent, and not mesne profits, is incorrect. It is evident that Rs.75,000/- per month was not agreed rent, but assessment of mesne profits made by Court. agreed rent, it appears, was Rs.45,900/-. Moreover, relationship of landlord and tenant having ended, what was assessed and paid was only damages, and not rent. 48. When matter travelled to this Court, this Court relied upon P. Mariappa Gounder (supra) decided by Madras High Court. We have already extracted relevant portion of decision in Uberoi Sons (Machines) Limited (supra) in 29 herein above. This Court not only held that Section 25B was clarificatory and was attracted for application to assessment year in question, but also held that receipt of mesne profits constituted revenue receipt. If they did not so constitute revenue receipt, there would have been no question of invoking Section 25B. In fact, we find that present appeal is covered on all fours by decision in Uberoi Sons (Machines) Limited (supra). 49. submission of Mr. Jagia that ratio of decision in Uberoi Sons (Machines) Limited (supra) was not to hold that income by way of mesne profits constituted revenue receipts is misplaced. This is because issue of invocation of Section 25B was intimately linked to issue whether said receipts were revenue receipts, or capital receipts. If they did not constitute revenue receipts, there would be no question of invoking or examining applicability of Section 25B. Moreover, Supreme Court has put its seal of approval on P. Mariappa Gounder (supra). We are, Signature Not Verified ITA 106/2005 Page 37 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 therefore, bound by said decision. Even when we examine issue in light of principles laid down by Supreme Court in Kettlewell Bullen and Co. Ltd. (supra), we reach to same conclusion. 50. Reliance placed by Mr. Jagia on Smt. Leela Ghosh (supra) is of no avail for two reasons. Firstly, when Smt. Leela Ghosh (supra) was decided and Calcutta High Court dissented from view of Madras High Court in P. Mariappa Gounder (supra), decision of Supreme Court in P. Mariappa Gounder (supra), was not available. P. Mariappa Gounder (supra), was decided by Supreme Court much later i.e. 21.01.1998, whereas Smt. Leela Ghosh (supra) was decided on 18.01.1993. In light of Supreme Court having affirmed decision of Madras High Court in P. Mariappa Gounder (supra), dissent in Smt. Leela Ghosh (supra) loses its force. Secondly, this Court has already followed decision of Madras High Court in P. Mariappa Gounder (supra), and taken note of that decision being affirmed by Supreme Court, while deciding Uberoi Sons (Machines) Limited (supra). same is decision of co-ordinate bench of this Court, and we are bound by that decision. We have not been persuaded by submissions of Mr. Jagia to take contrary view. Therefore, we reject appellant s reliance on Smt. Leela Ghosh (supra). 51. Reliance placed on Narang Overseas Pvt. Ltd. (supra) decision of Mumbai Bench of ITAT, is also misplaced. That is decision rendered on 28.02.2007. decision of this Court in Uberoi Sons (Machines) Limited (supra) was rendered on 31.08.2012. ITAT did not had benefit of decision of this Court. Even otherwise, Tribunal Signature Not Verified ITA 106/2005 Page 38 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 proceeded on basis that since there was cleavage of opinion between High Courts, where there are two views, one favourable to subject should be preferred. That cannot be said to be position so far as this Court is concerned. We, therefore, reject reliance placed by Mr. Jagia on Narang Overseas Pvt. Ltd. (supra). 52. Accordingly, we answer question of law set out in paragraph 2 hereinabove in favour of revenue, and against appellant. We hold that ITAT was right in holding that mesne profits and interest on mesne profits received under direction of Civil Court for unauthorised occupation of immovable property of assessee by Indian Overseas Bank erstwhile tenant of appellant, was liable to tax under Section 23(1) of Act, since mesne profits, and interest on mesne profits, in facts of present case constitute revenue receipt. 53. appeal stands disposed of in aforesaid terms. (VIPIN SANGHI) JUDGE (RAJNISH BHATNAGAR) JUDGE NOVEMBER 03, 2020 Signature Not Verified ITA 106/2005 Page 39 of 39 Digitally Signed By:BHUPINDER SINGH ROHELLA Signing Date:03.11.2020 18:09 Skyland Builders P. Ltd. v. Income-tax Officer
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