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Tax Publishers Skyland Builders (P) Ltd. v. ITO [ITA No. 106/2005, dt. 3-11-2020] : 2020 TaxPub(DT) 4579 (Del-HC) Taxability of Mesne profits *Facts:* Assessee had let out their premises to Indian overseas bank who was supposed to pay an increased rent of 20% after expiry of first 3 years of their lease. They did not comply and paid only a 10% increased rent. Assessee landlord sued the bank for compensation and eviction and assessee was paid Mesne profit compensation for the loss of rental income and interest for Rs. 77.87 lakhs. This Mesne profit was claimed to be a capital receipt not taxable under the Act. Revenue held the same as income from other sources and taxed it after allowing the legal expenses which was upheld by the Commissioner (Appeals) and then by ITAT. On higher appeal to the High Court -- Held against the assessee that the Mesne profits were in lieu of the rental income and thus was a compensation for loss in earnings and interest on the same. It was not a compensation for an income earning apparatus thus cannot be called a capital receipt. *Applied:* CIT v. P. Mariappa Gounder (1984) 147 ITR 676 (Mad-HC) : 1984 TaxPub(DT) 0422 (Mad-HC) affirmed by SC in P. Mariappa Gounder v. Commissioner of Income Tax (1998) 232 ITR 2 (SC) : 1998 TaxPub(DT) 1133 (SC) S. Kempadevamma v. CIT, (2000) 251 ITR 871 (Mad-HC) : 2001 TaxPub(DT) 0846 (Mad-HC) Commissioner of Income Tax-VI v. M/s. Uberoi Sons (Machines) Limited, (2012) 193 DLT 148 (DB) : 2013 TaxPub(DT) 0164 (Del-HC) *Dissented:* CIT v. Smt. Leela Ghosh, (1994) 205 ITR 9 (Kol-HC) : 1994 TaxPub(DT) 0228 (Cal-HC) Another plea of the assessee was that section 25B was inserted only with effect from assessment year 2000-01 and since it did not exist in the said assessment year the said Mesne profits cannot be taxed. It was held by the ITAT/affirmed by the High Court that the said section was only clarificatory as held in CIT v. R.J. Wood, (2011) 334 ITR 358 (Delhi) : 2011 TaxPub(DT) 1492 (Del-HC) where in it was confirmed that Mesne profits will be taxable in the year of receipt. What is Mesne profit? A claim for mesne profits is usually directed against one who has deprived the true owner of possession of his property and who has thereby prevented the true owner from enjoying the income or usufruct of the property. When, in such a suit or proceeding, the court awards mesne profits to the true owner, that represents a just recompense to him for the deprivation of the income which ought properly to have come into his hands but for the interference of the person in wrongful possession of the property. The Code of Civil Procedure defines mesne profits as that which a person in wrongful possession of property has actually received or might with ordinary diligence have received therefrom. The accent of the definition in section 2(12) of the Code concentrates more on the methodology of calculation of mesne profits rather than on what the true nature of mesne profits is. As we earlier stated, the rationale of awarding mesne profits is that the trespasser or the person in wrongful possession not only defies the title of the true owner, but also prevents the true owner from enjoying the income or the usufruct of the property in question. When, therefore, the court decrees mesne profits, that decree is in recognition of the position that the true owner is entitled to the income from the property and the person in wrongful possession is to compensate the true owner in that regard by paying either the actual income from the property or a reasonable estimate of that income. Having regard to these characteristics of mesne profits, there can be no doubt that they are also a species of taxable income. Under the scheme of the I.T. Act, anything which can properly be regarded as income and which is not expressly exempted from taxation under a specific provision of the statute must be regarded as taxable income. We are, therefore, satisfied that the Tribunal and the other authorities were right in their view that mesne profits has to be assessed as taxable income in the hands of the present assessee. ..........To say that we do not know how much is the mesne profits but nevertheless assert that mesne profits have accrued at a given moment of time, out of ignorance, is very much like an Irish Bull, an example of which was found in the description of an escaped convict from an Irish prison: "Age not known but looks older than he really is". If we do not know how much the mesne profits are, how can we say, with any modicum of confidence, that the mesne profits have already accrued? The question of accrual, like the question of receipt, cannot be based on any theory but must rest on the solid rock of actualities. 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. "Relation back" theory cannot work and would be quite inappropriate for settling the question of accrual of income, when both the accrual and income are unknown quantities. "The true principle to be applied is that where compensation is paid for deprivation of a capital asset or for restrain on trading or conduct of the business undertaking as such, it would be a capital receipt in the hands of the recipient of the compensation". In this case, no loss to the capital asset is stated. When the assessee did not get the enhanced rent from the lessee bank as per the agreement, therefore, assessee terminated the tenancy, as the bank did not comply with the contract. Assessee was entitled to enhance rate of rent after expiry of certain period, which was not complied with by the banker. Same facts were pleaded before Civil Courts in suit by assessee. Had the banker enhanced the rate of rent as per rent agreement, then probably assessee would not have filed the suit for possession and for Mesne Profit. Assessee was entitled for higher income as per contract with the bank but the bank did not obey the terms of the contract. Therefore, assessee terminated the contract and filed the suit for possession and Mesne ProfIt. The suit was thus filed by the assessee in respect of the relief claimed for entitlement of the income, which was denied by the lessee bank. Mesne Profit is calculated with reference to the loss of rent suffered by assessee. Therefore, clearly it is a case of earning of income from house property by the assessee, which was received in the name of Mesne Profit/damages". *Editorial Note:* The test is whether the compensation was for an income earning apparatus or in lieu of income. In the earlier case it would be a capital receipt and in the latter case it would be a revenue receipt. It was thus held in Kettlewell Bullen and Co. Ltd. v. Commissioner of Income Tax, Calcutta, AIR 1965 SC 65 : 1964 TaxPub(DT) 0345 (SC) the said case is also referred to in this decision.

Tax Publishers

Skyland Builders (P) Ltd. v. ITO [ITA No. 106/2005, dt. 3-11-2020] : 2020 TaxPub(DT) 4579 (Del-HC)

Taxability of Mesne profits

Facts:

Assessee had let out their premises to Indian overseas bank who was supposed to pay an increased rent of 20% after expiry of first 3 years of their lease. They did not comply and paid only a 10% increased rent. Assessee landlord sued the bank for compensation and eviction and assessee was paid Mesne profit compensation for the loss of rental income and interest for Rs. 77.87 lakhs. This Mesne profit was claimed to be a capital receipt not taxable under the Act. Revenue held the same as income from other sources and taxed it after allowing the legal expenses which was upheld by the Commissioner (Appeals) and then by ITAT. On higher appeal to the High Court --

Held against the assessee that the Mesne profits were in lieu of the rental income and thus was a compensation for loss in earnings and interest on the same. It was not a compensation for an income earning apparatus thus cannot be called a capital receipt.

Applied:

CIT v. P. Mariappa Gounder (1984) 147 ITR 676 (Mad-HC) : 1984 TaxPub(DT) 0422 (Mad-HC) affirmed by SC in P. Mariappa Gounder v. Commissioner of Income Tax (1998) 232 ITR 2 (SC) : 1998 TaxPub(DT) 1133 (SC)

S. Kempadevamma v. CIT, (2000) 251 ITR 871 (Mad-HC) : 2001 TaxPub(DT) 0846 (Mad-HC)

Commissioner of Income Tax-VI v. M/s. Uberoi Sons (Machines) Limited, (2012) 193 DLT 148 (DB) : 2013 TaxPub(DT) 0164 (Del-HC)

Dissented:

CIT v. Smt. Leela Ghosh, (1994) 205 ITR 9 (Kol-HC) : 1994 TaxPub(DT) 0228 (Cal-HC)

Another plea of the assessee was that section 25B was inserted only with effect from assessment year 2000-01 and since it did not exist in the said assessment year the said Mesne profits cannot be taxed. It was held by the ITAT/affirmed by the High Court that the said section was only clarificatory as held in CIT v. R.J. Wood, (2011) 334 ITR 358 (Delhi) : 2011 TaxPub(DT) 1492 (Del-HC) where in it was confirmed that Mesne profits will be taxable in the year of receipt.

What is Mesne profit?

A claim for mesne profits is usually directed against one who has deprived the true owner of possession of his property and who has thereby prevented the true owner from enjoying the income or usufruct of the property. When, in such a suit or proceeding, the court awards mesne profits to the true owner, that represents a just recompense to him for the deprivation of the income which ought properly to have come into his hands but for the interference of the person in wrongful possession of the property.

The Code of Civil Procedure defines mesne profits as that which a person in wrongful possession of property has actually received or might with ordinary diligence have received therefrom. The accent of the definition in section 2(12) of the Code concentrates more on the methodology of calculation of mesne profits rather than on what the true nature of mesne profits is. As we earlier stated, the rationale of awarding mesne profits is that the trespasser or the person in wrongful possession not only defies the title of the true owner, but also prevents the true owner from enjoying the income or the usufruct of the property in question. When, therefore, the court decrees mesne profits, that decree is in recognition of the position that the true owner is entitled to the income from the property and the person in wrongful possession is to compensate the true owner in that regard by paying either the actual income from the property or a reasonable estimate of that income. Having regard to these characteristics of mesne profits, there can be no doubt that they are also a species of taxable income. Under the scheme of the I.T. Act, anything which can properly be regarded as income and which is not expressly exempted from taxation under a specific provision of the statute must be regarded as taxable income. We are, therefore, satisfied that the Tribunal and the other authorities were right in their view that mesne profits has to be assessed as taxable income in the hands of the present assessee.

..........To say that we do not know how much is the mesne profits but nevertheless assert that mesne profits have accrued at a given moment of time, out of ignorance, is very much like an Irish Bull, an example of which was found in the description of an escaped convict from an Irish prison: "Age not known but looks older than he really is". If we do not know how much the mesne profits are, how can we say, with any modicum of confidence, that the mesne profits have already accrued? The question of accrual, like the question of receipt, cannot be based on any theory but must rest on the solid rock of actualities. 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. "Relation back" theory cannot work and would be quite inappropriate for settling the question of accrual of income, when both the accrual and income are unknown quantities.

"The true principle to be applied is that where compensation is paid for deprivation of a capital asset or for restrain on trading or conduct of the business undertaking as such, it would be a capital receipt in the hands of the recipient of the compensation". In this case, no loss to the capital asset is stated. When the assessee did not get the enhanced rent from the lessee bank as per the agreement, therefore, assessee terminated the tenancy, as the bank did not comply with the contract. Assessee was entitled to enhance rate of rent after expiry of certain period, which was not complied with by the banker. Same facts were pleaded before Civil Courts in suit by assessee. Had the banker enhanced the rate of rent as per rent agreement, then probably assessee would not have filed the suit for possession and for Mesne Profit. Assessee was entitled for higher income as per contract with the bank but the bank did not obey the terms of the contract. Therefore, assessee terminated the contract and filed the suit for possession and Mesne ProfIt. The suit was thus filed by the assessee in respect of the relief claimed for entitlement of the income, which was denied by the lessee bank. Mesne Profit is calculated with reference to the loss of rent suffered by assessee. Therefore, clearly it is a case of earning of income from house property by the assessee, which was received in the name of Mesne Profit/damages".

Editorial Note: The test is whether the compensation was for an income earning apparatus or in lieu of income. In the earlier case it would be a capital receipt and in the latter case it would be a revenue receipt. It was thus held in Kettlewell Bullen and Co. Ltd. v. Commissioner of Income Tax, Calcutta, AIR 1965 SC 65 : 1964 TaxPub(DT) 0345 (SC) the said case is also referred to in this decision.