Delhi High Court Upheld Income Tax Appellate Tribunal Order stating that Mesne Profits, and Interest on Mesne Profits Constituted Revenue Receipt

Delhi High Court Upheld Income Tax Appellate Tribunal Order stating that Mesne Profits, and Interest on Mesne Profits Constituted Revenue Receipt

The Delhi High Court in the matter of M/S Skyland Builder P. Ltd vs Income Tax Officer, by division bench, Hon'ble Justices Mr. Vipin Sanghi and Mr. Rajnish Bhatnagar, dismissed an appeal which was filed under Section 260A of the Income Tax Act (ITA) being preferred by the appellant/assesse to assail the order dated 19th August, 2004 passed by the Income Tax Appellate Tribunal Bench New Delhi (ITAT) pertaining to the assessment year 1999-2000.

The appeal was admitted on 15th April 2005 and the following question of law was framed by the Court for its consideration: "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."

The ITAT had rejected the assesses' claim with regard to non-taxability of mesne profits as income under the Act on the ground that it is a capital receipt. Consequently, the assesse had assailed the impugned order passed by the ITAT before the Delhi High Court.

The learned counsel for the appellant submitted that, incomes falling under the specific heads enumerated in the Income Tax Act – as being taxable income, alone are liable to tax. He submitted that not all income can be subjected to tax, and income which does not fall within the specific heads would not be liable to be taxed under the Act and relied on Section 14 of the Income Tax Act.

The counsel then went ahead to the definition of 'mesne profits' contained in Section 2(12) of the Code of Civil Procedure. He submitted that, such damages which are awarded for deprivation of the right to use the capital asset, constitute capital receipt, thus, mesne profits could not be taxed as income for the assessment year in question. The counsel had adverted to the Hals bury Laws of England to establish no longer any relationship existed between the landlord and tenant.

Mr. Deepak Anand, the learned counsel for the revenue advanced his submission that the damages/mesne profits received by the appellant are in the nature of revenue receipts. He submits that the tribunal has correctly answered the said issue. He submitted that the tribunal has rightly held that section 25B of the Act is clarificatory in nature and, therefore, applicable to the relevant assessment year.

The primary issue that needed the consideration of the appeal was whether the mesne profits, and interest on mesne profits, received by the appellant constituted revenue receipt, or capital receipt, in the hands of the appellant/assessee.

The court stated, "It is not possible to lay down any single test as infallible, or anysingle criterion as decisive, in the determination of this question, which must ultimately depend on the facts of the particular case."

The court further relied on the decision given by Supreme Court in the case of Kettle well Bullen and Co. Ltd, wherein a broad principle was laid down and applied the same principle in the present appeal and observed, the damage to the assessee was directly and intimately linked with the procurement of a capital asset i.e. the cement plant, which would lead to delay in coming into existence of the profit making apparatus, rather than a receipt in the course of profit earning process.

The court having heard the submissions was of the view that the issue is of no longer res intergra and observed 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 High Court upheld 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 constituted revenue receipt.