In the ITAT, Mumbai Bench (Special Bench)

Narang Overseas (P) Ltd.

v.

Assistant Commissioner of Income-tax, Central circle 36, Mumbai

G.E. VEERABHADRAPPA, K.P.T. THANGAL, VICE PRESIDENT (MZ), K.C. SINGHAL AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER AND DR. O.K. NARAYANAN, ACCOUNTANT MEMBER

IT APPEAL NO. 4623 (MUM) OF 2005

[Assessment year – 2002-03]

February 20, 2008

Section 4 of the Income-tax Act, 1961 - Income - Chargeable as - Assessment year 2002-03 - Assessee gave one of its property on leave and licence basis to a company ‘N’ - Even after termination of lease, ‘N’ was occupying and using property unauthorisedly and, thus, assessee was deprived of use and occupation of property - Under a consent decree, Apex Court awarded mesne profits to assessee on account of damages for deprivation of use and occupation of property - On basis of judgment of Madras High Court in case of CIT v. P. Mariappa Gounder, [1984] 147 ITR 676/17 Taxman 292 which was affirmed by Supreme Court, revenue held that mesne profits received by assessee constituted revenue receipt and, hence, taxable - However, on perusal of said judgment of Supreme Court, it was clear that in that case, Supreme Court was not concerned with issue whether mesne profit received against wrongful possession of property was in nature of revenue receipt or capital receipt, and only issue before Court related to year of taxability and, hence, said judgment could not be said to be an authority for proposition that nature of mesne profits was revenue receipt chargeable to tax - Held, yes – Whether, therefore, Commissioner (Appeals) was not justified in holding that receipt in question tantamounted to revenue receipt chargeable to tax - Held, yes - Whether in absence of any judgment of Supreme Court or of jurisdictional High Court on issue relating to nature and character of mesne profits, and since there were two views, one favourable to assessee ought to have been preferred, it was to be held that mesne profits received by assessee constituted capital receipt not chargeable to tax - Held, yes

Facts

The assessee-company, promoted by the members of one family, owned various properties including one building. The said property was given by the assessee on leave and license basis to another company ‘N’ promoted by the same family. Within a period of few months, disputes arose between the family members in respect of their properties. Thereafter, various family settlements were arrived at, but they could not be implemented. The trial court took cognizance of the matter and, inter alia, directed ‘N’ to hand over the possession of the suit property to the assessee. However, since besides said litigation, several other proceedings were pending before various other authorities and Courts, eventually the members decided to implement the family settlements and also to have all suits decreed by a consent decree. As a result, the Supreme Court decreed all the suits. Persuant to the said order, the licence created by the assessee in favour of ‘N’ was cancelled and ‘N’ agreed to hand over quite, peaceful and vacant possession of the said premises to the assessee and also to pay arrears of commission for occupation of the said premises along with interest and further to simultaneously pay damages and mesne profits for wrongful use and occupation of the said premises at the rate of Rs. 10 lakhs per month along with interest. Accordingly, the assessee received Rs. 33,47,01,137 during the assessment year 2002-03. However, in its return of income for the relevant year, the assessee did not offer said amount as income on the ground that the damages/mesne profits received by it were on capital account and hence, not liable to tax. The Assessing Officer, however, held that the amount received by the assessee could not be treated as mesne profits as the same represented arrears of commission payable by ‘N’ to the assessee under the licence agreement and that the same were revenue in nature. On appeal, the Commissioner (Appeals) held that the amount received by the assessee under the consent decree passed by the Apex Court represented mesne profits. As regards the nature of said receipt, he observed that the judgement of Madras High Court in the case of CIT v. P. Mariappa Gounder [1984]147 ITR/17 ITR 676 17 Taxman 292 was in the revenue’s favour and the same was affirmed by the Supreme Court in the case of P. Mariappa Gounder v. CIT [1998] 232 ITR 2. He, therefore, held that the mesne profits received by the assessee constituted revenue receipt. In second appeal, the dispute before the Division Bench was whether the mesne profit received by the assessee pursuant to the consent decree passed by the Supreme Court constituted revenue receipt assessable to tax. The revcnue contended that the issue stood concluded against the assessee by the decision of the Special Bench of the Tribunal in the case of Sushil Kumar & Co. v. Jt. CIT [2004] 88 ITD 35(Kol), wherein it was held that the judgment of the Madras High Court in the case of P. Mariappa Gounder, (supra) holding that mesne profit received by the assessee was the revenue receipt chargeable to tax got merged in the subsequent judgment of the Supreme Court and, consequently, the mesne profit received by the assessee was taxable as revenue receipt. However, the assessee contended that the issue was not correctly decided by the Special Bench in the case of Sushil Kumar & Co. (supra), inasmuch as the issue regarding the taxability of mesne profit was neither raised before nor considered by the Supreme Court. The assessee further contended that the Madras High Court had decided two issues - (1) the issue regarding the taxability of mesne profit and (2) the year of assessability, the High Court decided both the issues against the assessee, however, the issue regarding taxability of mesne profit was neither raised before nor considered by the Supreme Court since the assessee challenged only the issue regarding the year in which the mesne profit could be taxed, the Apex Court held that the High Court rightly held the same to be taxable in the assessment year 1963-64 and, therefore, the judgment of the Madras High Court regarding the issue of taxability of mesne profit did not merge in the judgment of the Supreme Court. In view of the assessee’s contentions, the Division Bench found it difficult to concur with the view expressed by the Special Bench in the case of Sushil Kumar & Co (supra). Consequently, it referred the matter to the Special Bench of three Members.

The Special Bench was of the view that the correctness of the Special Bench’s decision in the case of Sushil Kumar & Co. v. CIT (supra) could be decided only by a Larger Bench. Accordingly, a Special Bench comprising of five Members was constituted.

Held

A judgment of the Court has to be understood in the context of the question arose before the Court, the arguments made by the parties, the provisions of enactment considered by the Court, etc. A decision of the Court takes its colour from the question involved in the case in which it is rendered and while applying the decision to a later case the Courts must carefully try to ascertain the true principle laid down by the decision. [Para 6]

The judgment of the Supreme Court in the case of P. Mariappa Gounder (supra) shows that the Supreme Court was only concerned with one issue relating to the year of taxability of mesne profit, i.e., whether it was, taxable in the assessment year 1963-64 or assessment year 1964-65. The issue whether mesne profit constituted revenue receipt or capital receipt was not before the Supreme Court as was apparent from the question posed before it for adjudication, the contentions raised by the respective parties as well as the operational part of the judgment. The decision given by the Apex Court is binding on all the subordinate Courts as well as other authorities across the country in view of the provisions of article 141 of the Constitution of India. What is binding is the decision given by the Court after considering the facts of the case, the question referred before it and the arguments made by the parties. Hence, could not be said that the Apex Court gave any decision regarding the nature of the receipt by way of mesne profit. The decision of the Madras High Court regarding the nature of receipt remained unaffected by the judgement of the Apex Court. [Para 16]

Any part of the judgment of the High Court which is not challenged before the Apex Court remains unaffected and to that extent it does not become the part of the judgment of the Apex Court. It has been repeatedly observed by the Supreme Court that a decision is only an authority for what it actually decides. What is of the essence in a decision is its ratio and not every observation found therein nor what logically follows from the various observations made in it. Therefore, it could be said that in the case of P. Mariappa Gounder (supra) the Supreme Court adjudicated the issue regarding the nature and character of the mesne profit. The judgment of the Apex Court was restricted only to the issue regarding the year of taxability. [Para 21]

That judgement, therefore, could not be said to be an authority for the proposition that nature of mesne profits is revenue receipts chargeable to tax. Accordingly, the contention of the revenue that the issue regarding the nature of mesne profits was covered by the decision of the Supreme Court could not be accepted. [Para 23]

Consequently, the Commissioner (Appeals) was not justified in holding that the Apex Court impliedly upheld the finding of the Madras High Court that mesne profits tantamounted to revenue receipt chargeable to tax. [Para 31]

Having held so, the only issue which required adjudication was whether the mesne profits received by the assessee was revenue receipt or capital receipt in as much as the finding of the Commissioner (Appeals) that amount received by the assessee amounted to mesne profits had not been challenged by the department either by filing cross appeals or cross objection. However, in the course of hearing, the revenue contended that the aforesaid amount could not be treated as mesne profits since such receipts originated from the agreement between the assessee and ‘N’. [Para 32]

There is no dispute to the proposition that consideration received under the leave and license agreement amounts to revenue receipt chargeable to tax. The assessee itself had offered the same in the assessment years 1991-92 and 1992-93 as business income as was apparent from the chart, as per which the assessee had shown the income of Rs. 21,23,911 and Rs. 13,87,833 in the assessment years 1991-92 and 1992-93, respectively, as business income. Therefore, it was not necessary to adjudicate about the nature of receipt under the agreement. The dispute related to the amount received by the assessee at the rate of Rs. 10 lakhs per month along with interest at the rate of 21 per cent for the period commencing from 1-4-1992 till the date of possession handed over to the assessee in terms of the decree awarded by the Apex Court. There was no dispute to the fact that leave and licence agreement between the parties was concluded and terminated and ‘N’ was required to vacate the said premises on or before 31-3-1992. That agreement was taken cognizance by the city civil court in its order dated 29-6-1993. Accordingly, the agreement was no more in existence. After the termination of the said agreement, neither the assessee could legally recover from ‘N’ nor ‘N’ was liable to pay any amount to the assessee under the terms of the said agreement. What the assessee was entitled to was the compensation as per civil law against unlawful possession by ‘N’. Since the agreement ceased to exist, no part of the sum of Rs. 34,57,01,137/- could be said to arise from the said agreement. Consequently, the contention of the revenue that the said disputed amount received by the assessee represented business receipt chargeable to tax under the terms of the agreement could not be accepted. [Para 35]

The revenue further contended that consent decree did not make the compensation as mesne profit; that compensation could be said to be mesne profit only when it was determined by the Court after considering various facts; and that mere fact that was a particular amount was claimed by the assessee as mesne profit in the suit filed before the Court and the fact that the same had been accepted by the defendant would not make the compensation as mesne profit. In view of the judgment of the jurisdictional High Court in the case of Anant Chunilal Kate v. ITO [2004] 267 ITR 482/136 Taxman 527 (Bom.) wherein it has been held that consent decree has the same binding force as any other decree, the said contention could not be accepted. [Para 36]

The mesne profits has been defined in section 2(12) of the Code of Civil Procedure, 1908. In view of the said statutory definition, it was not necessary to look into any other definition. The said definition clearly takes within its scope any receipt against wrongful possession of property. In the instant case, the amount received under the decree of the Court was related to the wrongful or unlawful possession of the property by ‘N’ from 1-4-1992 till handing over the property to the assessee. Therefore, the same had to be treated as mesne profits. [Para 37]

As regards the issue as to whether the mesne profits received by the assessee under the consent decree granted by the Apex Court was revenue receipt chargeable to tax on capital receipt not chargeable to tax, there is a cleavage of opinion expressed by the High Court on that issue. On one hand, the Madras High Court in the case of P. Mariappa Gounder; (supra) has held that mesne profit is in the nature of revenue receipt chargeable to tax. On the other hand, various High Courts have expressed the view that the mesne profit is in the nature of capital receipt not chargeable to tax. [Para 41]

There is no judgment of the jurisdictional High Court on that issue. Therefore, such conflict can be resolved only by the Supreme Court in some appropriate case. In the absence of the judgment of the highest Court of land or of the jurisdictional High Court, the legal position is that where there are two views then the view favourable to the subject should be preferred. Therefore, it had to be held that mesne profit received for deprivation of use and occupation of property would be capital receipt not chargeable to tax. Consequently, the decision of the Special Bench of the Tribunal in the case of Sushil Kumar & Co. (supra), holding to the extent that mesne profit was taxable as revenue receipt was to be overruled. [Para 48]

In the instant case, after the termination of lease, ‘N’ was occupying and using the property unauthorisedly and, thus, the assessee was deprived of the use and occupation of the property and, therefore, the mesne profit received by the assessee under the consent decree awarded by the Apex Court at the rate of Rs. 10 lakhs was on account of damages for deprivation of use and occupation of the property and, therefore, the sum so received was capital in nature not chargeable to tax. [Para 49]

As regards the issue as to whether interest awarded from the date of termination of lease agreement till the date of consent decree could be said to be capital in nature, the revenue contended that interest on compensation is always revenue in nature. On the other hand, the assessee contended that, interest up to the date of determination of mesne profit would be in the nature of damages and, therefore, capital in nature while the interest received after such date would be revenue in nature since it would be deprivation of use of money. [Para 50]

If the interest is paid for deprivation of use of money fallen due to them it is revenue receipt chargeable to tax. On the other hand, if the interest is paid on account of the injury to the capital i.e., deprivation of use and occupation of the property then it is capital receipt not chargeable to tax, in the instant case, it had already been held that mesne profit was for deprivation of use and occupation of the property. The interest received by the assessee was also for the same period as it was awarded up to the date of decree. The money had become due on the date of decree. Accordingly, it was to be held that interest from the date of termination of lease till the date of decree would be capital receipt not chargeable to tax. However, if any interest was received by the assessee beyond that period then, it would be revenue receipt chargeable to tax. [Para 55]

In view of the above discussion, legal position could be summarized as under :-

(1) That the Supreme Court in the case of P. Mariappa Gounder (supra) was not concerned with the issue whether the mesne profit received against the wrongful possession of the property was in the nature of revenue receipt or capital receipt. The only issue before the Court related to the year of taxability. Hence, it could not be said that the Supreme Court adjudicated upon the issue relating to the nature and character of the receipt by way of mesne profits; (2) that the amount received against wrongful possession of the property amounted to mesne profits whether determined by the Court or under a consent decree within the ambit of section 2(12) of the Code of Civil Procedure; and (3) there was a difference of opinion amongst various High Courts on the issue relating to nature and character of the mesne profits. Therefore, in view of various decisions of the Supreme Court, it was to be held that the mesne profits would constituted capital receipt not chargeable to tax. [Para 65]

Therefore, the order of the Commissioner (Appeals) confirming the addition of Rs. 34,57,01,137 was to be set aside and, consequently, the addition sustained by him was to be deleted. In the result, the appeal of the assessee was allowed. [Para 67]

Case Review

(1) Sushil Kumar & Co. v. Jt. CIT [2004] [88 ITD 35 (Kol) (SB)] overruled [Para 48]

(2) Anant Chanilal Kate v. ITO [2004] 267 ITR 482/136 Taxman 527 (Bom.); Kumar Sudhendu Narain Dev v. Mrs. Renuka Biswas [1992] 1 SCC 206; CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC); CIT v. Naga Hills Tea Co. Ltd. [1973] 89 ITR 236 (SC); CIT v. Madho Prasad Jatia [1976] 105 ITR 179 (SC); CIT v. J.K. Hosiery Factory [1986] 159 ITR 85/25 Taxmann 80A (SC) and Smt. Shashi Gupta v. LIC of India [1995] 84 Comp. Cas. 436 (SC) followed. [Paras 36 and 48]

(3) Dr. Shamlal Narula v. CIT [1964] 53 ITR 151 (SC) and T.N.K. Govindaraju Chetty v. CIT [1967] 66 ITR 465 (SC)] distinguished on facts [Paras 54 and 56].