IN THE ITAT MUMBAI BENCH (SPECIAL BENCH)
Narang Overseas (P.) Ltd.
v.
Assistant Commissioner of Income-tax,
G.E. VEERABHADRAPPA,
vice president, 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 - Whether since in P. Mariappa
Gounder v. CIT [1998] 232 ITR 2, 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 of mesne profits, 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 mesne
profits received by assessee for wrongful deprivation of use and occupation of
property constitutes 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.
Under the agreement, the licensee i.e., N, could use and occupy the
premises for carrying on the business of selling fast food under the name
‘Croissants’ subject to payment of commission by way of certain percentage of
sales proceeds received by N. 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 including
the settlement that consequent to termination of license created in favour of
‘N’ in respect of property in question, N shall vacate the said premises on or
before 31-3-1992. 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. Pursuant 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 on or before 1-1-2002 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 from 1-4-1992 till 31-12-2001 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 assessment 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
The Special Bench was of the view that the correctness of the Special Bench’s decision in Sushil Kumar (supra) could be decided only by a Larger Bench. Accordingly, a Special Bench comprising of five Members was constituted.
Held
impact of supreme
court’s judgment in p. marippa gounder (supra)
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. [
The judgment
of the Supreme Court in 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
Any part of
the judgment of the High Court which is not challenged before the
That
judgment, 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. [
Consequently,
the Commissioner (Appeals) was not justified in holding that the
whether mesne profits
received by the assessee was revenue receipt or capital receipt
Having held
so, the only issue which required adjudication was whether the mesne profits
received by the assessee was revenue receipt or capital receipt inasmuch 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’. [
There is no
dispute to the proposition that consideration received under the leave and
license agreement amounts to revenue receipt chargeable to tax. 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. [
The revenue
further contended that consent decree did not make the compensation as mesne
profit; that compensation can be said to be mesne profit only when it is
determined by the Court after considering various facts; and that mere fact
that 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 Bombay High Court in 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. [
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. [
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
or capital receipt not chargeable to tax, there is a cleavage of opinion
expressed by the High Courts on this issue. On one hand, the
There is no
judgment of the jurisdictional High Court on this 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 assessee should be preferred. Therefore, in
view of various judgments of Supreme Court, in the instant case 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. [
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. [
whether interest
awarded from date of termination of lease till date of consent decree was a
capital receipt
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. [
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. [
conclusions
In view of
the above discussion, the legal position could be summarized as under:—
(1) that the Supreme
Court in 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
constitute capital receipt not chargeable to tax. [Paras 48 and 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. [
Case review
Sushil Kumar & Co. v. Jt. CIT [2004] 88 ITD 35 (Kol.) (SB) overruled (para 48); Anant Chanilal Kate v. ITO [2004] 267 ITR 482/136 Taxman 527 (Bom.); Kumar Sudhendu Narain Deb 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 Taxman 80A (SC); and Smt. Shashi Gupta v. LIC of India [1995] 84 Comp. Cas. 436 (SC) followed (paras 36 and 48); Dr. Shamlal Narula v. CIT [1964] 53 ITR 151 (SC) and T.N.K. Gobindaraju Chetty v. CIT [1967] 66 ITR 465 (SC); and P. Mariappa Gounder v. CIT [1998] 232 ITR 2 (SC) (para 1) distinguished on facts (paras 31, 54 and 56).
Cases referred to
P. Mariappa Gounder v. CIT [1998] 232 ITR 2 (SC)
(para 1), Dy. CIT v. Sardar Exhibitors (P.) Ltd. [2005] 1 SOT 918 (
S.E. Dastur for the Appellant.
S.C. Gupta for the Respondent.