AMRUT ENTERPRISES ,MUMBAI vs. JCIT 25(2), MUMBAI

The facts in briefs qua the issue involved are that, during the previous year relevant to A.Y. 2014-15, the Assessee received sum of Rs 6,31,49,000/- as mesne profits from SBI. As per the order of the Court of Small Causes, Mumbai, whereby SBI was ordered to pay compensation for the wrongful possession of the property. In the return of income filed u/s 139(1), Assessee had shown the Mesne profit received at Rs. 6,31,49,000/- as rental income and offered to tax under the head, “Income from house property” against which it claimed deduction u/s 24(a) at the rate of 30% and offered Rs. 4,42,04,300/- for tax. During the course of the assessment proceedings the Assessee submitted a revised claimed / computation vide letter dated 21.11.2016 stating that amount received as mesne profits is a capital receipt and not chargeable to tax in the hands of the Assessee.

The background of the matter is that, State Bank of India was occupant and lessee of the premises situated at 58, Nehru Road, Vile Parle, (E) Mumbai, as per lease agreement dated 3rd July, 1990 4 & 1018/Mum/2020 AMRUT ENTERPRISES with the then owners. The agreement was for period of 9 years starting from 1st Jan 1989 to 30th Jun 1998. The lease rentals payable by SBI as per the lease agreement was Rs. 7 sq. ft. per month for initial term of 5 years and was increased for the second term of 4 &1/2 years which were to be finalized by mutual negotiations between the lesser and the lessee. However, SBI continued to pay the lease rental at the initial rate of Rs. 7 per sq. ft per month and did not increase the rate till the expiry of lease agreement on 30th Jun1998. Even, after the expiry of the lease agreement on 30th Jun, 1998. SBI continued to occupy the said premises and did not hand over the possession of the premises to the owners.

Thereafter, legal notice dated 10th Nov, 2006 was served by the owner to SBI to vacate the premises and pay certain amount as mention there in the notice. In the meantime the Assessee had become the owner of the premises and filed suit against SBI in Small Causes Court for; a) recovery and vacant possession of said premises; b) Arrears of rent payable; c) Interest thereon; d) mesne profit; and e) Interest thereon, as SBI continued to occupy the said 5 & 1018/Mum/2020 AMRUT ENTERPRISES premises even after expiry of lease period as per Lease deed dt. 3rd July 1990. Assessee had accepted on account of rent payments at old rate from SBI till 9th November 2006 and thereafter assessee stopped accepting rent payments from SBI after notice dated 10th November 2006 and also during pendency of various suits filed by assessee in Small Causes Court.

On 6th November 2009, the Court of Small Causes at Mumbai (Bandra Branch) passed an order whereby SBI was ordered to handover the vacant and peaceful possession of the said premises to the Assessee. SBI was also directed to pay the Assessee, mesne profit for the period 1/12/2006 till assessee gets vacant and peaceful possession of the premises. However, the claim of assessee for arrears of rent / difference in rent and interest thereon was rejected by Hon'ble Court. Also claim of SBI regarding protection against eviction under provision of Maharashtra Rent control Act, 1999, was rejected by the court and also the plea of SBI that it is a Bank and provision of aforementioned act are not applicable to the premises let out to Bank. Notice dated 10/11/2006 given by the Assessee to the SBI for termination of tenancy of the premises was held legal and valid 6 & 1018/Mum/2020 AMRUT ENTERPRISES as SBI was in unlawful/ illegal possession of the said premises from 01/12/2006 onwards till SBI handed over possession of the same to Assessee. In lieu of order dt. 6th November 2009, the assessee filed Mesne Profit (Misc. Application) No. 3 of 2010 in TE & R. SUIT No. 13/16 of 2007 against SBI in May 2010 along with Architect and Valuer, Mr. Roshan Namavati's Report in respect of mesne profit payable by SBI to Assessee from 1st Dec '2006 onwards.

On 7th January 2014, the assessee and SBI agreed upon an out of court settlement and filed consent terms with the Hon'ble Court. On 5th February 2014, Hon'ble Judge of Small Cause Court passed order in Mesne Profit (Misc. Application) No. 3 of 2010 in view of settlement between both parties by way of Consent Terms dt. 7th January 2014. Assessee and SBI had filed cross appeals (Appeal No. 25 of 2010 in T E&R. SUIT NO # 13/16 OF 2007 and Appeal No. 30 of 2010 in TE&R Suit No # 13/16 OF 2007) against order dt. 6th November, 2009, in Small Causes at Bombay (Bandra Branch). Against the said appeal, the Court passed 2 orders dt. 18th January 2014, whereby SBI was directed to pay an amount of Rs. 5,00,00,000/- (Rupees Five Crore) towards Mesne Profit to 7 & 1018/Mum/2020 AMRUT ENTERPRISES Assessee. Both appeals were disposed of in lieu of the consent terms dt. 7th January 2014 by the Hon'ble court. Further, SBI agreed to pay additional mesne profits w.e.f. 1st January 2013 at the rate of Rs 180 per sq. ft. per month for the premises admeasuring 4,870 sq ft. carpet area to the assessee till the date of entering into new premises. Owing to this, the assessee received Rs 5 Crore plus Rs 1.31 Crore as mesne profits during the year. Accordingly, Assessee made revised claimed firstly, on account of lump sum amount as per Court order, that is for mesne profits at Rs. 5 Crore; and secondly, additional mesne profits as per order, Rs. 1,31,49,000/-. Accordingly in the revised claimed amount of Rs. 6,31,49,000/- was claimed as capital receipts.

Before the, Ld. Assessing Officer, Assessee had relied upon various decisions which has been noted at page 3-4 of the assessment order. The Ld. Assessing Officer, after reproducing the Assessee‟s reply and explanation, rejected the claim and distinguished the decisions relied upon by the Assessee held that in view of the decision of „Hon‟ble Supreme Court‟ in the case of “Goetze” (India) Ltd Vs. CIT reported in 284 ITR 323, Assessee 8 & 1018/Mum/2020 AMRUT ENTERPRISES cannot may ammendment in the return of income by way of any application at the assessment stage without revising the return. Thus, he rejected claim of the Assessee the Mesne profit is capital receipt.

However, Ld. Assessing Officer while coming to the conclusion has mainly relied upon the judgment of “Hon’ble Madras High Court in case of CIT Vs. P Mariappa Gounder (Supra)”, 147 ITR 176, when it was held that mesne profits are deemed to be income and they are to be treated as revenue receipts.

The Ld. CIT (A), after noting down the facts of the case, sequence of events and the various Court orders determining the compensation and mesne profit as well as the judgment relied upon by the Assessee and the Assessing Officer, noted that there are, various judgments favoring both the sides, wherein in some it was held as revenue receipts chargeable to tax and others treated to be capital receipts not chargeable to tax.

Ld. CIT (A), further observed that the assessee received two tranches of payment and the character of the two payments received are significantly different. The payment received of Rs. 5 9 & 1018/Mum/2020 AMRUT ENTERPRISES crores for the period 1.12.2006 to 30.12.2012 is a lump-sum payment which was received by the assessee as a compensation paid for deprivation of capital asset and the balance Rs.1,31,49,000/- as additional mesne profits at the rate of Rs 180 per sq. ft. for 4870 sq ft. per month w.e.f. 1" January, 2013 till the date of entering into new premises.

After going through the orders of the court and various observations made there and analyzing the various judgments, he held and observed as under:-.

Before us, Ld. DR strongly referred and relied upon the decision of “Hon’ble Madras High Court in case of CIT Vs. P Mariappa Gounder (Supra)”, when and it was held that;

He further, referred to the various observation of the Ld. CIT

The core issue before us is, whether, the mesne profits received by the Assessee from SBI by the order of the Court, is revenue receipt or capital receipt. Though, the term “mesne profit” has not been defined in the income tax Act, albeit it has been defined in section 2 (12) of the Code of Civil Procedure, 1908 as „those profits is the person in wrongful position of such property 15 & 1018/Mum/2020 AMRUT ENTERPRISES actually received or might with ordinary diligence have received there from, together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession'. In short, it means a any receipt against wrongful possession of property. The term 'mesne profits' relates to the damages or compensation recoverable from a person who has been in wrongful possession of immovable property. The Mesne profits are nothing but a compensation that a person in the unlawful possession of others property has to pay for such wrongful occupation to the owner of the property. The definition of 'Mesne Profits’ under section 2(12) of Code of Civil Procedure 1908 clearly takes within it scope any receipt against wrongful possession of property. The nature of deprivation suffered by the assessee is crucial for the purpose of determination of nature of receipt of mesne profits. Where the compensation is paid for deprivation of capital asset, or source of income, it would be a capital receipt in the hands of recipient of the compensation.

In short, mesne profits are a nature of damages for deprivation of for use and occupation of the property which is some 16 & 1018/Mum/2020 AMRUT ENTERPRISES kind of which is not in the nature of avoiding or arrear rents. In order to, understand whether the mesne profit which has been awarded by the court which in the nature of damages for a wrongful occupation of the property or not, it would be relevant to note down the following chronology of event.

From the above event, it is seen that SBI was occupying the premises of area admeasuring 4870 sq. ft. from the period of 3rd June, 1998 till 30th July, 2015, even though leased had already 20 & 1018/Mum/2020 AMRUT ENTERPRISES expired on 30th June, 1998. The Court had awarded amount of Rs. 5 core and Rs. 180 per sq. ft per month with effect from the 1 Jan, 2013 was paid to the assessee for illegal occupation of the premises of the SBI. Whenever decree for, mesne profits is passed, the real owner is compensated for the deprivation of the sums that are rightfully his. It is kind of compensation for the suffering a person has undergone due to illegal occupation and the hardship faced by the person. As noted by the Ld. CIT (A), Assessee has received two tranches of payments from SBI, through 3 orders of the Court which are as under:

Order dated 06.11.2009 wherein it was held that the SBI was occupying the property illegally and was also directed to pay the assessee Mesne Profit for the period 1/12/2006 till assessee gets vacant and peaceful possession of the premises.

Order dated 07.01.2014 SBI agreed to pay additional mesne profits w.e.f. 1st January 2013 at the rate of Rs 180 per sq. ft. per month for the premises admeasuring 4,870 sq ft. carpet area to the assessee till the date of entering into new premises Owing to this, the assessee received Rs 1.31 Crore as mesne profits during the year.

Order dated 18.01.2014 SBI was directed to pay an amount of Rs. 5,00,00,000/- (Rupees Five Crore) towards Mesne Profit to Assessee.

It is seen that, in the first order dated 06.11.2009, Court has clearly stated that, “I therefore, hold that the plaintiff is not entitled to claim the arrears of rent and interest as claimed in this suit. As plaintiff is not entitled to claim the arrears of rent, the question of limitation does not survive.” Further they added in paragraph 35 & 42 "Hence, by notice dated 10.11.2006 sent by the original plaintiff to the defendant, the tenancy was terminated. The said notice was 22 & 1018/Mum/2020 AMRUT ENTERPRISES duly received by the decedents advocate on 11.11.2006 and hence, tenancy stood terminated by the end of the month i.e. on 30.11.2006 to 30.12.2012. The possession of defendant over the suit premises from 01.12.2006 was therefore unlawful. The defendant is therefore liable to pay Mesne profit to the plaintiffs for wrongful use and occupation of the suit premises."

Thus, the difference in rental amount was clearly rejected by the Court and gave very clear cut finding that, no arrear rent is payable to the Assessee in absence of rent agreement. What the court has directed was purely mesne profit on account damages 23 & 1018/Mum/2020 AMRUT ENTERPRISES for property being illegally occupied by the SBI. After, two different order dated, 07.01.2014 & 18.01.2014, the Assessee received Rs. 5 crore, as one time lump sum payment for the period of 01.12.2006 to 31.12.2012, but another sum of Rs.1,31,49,000/- was given separately for the period 01.01.2013 to 31.01.2014 which was on the basis of some calculation per sq. ft area. No way, the court has said it is compensation of an arrear rent for this period. This in our opinion, even this amount of Rs, 1,31,49,000/- is similar to the lump sum payment of Rs. 5 crore and purely in the nature of mesne profit.

The Ld. CIT (A) has referred to section 25B which was inserted from AY 2001-02 in the Income Tax Act, wherein it has been contemplated that if the Assessee has received any amount by way of arrear of rent from property not charged to income tax any previous year, then the amounts received after deduction of sum equal to 30% of such amount shall be deemed to the income chargeable under the head income from house property. Accordingly, he held that, the amount of Rs. 1,31,49,000/- is in the nature of arrear rent, for which he held is taxable.

Before us, the department has relied upon, the decision of Hon‟ble Madras High Court as referred to by the Assessing Officer and another judgment of Hon’ble Delhi High Court in the case of Sky Land Builders P. Ltd vs. ITO, (2020) 121 taxman.com 151. Ld. DR has also relied upon, another decision of Hon’ble Madras High Court in the case of Kenpadevammaa vs. CIT (2002) 121 taxman 35.

On the other hand, the Assessee has relied upon the decision of Hon‟ble Bombay High Court in the case of Good Will Creators P.

Hon‟ble Kerala High Court in the case of CIT vs. M/s Annamma Alexander (Supra), has considered and distinguished the view taken by the Hon’ble Madras High Court in P. Mariappa Gounder case in the following manner:-

All the aforesaid cases clearly support the assessee in this reference. Since the mesne profits are only damages for loss of property or goods, these are not in the nature of revenue receipts. The receipt of Rs. 2 lakhs is clearly capital in nature. The counsel for the revenue, however, invited our attention to a decision of the Madras High Court in CIT v. P. Mariappa Gounder [1984] 147 ITR 676. In that case, the assessee agreed to purchase a Tile Factory under an agreement dated 22-5-1950. The vendor, contrary to the agreement and in breach thereof, sold it to another person and put him in possession. The assessee sued the vendor for specific performance. This suit was decreed in favour of the assessee and the same was affirmed by the Supreme Court. The Supreme Court also decreed mesne profits payable to the assessee as fixed by the 28 & 1018/Mum/2020 AMRUT ENTERPRISES trial Court. The Madras High Court held that a claim to mesne profits is usually directed against the one who has deprived the true owner of possession of his' property and who has thereby prevented the true owner from enjoying the income therefrom or usufruce of the property. When in such a suit or proceeding, the Court awards mesne profits to the true owner, it represents a just recompense to the true owner for the deprivation of the income which ought to have come into his hands, but for the interference of the person in wrongful possession of the property. It is in recognition of this principle that the true owner is entitled to the income from the property and the person who is in wrongful possession is to compensate the true owner by paying either the actual income from the property or a reasonable estimate of that income. Consequently, the mesne profits are also a species of taxable income.

In view of the, aforesaid decisions and the way has been deferred by the two High Court the Reliance placed by the department in case of “P. Mariappa Gounder” is not followed and accordingly, respectively following the judgment of Jurisdictional High Court in the case of good will creators P. Ltd. this issue is decided in the favor of the Assessee.

In so far as the decision of Hon‟ble Delhi High Court in the case of Sky Land Builders P. Ltd. (supra) vs. ITO, the Hon‟ble 30 & 1018/Mum/2020 AMRUT ENTERPRISES High Court referred to the decision of Supreme Court in P. Mariappa Gounder and held that, since Madras High Court decision has been confirmed, therefore the Calcutta High Court and Kerala High Court cannot be followed. But that in case before the Hon‟ble Supreme Court the only issue was year of taxability and nowhere there was any issue raised, whether the mesne profit receipts for illegal occupation of property is revenue receipt or capital receipt. Thus, the decision of Hon‟ble Delhi High Court is not being followed for this reason and accordingly, we are following the decision of M/s. Annamma Alexander 191 ITR 551 Kerala High Court; judgment of Calcutta High Court in the case of Smt. Leela Ghosh 205 ITR 9; and more importantly the judgement of Hon‟ble Jurisdictional High Court in the case of CIT vs. Good Will Creators P. Ltd (Supra). Thus, we hold that entire receipts of Rs. 6,31,49,000/- is capital receipts is not chargeable to tax.

Accordingly, appeal of the Assessee is allowed and revenue appeal is dismissed.

In AY 2015-16 the amount of Rs. 1,05,19200/- is also in the nature of mesne profits only as discussed in detail in the aforesaid

Accordingly, the appeals of the Assessee for A.Y. 2014-15 and 2015-16 are allowed and revenue’s appeal for A.Y. 2014-15 is dismissed.