VILE PARLE PRARTHANA CO-OP.HSG. SOC.LIMITED,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX -25(3), MUMBAI

Thus, total amount of Rs. 2.40 Crores was granted by the Small Causes court as Mesne Profits to the assessee’s society. For the sake of ready reference the relevant part of the decree passed by the Small Causes Court dated 11.10.2011 is reproduced below: - “It is ordered that- A. Mesne Profit application No. 17 of 2008 is allowed as under : (i) Defendant shall pay to the Plaintiffs Mesne Profits @ 200/- Per sq.ft. per month together with interest @ 6% p.a. From 9.1.2007 till (30.11.2008), realization thereof. (ii) Decree be drawn up accordingly. Given under my hand & seal of the court This the 11th day of October of 2010. Sd/- (V.S.KUlkarni) Judge, C.R.32.”

Ld. AO after considering the assessee’s submissions held that the Mesne Profits cannot be considered as capital receipt. Since assessee was receiving rent from bank since 1982 and had & 1411/Mum/2018 Vile Parle Prarthana CHS Ltd., applied before the court for enhancing the rent amount being received by the bank, which Court had ordered the bank to pay rent @ Rs.200 per sq. feet per month with interest @6% for overdue amount. Thus, it amounts to rental receipts only. There is no deprivation from the property or infringement of the rights. He thus held that an amount of Rs.2.40 crores received in A.Y.2012-13 and A.Y. 2013-14 is to be taxed as revenue receipts.

Ld. CIT(A) has upheld the order of the ld. AO after giving partial relief to the following extent: - In AY 2012-13, the addition or Rs.2.40 crores, by way 1. of mesne profits was reduced to Rs.2 crores, because during the relevant financial year, the Society had only received a sum of Rs.2 crores, out of the total amount of mesne profits of Rs.2.40 crores.

In AY 2014-15, the addition of Rs. 39,23,278/-, by way of mesne profits.

We have heard both the parties, perused the rival material placed on record as well as the various judicial judgments relied upon by the parties. Ld. Counsel before us submitted that, this issue has been covered by the decision of the Special Bench of the Tribunal of Five Members in the case of Narang Overseas P. Ltd., v. ACIT reported in [2008] 300 ITR AT(1)(Mum) (SB), according to which Mesne Profits, including interest received for the deprivation of the use and occupation of the property, would be a capital receipts not chargeable to tax. He further relied upon various other judgments of the Hon’ble High Courts. He submitted that ld. CIT (A) relied upon various judgments to & 1411/Mum/2018 Vile Parle Prarthana CHS Ltd., decide against assessee which has been duly considered by the Special Bench of the Tribunal. In so far as reliance placed by the ld. CIT(A) on the Judgment of CIT v. Goodwill Theatres P. Limited [400 ITR 566], the Hon’ble Supreme Court has only directed the Hon’ble Bombay High Court to decide the issue of exemption of Mesne profits on merits.

On the other hand, ld. DR relied upon the judgment of the Hon’ble Delhi High court in the case of Skyland Builders (P.) Ltd., v. ITO reported in [2020] 429 ITR 255 (Delhi), wherein the Hon’ble High Court has held that Mesne Profits and interest on Mesne profits received under the direction of Civil Court for un-authorised occupation of immovable property of the assessee by erstwhile tenants of the assessee is liable to tax u/s. 23(1) of the Act. Thus, it was held to be a revenue receipts.

We find that this Tribunal in the case of ACIT vs. Amrut Enterprises in ITA No. No.1215/Mum/2020, 1017& 1018/Mum/2020 vide judgment and order dated 02/01/2023, has discussed this issue of Mesne profits, whether it is a capital or revenue receipt after discussing the judgment of the Hon’ble Madras High Court in the case of CIT vs. P Mariappa Gounder reported in 147 ITR 176 and judgment of Hon’ble Delhi High Court in the case of Skyland Builders (P) Ltd., reported in 429 ITR 255. The Tribunal finally referring to various judgments held holding that it is a capital receipt. The relevant observation and the finding are as under:-

In short, mesne profits are a nature of damages for deprivation of for use and occupation of the property which is some 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…………………………………………………………….. 20. ……………………………………………………………………….. 21. ……………………………………………………………………….. 22. ……………………………………………………………………….. 23. ……………………………………………………………………….. 24. ………………………………………………………………………..

Before us, the department has relied upon, the decision of Hon’ble Madras High Court as referred to by the Assessing Officer & 1411/Mum/2018 Vile Parle Prarthana CHS Ltd., 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. 15 & 1018 /Mum/2020 AMRUT ENTERPRISES Ltd. 386 ITR 394; decision in the case of M/s. Annamma Alexander 191 ITR 551 Kerala High Court; and judgment of Calcutta High Court in the case of Smt. Leela Ghosh 205 ITR 9. The Hon‟ble Bombay High Court in the case of "CIT vs. Good Will Creators P. Ltd (Supra) held that, mesne profits received by the Assessee from a person on a wrongful possession of his property is a capital receipt not chargeable to tax, conforming the view of the Tribunal relying upon the decision of the special bench of the Tribunal in the case of Narang Overseas P. Ltd reported in 111 ITT 1.

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:- "The decision of the Madras High Court in P Mariappa Gounder's case (supra) at p. 681 prima facie supports the plea of the revenue that mesne profits awarded by the Court for wrongful possession are liable to be assessed as income. The discussion is contained in p. 681 With great respect to the learned Judges, who rendered the said decision, we are of the view that the said decision fails to give due effect to the decision of the Judicial Committee of the Privy Council in Girish Chunder Lahiri's case (supra) and the decision of the Supreme Court in Lucy Kochuvareed's case (supra) at p. 158, para 24. It is also not in accord with the earlier Bench decision of this Court in Periyar & Pareekanni Rubbers Lid's case (supra) and the decision of the Patna High Court in Rani Prayag Kumari Debi's case (supra). To the extent the said decision of the Madras High Court holds that mesne profits awarded by the Court for wrongful possession are liable to be assessed as income, we & 1411/Mum/2018 Vile Parle Prarthana CHS Ltd., express our respectful dissent, in view of the clear character of the receipt mesne profits- as a capital receipt. The Hon’ble Court went event to the extent of holding that amount of interest received on mesne profit cannot be treated as revenue receipts taxable in the hands of the Assessee. The court has referred to the various decisions and also the report of Judicial Committee of the principle laid down by Privy Council in Girish Chandar Lahari vs. Sakshi" and many other decisions of the Hon’ble Supreme Court.

Further, Hon’ble Calcutta High Court in the case of CIT vs. Smt Leela Ghosh, wherein Hon’ble Calcutta High Court after referring to various decisions rendered on mesne profit and definition given in the CPC have also deferred from the view taken by the Hon’ble Madras High Court. Relevant observations of their Lordships in this regard read as under:- 17. 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 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 & 1411/Mum/2018 Vile Parle Prarthana CHS Ltd., 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.

With great respect to the learned Judges, we could not persuade ourselves to agree with the views expressed by the Madras High Court in the aforesaid decision so far as it holds that mesne profits awarded by the Court for wrongful possession are liable to be assessed as income. Neither the decision of the Privy Council in Girish Chunder Lahiri's case (supra) nor the decision of the Supreme Court in Lucy Kochuvareed's case (supra) was either cited or noticed by the learned Judges of the Madras High Court. In fact, even the decision of the Patna High Court in Rani Prayag Kumari Debi's case (supra) and that of the Kerala High Court in Perriyar & Pareekanni Rubbers Ltd.'s case (supra) were neither noticed nor considered by the Madras High Court. In our view, on the facts of this case, the Tribunal was justified in holding that the mesne profits of Rs. 2 lakhs received by the assessee in this case were in the nature of damages and, therefore, capital receipt.

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 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 & 1411/Mum/2018 Vile Parle Prarthana CHS Ltd., 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.

Thus, we find that there are divergent opinions by different High Courts on this issue, therefore, the judgment of Hon’ble Kerala High Court in the case of CIT vs. Annamma Alexander 191 ITR 551 Kerala High Court; and judgment of Calcutta High Court in the case of Smt. Leela Ghosh 205 ITR 9 is being followed. It is a well settled law that, if there are two divergent views of different High Courts, then one favour to the assessee should be followed. Accordingly, we hold that Mesne profit is treated as capital receipt not chargeable to tax. In the result, this issue is decided in favour of the assessee for both the A.Yrs. 2012-13 and 2014-15.

In the result, both the appeals of the assessee are allowed.