COL. JASPAL SINGH,NEW DELHI vs. ITO, NEW DELHI

PER B.P. JAIN, ACCOUNTANT MEMBER:

1. That on the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals)-21, New Delhi [briefly "the CIT(A)"] has erred in upholding the assessment of income at Rs.14,03,626/- as against declared income of Rs.3,28,260/-. The Appellant denies his liability to be assessed at the total income of Rs.14,03,626/-.

2. That on the facts and circumstances of the case and in law, the CIT(A) has erred in holding that the mesne profit is a revenue receipt and as such, addition of Rs.10,75,365/- on account of mesne profit was rightly made.

3. That on the facts and circumstances of the case and in law, the CIT(A) erred in not following the binding decision of this Hon'ble Tribunal in ITO vs. Late Shri Sandeep Goyal, IT A 2603/Del/2012 dated 5.4.2013. That the appellant craves leave to add, alter, amend or vary any of the ground either at or before the hearing of the appeal.”

"In view of the these judgments, it cannot he said that in the ease of P. Mariappa Gounder (supra), the Hon'ble Supreme Court adjudicated the issue regarding the nature and character of the mesne profits. The judgment of the Apex Court is restricted only to the issue regarding the year of taxability C Further, in paragraph 23 (page 2j), it was held that: "The above discussion clearly reveals that judgment of the Hon'ble Supreme Court in the case of P. Mariappa Gounder (supra) only decides the issue regarding the year of taxability of the mesne profits. That judgment, therefore, cannot be said to be an authority for the I proposition that nature of mesne profits is revenue receipts chargeable to tax. Accordingly, the contention of Revenue that the issue regarding the nature of mesne profits is covered by the aforesaid decision of the Hon the Supreme Court cannot be accepted dispute that there is a cleavage of opinion expressed by the High Courts on this issue". Discussing all the case laws, including that of P. Mariappa Gounder. the Special Bench held in paragraph 49 (page 45) that: A "In the present case, after the termination of lease. NIHPL was occupying and using the ( property unauthorizedly and thus the assessee was deprived of the use and occupation of the ) property and therefore, the mesne profits received by the assessee under the consent decree awarded by the Apex Court at the rate of Rs. 10 lakhs p.m. was on account of damages for j deprivation of use and occupation of the profits and therefore, the sum so received was capital in nature not chargeable to tax." In paragraph 50 to 55 (page 45-48), the Special Bench examined the issue of taxability of interest from the date of termination of lease. It was observed in paragraph 55 that: "The above discussion clearly reveals that if the interest is paid for deprivation of use of money fallen due to them it is revenue receipt chargeable to lax. 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 lax. In the present case, it has already been held by us that mesne profit was f or deprivation of use and occupation of the property. The interest received bv the assessee is also for the same period as it is awarded up to the date of decree. The money has become due on the date of decree. Accordingly, it is held that interest from the date of termination of lease till the date of decree would be capital receipt not chargeable to tax. Notwithstanding the decision of Special Bench, which was directly on the issue because in the present case also the lease was terminated and mesne profits was on account of damages for deprivation of use and occupation, as in the case of Narang Overseas (P) Ltd (Supra), the Assessing Officer has assessed the mesne profits to tax. Out of Rs. 10,75.365/-, the amount of Rs.6,93,087/- was charged to tax u/s 25B of the Act, holding that the same w;as in addition to the rent and balance of Rs.3,82.278/- w as taxed as income from other sources. Appellate proceedings The CIT(A) upheld the assessment order following the case of P. Mariappa Gounder (supra). Submissions I. The issue is squarely covered by Special Bench order in Narang Overseas P Ld. (supra), wherein, judgment of Supreme Court in P. Mariappa Gounder (supra) was duly considered. II. In C1T v. Goodwill Theatres Pvt. Ltd. (2016) 386 ITR 294 (Bom), where Narang Overseas (P) Ltd (supra) was followed Hon’ble Bombay High Court has declined to admit the question of law holding that unless the Revenue challenges the order of the Special Bench, it would be unfair of the Revenue to pick and choose assessee where it would follow the decision of Special Bench in Narang Overseas P. Ltd. (supra)

III. The question whether mesne profits is a capital revenue receipt has not been considered Narang Overseas (P) Ltd (supra) by Hon’ble Delhi High Court either in Pal Properties (1) (P) Ltd. v. CIT f2002] 254 ITR 687 or in CIT v. Uberoi Sons (Machines) Ltd. (2012) 211 Taxman 123. In Pal Properties (supra) the questions before the Hon'ble Court were: ”1. Whether the Tribunal was right in law in holding that damages or any part thereof for illegal occupation of the premises accrued to the appellant though the claim therefore was yet to be adjudicated finally and was pending disposal before the High Court? 2. Whether the Tribunal is right is law in holding that the amount received by the appellant under interim order of the High Court dated 6- 1-1993 relevant to assessment year 1993-94 is taxable on month to month basis in assessment years 1990-91 and 1991-92 as relatable thereto?"

In Uberoi Sons (Machines) Ltd. (supra), tenant continued to occupy the premises and mesne profits towards arrears of rent for the assessment years 1992-93 to 1998-99 was sought to be taxed by reopening the assessments. The questions before the Hon'ble Court were: "(i) Whether the ITAT was, in the facts and circumstances of the case, correct in law in quashing the re-assessment order passed by the Assessing Officer under Section 147(1) of the Income Tax Act, 1961? (ii) Whether the ITAT was correct in law in holding that the excess amount payable to the assessee towards mesne profits/compensation for unauthorized use and occupation of the premises accrued to the assessee only upon the passing of the decree by the Civil Court on 14.10.1998?”

Since there is no direct decision of Delhi High Court, therefore, decision of Special Bench in Narang Overseas (P) Ltd (supra) is required to be followed, as held in CUT v. Janapriya Engineers Syndicate (2015) 371 ITR 439 (T&A.P.)”

On these facts, the Homble High Court observed at page 692 that: "Upon valid termination of tenancy, the tenant no longer remains a tenant but becomes a trespasser. For the purpose of his eviction, the appellant herein filed a suit and also claimed a decree for mesne profits. Rent and mesne profit connote two different meanings. ” Taking into consideration the facts of the case, the High Court at page 693 and 694 observed that: "In the instant case, the claim of the appellant against his erstwhile tenant is pending. The Us between the parties being pending adjudication, the fate thereof is unknown. In a given case, having regard to the delay in disposal of the matter, the parties may arrive at a settlement in terms whereof the landlord may give up his right of mesne profit or even pay some amount from his pocket. It, therefore, cannot be said that only because the claim of the appellant by wav of mesne profit denotes a higher amount of the rent, the same can be divided into two parts, as has been sought to be done by the Tribunal. ” In this background, the Hon'ble High Court answered the questions as under (page 696-697): "In that view of the matter, question No. 1 mast be answered in favour of the assessee and against the revenue. As a logical corollary, the quest ion No. 2 must also be answered in favour of the assessee and against the revenue. However, we may place on record that after a period of two years, by an interim order passed by the court, some amount had been directed to be paid to the assessee herein which the assessee had shown in its return without prejudice to its rights and contentions. We do not intend to express any opinion on merits so far as the contention of the assessee is concerned that despite the same, the income accrued by it, is not taxable. " The underlined portion clearly bring out that the High Court did not express any opinion on {taxability of the amount received pursuant to the interim order of the High Court dated 6.1.1993. ”