Mesne profits and interest on mesne profits awarded by Court for unauthorised occupation by tenant taxable tax u/s 23(1)
ABCAUS Case Law Citation
ABCAUS 3419 (2020) (11) HC
Important case law relied upon by the parties:
CIT vs. P. Mariappa Gounder 147 ITR 676
CIT vs. Smt. Leela Ghosh 205 ITR 9
Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. Commissioner of Income Tax (1997) 227 ITR 172 (SC)
East India Housing and Land Development Trust Limited vs. CIT (1961) 42 ITR 49 (SC)
Sultan Brothers vs. CIT (1964) 51 ITR 353 (SC)
Karanpura Development Co. Ltd. vs. CIT (1962) 44 ITR 362 (SC)
Kettlewell Bullen and Co. Ltd.
In a recent judgment the Hon’ble High Court has held that mesne profits and interest on mesne profits received under the direction of the Civil Court for unauthorised occupation of the immovable property of the assessee by the tenant was liable to tax under Section 23(1) of the Income Tax Act,1961 (the Act).
In the instant case, the assessee had challenged the order passed by the ITAT in rejecting the submission of the assesse that the mesne profits received by it constituted capital receipt and, as such, were not taxable under the Act.
The assessee had let out its property for a period of five years, and the monthly rent was liable to be increased after first three years. The lessee did not comply with term of the rent increase and therefore, the assesse terminated the lease agreement.
The assesse filed a suit for damages/Mesne Profit and for restoration of the premises. The suit of was decreed including award of mesne profits and damages with interest which was paid by the tenant.
In the return of income filed, the assesse claimed the mesne profit and interest on it as a capital receipt, not liable to be taxed as income.
However, the AO held that Mesne Profits awarded to the assessee was a revenue receipt and taxable as income.
Taxability of Mesne profits
Distinguishing the decisions relied upon by the assessee, and applying the broad principles laid down by the Hon’ble Supreme Court the Hon’ble High Court held that the receipt of mesne profits and interest thereon by the assessee was a revenue receipt.
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The Hon’ble High Court pointed out that the capital asset of the appellant i.e. the property in question was earning revenue for the appellant by way of rent till so long as the lease subsisted. After the termination of the lease, the erstwhile tenant continued to occupy the premises unauthorised. It was in lieu of the rent which the appellant would have otherwise derived from the tenant, that the mesne profits and interest thereon had been awarded. So far as the capital asset of the assesse was concerned, the same had remained intact.
Further the Hon’ble High Court stated that it was not the appellants case that there was any damage to the property/ capital asset in as much, as, the building structure was damaged by the tenant ,and that damages had been awarded by the Court on account of such physical damage.
The Hon’ble High Court clarified that had it been a case where the capital asset would have been subjected to physical damage, or of diminution of the title to the capital asset, and damages would have been awarded under the head, there would have been merit in the appellant’s claim that damages received for harm and injury to the capital asset, or on account of its diminution, would be a capital receipt