COMMISSIONER OF INCOME TAX (CIT) V. Mrs. ANNAMMA ALEXANDER AND Ors.
Decided by the High Court of Kerala.
CITATION: 1991 191 ITR 551 Ker
13 March, 1991
FACTS OF THE CASE:
Mrs. Annamma Alexander is the original assessee in this case who is the legal heir of late Mr. Alexander. After the death of Mrs. Annamma Alexander in 1991 the brothers and sisters of Annamma has impleaded as additional respondents in the case.
The ancestor of the assessee late Mr. Alexander filed a suit for eviction of the trespassers in his 131.23 acres of land. The trespassers were the Nair service society, the manager and four others. The land was divided into two parts as list(a) and list(b). the claim of assessee on list(a) was ordered in his favour and a commission was set up to determine the compensation payable, which determined the amount of compensation to be awarded as Rs.10,19,160 including the interests ordered by the court. The assessee went on appeal to the High Court. The High Court in its order (K.C. Alexander V. Nair Service Society) ordered that the aforesaid decree was not only applicable to list(a) but also to list(b) properties. The HC ordered the assessee was entitled to mesne profits for list(a) properties with different interest rates from the date of trespass to the date of order of the court. The High court through its decree awarded the assessee mesne profits in respect of List(a) properties from the date of trespass to the date of institution of the suit, at the rate of Rs. 5,000 per annum and, thereafter, at the rate of Rs. 31,193 per annum from the date of the suit to the date of the judgment by the High Court. Under item no.2 of the decree the assessee was also entitled to an interest of six percent per annum on the calculated mesne profits from the date of its accrual. A sum of Rs.2,06,423 was also awarded as compensation for waste with interest of six per cent per annum.
The Nair society service society not being satisfied by the judgment of the HC went on to appeal to the Supreme Court (Nair Service Society V. K.C. Alexander). The SC reaffirmed the judgment of the HC.
The total amount of the assessee, treated as income for the assessment year 1966-1967 was 3,29,160. A question arose whether the interest amount awarded under item no.2 was a revenue receipt in the hands of the assessee. It is important to note that the Income tax officer did not seek to tax the compensation awarded under the decree but the area of confusion was whether the interest awarded on each year’s mesne profit was taxable as revenue receipts or not.
ISSUES DEALT:
1. Whether, on the facts and in the circumstances of the case, the amount of interest receipt on the mesne profits is income under the Income-tax Act ?
2. Whether, on the facts and in the circumstances of the case, the entire interest receipt as per the judgment of the High Court passed on December 23, 1965, is assessable in the assessment year 1966-67?
3. Should not the Tribunal have considered the question of the year or years in which the amount is to be assessed?
CASE AS DECIDED BY THE INCOME TAX OFFICER:
Plea of assessee:
a. The assessee brought before the court the findings in the case of the CIT V. Periyar and Pareekanni rubbers Ltd.: in this case the assessee had in the assessment year received Rs.24,103.33 as compensation by way of interest on the compensation amount payable to him on compulsory acquisition of land that belonged to the company under the Land Acquisition Act, 1894. The land was acquired by the government not under the Act but by an agreement between the assessee and the government on November 29, 1961 and the order was passed in August 31, 1962. The amount represented the interest on the amount of compensation awarded between November 29, 1961 to September 6, 1962 the date of payment. The court held that the interest between the period of November 29, 1961 to August 31, 1962 was alone to be treated as capital receipts as compensation for deprivation of property and the interest for the period September 1 to September 6, 1962 will be treated as revenue receipts and The court drew a distinction between acquiring possession under the provisions of the Act and otherwise. In the absence of such provision of law any acquisition made either by agreement or unauthorizedly means deprivation of property and any amount paid as interest in such cases will be treated as compensation only. The fact that compensation that is payable for such deprivation is calculated on a percentage of interest on that amount does not affect the question It is still compensation for deprivation of property.1
b. Certain observations in the Law and Practice of Income Tax by Kanga and Palkhivala, Seventh Edition, Volume I, page 142 was also relied upon by the
The Income tax officer held that the interest amount being specified, there cannot be any ambiguity in the nature of the receipt.
DECISION OF COMMISSIONER OF INCOME TAX (APPEALS):
The commissioner of the Income Tax held that the mesne profit and interest of mesne profit (i.e.) mesne profit proper, are of different nature and therefore mesne profit is not taxable but the mesne profit proper is taxable under law. The Commissioner also observed that the amount of interest being awarded for several years it cannot be assessed with reference of the date of judgment. Only that amount which is referred to the specific relevant year can be taxed on that assessment year.
APPEAL BEFORE THE INCOME-TAX APPELLATE TRIBUNAL:
Plea of assessee:
The assessee contended that the interest on the mesne profit will also form a part of the mesne profit and therefore cannot be treated as revenue receipts. The plea of agricultural income was also contended by the assessee.
Plea of the revenue:
The revenue argued that the interest is an amount accrued to the assessee by the court through its judgment but not a part of the compensation which he would have been entitled before the date of the judgment. Therefore, it must be made taxable in the hands of the assessee.
Decision:
The tribunal pointing out the error made by the Income tax officer in not considering the mesne profits proper, i.e., the amount determined from the date of dispossession to the date of institution of the suit and from the date of the suit to the date of the judgment of the High Court. The tribunal held that the interest received by the assessee will not form a part of the income of the assessee and therefore not taxable in the hands of the assessee. The amount having been decided that it will not form a part of the income the plea of the assessee that it formed a part of agricultural income was not considered.
The court relied on the following judgment to come to this conclusion.
a. CIT V. PERIYAR AND PAREEKANNI RUBBERS LTD:
In this case an amount was paid as compensation by way of interest on the compensation amount payable to the assessee on compulsory acquisition of land that belonged to the company under the Land Acquisition Act, 1894 for deprivation of property without authority of law. The court held that the interest awarded for the period of possession of the property before the order of the court will be treated as compensation2 for deprivation of the property and the nature of the possession of property has changed only from the date of the order of the court. Therefore, for the unlawful possession of property prior to such date any amount or interest awarded shall be treated as capital receipts not taxable in the hands of the assessee. Any interest paid between the period of judgment and the date of payment; the court refused to allow deductions.
b. CIT V. RANI PRAYAG KUMARI DEBI3
The Raja of Jharia had died in 1916, left behind moveable and non-moveable assets. It was taken over by Raja Shiva Prasad Singh claiming to be the owner of such assets. The assessee along with two co-widows filed suit for entitlement of such assets. The court ordered the moveable assets not belonging to the Raja to be returned to the assessee and other two widows and for the assets which cannot be returned due to any reasons a value of compensation for such assets. Damages for all moveables to be returned in the form of damages for detention was also ordered by the court. Later a compromise was arrived at between the parties. The question arose for the assessment year 1937-38, the previous year of which the assessee had received an amount of 1 lakh as compensation, whether such amount is subject to taxation? The Income tax department wanted to tax an amount of Rs.62,500 which was asserted to be the income of the assessee. The assessee contended that the amount received by her was her income but it was awarded as compensation for unlawful detention of her properties. Hence the question whether the amount received is income in the hands of the assessee? The court was of the opinion that the amount Rs.62,500 was received as damages for the detention of the moveable properties of the assessee. As for the interest paid the court said that it formed a part of the damages. The interest paid will not form any part of the agreement between the parties either express or implied but it will be damages only. The court held that “in the absence of any usage or contract, express or implied or of any provision of law to justify the award of interest on the decretal for that period could not be allowed by way of damages caused to the respondents for the wrongful detention of their money by the railway company.”4
APPEAL BEFORE THE HIGH COURT OF KERALA
A. ARGUMENTS OF THE REVENUE:
the council for the revenue contended that the mesne profit itself will form a part of the income and therefore the in interest entitled on the mesne profits will also form a part of the income and hence taxable. The following judgments was relied upon by the council of revenue.
i. Mahant Narayana Dasjee Varu v. Tirumalai Tirupathi Devasthanam:5
The Devasthanam committee demanded for the of possession of the property belonging to the Devasthanam’s. Later, they filed a suit for possession of the property. They were entitled to such possession from and after June 7, 1933 when the Tirumalai Tirupathi Devasthanam Act was passed. The suit claimed for possession of the property and for mesne profits. The subordinate judge passed an order entitling the Devasthanam committee of mesne profits with an interest at six percent from the date of decree of the court and until the date of realisation.
However, on appeal the High Court reduced both the amount of mesne profit and the interest on the mesne profits. On appeal the learned judges had looked into the definition of mesne profits under section 2(12) of the Civil Procedure Code for ascertaining the nature of the mesne profits and the interest on such mesne profits. According to section 2(12) of the Civil Procedure Code, mesne profits of property mean, “those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received therefrom, together with interest on such profits but not include profits due to improvement made by the person in wrongful possession.” The court pointed out that the phrase “together with interest” makes it clear that the interest forms an integral part of the mesne profits. The Devasthanam being entitled to the possession of the property were deprived of such possession by the Mahants and therefore the amount paid by the Mahant including the interests will form an integral part of the damages bound to be paid.
ii. CIT v. P. Mariappa Gounder:6
The facts that led to this case is that the assessee agreed to buy a factory from the vendor for a consideration of Rs.90,003 and he also paid an advance of Rs.5,003. However, the vendor committed a breach of the agreement by selling the factory to a third party, Kochu Vareed. The third party took possession of the factory. Thereafter, the assessee sued the vendor for specific performance of the agreement between him and the vendor. Kochu Vareed impleaded and case and fought against the assessee. The trial court ordered for the specific performance of the agreement. Being aggrieved by the trial court order Kochu Vareed filed an appeal to the Kerala High Court which reversed Trial court order. The assessee went on appeal to the Supreme Court where the decree of the rail court was revived and the court also ordered that the assessee was entitled to damages in form of mesne profits and order the trial court to determine the quantum of the mesne profit. The amount was determined to be Rs.67,093.
The relevant issue that arose from the above said facts was whether the amount received by the assessee will form a part of the assessee’s income making it taxable. The Income tax officer, AAC and the Income tax appellate authority were of the opinion that the amount received by the assessee will form a part of the income of the assessee.
The appeal lay to the High Court of Madras to determine whether the amount received will constitute to the income of the assessee. The learned judges looking into the definition of mesne profits in the code of Civil Procedure opined that the language in the Code dealt with the methodology of calculating the mesne profits rather than the nature of the mesne profits. when the trespasser is in the possession of the property, he not only defies the owner of his title over the property but also deprives him of the income or the usufruct he would have earned had he been in the possession of the property. Therefore, the main reason for decree of mesne profit is to entitle the rightful owner not only of his title over the property but also to make the trespasser pay the income earned during the time of wrongful possession or the estimate of such value. Having consideration to the above said contentions the court held that the amount in the hands of the assessee in the nature of mesne profits are taxable.
B. ARGUMENTS OF THE ASSESSEE:
The council for the assessee relied mainly on the definition of mesne profits under section 2(12) of the Code of Civil Procedure. The phrase “including interests” used in the definition makes it clear that the interest paid also forms a part of the mesne profit awarded as damages.
The council for the assessee relied on the following judgment:
i. Periyar and Pareekanni Rubbers Ltd.’s case7:
The government had taken possession of the property of the assessee not in accordance with the section 16 or section 17 of the Land Acquisition Act but under an agreement made between the government and the assessee. The government took he possession of the property on November 29, 1961. The court through its order dated August 31, 1962 held that the property will be under the control of the government form the date of order and the period between the date of acquisition of possession of the property and the date of the order is considered to be a period in which the government was in wrongful possession of the property (i.e.) deprived the assessee of his rightful possession. Therefore, damages were awarded to the assessee for such period along with an amount of Rs.24,106.33 which represented the interest on the amount of compensation awarded for the period between November 26, 1961 to September 6, 1962 (date of payment).
The question arose with reference to the assessment year 1963 to-64. The question was whether the amount received by the assessee in the previous year was taxable or not. The tribunal held that the interest amount for the period between November 29, 1961 to August 31, 1962 being a period depriving the assessee of his property, to be of the nature of capital receipt not taxable. The interest paid for the period of September 1, 1962 to September 6, 1962 will be in the nature revenue receipts and not exempt from taxation. This decision was challenged by the revenue in the High Court of Kerala.
The High Court drew a distinction between the two ways of acquisition of property by the government. One way is through the authority under law (i.e.) under sections 16 and 17 of The Land Acquisition Act where the property will vest in the government. Any other ways of acquisition of property will not be lawful and will result in deprivation of property from the lawful owner and any amount decreed including the interests will only amount to mesne profits in nature of capital receipts not taxable in the hands of the assessee. The fact that compensation that is payable for such deprivation is calculated on a percentage of interest on that amount does not affect the question. It is still compensation for deprivation of property.8 Therefore the court held that the amount would be nothing other than damages for deprivation of property, not taxable.
JUDGMENT:
I. FINDINGS OF THE COURT:
The court while deciding the issue has looked into the definition of mesne profits. Section 2(12) of the Code of Civil Procedure defines mesne profit as:
‘mesne profits’ of property means those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received therefrom, together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession.”
According to this definition mesne profits are profits which the person in wrongful possession of the such property has or would have received during such period of wrongful possession. The definition also includes interests to form a part of mesne profits but makes it clear that any profit which the person in wrongful possession has received due to any improvements made by him in such property will not form a part of mesne profit.
The learned judges have also drawn attention to the definition of mesne profit as decided in the following cases:
i. Girish Chunder Lahiri v. Shoshi Shikhareswar Roy:9
The court in this case has said that “mesne profits in the nature of damages which the Court may mould according to the justice of the case.”
ii. In Lucy Kochuvareed v. Mariappa Gounder10:
In this case the court was of the opinion that though the definition of mesne profits under section 2(12) may be the basic principle governing the liability under mesne profits, no single rule can be laid down to govern the award and assessment in every case, mesne profit being damages paid for deprivation of possession of property, the court may mould the rule according to each case for the purpose of serving justice.
The learned judges of the Kerala High Court had commented on the quality of the claim of interest as compensation. The Kerala High Court had said that if the claim for such interest as compensation is for deprivation of use of money at the due date then such interest would become income in the hands of the assessee because such interest will represent the profit the assessee would have made had he been in the use of money at that time. On the other hand, if the claim for interest as compensation is to make good for the loss of property or loss of goods or some other injury to the capital then the interest paid for such capital loss will only be of the nature of capital receipt.
Therefore, mesne profits and interests on such mesne profit are only damages for the loss of property or goods and are only in the nature of capital receipts and not revenue receipts.
The court has pointed out the decision of the appellate tribunal in this present case where the tribunal held that the interest decreed under item no.2 will form an integral part of the mesne profit. Since the interest is an integral part of mesne profit it is of the nature of capital receipt not taxable.
The court took a similar view of the appellate tribunal and held that mesne profits are compensation paid to the person deprived of possession of his property in the nature of damages and such mesne profits are of the nature of capital receipt not taxable. The interest paid will also form an integral part of the mesne profit and are not taxable. The court cites the case of CIT v. Rani Prayag Kumari Debi11 to support its stand. In this case as already stated the estate held by the holder was taken into possession by a distant relative on death of the holder. A suit was filed for possession and damages was decreed. The court opined that the damages entitled to the widow of the holder are mesne profits in the nature of capital receipts awarded for deprivation of property by the widow. Such damages will not form a part of the income but are capital receipts not taxable in the hands of the widow. Another case cited by the Kerala High court in its judgment is CIT v. Periyar and Pareekanni Rubbers Ltd.12. this case has also already been discussed above. In this case the court held that when a property is not acquired according to the Land Acquisition Act then it results in deprivation of property by the lawful owner and any amount paid in compensation will only be of the nature of capital receipts.
The decision in both the cases are of the view that compensation for deprivation of property including any interest awarded will be only of the nature of capital receipt and hence not taxable. The mere fact that the mesne profits are calculated with reference to the profit the person in wrongful possession had received or would have received will not render the mesne profit as income. The term “profit” will have no effect in determining the nature of the compensation awarded as revenue receipt, such compensation will still have the nature of capital receipt irrespective of the term “profit” used in determining the amount.
The decision of the Punjab and Haryana High Court13 has categorically laid down that “if interest is received on the basis of a contract or under a statute, the same is taxable, but if interest is awarded by the court for loss suffered on account of deprivation of property it amounts to compensation, though called interest, and would not be taxable”.
In the case of CIT v. Chiranji Lal Multani Mal Rai Bahadur (P) Ltd14 if the interest is paid to the assessee out of a contract or agreement then it will become taxable but if the interest is awarded by the decree of the court for deprivation of property then though it is interest it will amount compensation and not taxable.
The view that the mesne profit awarded as compensation for deprivation of possession by the rightful owner is in the nature of revenue receipts liable for assessment as income15 has been dissented by the Kerala High Court and it has been held that such compensation are of the nature of Capital receipts not forming a part of the income and hence not taxable in the hands of the assessee.
II. DECISION:
The Kerala High court held that the Appellate Tribunal was right in holding that the interest awarded on the mesne profits to the assessee in the present case are not of the nature of revenue receipts. The order was decreed in favour of the assessee and in negative of the revenue. Therefore, the question whether such amount should be assessable in the 1966-67 or the year or years in which it became due does not arise for consideration itself.
OBSERVATION OF THE CASE:
Mesne profits are damages paid to the rightful owner of the property by the person who had been in the wrongful possession of the property thereby depriving the rightful owner the right to possession over his property. As stated in section 2(12) of the Code of Civil Procedure mesne profits includes the interests paid on such mesne profit. However, profit made by the person in wrongful possession out of any improvements made by him in such property will not be included in mesne profits.
The question that the court has answered in this case is whether the mesne profit is of the nature of capital receipts or revenue receipts. Another question answered by the court is whether the interest paid on the mesne profit forma an integral part of the mesne profit or not.
Capital receipts:
Capital receipt are inflow of cash out of financial or capital activities and not out of any operating activities of the business. These kind of activity does not take place routinely. The capital receipts will either create liability of the business or reduce the asset of the business. Example, taking a loan to run the business or selling an unnecessary equipment.
Revenue receipts:
Revenue receipts neither create any liability in the business nor reduces the assets of the business. These receipts are of recurring nature. The affect the profit or loss of the business. For example, on selling or delivering the goods to a customer the business is entitled to revenue or is said to have earned a revenue.
With regard to mesne profits, mesne profits deal with property which are capital assets. Therefore, the compensation which is given for depriving the lawful owner of his property will be of the nature of capital receipt. It is also to be noted that if the compensation is given as damages for a capital asset of enduring nature only then it will be of a capital receipt but if the compensation is a payment by agreement then it will be the nature of only a revenue receipt.
A decree of mesne profits is to make good for the deprivation of the sums that were rightful to the owner of the property. Therefore, mesne profits can only be regarded as compensation and it will not form any part of the income of the assessee.
Mesne profit is of the nature of capital receipt and since the interest on mesne profit also forms an integral part of the mesne profit it will also be of the nature of capital receipts. Capital receipts are not taxable in the hands of the assessee, mesne profits thus received by the assessee will not be liable to be taxed.
REFERENCES:
http://www.bareactslive.com/ACA/ACT379.HTM
https://indiankanoon.org/doc/1843082/
Notes:
1 Dr. Shamlal Narula v. Commissioner of Income-tax
2 Vallabhdas Naranji v. Development Officer, Bandra, A.I.R. 1929 P.C. 163 Dr. Shamlal Narula v. Commissioner of Income-tax
3 [1940] 8 ITR 25
4 Commissioner of Income Tax, Bihar … vs Rani Prayag Kumari Debi. 1940 8 ITR 25 Patna
5 AIR 1965 SC 1231, 1235
6 [1984] 147 ITR 676 at pp. 680, 681 and 682
7[1973] 87 ITR 666 (Ker)
8 T. N. K. Govindarajulu Chetty v. Commissioner of Income-tax, [1967] 66 I.T.R. 465
9 [1900] 27 1A 110, 112
10 AIR 1979 SC 1214
11 Supra
12 Supra
13 CIT v. Chiranji Lal Multani Mal Rai Bahadur (P) Ltd. [1989] 179 ITR 157, 160,
14 [1989] 179 ITR 157, 160,
15 CIT v. P. Mariappa Gounder [1984] 147 ITR 676, 681
Girish Chunder Lohiri v. Shoshi Shikhareswari Roy [1900] 27 IA 110 Periyar and Pareekanni Rubbers Ltd. [1973] 87 ITR 666
CIT v. Rani Prayag Kumari Debi [1940] 8 ITR 25
****
Author of the Research Article: SUJEE.P | SASTRA Deemed to be University, Thirumalaisamudhram, Thanjavur.
