Mesne Profits are out of NET

Introduction

The profit accrued to a person on his wrongful possession of a property is deemed to be mesne profits. “Mesne Profits are profits of land taken by a tenant in wrongful possession from the time that the wrongful possession commenced to the time of the trial of an action of ejectment brought against him.”[1]“They are compensation, which is penal in nature and they correspond to the profits which the person in wrongful possession is receiving or might receive with due diligence for his wrongful occupation of the land.”[2]“Mesne profits are the amounts awarded against a person in wrongful possession of property”.[3]

‘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.”[4]They are the profits of an estate received by a tenant in wrongful possession between two dates. It is also termedMedium Tempus.[5]Further they are the rents and profits which a trespasser has, or might have,received or made during his occupation of the premises, and which therefore, he must pay over the true owner as compensation for the tort which he has committed.[6]Thus “Wrongful Possession” of the property is the most important condition for holding a person liable for mesne profits.

Taxability of mesne profits is not settled. Mesne profits are taxable only when they are revenue in nature and not when it is in the nature of capital receipt. This article aims at addressing this haziness.

Taxability

As already mentioned above there are diverse opinions as to whether mesne profits are capital receipt or revenue receipt. In order to determine the nature of the sum and its taxability, it is necessary to understand the meaning of the terms capital receipt and revenue receipt.

There is no concrete definition for capital and revenue receipt in the Income Tax Act, 1961. No straightjacket formula is available to determine the nature of the receipt either as capital or revenue.“The question whether the receipt is the capital or revenue has to be determined by drawing the conclusion of law ultimately from the facts of the particular case and it is not possible to lay down any single test as infallible or any single criterion as decisive.”[7]

Revenue receipts are chargeable to tax while capital receipts are not so, except for when it is expressly stated in law.

Mesne profits-Revenue Receipts

There are numerous judgements of various High Courts supporting eitherside. The Madras High Court in its landmark judgement CIT Vs P.Mariappa Gounder[8] held that mesne profits are deemed to be income and they are to be treated as revenue receipts, thereby making them chargeable to tax. The court in this regard stated that, “When, therefore, the court decrees mesne profits, that decree is in recognition of the position that the true owner is entitled to the income from the property and the person in wrongful possession is to compensate the true owner in that regard by paying either the actual income from the property or a reasonable estimate of that income. Having regard to these characteristics of mesne profits, there can be no doubt that they are also a species of taxable income.”[9]The Hon’ble High court of Delhi[10]pondered upon the meaning of the term “income” and held in consonance with Mariappa Goundercase(supra) that mesne profits are revenue receipts and are taxable.

Further, ITAT of Delhi[11] followed the ruling in Mariappa Gounder (supra) and held that mesne profits are income and are chargeable to  tax.

Mesne Profits- Capital Receipts

In one of its landmark judgement[12], the Kerala High Court took a different view from High Court of Madras and held that “Mesne profits are only an award for compensation for the loss of property or injury to the capital…Therefore, we have no hesitation to hold that mesne profits awarded by the decree are only damages for loss of property or goods and are only a capital receipt and not revenue receipt”.

The same was reiterated by the Hon’ble Calcutta High court,[13] wherein mesne profits are only damages in nature and therefore not revenue receipt chargeable to tax.

Similarly, in various judgements viz, CIT Vs M/s Goodwill Theatres Pvt Ltd[14], Achutan Pillai Vs CIT[15], Narang Overseas Pvt Ltd Vs The ACIT[16] etc, the respective High Courts and ITAT held that mesne profits are capital receipts and not chargeable to tax.

View of the Apex Court

The Mariappa Gounder case reached Supreme Court in which the assessee took only one issue that, year of taxability and not the issue whether mesne profit is taxable or not.

The point of reference before the Madras High Court in Mariappa Gounder(supra), there were two issues that were to be addressed and they were:

“(1) Whether mesne profits, decreed by a court of law, can be held to be taxable income in the hands of the decree holder?

(2) The other question is about the relevant year in which mesne profits are to be charged to income-tax?”

When this was taken to appeal before the Hon’ble Supreme court, there was no merger of issues in the appeal i.e. only issue two was taken to appeal and the apex court gave its ruling only in this regard while issue one was not adjudicated. Thus the issue remains to be passed subsilentio. There is no concrete opinion of the apex court in this regard.

Conclusion

Whenever a decree for mesne profits is passed, the real owner is compensated for deprivation of the sums that are rightfully his. This implies that mesne profits as rightly pointed out by the Kerala High court in Annama Alexander case (supra) are only damages provided to the real owner. It is only making good his sufferings, which makes it clearly evident that they do not constitute the nature of “income” and thus are only capital receipts not chargeable to tax.Reliance can also be placed on decision of the Madras High Court[17] where it was held that “compensation awarded by the Motor Accident Claims Tribunal and interest accruing thereon, is to ameliorate the sufferings of the victims and does not have the character of “income”. If there is a conflict between social welfare legislation and taxation legislation, the social welfare legislation will prevail since it sub serves larger public interest. CBDT Circular dated 14.10.2011 is not good law.”According to a recent order of the Income-tax Appellate Tribunal, (ITAT) Mumbai bench, it is noted that this compensation was towards the hardship which the flat owner would face owing to the redevelopment. It held that such compensation should be in the nature of a “capital receipt“, which “is outside the scope of income that can be chargeable to tax.” It was further observed that “One has to see the nature of income in the hands of the recipient and not the payer (redeveloper).”[18]

Hence, it is the view of the authors that mesne profits are only capital receipts and out of the nets of taxmen.

AUTHORS

Name	Contact No.	Email Id.
CA.S. BALACHANDRAN (Professor)	+91-9442359192	santhanambalachandran@gmail.com
Ms.J.JAYAPRADA (Student, VII semester B.A., LL.B.(Hons.))	+91-9500684413	jayaprada.sops@gmail.com

ADDRESS: School Of Law, SASTRA University, Thirumalaisamudhiram, Thanjavur-613401

[1]Y.Srinivasa Rao Judge,Mesne Profits, Recent Articles in Law- written by a judge, available at https://articlesonlaw.wordpress.com/2016/03/25/mesne-profits/

[2]PurificacaoFernandesAndAnr. vs Hugo Vicente De Perpetuo Socorro MANU/MH/0276/1985

[3] CIT Vs M/sUberoi and Sons(machines) Ltd,MANU/DE/4050/2012

[4]Section 2(12) of the Code of Civil Procedure,1908 available at http://www.vakilno1.com/bareacts/laws/civil-procedure-code-1908.html#2_Definitions

[5] Black’s Law Dictionary 1246 (8^th ed.2004)

[6] Law Lexicon 2992 (3^rd ed.2012)

[7]Oberoi Hotel (P) Ltd Vs CIT MANU/SC/0149/1999

[8]CIT Vs P.MariappaGounder MANU/TN/0150/1983

[9]Ibid

[10]CIT Vs M/s Uberoi Sons(Machine)Ltd MANU/DE/4050/2012

[11]Skyland Builders P. Ltd. vs I.T.OMANU/ID/0176/2004

[12]CIT Vs Mrs. Annama Alexander and OrsMANU/KE/0132/1992

[13]CIT Vs Smt.LiLa Gosh MANU/WB/0116/1993

[14]MANU/MH/1267/2016

[15]MANU/KE/0537/1998

[16]MANU/IU/0090/2008

[17]Tamil Nadu State Transport Corporation (Salem) Ltd vs. ChinnaduraiMANU/TN/0981/2016

[18]LubnaKably, Compensation for redevelopment not taxable, Times Of India, August 26, 2016, available at http://timesofindia.indiatimes.com/india/Compensation-for-redevelopment-not-taxable/articleshow/53892970.cms