Mesne Profits received, for unauthorized occupation of the premises, constitute capital receipt not chargeable to tax. The decision of the Madras High Court in the case of CIT vs. P. Mariappa Gounder (147 ITR 676) is distinguishable on facts.
Mesne profits, being capital receipts, were deductible while computing book profits u/s. 115JB.
Facts I :
During the year under consideration the assessee company received mesne profits for unauthorised occupation of the premises from Central Bank of India who was in possession of rented premises belonging to the assessee.
The tenancy of Central Bank of India (“the Bank”) ended on 01-06-2000. The Bank handed over possession of the premises to the assessee on 30-09- 2003 though the Supreme Court had vide its order directed the bank to handover the possession by 30- 06-2003. The Small Causes Court vide its order dated 28-03-2007 (received by the assessee on 30th June, 2007) disposed off the suit filed by the assessee company for mesne profit for the period 01-06-2000 to 30-09-2003 by fixing the compensation to be Rs. 3,33,38,960 plus interest thereon at 6% i.e. Rs. 8,33,474 per month.
The application of the Bank to stay execution and operation of the order dated 28-03-2007 was disposed of by the Small Causes Court by directing the Bank to pay Rs. 1,47,28,280. The Bank also filed an appeal against the determination of mesne profits, which appeal was admitted and was pending. In the meantime, the Bank paid assessee company Rs. 1,47,28,280 which the assessee regarded it as capital receipt. The Assessing Officer relying on the ratio of the decision of the Madras High Court in the case of P. Mariappa Gounder 147 ITR 676 (Mad) considered this amount to be chargeable to tax.
Aggrieved, the assessee preferred an appeal to CIT(A) who held that in the case before the Madras High Court which has been affirmed by the Supreme Court the issue was of the year of taxability of mesne profit. Relying on the ratio of the decision of Special Bench of Mumbai Tribunal in the case of Narang Overseas P. Ltd. 111 ITD 1, appeal against which was dismissed by Bombay High Court vide order dated 25-06-2009 (ITA No. 1797 of 2008), the CIT(A) allowed the appeal of the assessee.
Aggrieved, the revenue preferred an appeal to the Tribunal.
Fact II : The assessee had treated the sum of Rs. 1,47,28,280 as capital receipt and had taken it directly to capital reserve account without crediting the profit & loss account. The AO held that since the receipt is revenue in nature the same needs to be added back to book profit in view of the provisions of section 115JB. He brought the same to tax while computing the book profits.
Aggrieved, the assessee preferred an appeal to CIT(A) who deleted the addition by observing that the receipt is capital in nature. However, while deleting the addition he observed that since the mesne profit is reflected in profit & loss account, it is rightly taxable for computing book profit, hence, on principle, the findings of AO were upheld. Aggrieved by these observations the assessee preferred an appeal to the Tribunal.
Held I: The Tribunal noted that the AO decided the issue against the assessee by following the decision of Madras High Court in the case of P. Mariappa Gounder (supra). The Special Bench of the Mumbai Tribunal has while deciding the case of Narang Overseas (supra) considered the decision of the Madras High Court and also the decision of the Supreme Court confirming the decision of the Madras High Court. It also noted that the decision of the Special Bench has been confirmed by the Bombay High Court vide order dated 25-06-2009. The Tribunal found the order of CIT(A) to be in consonance with the order of the Special Bench. The Tribunal confirmed the order of the CIT(A) on this issue.
Held II: The Tribunal held that since the mesne profit is capital in nature in view of the decision of the Special Bench, they cannot be brought to tax u/s. 115JB of the Act. Even Explanation 2 to section 115JB supports the case of the assessee. CIT(A) was justified in deleting the addition computed by the AO u/s. 115JB of the Act. The Tribunal observed that the assessee’s counsel is correct in objecting to the findings of the CIT(A).
