Whether mesne profits received under consent decree by Apex Court was revenue receipt chargeable to tax or capital receipt not chargeable — Held, Not chargeable

The assessee-company, promoted by the members of one family,
owned various properties including one building. The said property was given by
the assessee on leave-and-licence basis to another company ‘N’ promoted by the
same family. Under the agreement, the licensee i.e., N, could use and
occupy the premises for carrying on the business of selling fastfood under the
name ‘Croissants’, subject to payment of commission by way of certain percentage
of sale proceeds received by N. Within a period of few months, disputes arose
between the family members in respect of their properties. Thereafter various
family settlements were arrived at, including the settlement that consequent to
the termination of licence created in favour of ‘N’ in respect of property in
question, N shall vacate the said premises on or before 31-3-1992.

The members decided to implement the family settlements and
also to have all suits decreed by a consent decree. As a result, the Supreme
Court decreed all the suits. Pursuant to the said order, the licence created by
the assessee in favour of ‘N’ was cancelled and agreed to hand over quiet,
peaceful and vacant possession of the said premises to the assessee on or before
1-1-2002 and also to pay the arrears of commission for occupation of the said
premises along with the interest and further to simultaneously pay damages and
mesne profits for wrongful use and occupation of the said premises from 1-4-1992
till 31-12-2001, at the rate of Rs.10 lakhs per month along with interest.
Accordingly, the assessee received Rs.33,47,01,137 during the A.Y. 2002-03.
However, in return of the relevant assessment year, the assessee did not offer
the said amount as income, on the grounds that the damages/mesne profits
received by it were on capital account and, hence, not liable to tax. The AO,
however held that the amount received by the assessee could not be treated as
mesne profits as the same represented arrears of commission payable by ‘N’ to
the assessee under the licence agreement and that the same were revenue in
nature.

On appeal, the Commissioner (Appeals) held that the amount
received by the assessee under the consent decree passed by the Apex Court
represented mesne profits. As regards the nature of the same receipt, he
observed that the judgment of the Madras High Court in CIT v. P. Mariappa
Gounder (1984) 147 ITR 676/17 Taxman 292 was in Revenue’s favour and the
same was affirmed by the Supreme Court in P. Mariappa Gounder v. CIT,
(1998) 232 ITR 2. He, therefore, held that the mesne profits received by the
assessee constituted revenue receipt.

On second appeal, the dispute before the Division Bench was
whether the mesne profit received by the assessee pursuant to the consent decree
passed by the Supreme Court constituted revenue receipt assessable to tax. The
revenue contended that the issue stood concluded against the assessee by the
decision of the Special Bench of the Tribunal in Sushil Kumar & Co. v. Jt.
CIT (2004) 88 ITD 35 (Kol.), wherein it was held that the judgment of the
Madras High Court in P. Mariappa Gounder (supra), holding that the mesne
profit received by the assessee was revenue receipt chargeable to tax got merged
in the subsequent judgment of the Supreme Court and consequently the mesne
profit received by the assessee was taxable as revenue receipt.

However, the assessee contended that the issue was not
correctly decided by the Special Bench in Sushil Kumar & Co. (supra),
inasmuch as the issue that the taxability of mesne profit was neither raised
before nor considered by the Supreme Court.

The assessee further contended that the Madras High Court had
decided two issues — (1) the issue regarding the taxability of the mesne profit,
and (2) the year of assessability; the High Court decided both the issues
against the assessee; however, the issue regarding the taxability of mesne
profit was never raised before nor considered by the Supreme Court, since the
assessee challenged only the issue regarding the year in which the mesne profit
could be taxed; the Apex Court held that the High Court rightly held the same to
be taxable in the A.Y. 1963-64 and, therefore the judgment of the Madras High
Court regarding the issue of taxability of mesne profit did not merge in the
judgment of Supreme Court. In view of assessee’s contentions, the Division Bench
found it difficult to concur with the view expressed by the Special Bench in
Sushil Kumar & Co. (supra). Consequently, it referred the matter to the
Special Bench of three Members.

The Special Bench was of the view that the correctness of the
Special Bench’s decision in Sushil Kumar (supra) could be decided only by
a Larger Bench. Accordingly, a Special Bench comprising of five Members was
constituted.