ORDER
Bhanesh Saini, Judicial Member
1. This appeal by the assessee is directed against the order of CIT(A) 11, New Delhi dated 27th December 2002 for assessment year 1999-2000 on the following grounds:
1. “That on the facts the order passed by the assessing officer/commissioner of Income Tax [Appeal], hereinafter referred as CIT[A] are bad in law and void ab initio.
2. That on the facts and circumstances of the case and in law, the Id Commissioner of Income Tax (Appeal) hereinafter referred as CIT{A} erred in disallowing expenses incurred and reflected in the profit and loss account for the purpose of business.’
3. That on the facts and circumstances of the case and in law, the CIT{A} erred in treating Mesne Profit [including interest on Mesne Profit] as revenue receipt and taxing the same as income from other sources.
4. That on the facts and circumstances of the case and in law, the CIT{A} erred in disallowing repair and maintenance expenses and directing allowance of repair and maintenance expenses in accordance with Section 24 of the Act. without prejudice and altematively an appropriate portion of total repair and maintenance expenses incurred for bringing the property to its original and habitable position is allowable as business expenses.”
2. We have heard Id Representative of both the parties and gone through the observations of the authorities below and the details submitted in the paper book by counsel for assessee and case laws relied upon by the Id representatives.
3. The facts as taken from the record are original return of income declaring income of Rs. 21,79,770/- was filed on 29th December 1999. Subsequently, the return was revised on 11th April 2000 declaring income of Rs, 11,55,450/- under 115JA. In the original return, the Mesne Profits of Rs. 77,87,303/- was declared as taxable income whereas in the revised return, the assessee company claimed it as a capital receipt and executed it from its taxable income. Originally return was processed Under Section 143 [1][a] but was taken up for scrutiny and statutory notices were served upon the assessee and assessee attended the assessment proceedings. The assessee has shown lease rent received of Rs. 8,06,670/- as business income in the profit and loss account. AO asked the assessee as to why lease rent be not assessed as income from house property as against business income.
4. The assessee submitted before the AO that the assessee converted the entire unit into a totally different and specifically a business/commercial unit for Indian Overseas Bank as in its present form it would not have been taken the units on lease. It was submitted that the letting out of the building is an inseparable, indeed, the building could not have been let out without the modification, to the letting out of the strong room and currency chest, the same is not ordinarily letting out of the building. Thus, the income is taxable as business income and not as an income from house property. Infact in the past assessee’s income from letting has been assessed as income from other sources. The AO found that in the assessment year 1996-97, the income from letting out has been assessed as income from other sources in which assessment was completed Under Section 143[3] of the Income Tax Act.
5. The AO, in view of the past history, assessed the income from letting of Rs. 8,06,670/- as income under head “other sources Under Section 56 of the Income Tax Act”. It is also stated that against the above income, assessee claimed certain expenditure but according to the AO, the same could be allowed in terms of provisions of Section 57[iii] of the Income Tax Act. Assessee claimed expenditure of house tax, ground rent, insurance, building repairs and maintenance of Rs. 31,64,769/-. The assessee explained that the expenses were incurred on account of building repair and maintenance as the building was in a state of great despair as the assessee company did not carry out any repair since 1990. The repair included recasting of the cracked roof, re-plastering of the walls, replacing the cracked floor, repairs and renovation of bath rooms, replacing the electrical wiring, painting the building, replacement of the flooring of the parking area of about 4,000/- sqft and repair of the boundary wall etc.
6. The AO did not accept submission of the assessee as it was capital expenditure in nature which was spent for improving the fixed assets. AO also observed that from the nature of the expenses incurred above, it is apparent that all the expenses have been incurred to restore the building into shape so as to increase the earning capacity. AO also observed that the capital expense is a non-recurring outlay whereas revenue expenditure is normally recurring outlay. The nature of the repairs carried out outrightly confirm that these are in the nature of capital expenditure. AO also relied upon 87 ITR 310. AO accordingly disallowed the building repair and maintenance expenses of Rs. 31,64,769/-. However, AO allowed depreciation @5%.
7. Assessee claimed Mesne Profit amounting to Rs. 77,87,303/- received during the year as exempt income. The AO recorded the facts as under:
The assessee company had let out the property in the year 1980 for a period of 5 years at a monthly rent of Rs. 22,634/-. The parties had agreed to increase the rent by 20% after expiry of first three years. The lessee did not comply the terms and increased only 10% rent and paid Rs 24895/- per month. Therefore, assessee terminated the lease agreement w.e.f. 31.01.1990 by serving the notice upon the lessee. Since the lessee failed to vacate the premises, therefore, assessee filed a suit for damages/Mesne Profit and for restoration of the premises to the owner. The suit of the assessee was decreed vide judgment/decree issued dated 27th July, 1998 for Mesne Profit and damages including interest. In compliance to the Court’s order, lessee i.e. Indian Overseas Bank paid Rs. 77,87,303/- to the assessee company which claimed the receipt as exempt income. The AI issued show cause notice as to why Mesne Profit be not treated as taxable income. The assessee filed its written submission claiming contrary and relied upon the following deisions:
1. 238 ITR 458 [Ker]
2. 199 ITR 303 [ker]
3. 205 ITR 9 [Cal]
4. 191 ITR 551[Ker]
8. The assessee, relied upon these cases on the principle that Mesne Profit are in the nature of capital receipts and, therefore not taxable. However, the AO did not accept the contention of the assessee because of the reasons namely that the Mesne Profit are recompensed by the tenant even after the termination of the lease. AO referred to Section 2[12] of the code of civil procedure which defines “Mesne Profit means those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received there from, together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession”. The AO relied upon decision of Madras High Court in CIT v. P. Mariappa Gounder 147 ITR 676 in which it was held that Mesne Profit are also a species of taxable as income. The AO in the above case held that it is crystal clear that because of wrongful possession, the assessee owner was prevented from enjoying the income there from or usufruct of the property. The AO following, the decision of the Madras High Court in the matter of P. Mariappa Gounder [supra] held that Mesne Profit awarded to the assessee is a revenue receipt and taxable as income. The AO, therefore, did not accept the argument of the assessee and assessed the amount of Rs. 77,87,303/- to tax under the head income from other sources. However, he has allowed deduction of legal expenses incurred of Rs. 3,10,000/- being allowable against Mesne Profit. The assessee challenged the assessment order before the CIT{A}.
9. It was submitted before the CIT[A] that assessee had converted different small commercial units into totally different unit specially to meet the requirement of Indian Overseas Bank by constructing strong room, currency chest, etc. therefore, income received is business income rather income from other sources. It was also submitted that in the previous years, rental income was taken as income from other sources because of non-registration of title deed in favour of the assessee by DDA but now, the DDA executed title deedin favour of the assessee in 1985. It was also submitted that since the amount has been realized for the use of the building, which is one of the main objet of the assessee company, therefore, the income realized is taxable as business income.
10. The CIT{A}, considering the fact that title deed is registered in the name of the assessee, therefore, it is clear that assessee is earning income by way of letting out of the premises. Therefore, the income shown by the assessee was held to be income from house property. AO was also directed accordingly. As far as the expenditure are concerned, part disallowance were also deleted. However, CIT{A} has confirmed disallowance of Rs. 31,64769/- as was claimed by the assessee as revenue expenditure. The CIT[A] held that since income of the assessee is taken as income from house property, therefore, such expenditure made on account of repair, etc., cannot be allowed. The action of the AO was accordingly upheld. CIT{A} also disallowed the depreciation granted as the income is taken from income from house property. The claim of depreciation was accordingly not allowed. As far as the other expenses are concerned, which are claimed as business expenses, the CIT[A] held that since the income declared is taken as income from house property and not as income from business, therefore, the expenditure by the appellant/assessee will be allowed only as per the provisions relating to computation of income from house property. The CIT{A} directed the AO accordingly. The assessee also claimed before the CIT{A} that Mesne Profit is exempt from tax being capital receipt.
11. The assessee relied upon the same cases which were relied upon before the AO and it was submitted that the Hon’ble Calcutta High Court in the matter of CIT v. Smt Leela Ghosh 205 ITR 9 has dissented with the decision of Hon’ble Calcutta High Court has given reasons for disagreeing with the view of Hon’ble Madras High Court in support as referred to and relied upon decisions reported in 8 ITR 25,87 ITR 666. It was also submitted that the Hon’ble Calcutta High Court has held that Mesne Profit received by the assessee in that case were in the nature of damages and therefore, a capital receipt. The assessee also relied upon observation from the decisions of different High Courts as is referred to before the AO.
12. The assessee also took alternate plea before the CIT[A] that even if the amount received in the form of Mesne Profit is treated as an arrears of rent, the same cannot be taxed under the Income Tax Act because of Section 25B of the Income Tax Act was inserted subsequently. The assessee also explained the purpose of insertion of Section 25B in the Act. The CIT[A] considering the fact and circumstances of the case and relying upon the decision of Hon’ble Madras High Court in the matter of P. Mariappa Gounder was of the view that in the present case, there is no loss of capital asset.
13. The CIT[A] considering the finding of the Civil Court granting Mesne Profit at the enhanced rate, also held that the award by the Civil Court are infact arrears for the loss of income and not for the loss of capital asset. Therefore, the Mesne Profit as received is revenue receipt. The CIT[A] also held that AO has correctly added the same to the income of the assessee and also rightly allowed deduction from legal expenses incurred for earning the Mesne Profit. As far as the alternate plea is concerned, with regard to Section 25B of the Income Tax Act, the CIT[A] observed that if we look at the scheme of Section 25B find that this particular section does not bring any novel idea. It only sets at rest doubts in the area regarding taxation of such income. The CIT[A] accordingly upheld the finding of the AO and dismissed the appeal of the assessee.
14. The assessee is in appeal before us on the ground mentioned above. Ld counsel for assessee mainly argued on the point of taxability of Mesne Profit for the purpose of Income Tax Act. Ld Counsel for assessee argued that Mesne Profit is capital receipt and as such cannot be taxed. Ld counsel for assessee also argued that interest received on Mesne Profit is also not taxable. Ld counsel for assessee relied upon the same submissions made before the authorities below and relied upon the following decisions:
191 ITR 551 [Keral]
238 ITR [Ker]
199 ITR 303 [ker]
205 ITR 9 [Cal]
8 ITR 25 [Patana]
87 ITR 666 [Ker]
15. Ld Counsel for assessee argued that the decision of Madras High Court in the matter of P. Mariappa Gounder 147 ITR 676 is dissented by Calcutta High Court and as such decision in favour of the assessee may be made applicable. Ld counsel for assessee in support of the alternate contention also argued that Section 25B of the Income Tax Act is not applicable as it was inserted in the Income Tax Act subsequent to the assessment year involved in the appeal. Ld counsel for assessee as such argued that the orders of the authorities below may be reversed and appeal of the assessee may be allowed.
16. On the other hand, Ld DR heavily relied upon the orders of the authorities below and argued that CIT{A} has taken the income the income of the assessee from main source i.e. lease rent received of Rs. 8,06,670 as income from house property as against business income shown by the assessee and the finding of the CIT[A] have not been challenged by the assessee. Therefore these findings of facts recorded by the CIT{A} have become final. Ld DR accordingly argued that assessee is not entitled for any deduction of expenses incurred for the purpose of business as assessee was not having any business income. The CIT{A} has therefore, rightly directed that whatever deductions are allowable on the head income from house property’ be allowed as deduction. Ld DR accordingly argued that AO is, therefore justified in disallowing business expenditure. Ld DR referred to the decision of the Civil Court, copy of which is filed in the paper book dated 27th July 1998 and argued that the assessee claimed damages on account of loss of income as the lessee has not vacated the property after the termination of the tenancy. Therefore, Civil Court enhanced the rate of rent and as such assessee got the enhanced rate being loss of income.
17. Ld DR submitted that assessee has claimed exemption of the Mesne Profit being capital receipt but no provision is mentioned as to under which provision Income is claimed exempted. Ld DR also argued that in the present case, there is no loss of capital asset. Therefore, the Mesne Profit as is received by the assessee is not capital receipt and income from other sources. Ld DR relied upon 251 ITR 871 [mad.]. ld Dr argued that assessee has no case and as such appeal may be dismissed accordingly.
18. We have considered rival submissions and material available on record and the case laws referred to above by the parties and details submitted in the paper book.
19. Before proceeding with ground No. 3 with regard to the point of Mesne Profit, we would like to decide the remaining grounds of appeal. With regard to disallowance of expenses incurred and reflected in the profit and loss account for the purpose of business and disallowance of repair and maintenance expenses, the assessee in the profit and loss account for the year under consideration has shown lease rent received in a sum of Rs. 8,06,670/- as ‘business income’. The assessee also claimed certain expenditure, no other business income is shown.
20. The AO, on the basis of the assessment order in assessment year 1996-97, held it to be ‘income from other sources’ Under Section 56 of the Income Tax Act. The CIT[A] held that since title deed is registered in the name of the assessee, therefore, the assessee is earning income by way of letting out of the premises. The CIT[A] therefore directed that the income shown by the assessee is to be taken as ‘income from house property’. Assessee has not taken any specific ground challenging the finding of the CIT[A] taking it to be the income from house property. No other income is claimed and even ld Dr during the course of argument, submitted that assessee has not shown any business activity during the assessment year in question and this fact is not disputed by the assessee before the authorities below. Therefore, in our considered view, the CIT[A] has rightly taken the income shown by the assessee as income from house property. Since there is no specific challenge to the finding of the CIT{A}, therefore, CIT{A} was justified in directing that whatever deductions are permissible under the head ‘income from house property’, be allowed as deduction to the assessee. Once no business activity is claimed, therefore, no deduction for the expenses can be allowed which is not permissible under the head ‘income from house property’.
21. The CIT{A} also taken the same view that since income is taken from the house property, therefore, expenses incurred in the name of business expenditure cannot be allowed. We may refer to the decision of Hon’ble Supreme Court in the matter of Sultan Brothers [P] Ltd., 51 ITR 353 in which it was held that “as the assessee never carried on any business of a hotel in the premises let out, or otherwise at all and there was nothing to show that it intended to carry on hotel business itself in the same building, the letting of the building did not amount to carrying on of a business and the income under the lease could not, therefore, be assessed Under Section 10 of the Income Tax Act as “income from business’.”
22. The CIT[A] has rightly taken the income of the assessee as “income from house property’. Therefore, assessee would be entitled to permissible deductions from house property and not of the business expenditure as is alleged. Considering these facts, we don not find any infirmity in the order of the CIT{A}. Accordingly the ground No. 2 and 4 of the appeal are rejected.
23. As far as ground 1 is concerned, the assessee claimed that the orders of the authorities below are bad in law and void ab inito. However, nothing is argued on this ground of appeal and even we do not find as to how the orders of the authority below are bad in law and void Accordingly, ground 1 is also rejected.
24. Now, we take up ground 3 in which the taxability of the Mesne Profit is challenged. the facts on this issue are not in dispute. However, we may mention briefly the facts on the issue as – that the assessee leased out unit No. 9, 10, 11-12 and 20 of B-2 Market Safdar Jung Enclave to Indian Overseas Bank in the year 1980 for a period of five years at a monthly rent of Rs. 22,632/-. The parties had agreed to increase the rent by 20% after the expiry of first three years. The lessee did not comply with this agreement and increased the rent annually by 10% and accordingly paid Rs. 24,895/- per month. The assessee company/lessor served a notice dated 8th January 1990 upon the lessee [Indian Overseas Bank] terminating the tenancy and required the lessee bank to vacate the premises in their possession. The suit No. 365/97/90 was decreed from the Court of Sh. S.N. Dhingra, ADJ Delhi vide judgment/decree dated 27th July 1998. The Civil Court decreed the Mesne Profit / damages @ 12 per sqft. Per month with effect from 1st February 1990 to 31st January 1992, from 1st February 1992 @ 16 per sqft. and from 1st February 1995 @ 20 sqft. per month. In addition to this, the assessee was also granted interested interest on un-paid Mesne Profit/Damages duly withheld by the bank @ 15% P.A.
25. In compliance to the directions of the Civil Court, the assessee was paid a sum of Rs. 77,87,303/- as Mesne Profit/damages and interest thereon. The assessee claimed it to be exempt from income tax being capital receipt. However, AO considering the decision of Madras High Court in the matter of P. Mariappa Gounder [supra] held it to be revenue receipt and taxable as income. Since the suit was decreed in the financial year relevant to the assessment year in question, on 27th July 1998 and the amount was also received in the financial year, therefore, it to be ‘income from other sources’. AO directed to allow deduction for the legal expenses which were spent for earning the Mesne Profit. The legal expenses which were spent for earning the Mesne Profit. The CIT[A] confirmed the action of the AO.
The question before us is whether Mesne Profit quantified and recovered in financial year relevant to assessment year in appeal are Revenue receipt taxable under Income Tax or capital receipt?
26. We find that the authorities below have heavily relied upon the decision of Madras High Court in the matter of P. Mariappa Gounder.
Therefore, it would be relevant to reproduce the findings of Hon’ble Madras High Court for the sake of convenience in which it was held that the Mesne Profit awarded by the Court for wrongful possession are liable to be assessed as income and the same is to be included for the assessment in the year in which it is actually quantified. The question which was referred to Hon’ble Madras High Court for its esteemed opinion is as under:
“Whether Mesne Profit decreed by Court of Law can be held to be taxable income in the hands of the decree holder?”
The other question is about the relevant year in which Mesne Profit are to be charged to income tax.
27. The Hon’ble Madras High Court answered the first question as under:
“We do not think it should take us long to find the correct answer. A claim for mesne profits is usually directed against, one who has deprived the true owner of possession of his property and who has thereby prevented the true owner from enjoying the income or usufruct of the property. When, in such a suit or proceeding, the court awards mesne profits to the true owner, that represents a just recompense to him for the deprivation of the income which ought properly to have come into his hands but for the interference of the person in wrongful possession of the property.
The code of civil procedure defines mesne profits as that which a person in wrongful possession of property has actually received or might with ordinary diligence have received, therefrom. The accent of the definition in Section 2[12] of the code concentrates more on the methodology of calculation of mesne profits rather than on what the true nature, of mesne profits is. As we earlier stated, the rationale of awarding mesne profits is that the trespasser or the person in wrongful possession not only defies the title of the true owner, but also prevents the true owner fro enjoying the income or the usufruct of the property in question. 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. Under the scheme of the I.T. Act, anything which can property be regarded as income and which is not expressly exempted from taxation under a specific provision of the statute must be regarded as taxable income. We are, therefore, satisfied that the Tribunal and the other authorities were right in their view that mesne profits has to be assessed as taxable income in the hands of the present assessee.
28. The second question was answered by Madras High Court as was held by AAC who held that the Mesne Profit is chargeable in the year in which trial court quantified the amount of Mesne Profit. In the present case, the Mesne Profit was quantified as well as actually paid in the previous year relevant to the assessment year under appeal. Therefore, authorities below held that the point in issue are squarely covered by the decision of Hon’ble Madras High Court.
29. The CIT[A] in the present appeal considered that the loss of capital asset is a capital receipt and when it is awarded for the loss of income, it is a revenue receipt. The CIT[A] also held that in the instant case, the Mesne Profit is certainly for loss of income because there is no loss of capital asset.
30. It is an admitted fact that the assessee filed suit against tenant i.e. Indian Overseas Bank for recovery of possession and for Mesne Profit. It was pleaded by the assessee before the Civil Court for grant of Mesne Profit that the rent of the similar and nearly similar property in the area in which suit property was situated was not less than Rs. 20 sqft. per month. The assessee claimed damages for use and occupation of the premises at that rate for wrongful possession of the lessee i.e. the bank. The Civil Court, as per the pleading of the parties, framed the issue No. 4 as follows which is relevant under the present appeal.
Issue No. [iv]
Whether the defendant are unauthorized occupants and are liable to pay damages / Mesne Profit for use and occupation of the suit premises and so at what rate and for what period ? OPP
The Civil Court decreed the suit of the assessee on this issue and directed the lessee then to pay the damages of the Mesne Profit with effect from 1st February 1990 @ Rs. 12 and thereafter at enhanced rate which is mentioned above. Interest was also granted to the assessee.
31. The ld counsel for assessee during the course of the arguments as per query of the Bench, admitted that the assessee received the Mesne Profit of Rs. 77,87,303/- which is addition to the admitted rent received by the assessee. This fact is also supported by details given in profit and loss account. He has also admitted that what ever admitted rent was received during the course of proceedings before the Civil Court was shown as business income in the respective assessment years. These facts clearly proved that whatever amount was received by the assessee was shown as income but we are concerned with the assessment year under appeal in which assessee has shown the business income in a sum of Rs. 8,06,670/-, being lease rent received during the financial year relevant to the assessment year under appeal which was taken as income from house property by the CIT[A] and his findings are not challenged.
32. The finding of the CIT[A] and the findings of the Civil Court shows that what the assessee has received by way of Mesne Profit, was the enhanced income of the assessee for use and occupation of the tenanted premises by the lessee bank. Therefore, ld DR rightly contended that the assessee claimed for enhancement of the rent by way of Mesne Profit. The Ld DR also rightly contended that there is no case for loss of capital asset. Ld DR also lightly contended that the assessee received Mesne Profit being loss of income.
33. Hon’ble Madras High Court in the matter of P. Mariappa Gounder [supra] also held that
“The true principle to be applied is that where compensation is paid for deprivation of a capital asset or for restrain on trading or conduct of the business undertaking as such, it would be a capital receipt in the hands of the recipient of the compensation”. In this case, no loss to the capital asset is stated. When the assessee did not get the enhanced rent from the lessee bank as per the agreement, therefore, asses see terminated the tenancy as the bank did not comply with the contract. Assessee was entitled to enhance rate of rent after expiry of certain period which was not complied with by the banker. Same facts were pleaded before Civil Courts in suit by assessee. Had the banker enhanced the rate of rent as per rent agreement, then probably assessee would not have filed the suit for possession and for Mesne Profit. Assessee was entitled for higher income as per contract with the bank but the bank did not obey the terms of the contract. Therefore, assessee terminated the contract and filed the suit for possession and Mesne Profit. The suit was thus filed by the assessee in respect of the relief claimed for entitlement of the income which was denied by the lessee bank. Mesne Profit is calculated with reference to the loss of rent suffered by assessee. Therefore, clearly it is a case of earning of income from house property by the assessee which was received in the name of Mesne Profit/ damages.
34. The Civil Court awarded the enhanced rent being the loss of income to the assessee as the banker refused to comply with the terms of the contract for enhanced rent which is also specifically mentioned by the AO in Para 3 of the assessment year. Therefore, the authorities below have rightly taken it to be the revenue receipt.
35. The CIT[A] has taken the part of the admitted rent as ‘income from house property’. The Mesne Profit are part of the same which is in the nature of enhanced compensation to the assessee as the bank failed to comply with the terms of the contract. The finding of the CIT[A] with regard to taking the lease rent income as income from house property’ is not challenged by the assessee in the present appeal. Section 22 of the Income Tax Act provides income from house property and it provides that annual value of the property of which assessee is owner shall be chargeable to Income Tax Act under the head ‘income from house property’. Section 23 [1][a] of the Income Tax Act provides how annual value is to be determined and provides that ‘for the purpose of Section 22, the annual value of the property shall be deemed to be – [a] the sum for which the property might reasonably be excepted to let from year to year. The assessee as per the contract [stated in assessment order] with the lessee banker was entitled for higher rate of rent which banker did not comply. Assessee claimed Mesne Profit at the higher rent as was applicable in the near-by locality as per the latest rates prevailing in the market.
36. The Civil Court accepted the evidence of the assessee and granted higher rate of Mesne Profit which was prevailing in the market nearby the tenanted / suit premises. The tenancy was terminated with effect from 31st January 1990 and the Civil Court granted enhanced rate of Mesne Profit with effect from 1st February 1990 till the decree satisfied and payment is made of the decreed amount. Therefore, the sum which was granted by the Civil Court as Mesne Profit in respect of the tenanted property could be presumed to be reasonably be expected sum for which property could be let from year to year. The same value could be taken as annual letting value of the property in dispute as per Section 23[1].
37. According to Section 22, the annual value of the property shall be chargeable to income tax under the head income from house property. Hon’ble Delhi High Court in the matter of Ram Prasad and Sons v. CIT 81 Taxman 332 considering the fact that, owner has been occupying the property in question and it was not let out held in respect of the consideration of the annual letting value that :-
“The manner of arriving at the income as stated in Section 22 read with Section 23 is to find out the annual value of the property. Whether the property is in direct occupation of the owner or leased to tenant, the basis to arrive at the income is the same subject to some variations regarding deductions. Nowhere, a different method is provided to arrive at annual value of the property when it is under occupation of the owner. As per Section 23[1][a], the annual value of any property shall be deemed to be the same for which the property might reasonably be accepted to let out from year to year. In other words, reasonable estimate shall have to be made of the value as provided under the Act.”
38. The AO has taken the lease rent received by the assessee in a sum of Rs. 8,06,670/- as ‘income from other sources’. CIT[A] taken it as ‘income from house property’. Therefore, considering the facts and circumstances of the case, the enhanced rate of Mesne Profit as is held by the Civil Court could be taken as annual value of the property as the property would reasonably be excepted to let out from year to year at such rate as is held by the Civil Court.
39. Hon’ble Madras High Court in the recent decision in the matter of S. Kempadevamma v. CIT 251 ITR 871
“Held that the money payable for the period subsequent to the date of termination of the lease termed as damages for use and occupation did not on that ground alone render that amount, a capital receipt in the hands of the owner. The amount received was an yield, from the property and was a revenue receipt. Therefore, the damages awarded to the assessee were in the nature of compensation for loss of profits and hence revenue income.”
[This decision is directly applicable to this case along with decision of Madras High Court in the matter of P. Mariappa Gounder]
40. Ld Counsel for assessee relied upon following decisions:
1. Decision of Kerala High Court in the case of CIT v. Periayar & Parikanni Rubbers Ltd., 87 ITR 666. In this case, the property was compulsorily acquired by the Government and therefore, held that interest paid was a capital receipt. This case is clearly distinguishable on facts.
2. Decision of Patna High Court in the matter of Rani Prayag Kumari 8 ITR 25 in which the facts are distinguishable as the amount in question was received by assessee as damages for wrongful detention of movable properties of the assessee.
3. Decision of Kerala High Court in the case of Smt. Annamma Alexander and Ors. 199 ITR 303 in which assessee claimed Mesne Profits and also damages for the waste committed by the trespassers in cutting down some trees. The facts are clearly distinguishable.
4. Decision of Kerala High Court 191 ITR 551 Smt. Annamma Alexander and Others. This decision is referred to in 199 ITR 303 above and as such distinguishable on facts.
5. Decision of Kerala High Court in the case of Achuthan Pillai and Company 238 ITR 458 in which it was held that there was no transfer of capital asset in favour of V Ltd. By leasing of the building by A to V Ltd only the right to use and possession of the building was transferred. Facts are clearly distinguishable.
6. Ld Counsel for the assessee relied upon the Decision of Calcutta High Court in the matter of Smt. Leela Ghosh 205 ITR 9. In this case, the facts as considered was that assessee inserted the property which was under lease on the death of her husband. The lease expired in 1970. However, the lessee did not give possession to the assessee. Therefore, the suit filed by the assessee for eviction and Mesne Profit was decreed. When quantification of the Mesne Profit was pending, the Government requisitioned the demised property. The requisition order was challenged and subsequently settlement was arrived at. Under the terms of the settlement, the property in question was to be acquired by the state under Land Acquisition Act and compensation for such acquisition was to be paid to the assessee. Apart from the compensation for acquisition for acquisition of the said premises, assessee received a sum of Rs. 2,00,000/ -from the state on account of Mesne Profit for use and occupation of the said premises by erstwhile tenant. In this case, Tribunal held that Mesne Profit of Rs. 2,00,000/- arose as a result of transfer of capital asset and the same was assessable under the head ‘capital gains’. However, the Hon’ble High Court held that the Mesne Profit of Rs. 2,00,000/- received by the assessee in this case were in the nature of damages and, therefore, capital receipts. The Honble Calcutta High Court also relied upon decision of Privy Council in the case of Girish Chunder Lahiri and decision of Supreme Court in the case of Lucy Kochuvareed. In these cases, it was held that the Mesne Profits are in the nature of damages which fee Court may mould according to justice of the case. However, in the present case, the facts are altogether different and even the Hon’ble Madras High Court in the matter of P. Mariappa Gounder considered the different facts. Therefore with great respect to the decision of Hon’ble Calcutta High Court, we do not propose to rely upon the aforesaid judgment as the Mesne Profits are always at the discretion of the Court, depending upon the nature of evidence available on record and more particularly the facts in the case of Smt. Leela Ghosh are altogether different to the facts under appeal. Counsel for assessee heavily relied upon this decision as in this decision the case of Madras High Court in the matter of P. Mariappa Gounder was dissented. CIT[A] referred to the facts in this case. This decision was rendered on 18th January 1993. However, Hon’ble Madras High Court in its subsequent decision in the matter of S Kempadevamma [Supra] delivered the contrary decision in favour of the revenue on the identical facts vide judgment dated 27th November 2000. The later decision of the Madras High Court is clearly binding in nature. Hon’ble Madras High Court delivered this judgment after the decision of the Calcutta High Court. The decisions of the Hon’ble Madras High Court are directly on the point in issue and 251 ITR 871 is the latest decision and therefore, we therefore, respectfully follow the same decision of the Madras High Court.
41. Considering the above fact, we do not follow the decision of the Hon’ble Calcutta High Court as is relied upon by the counsel for assessee.
42. During the course of arguments, ld counsel for assessee could not establish as to under which provision of income tax the income earned by way of Mesne Profit is exempted. Therefore, the case laws relied upon by ld counsel for assessee are not applicable.
43. We, therefore, considering above decision and the decision of Delhi High Court and Hon’ble Madras High Court uphold the finding of the authorities below to the point that the Mesne Profit is revenue receipt and is taxable under the Income Tax Act.
44. Ld counsel for assessee has also raised the alternate plea that even if the amount received in the form of Mesne Profit is treated as arrears of rent, the same cannot be taxed under the Income Tax Act under Section 25B of the Income Tax Act as was inserted subsequently which is applicable from assessment year 2001-02. Ld counsel for assessee has taken us to the details submitted in the paper book with regard to object of the insertion of Section 25B in the Income Tax Act which is also reproduced by CIT[A] in the impugned order. Ld Counsel for assessee submitted that since Section 25B was made applicable from the assessment year 2001-02, therefore, the Mesne Profit cannot be added in the year under consideration.
45. On the other hand, ld DR relied upon decision of Madras High Court in the matter of P. Mariappa Goundre [supra]. Having considered alternate submission, we find that. CIT[A] discussed this issue in the impugned order. CIT[A] clearly held that the Mesne Profits are revenue receipt in nature as against the claim of the assessee for capital receipt. We have also confirmed the findings of the CIT[A] and treated the Mesne Profit as revenue receipt. The CIT[A] stated that there is no denying the fact that Section 25B is applicable from A.Y. 2001-02, CIT[A] also observed that there is no need to mention Section 25B as is pointed out as if we look at the scheme of Section 25B CIT[A] found that this particular section does not bring any novel idea.
46. The view of the CIT[A] had been that, it only sets at rest the doubts in the area regarding taxation of such income. Such incomes like arrears of rent have been taxed in the past also. According to the CIT[A], Section 25B of the Income Tax Act only sots at rest the controversy in this area and it is crystal door that such incomes are rightly taxable. CIT[A] therefore, held that alternate plea of the assessee would be of no help to the assessee. It is an admitted fact, that Mesne Profit were computed and settled by decree of the Civil Court vide decree dated 27th July 1998. The assessee also admittedly received the Mesne Profit from the lessee banker in the financial year relevant to the assessment year in question. Therefore the computation and receipt of the Mesne Profit are admittedly in the assessment year in question. This point is already decided by Hon’ble Madras High Court in the matter of P. Mariappa Gounder in which it was held that the Mesne Profit is to be taxed in the assessment year in which it was finally determined. Since in the instant case, the quantification and receipts are both in the financial year relevant to the assessment year under appeal, therefore, assessee would have no case for raising the alternate plea. Even we find that CIT[A] was justified even in ignoring the alternate plea on the strength of Section 25B of the Income Tax Act as whenever arrears are settled are taken as income of the assessee in which it was finally determined. Accordingly, we do not find any merit in the alternate submission raised by counsel for assessee.
47. No other issue is argued or pressed before us.
48. Considering the above discussion and the decisions of Honble Madras High Court [supra] as well as of Delhi High Court, we do not find it proper to interfere in the orders of the authorities below. We, accordingly, dismiss the appeal of the assessee.