ORDER
Pramod Kumar, A.M.
1. This is an appeal filed by the Revenue and is directed against the order dt. 20th July, 2004 passed by the CIT(A) in the matter of assessment under Section 143(3) of the IT Act, 1961, for the asst. yr. 2001-02.
2. The AO has raised six grounds of appeal but, in effect, the solitary grievance of the AO is that the CIT(A) erred in holding that the sum of Rs. 11,00,000 received by the assessee was on account of sale of a long-term capital asset, and that the CIT(A) ought to have held that the said receipt is in the nature of mesne profits liable to be taxed under the head ‘Income from other sources’ as was the stand of the AO.
3. Briefly, the relevant material facts. In the course of scrutiny assessment proceedings, the AO noticed that the assessee has claimed long-term capital gains on account of sale of bungalow at 384/1, Jai Co-operative Society, Bhawani Peth, Pune. This property was sold by the assessee by way of agreement dt. 8th July, 2000 to one Abdul K. Jaffery. The assessee had acquired the property, as noted by the AO, vide agreement dt. 6th Dec, 1980 from one Mamta Lal Gurani. The AO noted that the agreements did not contain usual details about the mode of acquiring these properties and were unregistered. The assessee’s submission that the said property was all along shown in her IT returns was noted but brushed aside. The AO then enquired about the fact whether or not the name of the assessee is entered into in the municipal and other records and found, what he termed as, “various vital defects in legal title”. He also took note of the fact that there were certain Court disputes in connection with this property and there were decisions against the assessee. The legal ownership of the property did not, according to the AO, vest in the assessee. It was in this backdrop that the AO came to the conclusion that there was no capital asset and as such gains on the alleged sale of bungalow could not be taxed as ‘capital gains’. In his view, the receipt of Rs. 11,00,000 was to be taxed as a mesne profit liable to includible under the head ‘Income from other sources’. Exemption under Section 54F was also, accordingly, declined. Aggrieved, assessee carried the matter in appeal before the CIT(A). In appeal, the CIT(A) took note of the fact that the assessee was not in physical possession of the said property and that there were certain disputes about ownership of the property as well. He noted that the assessee had certain rights in the property and it was on the sale of these rights that the assessee received Rs. 11,00,000. The CIT(A) further held that the amount having been received in connection with a capital asset cannot be taxed as income of the assessee. It was also noted that in any event there is no reasoning whatsoever in support of AO’s stand that the receipt is on account of mesne profits. It was in this backdrop that the stand of the AO was reversed, and the grievance of the assessee was upheld. The AO was, accordingly, directed to treat the receipt of Rs. 11,00,000 as on account of sale of long-term capital asset, and to grant exemption under Section 54F accordingly. Revenue is aggrieved of the order of the CIT(A) and is in appeal before us.
4. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
5. We find that the AO has proceeded on the basis that unless the assessee holds a perfect title to a house property, the sale of such property cannot lead to gains taxable under the head ‘Capital gains’. This approach is clearly fallacious and unsustainable in law. All that the assessee is required to have, in order that gains on sale of which can be taxed as ‘capital gains’, is a capital asset and rights to a property, howsoever imperfect, constitute a capital asset. There is no dispute that the assessee acquired these rights in 1980 and the same were duly reflected in her tax returns. There is also no dispute that these rights were sold in the relevant previous (year). The objections are only to the imperfections in the rights, but then that aspect of the matter is not really relevant for the present purposes. As the CIT(A) has rightly observed that in case the sale proceed of these rights cannot be taxed as capital gains, it cannot be taxed at all. The reason is this. The definition of income includes only such capital receipts as are chargeable to tax under Section 45. In other words, capital receipts, not chargeable to tax under Section 45, are outside the ambit of ‘income’. Now, the receipt in question being referable to a capital asset, i.e. the rights have been acquired by the assessee in connection with the bungalow at Bhawani Peth, the receipt can only be treated as capital receipt.
6. In the case of CTT v. Ashoka Marketing Ltd. , the assessee had entered into an agreement with a vendor for purchase of certain property belonging to the vendor. The vendor, having failed to complete the transaction because title of the property was not marketable as there was a prior mortgage of the property with the Government, paid liquidated damages of Rs. 1 lakh to the assessee. Hon’ble High Court, dealing with taxability of such liquidated damages received by the assessee, observed that such liquidated damages are neither in the nature of capital gain nor in the nature of a revenue receipt, and, therefore, outside the ambit of taxable income. We may, in this regard, quote following observations of the Hon’ble High Court:
2. It may be recalled that on the failure on the part of vendor to complete the agreement, because of the title being not marketable and there having been a prior mortgage with the U.P. Government, it was not possible on the part of the assessee to purchase the property. For this transaction, the assessee did not have to part with any money or stock-in-trade. There was no cost involved in acquisition of the sum of Rs. 1 lakh. Hence, it could not be deemed to be a capital gain at all. The liability of the assessee could arise only if there would have been a transfer of capital asset and since there was no element of cost in the acquisition of Rs. 1 lakh, it could not answer the description of either a capital gain or revenue receipt.
3. We have scrutinized the facts as also the reasoning given by the Tribunal. We are in accord with the findings of the Tribunal that the amount of Rs. 1 lakh is not in the nature of capital gain or in the nature of the revenue receipt. There is no transfer in relation to a capital asset within the meanings of Section 2(47) of the IT Act, 1961 and the amount of Rs. 1 lakh also does not confirm to the concept of a capital asset….
The Hon’ble High Court then formed a view that on the facts and in the circumstances of the case, the Tribunal was right in holding that sum of Rs. 1 lakh received by the assessee is neither a revenue receipt nor a capital gain. In relying upon this judgment, we are only concerned with the proposition that a receipt which is neither a capital gain nor a revenue receipt will be outside the ambit of income chargeable to tax. We can also safely infer that merely because a receipt is not a capital gain chargeable to tax, it would not mean that such a receipt is revenue receipt in nature. The view of the CIT(A) is supported by this judicial precedent.
7. The next issue that we may touch upon is whether the assessee can be said to have received mesne profits in this case.
8. The expression ‘mesne profits’ is not defined under the IT Act, but the same is defined in the C.P.C. Section 2(12) of the CPC defines it as follows:
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.
9. There cannot be, therefore, any question of the owner being in receipt of mesne profits on sale of her rights in the property. The action of the AO is devoid of any basis at all, and there is no discussion whatsoever about the reasons why he considers it to be mesne profits.
10. For the reasons set out above, we approve the well reasoned conclusions arrived at by the CIT(A) and decline to interfere in the matter. The order of the CIT(A) stands confirmed and approved.
11. In the result, the appeal filed by the Revenue is dismissed. It was so pronounced in the open Court at the time of conclusion of hearing itself.