Mense Profit is not liable for taxation under the Income Tax Act – 1961: – CA Naresh Jakhotia




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Mense Profit is not liable for taxation under the Income Tax Act – 1961:  – CA Naresh Jakhotia

Mense Profit is not liable for taxation under the Income Tax Act – 1961:

CA Naresh Jakhotia

There are various incomes which are not taxable for the reason that the amount is a capital receipt, not includible in the definition of “income” as such. It is a well known settled principle of taxation that revenue receipts are chargeable to tax unless otherwise specifically exempt from tax whereas capital receipts are not unless and otherwise expressly made taxable.

Most interestingly, Income Tax Act does not have concrete definition for capital and revenue receipt. The judicial pronouncements show that there cannot be a straight formula to determine the receipt either as capital or revenue receipts. Its determination has to be independent varying from the facts of the particular case.

One such receipt or amount which is not taxable in the Income Tax Act – 1961 is “Mense Profit”. The word is “Mense Profit” is used in the Code of Civil Procedure 1908.

The Definition of mesne profits is provided in section 2(12) of Code of Civil Procedure 1908 as under:-

“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.”

The key feature of the “Mesne Profits” would be

  1. “Mesne profits are the amounts awarded against a person in wrongful possession of property”
  2. Amount received by a tenant on account of wrongful possession
  3. It is paid for the period commencing from the time of taking the wrongful possession to the time of the trial of an action of ejectment brought against him.
  4. The amount paid is 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.
  5. Mesne profits are not taxable if it is in the nature of capital receipt. If it is in the nature of revenue nature, then its taxability is not questionable.

Here is an interesting case on the issue by the Kolkata Bench of IUTAT in the case of Income-tax Officer Vs Shri Kamal Kumar Ghosh (ITAT Kolkata) [[I.T.A. No. 254/Kol/2017] which in short was as under:

  1. The amount of Rs 90,00,000/- (assessee’s share of 50%) was received by the assessee which has arisen from surrendering his leasehold rights.
  2. Assessee treated the same as mesne profits and hence capital receipt whereas the ld AO treated the same as revenue receipt.
  3. Question before ITAT was whether  said mesne profits would be liable for tax in the hands of the assessee or not?
  4. It was held that profit accrued to a person on his wrongful possession of a property is deemed to be mesne profits and not liable for taxation.

The complete order is as under:

This appeal filed by revenue is arising out of order of CIT(A)-12, Kolkata vide appeal No. 378/CIT(A)-12/Kol/Wd-40(1)/2014-15 dated 09.11.2016. Assessment was framed by ITO, Ward-37(1), Kolkata u/s. 143(3)/147/148 of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2011-12 vide his order dated 29.03.20 14.

  1. The first issue to be decided in this appeal is as to whether the ld CIT (A) was justified in deleting the addition made in the sum of Rs 82,64,770/- on account of undisclosed receipts in the facts and circumstances of the case. The inter connected issue thereon to be decided is as to whether the ld CIT (A) was justified in deleting the addition of Rs 90,00,000/- in the facts and circumstances of the case.
  2. The brief facts of this issue are that the assessee is an individual deriving rental income from his two house properties located at208, Rash Behari Avenue, Kolkata-29 and20, Hindustan Park, Kolkata – 29. In addition to these rental income, he has not shown any income under the head income from other sources. An information from the DDIT(Inv) Unit –IV, Kolkata was received in the office on 10.1.2013 stating that Kamal Kumar Ghosh (deceased) and his brother Amal Kr. Ghosh, have received total of Rs.2,00,00,000/- in the financial year 2010-11 from Mr Anup Kr. Jash, representing certain builder and developer companies for some alleged land deal. As per the details furnished by the DDIT(Inv.) Unit –IV, Kolkata, these monies were received in the following undisclosed bank accounts of the assessee and his brother’s through the under mentioned cheques :-
Sl. No. Name of the a/c Holder Name of the Bank & Branch A/c. No. Ch. No. Dt. Of
deposit		 amount
1. Kamal Kr. Ghosh & Amal Kr. Ghosh (Jt. A/c.) Standard Chartered Bank, 19,

N.S. Road,
Br. Kol

 32710207216 032900 06/05/10 45,00,000/-
2. Kamal Kr. Ghosh & Lakshmi Ghosh Do 32710342393 032899 06/05/10 45,00,000/-
3. Do Do Do 032911 06/05/10 45,00,000/-
4. Kamal Kr. Ghosh & Amal Kr. Ghosh Do 32705048938 971782 30/06/10 20,00,000/-
5. Do Do 32710349339 …..
6. Amal Kr. Ghosh Uco Bank
Ballygunge Branch		 SB-1008811 32910 07/05/10 45,00,000/-

3.1. Since these transactions were not reflected in the return of income filed by the assessee, proceedings u/s 147 of the Act were initiated and notice u/s 148 of the Act was issued on 6.2.20 13 for assessment of escaped income of Rs 90,00,000/- i.e 50% share of Kamal Kr.Ghosh (Deceased) of above land deal. The assessee sought for the reasons recorded for reopening the assessment which were duly furnished by the ld AO. The assessee filed his return of income in response to notice u/s 148 of the Act on 5.4.2013. The assessee replied in the re-assessment proceedings that the monies were received by him and his brother for surrendering the leasehold right in the two properties namely No. 36A, Garcha 1st Lane and part of the Premise No. 36B, Garcha 1st Lane, Kolkata – 9 and 44/11, Garcha Road and part of Premise No. 36B, Garcha 1st Lane, Kolkata in favour of group of companies / persons duly represented by one Sri Anup Jash, an authorized representative and a constituted power of attorney of the group concerned by way of surrender lease made on 5.5.2010. Therefore, the assessee stated that the impugned transaction was nothing but consideration received for surrender of leasehold right over the lease hold properties above. Sri Amal Kr.Ghosh, brother of the assessee had stated under statement recorded u/s 131 of the Act on 18.3.2014 and through his letter dated 19.9.20 13 that he along with his brother Kamal Kr. Ghosh (Deceased) have received Rs 1,80,00,000/- ( Rs 90 lacs for each brother) for surrendering the leasehold right. The assessee further stated that he and his brother both have incurred capital loss of Rs 10,00,000/- each in this transaction for surrender of leasehold right in this financial year . The details of capital loss and computation submitted in this regard are as under:-

Table-1 (details of property wise sale consideration received)

Sl. No. Address of the
property		 Agreement date Period of
lease		 Commencing from Year of
surrender		 Amount received
A 36B, Garcha 1st

Lane & 44/11,
Garcha Road

 10/02/1976 30 years 25/08/1976 F.Y 10-11 90 lacs
B 36B, Garcha 1st
Lane, Garcha Road		 29.10.1976 10 yrs, 24/08/1976 10-11 90 lacs

Table-2 (details of indexed cost and computation of capital loss)

Sl. No. Address of the
property		 Value as on 01/04/198 1 (Rs.) Indexation factor Indexed

value of cost (Rs.)

 Surrender amount Gain/Loss
A 36B, Garcha 1st Lane & 44/11,
Garcha Road		 24.04 lacs 7.11 170.92 lacs 90 lacs (-) 80.92
lacs
B 36B, Garcha 1st
Lane, Garcha Road		 4.12 lacs 7.11 29.29 lacs 90 lacs (+)60.71 lacs
Total Loss (-) 20.21
lacs

Table-3 (Details of Assessee’s share of loss in the transaction)

Sl. No. Address of the property Value as on 01/04/1981 (Rs.) Indexation factor Indexed value of
cost (Rs.)		 Surrender amount Gain/Loss Share of Kamal Ghosh
A 36B, Garcha 1st Lane & 44/11, Garcha Road 24.04 lacs 7.11 170.92 lacs 90 lacs (-) 80.92
lacs		 (-)40.76 lacs
B 36B, Garcha 1st Lane, Garcha Road 4.12 lacs 7.11 29.29 lacs 90 lacs (+)60.71 lacs (+)30.36 lacs
Total Loss (-) 20.21 lacs (-)10.10 lacs

3.2. The ld AO stated in his order that the authorized representative of the assessee also furnished a copy of valuation report of Mr Rajat Mitra, B.Sc (Hons.) Glasgow, M.I.E.C. Eng. a registered valuer vide W.B. Cat –VII/21/CC of 1988 who is a member of “ENGINEERS & VALUERS COLLABORATED” for the above mentioned properties for cost of indexation.

3.3. The ld AO in order to examine the veracity of the claim made by the assessee, sought for details such as copy of indenture of leasehold rights in favour of these two brothers, copy of deed for surrender of rights, statements of abovementioned bank accounts etc. The details of bank accounts and total transactions thereon are as under:-

Sl. No. Name of the holder/s A/c. No. Date of deposits Total deposits/ credits
1 Amal Kr. Ghosh & Abarna Ghosh 950101008811 As per bank
statement		 46,93,871/-
2. Kamal kr. Ghosh Amal Kr. Ghosh 32210059080 As per bank
statement		 7,62,324/-
3. Kamal kr. Ghosh Amal Kr. Ghosh 32205020007 Do 17,42,300/-
4. Kamal kr. Ghosh Amal Kr. Ghosh 32710207216 Do 97,48,204/-
5. Kamal kr. Ghosh Amal Kr. Ghosh 32710342393 Do 1,90,80,473/-
6. Kamal kr. Ghosh Amal Kr. Ghosh 32710349339 Do 7,02,368/-
7. Kamal kr. Ghosh Amal Kr. Ghosh 32705048938 Do 8,00,000/-
Total 3,75,29,540/-

3.4. The ld AO treated the aforesaid bank accounts as undisclosed bank accounts and arrived at the undisclosed income of the assessee in the following manner:-

i) Total deposits/credits as found recorded in the bank accounts of the assessee Rs. 3,75,29,540/-
ii) Less: Illegal receipt considered separately Rs. 1,80,00,000/-
iii) Less: Contra entries, seen in the bank a/c.Balance Rs.30,00,000/-

Rs. 1,65,29,540/-
50% of Rs.1,65,29,540/- to be added in the hands of the assessee i.e. Rs. 82,64,770/-

3.5. Accordingly, he added Rs 82,64,770/- in the hands of the assessee while completing the assessment.

3.6. The assessees produced the first copy of indenture dated 24.8.1976 wherein the Lessor Sri Prabhas Chandra Sinha, S/o Purna Chandra Sinha of 26A, Padda Pukur Road, Kolkata -2 0 entered into a leasehold agreement with Kamal Kr. Ghosh (deceased) and Mr Amal Kr. Ghosh , both sons of Sri Digendra Nath Ghosh of 20, Hindustan Park, Kolkata -29 to lease out the property at (i) 36A, Garcha 1st Lane and (ii) Portion of 36B, Garcha 1st Lane, Kolkata for tenure of 10 years , commencing from 24.8.1976 at rental payment of Rs 350/- per month. The ld AO observed that although there was provision of further extension of this leasehold arrangement for further 25 years with prior request of 3 months before the expiry of the 10 years period, but as per record, no such indenture of further extension was furnished in the assessment proceedings to establish that the leasehold rights were extended for further period of 25 years. The ld AO further observed to the fact that reference of the indenture dated 24.8.1976 for 10 years lease period in the deed of conveyance of surrender right by assessee in favour of group companies / persons dated 5.5.20 10 makes in absolutely clear that no such indenture for extension of leasehold right was made after the expiry of 10 years period. Therfore, it is clear that the leasehold right of the assessee and his brother over the above mentioned properties expired on 24.8.1986 and the assessee has no claim whatsoever over the properties after the lapse of the leasehold period. The ld AO observed that assessee was only under illegal occupation / possession over the subject mentioned properties after the expiry of leasehold right for the last 24 years. In this background, he started examining whether the assessee was entitled to surrender or transfer his leasehold rights to any other persons at his will in the future.

3.7. Likewise another leasehold agreement was made between Sri Subhas Chandra Sinha, S/o Purna Chandra Sinha of 26A, Paddapukur Road, Kolkata – 20 and Kamal Kr.Ghosh and Amal Kr. Ghosh, both sons of Digendra Nath Ghosh of 20, Hindustan Park, Kolkata -29 , through an indenture dated 10.2.1976 to lease out the property located at 36B, Garcha 1st Lane and 44/11, Garcha Road, Kolkata for a periodof 30 years commencing from 25.8.1976 with rent of Rs 300/- per month of the first 20 years and at the rate of Rs 350/- per month for the remaining 10 years. This indenture gave right to lessees to use the said demised premises or any part thereof for themselves or for their relatives or by letting out the same to any person or persons or any body either in whole or in part for the purpose of residence. The said indenture carried a clause for extension of lease for further 5 years period by giving notice to the lessor 3 months before the date of expiry of 30 years lease period. The ld AO observed that this indenture made on 10.2.1976 also expired in 2006 as no proof of renewal of the same was submitted in the assessment proceedings. He further observed that the lease agreement contained a clause that the leasehold property shall go back to the owners on expiry of the lease tenure. Accordingly, he concluded that the assessee and his brother  Amal Kr. Ghosh did not possess any right over the leasehold properties after the expiry of the lease period and hence they were only illegal occupants in the subject mentioned properties.

3.8. In view of the above facts, the ld AO treated the transfer / surrender of lease rights , after the expiry of the lease period to some third persons /companies as illegal , bad in law , null and void. Accordingly, the ld AO denied the benefit of indexation benefits claimed by the assessee through the support of valuation report of ‘Engineers & Valuers Collaborated’. The ld AO further noticed that the properties had been transferred to various persons / group of companies duly represented by one Sri Anup Jash through several sale deeds on various dates in the years 1999, 2000 and 2004. The assessee and his brother were therefore in illegal occupation / possession of the said properties even after the same were sold out to the third parties / companies. Accordingly, the amount of Rs 1,80,00,000/- was therefore an illegal payment made to Kamal Kr.Ghosh (Deceased) and his brother Amal Kr. Ghosh for evacuating from their illegal possession of the said premises. This payment was therefore made just to lift the illegal encroachment done / created by the assessee and his brother. Hence the ld AO held that the assessee and his brother does not have any interest in those properties which can be treated as capital asset. Hence this receipt of Rs 1,80,00,000/- , out of which Rs 90,00,000/- pertains to this assessee being 50% share, would have to be taxed as money received for vacating illegal possession separately and accordingly added the sum of Rs 90,00,000/- to the total income of the assessee.

  1. The assessee filed the contents of each and every entry in the aforesaid bank accounts by making individual analysis of the same as under:-

4.1. The assessee submitted the summary of aforesaid details as under:-

  1. a) Only bank interest and rent received are taxable income.
  2. b) Rs 1,80,00,000/- received by both the assessee for surrendering wrongful possession of land as mentioned above, being in nature of ‘Mesne profit’ , hence not taxable .
  3. c) Proceeds received from several mutual funds either on maturity or redemption, question of capital gains do not arise because all are in long term nature.
  4. d) Income distribution received from several mutual funds are in nature of dividend hence not taxable.
  5. e) Money received from Birla Sunlife Insurance Company is not taxable.
  6. f) Drawings, contra entries, mistake by ld AO, deposit of cash in hand, encashment of fixed deposit and contra double deposit on account of car purchase etc as mentioned hereinabove, are self explanatory, hence not taxable.

4.2. The ld CIT (A) forwarded the same to the ld AO for examination and remand report. The ld AO in his remand report stated that the assessee had not submitted any details in the remand proceedings and accordingly observed that the addition of Rs 82,64,770/- was rightly made in his hands. Similarly, he reiterated the findings of the ld AO in the assessment order with regard to taxability of surrender of lease hold rights in the sum of Rs 90,00,000/-.

4.3. The assessee submitted that no extension was applied for the lease agreement, neither landlord filed any eviction suit against the assessee and his brother after the expirty of the lease period nor possession of the property was returned by the assessee even after the expiry of the lease period. The developer who negotiated the title through sale, did not get the possession of the land of said transaction of sale, but actual possession was retained by the assessee and the same was delivered to landlord / developer by assessee only after receiving Rs 1,80,00,000/- i.e Rs 90,00,000/- each to Amal Kr Ghosh and Kamal Kr Ghosh, by surrendering the possession of the land which should be treated as ‘Mesne Profit’ under section 2(12) of Code of Civil Procedure. The assessee placed his reliance on the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs Smt Lila Ghosh reported in 205 ITR 9 (Cal) . It was pleaded that in that case, following the court order, Smt Ghosh surrendered the right over the property to State of West Bengal under the Land Acquisition Act 1894 and the assessee Smt Ghosh received the sadi Rs 2,00,000/- on account of Mesne profit for the use and occupation of the said land by the erstwhile tenants who were in illegal possession of the land. In addition to it, Smt Ghosh received Rs 11,00,000/- as compensation for surrendering the right over property. The ld AO in his remand report stated that this case is not at all applicable to the facts of the instant case before the ld CIT (A).

4.4. The ld CIT (A) observed that the definition of ‘Mesne Profits’ under section 2(12) of Code of Civil Procedure 1908 clearly takes within it scope any receipt against wrongful possession of property. The nature of deprivation suffered by the assessee is crucial for the purpose of determination of nature of receipt of mesne profits. Where the compensation is paid for deprivation of capital asset, or source of income, it would be a capital receipt in the hands of recipient of the compensation. On the other hand, where the sums are awarded by the court in the nature of restitution of interest, dividend or any other yield, out of the property is contrast to awarding compensation, the sum awarded is on the nature of income. The ld CIT (A) discussed the facts and principles laid down in various decisions of High Courts and held that the amount of Rs 90,00,000/- received in lieu of total and final surrender of leasehold rights can only be treated as mesne profit which was received for deprivation of use and occupation of property and would thus be capital receipt and not chargeable to tax.

4.5. With regard to the addition made in the sum of Rs 82,34,770/- towards remaining credits in the various bank accounts , the ld CIT (A) observed that the assessee had filed all details of the credit entries in various bank accounts. He stated that these details were sought to be examined by the ld AO in the remand proceedings. But the ld AO instead of giving a specific finding about the nature of each credit and its taxability, simply sent a vague report by stating that no details were furnished by the assessee. In this scenario, the ld CIT (A) went into the details submitted by the assessee and accepted the same and accordingly deleted the addition in the sum of Rs 82,34,770/-.

  1. Aggrieved, the revenue is in appeal against the deletion of two additions by the ld CIT (A).
  2. None appeared on behalf of the assessee. We have heard the ld DR. It is not in dispute that the amount received in the sum of Rs 90,00,000/- (assessee’s share of 50%) was only for surrendering his leasehold rights. The assessee treated the same as mesne profits and hence capital receipt whereas the ld AO treated the same as revenue receipt. Now the short question is whether the said mesne profits would be liable for tax in the hands of the assessee. We find that the definition of mesne profits is provided in section 2(12) of Code of Civil Procedure 1908 as under:-

“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.”

We find that the Special Bench of Mumbai Tribunal in the case of Narang Overseas Pvt Ltd vs ACIT reported in 111 ITD 1 (Mum ITAT ) (SB) had held that mesne profits received by assessee for wrongful deprivation of use and occupation of property constitutes capital receipt and hence not chargeable to tax. Respectfully following the same , we hold that the ld CIT (A) had rightly granted relief to the assessee by holding that the receipt of Rs 90 lacs by the assessee is a capital receipt not chargeable to tax. Accordingly, the grounds raised in this regard by the revenue are dismissed.

6.1. With regard to the other addition of Rs 82,34,770/-, we find that the assessee had explained the each and every credit of various bank accounts and the nature of receipts are very much visible from the bank statements itself for most of the transactions. When the remand report was called for from the ld AO in this regard, the ld AO , instead of verifying the nature of credits and give a finding with regard to taxability thereon, ignored to do the same and chose to just send a vague report by stating that no details were furnished by the assessee. In these circumstances, the ld CIT (A) chose to accept the contentions of the assessee and found that the entire credits in the bank account were duly explained by the assessee. Accordingly, he deleted the addition of Rs 82,34,770/-. We find no infirmity in the order of the ld CIT (A) in this regard. Accordingly, the grounds raised in this regard by the revenue are dismissed.

  1. In the result, the appeal of the revenue is dismissed.

Order is pronounced in the open court on 20.06.2018

 

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