Compensation received for unlawful possession of immovable property constitutes a capital receipt and is not subject to income tax.
In a recent decision, the Mumbai Bench of the ITAT held that compensation received for unlawful possession of immovable property-known as mesne Profits-constitutes a capital receipt and is not subject to income tax.
Case Highlights:
a. A Mumbai housing society leased part of its commercial premises to a PSU bank in the mid-1980s at a nominal rent of ₹6/sq. ft., linked to a loan from the same bank.
b. Despite loan repayment in 2001, the bank continued to occupy the property at the same rent until 2008.
c. Following legal proceedings, the Court awarded ₹2.40 crore in mesne profits (plus interest) to the society for the period of unauthorized occupation.
d. Tax authorities argued this compensation was taxable as revenue income.
e. The society contended it was a capital receipt, compensating for the loss of possession and enjoyment of the property.
f. The Tribunal ruled in favour of the society, relying on a Special Bench decision that mesne profits are compensatory, not revenue in nature.
g. It also noted conflicting High Court rulings on the taxability of mesne profits.
h. The Tribunal applied the settled legal principle that where two interpretations are possible, the view favourable to the assessee should prevail.
This decision is expected to benefit property owners involved in tenancy disputes, supporting the view that damages for wrongful occupation are capital receipts and not subject to income-tax.
The copy of the order is as under:
