[1991] 191 ITR 551 (KER.)

HIGH COURT OF KERALA

Commissioner of Income-tax

v.

Mrs. Annamma Alexander

K.S. PARIPOORNAN AND K.A. NAYAR, JJ.

IT REFERENCE NOS. 111 AND 112 OF 1984

MARCH 13, 1991

 

JUDGMENT

K.S. Paripoornan, J.—At the instance of the Revenue, the ITAT has referred the following question of law for the decision of this court in the above referred cases:

"R.A. No. 160(Coch) of 1983:

1. Whether, on the facts and in the circumstances of the case, the amount of interest receipt on the mesne profits is income under the Income-tax Act?

R.A. No. 161(Coch) of 1983:

2. Whether, on the facts and in the circumstances of the case, the entire interest receipt as per the judgment of the High Court passed on December 23, 1965, is assessable in the assessment year 1966-67?

3. Should not the Tribunal have considered the question of the year or years in which the amount is to be assessed?"

The assessee is common in both the cases. Both the cases relate to the assessment year 1966-67 for which the accounting period ended on March 31, 1966. The references arise out of the common appellate order passed by the Appellate Tribunal dated March 14, 1983, in I.T.A. No. 390(Coch) of 1980 (appeal filed by the assessee) and I.T.A. No. 391 (Coch) of 1980 (appeal filed by the Revenue). The Appellate Tribunal allowed the appeal filed by the assessee (I.T.A. No. 390(Coch) of 1980), but dismissed the appeal filed by the Revenue (I.T.A. No. 391 (Coch) of 1980). That resulted in the Revenue filing two different applications for referring certain questions of law for the decision of this court. It is in pursuance of the said two applications (R.A. Nos. 1.60 and 161(Coch) of 1983) that the above three questions have been referred for the decision of this court in the two referred cases at the instance of the Revenue.

The original assessee in this case was one of the legal heirs of late Rev. Fr. K.C. Alexander. Before the Appellate Tribunal and in the reference proceedings, one of the legal heirs, Mrs. Annamma Alexander alone contested the proceedings. After the hearing of the referred cases was over, Mrs. Annamma Alexander died on January 3, 1991. The sisters and brother of the deceased, Mrs. Annamma Alexander, who are the legal representatives, have been impleaded as per their statement dated January 24, 1991. Advocate Mr. P. Balachandran filed vakalath for the legal heirs, the sisters and brother of the deceased, Mrs. Annamma Alexander, who have been impleaded as additional respondents Nos. 2 to 5. The matter was heard again.

The ancestor of the assessee, late Rev. Fr. K.C. Alexander, filed a suit in 1958 for the eviction of the, trespasser on the landed properties belonging to him to the extent of 131.23 acres. It was stated that the trespassers are the Nair Service Society, the manager of the said society and four others. The court divided the property into two lists, namely, 55.47 acres in list LI(a) and 75.76 acres in list LI(b). The claim of the assessee on LI(a) properties and against defendants Nos. 3 to 6 in the suit was decreed. A commission was appointed for determining the compensation payable to the assessee in respect of the properties in LI(a) list-55.47 acres. The commission determined the amount of compensation at Rs. 10,19,160 which included also the interest by the court's decree dated July 27, 1959. The assessee went in appeal to the High Court against the aforesaid judgment of the court below. The High Court, by its judgment dated December 23, 1965, reported in [1966] KLT 333 (K.C. Alexander v. Nair Service Society), held that the decree is applicable to lists LI(a) and LI(b) properties and against the Nair Service Society, the first defendant. The Nair Service Society went in appeal from the aforesaid judgment to the Supreme Court The Supreme Court of India, by its judgment dated 12-2-1968, reported in [1968] KLT 182 (Nair Service Society v. K.C. Alexander) confirmed the judgment of the High Court regarding LI(a) properties. A remit was ordered regarding LI(b) properties. It is evident from the decretal portion of the judgment of the High Court that mesne profits were awarded in respect of LI(a) properties from the date of trespass, i.e., from October 16, 1989, till October 13, 1942, the date of institution of the suit, at the rate of Rs. 5,000 per annum and, thereafter, at the rate of Rs. 31,193 per annum from the date of the suit to the date of the judgment by the High Court, i.e., December 23, 1965. Item No. (2) in the decretal portion also decreed that the assessee shall be entitled to the mesne profits so calculated with interest on each year's mesne profits at six per cent. per annum from the date of its accrual. On item No. (4) a sum of Rs. 2,06,423 for compensation for waste with interest at six per cent. per annum on that sum from the date of the judgment, i.e., December 23, 1965, was decreed. The question that arises is whether the interest awarded under item No. (2) that the assessee is entitled to mesne profits calculated with interest on each year's mesne profits is a revenue receipt in the hands of the assessee. The actual amount so treated as income for the assessment year 1966-67 is Rs. 3,29,160. The Income-tax Officer did not seek to assess the mesne profits that were allowed in item No. (2) at the rate of Rs. 5,000 per annum for the subsequent period up to the date of the judgment. The dispute was only with regard to the interest part on item No. (2). Relying on the decision of this court in CIT v. Periyar and Pareekanni Rubbers Ltd. [1973] 87 ITR 666 and certain observations in the Law and Practice of Income-tax by Kanga and Palkhivala, Seventh Edition, Volume I, page 142, the assessee contended that the interest part in item No. (2) cannot be treated as a revenue receipt in the hands of the assessee. The Income-tax Officer distinguished the decision in Periyar and Pareekanni Rubber Ltd.'s case [1973] 87 ITR 666 and also the observations in the Law and Practice of Income-tax, by Kanga an d Palkhivala, 7th Edn. Vol. 1, p. 142, and took the view that the interest portion is clearly specified and separable and there was no ambiguity about the nature of this receipt.

In the appeal, the Commissioner of Income-tax (Appeals) held that though mesne profits might comprise interest, since the interest is a severable part, it would have an identity different from that of mesne profits proper and would not have the same character as mesne profits and, therefore, it was taxable. However, the Commissioner of Income-tax (Appeals) accepted the alternative contention of the assessee that the interest is relatable to several years and cannot be assessed with reference to the date of the judgment of the High Court. He held that what was assessable for the assessment year 1966-67 was only that part of the interest out of Rs. 3,29,160 as was referable to the financial year 1965-66. The assessee as well as the Revenue filed appeals before the ITAT against the order passed by the Commissioner of Income-tax (Appeals) dated April 25, 1980. The assessee contended that the interest in item No. (2) of the decretal portion of the judgment of the High Court is an integral part of the mesne profits, that it is the same as mesne profits and so it cannot be treated as a revenue receipt taxable in the hands of the assessee. On the other hand, the Revenue contended that interest has arisen as a result of the judgment of the High Court and, therefore, must be taken to have accrued to the assessee on the date of judgment and not earlier. The assessee also made an alternative contention that the income is agricultural income. The ITAT found that the Income-tax Officer did not assess the mesne profits proper, i.e., the amount determined at the rate of Rs. 5,000 per annum from the date of dispossession to the date of institution of the suit and at the rate of Rs. 31,193 from the date of the suit to the date of the judgment of the High Court. The Appellate Tribunal held that the interest mentioned in item No. (2) is not anything other than the mesne profits awarded to the assessee and so there can be no question of treating this amount as a revenue receipt taxable in the hands of the assessee. To come to the said conclusion, the Tribunal relied on the decision of this court in CIT v. Periyar and Pareekanni Rubbers Ltd. [1973] 87 ITR 666 and the decision of the Patna High Court in CIT v. Rani Prayag Kumari Debi [1940] 8 ITR 25. The Tribunal held that the decision of the Patna High Court aforesaid squarely applies to the facts of this case. The Tribunal held that the sum of Rs. 3,29,160 cannot be assessed as the income of the assessee for the assessment year 1966-67. Since the Tribunal held that this is not income assessable to tax, the other point raised by the assessee, that if it is income, it is agricultural income, was not considered by the Tribunal. It is thereafter, at the instance of the Revenue, that the ITAT has referred the above three questions of law for the decision of this court.

We heard counsel for the Revenue, Mr. P.K.R. Menon, as also counsel for the respondent/legal heirs of the deceased assessee, Mr. P. Balachandran. Counsel for the Revenue stressed that mesne profits themselves is income and so the interest the assessee was entitled to realise on mesne profits is also income. A few decisions were cited to substantiate the said plea. Amongst them, strong reliance was placed on the decision of the Supreme Court in Mahant Narayana Dasjee Varu v. Tirumalai Tirupathi Devasthanam, AIR 1965 SC 1231, 1235, para 10(3) and the decision of the Madras High Court in CIT v. P. Mariappa Gounder [1984] 147 ITR 676 at pp. 680, 681 and 682. Counsel also distinguished the decision of the Kerala High Court, strongly relied on by the Appellate Tribunal to hold in favour of the assessee, in CIT v. Periyar and Pareekanni Rubbers Ltd. [1973] 87 ITR 666.

Counsel for the assessee drew our attention to the definition of the word "mesne profits" contained in section 2(12) of the Code of Civil Procedure and contended that interest on mesne profits is an integral part thereof and that mesne profits awarded are nothing but damages. Strong reliance was placed on the decisions in Periyar and Pareekanni Rubbers Ltd.'s case [1973] 87 ITR 666 (Ker) ; CIT v. Rani Prayag Kumari Debi [1940] 8 ITR 25 (Patna) and a few other decisions.

Section 2(12) of the Code of Civil Procedure defines mesne profits as follows:

"(12) '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."

As early as 1900, the Judicial Committee of the Privy Council in Girish Chunder Lahiri v. Shoshi Shikhareswar Roy [1900] 27 IA 110, 112, stated what is meant by "mesne profits". The Judicial Committee stated the law thus:

". . . mesne profits are in the nature of damages which the court may mould according to the justice of the case."

In Lucy Kochuvareed v. Mariappa Gounder, AIR 1979 SC 1214 ; [1979] 3 SCC 150, at page 158, paragraph 24, the Supreme Court of India stated what mesne profits means (at p. 1219 of AIR 1979 SC):

"Mesne profits being in the nature of damages, no invariable rule governing their award and assessment in every case, can be laid down and 'the court may mould them according to the justice of the case'."

In the light of the above pronouncements, it cannot be doubted that mesne profits are only an award of compensation for the loss of property or injury to the capital. In Law of Income-tax, by A.C. Sampath Iyengar, Seventh Edition, Volume I, page 518, the distinction between "interest proper" and "damages by way of interest" for the purpose of income-tax has been succinctly stated. It is thus:

"If the quality of the claim for interest is compensation, for the reason that the claimant has been deprived of the use of the money and has not had his money at the due date, it would be income in his hands. It may be regarded either as representing the profit he might have made if he had had the use of the money in time, or, conversely, the loss he had suffered, because he had not had that use. If, on the other hand, the claim is for loss of property or loss Of goods, or some other injury to capital and the element of interest comes in by way of estimating the compensation to be granted for such capital loss or capital injury, then, the receipt would be capital."

Therefore, we have no hesitation to hold that mesne profits awarded by the decree are only damages for loss of property or goods and are only a capital receipt and not a revenue receipt.

In this case, the Appellate Tribunal has stated that the Income-tax Officer did not assess the mesne profits proper on the ground that they would represent the compensation for the right of the assessee to the enjoyment of the land which he could not exercise because of adverse possession and, therefore, were not taxable. The Appellate Tribunal has further stated that the interest awarded is an integral part of the mesne profits and so it would follow that the interest decreed as item No. (2) in this case is not anything other than the mesne profits awarded. Since the interest is on mesne profits, there can be no question of treating this amount as a revenue receipt taxable in the hands of the assessee. In Mahant Narayana Dasjee Varu v. Tirumalai Tirupathi Devasthanam, AIR 1965 SC 1231, 1235, para 10(3), the Supreme Court has held that, under section 2(12) of the Civil Procedure Code, which contains the definition of "mesne profits", interest is an integral part of mesne profits and it proceeds on the theory that the person in wrongful possession appropriating the income from the property himself gets the benefit of the interest on such income.

We are of the view that, in the light of the decision of the Judicial Committee of the Privy Council and the decisions of the Supreme Court, mesne profits themselves being an award of compensation in the nature of damages and not taxable, interest thereon which is an integral part of the mesne profits is also not a revenue receipt and will not be taxable as income. There is support for the above view also in the decisions of the Patna and Kerala High Courts relied on by the Appellate Tribunal. In CIT v. Rani Prayag Kumari Debi [1940] 8 ITR 25 (Pat), on the death of the holder of an impartible estate, a distant relation took possession of all the movables and immovables left by the deceased. The holder instituted a suit against the trespasser and a decree was passed in favour of the holder. The decree awarded damage; for wrongful detention of the movables. The court held that the amount was received by the widow of the deceased holder as damages for wrongful detention of the movable properties of the assessee and not under any contract to pay interest and so the damages received were not income. In CIT v. Periyar and Pareekanni Rubbers Ltd. [1973] 87 ITR 666 (Ker), the Government took possession of the property on November 29, 1961. The award in the case was passed on August 31, 1962. Possession was taken not under the Land Acquisition Act, but on an agreement between the assessee and the Government. The amount of Rs. 24,106.33 awarded represented the interest on the amount of compensation awarded for the period from November 29 , 1961, to September 6, 1962, the date of payment. The Appellate Tribunal held that the bulk of the amount awarded represented compensation for deprivation of property and so a receipt in the nature of capital. The said view was endorsed by a Bench of this court. At page 668 of the report, the court observed thus:

"....In the absence of any such statutory provision, even when possession is assumed by the Government, whether under some provision of law or by agreement or even sometimes unauthorisedly, the view is that there has been deprivation of property and the interest paid by the Government is merely compensation for deprivation of such property. The fact that compensation that is payable for such deprivation is calculated at a percentage of interest on that amount does not affect the question. It is still compensation for deprivation of property. This is the distinction that has been drawn by the Supreme Court in the decision in Dr. Shamlal Narula v. CIT [1964] 53 ITR 151 referred to by the Tribunal. That this distinction is real, cannot be disputed and in a later decision of the Supreme Court in T.N.K. Govindarajulu Chetty v. CIT [1967] 66 ITR 465, the earlier decision is referred to and approved. In the nature and in the circumstances of this case, we are unable to hold that the amount paid to the assessee and allowed by the Tribunal as a deduction represented anything other than compensation for deprivation of property. The property was not vested in the Government till the award was passed on August 31, 1962."

The decision of the court was to the effect that the payment made for the period before the award was compensation by way of capital. The ratio of the above two decisions also clearly supports the plea of the assessee that mesne profits as also the interest thereon awarded by the decree under section 2(12) of the Civil Procedure Code represented only a capital receipt. The fact that mesne profits are estimated with reference to the profits which the person in wrongful possession of such property actually received or would have ordinarily received for the purpose of computation or determination of the compensation will not in any way render them an "income" or a revenue receipt. The compensation is measured by the amount of profit which the person in wrongful possession would have earned. The label "profits" or the measure adopted to estimate the mesne profits will not have the effect of measuring the character of the compensation awarded to the person who has been wrongfully deprived of the property as a revenue receipt. The decision of the Supreme Court in Mahant Narayana Dasjee Varu v. Tirumalai Tirupathi Devasthanam, AIR 1965 SC 1231, 1235, heavily relied on by counsel for the Revenue, does not militate against the said view. The decision of the Punjab and Haryana High Court in CIT v. Chiranji Lai Multani Mal Rai Bahadur (P) Ltd. [1989] 179 ITR 157, 160, has categorically laid down that "if interest is received on the basis of a contract or under a statute, the same is taxable, but if interest is awarded by the court for loss suffered on account of deprivation of property it amounts to compensation, though called interest, and would not be taxable".

The decision of the Madras High Court in CIT v. P. Mariappa Gounder [1984] 147 ITR 676, 681, prima facie supports the plea of the Revenue that mesne profits awarded by the court for wrongful possession are liable to be assessed as income. The discussion is contained on page 681 of the reports. With great respect to the learned judges who rendered the said decision, we are of the view that the said decision fails to give due effect to the decision of the Judicial Committee of the Privy Council reported in Girish Chunder Lohiri v. Shoshi Shikhareswari Roy [1900] 27 IA 110, and the decision of the Supreme Court of India in Lucy Kochuvareed v. Mariappa Gounder, AIR 1979 SC 1214; [1979] 3 SCC 150, 158, para 24. It is also not in accord with the earlier Bench decision of this court in CIT v. Periyar and Pareekanni Rubbers Ltd. [1973] 87 ITR 666 and the decision of the Patna High Court in CIT v. Rani Prayag Kumari Debi [1940] 8 ITR 25. To the extent the said decision of the Madras High Court holds that mesne profits awarded by the court for wrongful possession are liable to be assessed as income, we express our respectful dissent, in view of the clear character of the receipt - mesne profits - as a capital receipt.

In the light of our above discussion, we are of the view that the Appellate Tribunal was justified in holding that the amount of interest received on mesne profits in the instant case cannot be treated as a revenue receipt taxable in the hands of the assessee. We answer the question referred to this court in Income-tax Reference No. 111 of 1984, in the negative, against the Revenue and in favour of the assessee. We hold that the amount of interest received on the mesne profits is not income (revenue receipt) under the Income-tax Act.

In the light of our above conclusion that the interest on mesne profits cannot be considered to be a revenue receipt at all, the questions referred to this court in Income-tax Reference No. 112 of 1984 need not be considered. The question as to whether the entire interest received is assessable in the assessment year 1966-67 or the amounts should be assessed in the year or years in which the amount accrued due does not arise for consideration. We decline to answer both the questions referred to this court in Income-tax Reference No. 112 of 1984 (I.T.A. No. 391/Coch of 1980).

The references are disposed of as above.