COMMISSIONER OF INCOME TAX Vs. MARIAPPA GOUNDER P

JUDGEMENT

(1.) TWO controversies arise in these references under the I.T. Act, 1961. One is whether mesne profits decreed by a 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 profits are to be charged to income-tax ?

(2.) THE decree holder, in this case, is an income-tax assessee. He obtained a decree for mesne profits against one Kochu Vareed in the following circumstances. THE assessee agreed to purchase a title factory for Rs. 90,003 and paid an advance of Rs. 5,003 to the vendor under a written agreement dated May 22, 1950. THE vendor, however, did not convey the property as promised, but in breach of the agreement, sold it to a third party by name Kochu Vareed and put him in possession. THE assessee then sued his vendor for specific performance. Kochu Vareed impleaded him self in the suit and contested the assessee's claim. THE trial court decreed specific performance. Kochu Vareed, however, appealed against the decree. THE Kerala High Court allowed his appeal. THE assessee took the matter in further appeal to the Supreme Court. By judgment dated April 22, 1958, the Supreme Court allowed the assessee's appeal and restored the trial court's decree for specific performance. THE court also sustained the assessee's claim for mesne profits against Kochu Vareed, and remitted the case to the trial court for inquiry and determination of the mesne profits. THE trial court went into the matter and determined the quantum of mesne profits by order dated October 22, 1962. THE mesne profits fixed by the court, after certain adjustments, came to Rs. 67,093. This amount actually reached the assessee's hands some time during the next financial year ended March 31, 1964.

(3.) MR. K. Srinivasan, learned counsel for the assessee, referred to a few reported cases dealing generally with payment of compensation for deprivating taxpayers of their properties. Those case are distinguishable on the ground that the deprivation suffered by the assessee there in was of capital assets of which the assessee were the true owners. In the present case, the award of mesne profits is an award of compensation for the true owner's deprivation of the yearly income from the property, which is a different thing altogether. The true principle to be applied is what where compensation is paid for deprivation of a capital asset or for a restraint on trading or the conduct of a business undertaking as such, it would be a capital receipt in the hands of the recipient of the compensation. A similar consideration will prevail in cases where compensation is received for immobilisation, sterilisation, destruction or loss of an assessee's capital asset even without affecting his business as such. In such cases it can truly be said that to compensation is in substitution, not of income, but of the very source of income. Mesne profits are not of that kind. Even the measure of mesne profits, as the definition in the Code of Civil Procedure makes clear, is the income which the person in wrongful possession derives from the property or might with due diligence have obtained from the property. Mesne profits are, therefore, a substitute for actual returns from investment. In this category must be included any sum awarded by a court in restitution of interest, dividends or any other yield out of property, in contrast to awarding compensation, recompense or damages for any loss, sterilisation or damage to capital assets as such.