Mesne Profits Received for Wrongful Deprivation of Use and Occupation of Property is Capital Receipt, Not Taxable: ITAT [Read Order]

Mesne Profits - Taxscan

The Kolkata bench of the ITAT in ITO v. Shri Kamal Kumar Ghosh (Deceased), held that the Mesne Profits received by assessee for wrongful deprivation of use and occupation of property constitutes capital receipt and hence not chargeable to tax under the provisions of the Income Tax Act, 1961.

The assessee, in the instant case, has received Rs. 90 lakhs for surrendering his leasehold rights. The assessee treated the same as mesne profits and hence capital receipt. However, the AO treated the same as revenue receipt by holding that the assessee was only under illegal occupation / possession over the subject mentioned properties after the expiry of leasehold right for the last 24 years.

He was of the view that this payment was therefore made just to lift the illegal encroachment done / created by the assessee and his brother and hence, the assessee and his brother does not have any interest in those properties which can be treated as capital asset. Hence this receipt 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.

Concluding the matter in favour of the assessee, the first appellate authority held that the amount 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.

Confirming the first appellate order, the bench relied on the decision of the Special Bench of Mumbai Tribunal in the case of Narang Overseas Pvt Ltd vs ACIT wherein it was 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.

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