IN THE INCOME TAX APPELLATE TRlBUNAL
'SPECIAL BENCH :MUMBAI
BEFORE SURl G.E. VEERABllADRAPPA, VP, SURI K.P.T. VP IMZ), K.C. SINGIIAL, J.M., DR. O.K. NARAYANAN, A.M. AND MS. SUSHMA CHOWLA, J.M.
I.T.A. No. 4623/Mum/05
(Assessment year 2002-03)
Appellant by: Shri S.E. Dastur
Respondent by: Shri S.C. Gupta
AIT Head Note:(1) That the Hon’ble Supreme Court in the case of P. Mariappa Gounder (supra) was not concerned with the issue whether the mesne profit received against the wrongful possession of the property is in the nature of revenue receipt or capital receipt. The only issue before the court related to the year of taxability. Hence it cannot be said that the Hon’ble Supreme Court adjudicated upon the issue relating to the nature and character of the receipt by way of mesne profits.
(2) That the amount received against wrongful possession of the property amounts to mesne profits whether determined by the court or under a consent decree within the ambit of section 2(12) of the Code of Civil Procedure, 1908.
(3) There is a difference of opinion amongst various High Courts on the issue relating to nature and character of the mesne profits. Therefore, following various judgments of the Hon’ble Supreme Court mentioned in Paragraph No. 48, it is held that the mesne profits constitute capital receipt not chargeable to tax.(Para 65)
ORDER
Date of hearing: 06.08.2007
Date of order: 20.02.2008
PER SINGHAL, J.M.
1. The Hon'ble President, ITAT, vide order dated 7.8.2006 has constituted this Bench to adjudicate the following issue:
"Whether in the light of decision in 232 ITR 2 it must be held that mesne profit received by the assessee is revenue income chargeable to tax.”
as well as to dispose off the appeal of the assessee containing the following grounds:
(1) The learned Commissioner of Income Tax (Appeals [CIT(A) ] erred in holding that the mesne profit of Rs. 34,57,01,137/-received by the Appellant pursuant to the consent decree dated 08.01.2002 constitutes revenue receipt assessable to tax and consequently, in confirming the AO's order bringing the same to tax.
(2) The CIT erred in holding· that as per the decisions in P. Mariappa Gounder Vs. CIT (1998) 232 ITR 2(SC) and DCIT V. Sardar Exhibitors Ltd. (2005) SOT 918 (Del) mesne profits taxable revenue receipts.
(3) He further erred in this connection in holding that paragraphs 28 to 31 of the Tribunal's order dated 16.12.2004 pertaining to block assessment were not the operative parts of the Tribunal’s order and therefore, can only be construed as obiter dicta and not ratio decidendi.
(4) The learned CIT(A) further erred in this connection in enhancing assessed income by Rs. 1,18,75,000/-.
(5) Appellant prays that the impugned addition of Rs.34,57,0l,137/-be demolished as unlawful, illegal and invalid and consequently, held to be null and void.
(6) The learned CIT(A) erred in sustaining the levy of interest under Sections 234B and 234C of Rs.4,49,59,291/-and Rs. 43,302/-respectively.
(7) The Appellant leave to add to and/or amend and/or delete and/or modify and/or alter the aforesaid grounds of appeal as & when the occasion demands.
(8) All the aforesaid grounds of appeal are independent, in the alternative & without prejudice to one another.
2. At the outset, it would be appropriate to narrate the circumstances this Bench has been constituted. The dispute before the Division Bench was whether the mesne profit of Rs. 34,57,01,137/-received by the assessee pursuant to the consent decree date 8th January, 2002, passed by the hon’ble Supreme Court constitutes revenue receipt assessable to tax. It was contended on behalf of the Revenue that this issue stood concluded by the decision of the Special Bench of the Tribunal in the case of Sushi! Kumar & Co., 88 ITD 35(Kol)(SB), wherein it was held that the judgement of the hon'ble Madras High Court in the case of P. Mariappa Gounder, 147 ITR 677 holding that mesne profit received by the assessee was Revenue receipt chargeable to tax under the Income-tax Act, 1961 (the Act.) got merged in the subsequent judgement of the hon'ble Supreme Court which is reported as 232 ITR 2 (SC) and consequently the mesne profit received by the assessee was taxable as revenue receipt. However, the learned counsel for the assessee contended before the Division Bench that the issue was not correctly decided by the Special Bench in the ease of Sushi! Kumar & Co., inasmuch as the issue regarding the taxability of mesne profit was neither raised before nor considered by the hon'ble Supreme Court. The issue before the hon'ble Court was whether the mesne profit was assessable in assessment year1963-64 or assessment year 1964-65. It was contended on behalf of the assessee that the hon'ble Madras High Court had decided two issues -(1) the issue regarding the taxability of mesne profit and (2) the year of assessability. The High Court decided both the issues against the assessee by holding that mesne profit was taxable as revenue receipt in assessment year 1963-64. However, the issue regarding taxability of mesne profit was neither raised before nor considered by the hon'ble Supreme Court since the assessee challenged only the issue regarding the year in which the mesne profit could be taxed. The apex court held that the High Court rightly held the same to be taxable in assessment year 1963-64. In these premises, it was contended that the judgement of the Madras High Court regarding the issue of taxability of mesne profit did not merge in the judgement of the hon'ble Supreme Court. Reliance was placed on the judgement of Supreme Court in the case of Kunhayanned vs. State of Kerala, 245 ITR 360, wherein it was held that subject matter of the two proceedings must be identical for applying the theory of merger. The Division Bench considering the above judgement observed "it is difficult for us to concur with the view expressed by the hon'ble Special Bench in the case of Sushil & Co.". Consequently, reference 255(3) of the Act was made to the hon'ble President, ITAT, for constituting the Special Bench to resolve the controversy. In pursuance of the recommendation of the Division Bench, the hon'ble President vide order dated 7th August, 2006,constituted a Special Bench of three Members to resolve the controversy referred to in the question mentioned earlier by us.
3. The Special Bench, constituted by three Members, heard the matter. Vide order dated 13th April, 2007, it was of the view that the decision of the Special Bench in the case of Susheel & Co., can be decided only by a larger Beneh of five Members. In view of such recommendation, the hon'ble President has constituted this Special Bench comprising of five Members to resolve the controversy as well as to dispose the appeal.
4. Let us first proceed to consider the impact of the judgement of hon'ble Supreme Court in the case of P. Mariappa Gounder, 232 ITR 2, so as to resolve the controversy arising from the question referred. The contention of the learned senior counsel for the assessee, Mr. Dastur, is that the issue regarding the character of the mesne profit i.e.-whether revenue or capital was never before the hon'ble Supreme Court in the above case. The only issue to be considered by the hon'ble Supreme Court was the year of taxability i,e., whether the mesne profit should be taxed in assessment year 1963-64 or assessment year 1964-65. Therefore, it cannot be said that the Supreme Court judgement is an authority for the proposition that mesne profit is to be treated as revenue receipt chargeable to tax. In this connection, he relied on the judgement of hon'ble Supreme Court in the case of Rameshwarlal Sanwarmal Vs. CIT, 122 ITR 1, wherein it was held that if a question which is neither raised nor argued before the Supreme Court, then the decision delivered by the Supreme Court cannot be said to be a decision in respect of such question. It was further contended by him that theory of merger is not a doctrine of rigid, and universal application and, therefore, it cannot be said that wherever there are two orders, one by the inferior authority and the other by the superior authority passed in an appeal or revision, there is a fusion or merger of two orders irrespective of the subject matter of appeal or revisional order. Thus it has been contended that what is merged is the decision on the question considered and nothing else. In this connection he has relied on various decisions mentioned below:
CIT vs. Amritlal Bhogilal & Co. 34 ITR 130.
S. Shanmugavel Nadar vs. State of Tamil Nadu, 263 ITR 658.
Kunhayammed & Ors. Vs. State of Kerala, 245 ITR 360.
State of Madras vs. Madurai Mills Co. Ltd., AIR (l967) SC 681.
5. Proceeding further he drew our attention to the judgement of Madras High Court as well as the judgement of hon'ble Supreme Court in the case of P. Mariappu Gounder to point out that two references were made to the hon'ble High Court -one related to the character of mesne profit whether capital or revenue receipt and the other related to the year of taxability. The Madras High Court held that the mesne profit decreed by the Supreme Court constituted as revenue receipt and, therefore, it was chargeable to tax. Thus this reference was decided against the assessee. In respect to the other references at the instance of revenue it was held that income was chargeable to tax in assessment year 1963-64. Thus, the issue arising from the revenue's references was also decided against the assessee.However, the appeal by the assessee was also decided against the assessee. However, the appeal by the assessee was preferred only in respect of the year of taxability and the court decided the issue against the assessee by holding that mesne profit accrued in assessment year 1963-64 as is apparent from the judgement of the apex court. On these facts it was vehemently pleaded by Mr. Dastur that the nature of mesne profit was not the subject matter of consideration by the hon'ble Supreme Court and, therefore, the decision of the hon'ble Supreme Court cannot be construed as decision on the taxability of mesne profit. What has been merged in the order of Supreme Court is the decision of hon'ble Madras High Court in respect of the question relating to the year of taxability and not in respect of the nature of character of mesne profit. On the other hand the learned senior DR has relied on the decision of Supreme Court in the case of Kunhayammed & Drs. Vs. State of Kerala. 245 ITR 360 in support of the contention that entire judgement of the High Court merges in the order of the Supreme Court.
6. Rival submissions of the parties have been considered carefully. The issue for our consideration relates to the impact of the Supreme Court judgement in the case of P. Marippa Gounder, 232 ITR 2. At the outset, it may be mentioned that a judgement of the court has to be understood in the context of the question arose before the court, the arguments made by the parties, the provisions of enactment considered by the court, etc. Reliance can be placed on the Supreme Court judgement in the case of Sun Engineering Works Pvt. Ltd. 198 ITR 297, wherein it has been held that the judgement of Supreme court should be understood in the context of the question under consideration and the judgement must be read as a whole. A decision of the court takes its colour from the question involved in the case in which it is rendered and while applying the decision to a later case the courts must carefully try to ascertain the true principle laid down by the decision.
7. The issue for our consideration is about the impact of the judgement of hon'ble Supreme Court in the case of P. Mariappa Gounder (supra). In order to appreciate the controversy. it would be appropriate to refer the facts of the case as well as the questions which were referred to by the Tribunal for the esteemed opinion of the High Court. At the outset, it may be mentioned that there appeared to be some confusion in the facts as stated by the hon’ble Supreme Court and as stated by the hon'ble Madras High Court. In the Madras High Court judgement it is mentioned that as per the ITO the mesne profit was chargeable to tax in assessment year 1964-65 while as per the judgement of Supreme Court-it was charged to tax in assessment year 196364. Again the High Court judgement says that the AAC, on appeal, held that it was chargeable to tax in assessment year 1963-64 while as per the judgement of Supreme Court the Me held it to be taxable in assessment year 1964-65. Further, the High Court judgement says that on further appeal the Tribunal held it to be taxable in assessment year 1959-60 while as per the Supreme Court judgement the Tribunal held it to be taxable in year 196364.
8. When such conflict was put to the learned counsel for the it was clarified by him that two appeals were preferred before the Tribunal i,e., one against the order relating to assessment 1964-65 whi.ch was the initial order of assessment and the second appeal against the order of assessment for assessment year 1963-64 which was the reassessment proceedings u/s. 147 of the Act as the ITO had reopened the assessment on the basis of the order of MC relating to assessment year1964-65, In order to clarify the same, ed counsel for the assessee has furnished the copy of the order of the Tribunal dated 29th July, 1975, delivered in the of P. Mariappa Gounder. The very first para on the said order says that order of assessment for 1963-64 of reassessment proceedings u/s. 147 of the Act. Para 6 of the said shows that the mesne profit was initially brought to tax in assessment year 1964-65 but the AAC held the same to be taxable in assessment year 1963-64, which has resulted in reopening of the assessment for assessment year 1963-64. Considering the order of the Tribunal mentioned above, it is clear that the issue arose in two proceedings i.e., one against the original assessment proceedings for assessment year 1964-65 and the other against the reassessment proceedings for assessment year 1963-64. Thus, it appears that the High Court has referred to the facts as per the original assessment proceedings for assessment year 1964-65 while the apex court has referred to the facts as per the reassessment proceedings for assessment year Therefore, in reality, there is no conflict of facts and the confusion had arisen only because both the courts referred to the acts relating to different proceedings.
9. Now, it would be appropriate to refer to the facts in detail relating to the of P. Mariappa Gounder (supra). In that case the assessee had agreed to purchase a tile factory, vide written agreement dated 22nd May, 1950. When the vendor did not convey the property as promised, the assessee filed a suit for performance which was ultimately decreed in appeal by the hon'ble Supreme Court vide its judgement dated 22nd April, 1958. In the terms of the decree, the assessee was required to deposit a sum of Rs. 85,00/- within 30 days of the decree and thereupon the title in the property was to be conveyed to the. The hon'ble Court also passed a decree declaring that the assessee was entitled to mesne profit against the respondent which was to be quantified by the Trial Court after making due enquiry. The Trial Court determined the mesne profits at Rs. 57,093/-vide order dated 22nd December, 1962, relevant to assessment year However, the amount of mesne profit was received by the assessee in the following accounting year relevant to assessment year 1964-65, The Income-tax Officer held that the mesne profits constituted the taxable income and was chargeable to tax in the assessment year 1964-65 on receipt basis, On appeal, the AAC held it be taxable in assessment year 1963-64 since the mesne profits accrued on 22nd December, 1962, when it was quantified by the Trial Court. On further appeal, the Tribunal held that the mesne profits were taxable as income but took the that mesne profits should be deemed to have been accrued the moment the Supreme Court declared the assessee's right thereto which was in the s year ending on 31st March, 1959, relevant assessment year 1959-60 meanwhile, the ITO reopened the assessment for A.Y. 1963-64 u/s 147 on the basis of the order of the AAC pertaining to A.Y. 1964-65 & consequently assessed the same in A.Y. 1963-64. On appeal, the AAC held it to taxable in A.Y. On further appeal, the tribunal held it to be taxable in A.Y. 196364. Aggrieved by the said decisions of the Tribunal, the as well as the Revenue sought reference u/s. 256 of the Act for the esteemed opinion of the hon’ble High Court. At the instance of the assessee, the following question was referred to:
“whether the mesne profits decreed by the Supreme Court is of an income nature?”
However, at the instance of the Revenue the following questions were referred to:
"(1) Whether mean profits decreed by the Supreme Court accrued to the assessee earlier to the accounting year relevant to assessment year 1963-64?
(2) Whether on the facts and circumstances of the case, the mesne profits received by the assessee is liable to be taxed in the assessment year 1964-65?
10. The han'hie High Court vide its judgement dated 17th January 1983 held that mesne profit decreed by the Supreme Court was a revenue receipt. Thus the question referred to at the instance of the assessee was answered in favour of the Revenue and against the assessee. Further, it was held that such profit was taxable in the assessment year 1963-64 and thus the questions referred to at the instance of the Revenue were also answered in favour of the Revenue and against the assessee.
11. In view of the above discussion, let us now peruse the judgement of the Supreme Court. The very first sentence of the judgement reads as under:
"The question which arises consideration in this appeal is as to in which assessment year the appellant is liable to be assessed in respect of mesne profits which were awarded in his favour.”
12. After stating the facts of the case, their Lordships set out the questions, which were referred by the Tribunal to the Hon’ble High Court for its esteemed opinion. Those questions are mentioned below:
“1 Whether the mesne profits decreed by the Supreme Court accrued to the assessee earlier to the accounting year relevant to the assessment year 1963-64?
2. Whether, on the facts and in the circumstances of the case, the mesne profits received by the assessee is liable to be taxed in the assessment year 1964-65”
13. Proceeding further, their Lordships referred to the contentions of the parties. The contention on behalf of the assessee was noted as below:
"It is contended by Shri Balakrishnan that the right to receive the mesne profits accrued to the appellant on April 22, 1958, when this court decreed the suit of the appellant and held that he was entitled to receive the mesne profits. Learned counsel submits that as the right had accrued on that day, merely because the quantification of the same was postponed, it would not mean that the income accrued only at the time when the trial court computed the amount of mesne profits.”
14. On the other hand the contention on behalf of the Revenue was noted as below:
“Shri Ahuja, learned counsel for the respondent, however, that with the passing of the decree by this court the appellant only got an inchoate right and his right to receive the mesne profits got ascertained only when the trial court had determined the amount on December 22, 1962.”
15. Thereafter the Court discussed the legal position regarding the date of accrual of income in the light of Order XX Rule 12 of the Code of Civil Procedure, the decision of High Court of Andhra Pradesh in the case of Khan Bahadur Ahmed Aliadin and Sons 74 ITR 651 and the judgement of own court in the case of CIT VS. Hindustan Housing 'and Land Development Trust Ltd. 161 ITR 524 held as under:
"Applying the ratio of the aforesaid decisions, it appears to us the decree dated April 22, 1958, passed by this court only created an inchoate right in favour of the appellant. It is only when the trail court determined the amount of mesne profits that the right to receive the same accrued in favour of the appellant. In other words, the liability became ascertained only with the order of the trail court on December 22, 1962, and not earlier. Following the mercantile system of accounting, the mesne profits awarded by order dated December 22, 1962, were rightly taxed in the assessment year 963-64 and it was woolly irrelevant as to when the amount warded was in fact realised by the assessee. In our opinion, therefore, the High Court was right in deciding the reference of the Department. We accordingly dismiss the appeals but circumstances of this case award no costs. “
16. The above discussion clearly shows that the hon'ble Supreme Court only with one issue relating to the year of taxability of mesne profit, i.e., whether it was taxable in assessment year 1963·64 or assessment year 1964-65. The issue whether mesne profit constituted revenue receipt or capital receipt was not before the Court as is apparent from the question posed by the Court for adjudication, the contentions raised by the respective parties as well as the operational part of the judgement. The decision given by the apex court is binding on all the subordinate courts as well as other authorities across the country in view of the provisions of Article 141 of the Constitution of India. What is binding is the decision given by the Court after considering the facts of the case, the question referred before it, the arguments made by the parties. Hence it cannot be said that the apex court gave any decision regarding the nature of the receipt by way of mesne profit. The decision of the Madras High Court regarding the nature of receipt remained unaffected by the judgement of the apex court.
17. The view taken by us is fortified by the decision of the apex court in the case of Rameshwarlal Sanwarmal VB. CIT, 122 ITR 1. In that case assessee was the HUF which was the beneficial of certain shares in a private limited company called Shamsunder Tea Company Pvt. Ltd. these stood in the name of S.N. Saharia, Karla of the HUF, in the register of the company. The said company loan to three run by the HUF, and the same was treated as deemed dividend in the hands of assessee HUF u/s. 2(6A)(e) of the Indian Income-tax Act, 1922 (1922 Act) by the ITO for assessment year 1955-56 and 1956 -57. The order of the ITO was confirmed by AAC as well as the Tribunal. At the instance of the assessee six questions were referred by the Tribunal for the opinion of the High Court which included the following question:
“Where, on the facts and in the circumstances of the case and on a true interpretation of the terms of section 2(6a0(e) of the Indian Income-tax Act, 1922, the Tribunal was right in holding that the amounts of Rs. 2,21,702 (gross) and Rs. 3,43,505 (net) were dividends in the hands of the applicant, HUF, for the 1955-56 and 1956-57, respectively, when the shares were registered in the name of Shri S.M. Saharia, the karta of the family/”
18. In answering the above question, the hon’ble High Court gave two findings -1) that the loans advanced to the three business concerns of the assessee could not be regarded as deemed dividend within the meaning of section 2(6A)(e) inasmuch as the word 'shareholder' in section 2(6A)(e) meant registered shareholder i.e., a shareholder whose name is recorded in the register of the company. Since the assessee was not the registered shareholder, such loans could not be treated as deemed dividend, and 2) even it be assumed that advance was liable to be regarded as deemed dividend u/s. 2(6A)(e), it could be taxed only in the hands of registered shareholder not of the assessee.
19. Aggrieved by the decision of the High Court, the Revenue preferred an appeal before the apex court. However, inadvertently, the Revenue challenged only the latter finding of the High Court. The correctness of the first finding given by the High Court -remained unchallenged. After considering the contentions of the parties, the Supreme Court decided the issue in favour of Revenue. Since the High Court had not answered the other questions, the Supreme Court remanded the matter to the High Court. On remand, the High Court decided the other issues against the assessee. Aggrieved by the same, the assessee preferred the appeal before the apex court.
20. On behalf of the assessee it was contended before the hon'ble Supreme Court that amount of loans advanced to the three concerns of the assessee could not be regarded as deemed dividend within the meaning of section 2(6A)(e} since the assessee was not a registered shareholder of the company. This contention was sought to be supported by the earlier decision of the in the case of CIT vs. C,P. Sarathy Mudaliar, 83 ITR 170 (SC). As against the argument urged on behalf of the Revenue was that it was not open to the assessee to raise this contention since it was covered by the decision of the in assessee's own case (82 ITR 628 sq. However, the Revenue that this contention was not specifically raised before the Court but it was submitted that it must be held to have been impliedly decided against the assessee by the earlier decision of the Court. The hon’ble Supreme Court rejected the contention of the Revenue by observing as under:
“…The most important circumstance which it ignores is that when the reference was first heard by the High Court, the first question was decided in favour of the assessee on two counts: one was that, since the assessee was not a registered shareholder of the company, the loans advanced to the three business concerns of the assessee could not be regarded as "deemed dividend" within the meaning of s. 2(6A)(e) and the other was that even if they could be treated as dividend" under s. 2(6A)(e), they could be only in the' hands of S.M. Saharia, the registered shareholder, and not in the hands of the assessee who was merely a beneficial owner of the shares. When the revenue preferred an appeal against the judgement of the High Court, the revenue should have assailed the decision of the High Court in both its limbs, but through some inadvertence, which is difficult to understand, revenue challenged only the second limb of the decision completely the first. The result was that the decision of Court that the amounts of loans advanced to the three business concerns of the assessee did not fall within the definition of “deemed dividend" in s. 2(6A)(e) remained intact and unaffected by the decision of this court in the appeal. Now, it is true that this court could not have answered the first question against the without overruling this part of the decision of the High court, but through some unfortunate error, this court set aside the answer given by the High Court in favour of the assessee without considering whether this part of the decision of the High Court was right or wrong. When no contention was raised on behalf of the revenue before this court the decision of the High Court on this point was wrong and that even though the assessee was not a registered shareholder, the amounts of loans advanced to the three business concerns of the assessee were still liable to be regarded as “Deemed dividend” under s. 2(6A)(e) and no such contention formed the therefore, no occasion to consider this answer given by this court see how it can be said merely from the answer given by this court in favour of the revenue that this contention was impliedly decided in favour of the revenue. It would be starting logic to an absurd limit to say that though this contention was not raised, no argued, not discussed and not decided, yet it must be held to have been impliedly decided because, through an error committed by this court, an answer was given favour of the revenue in ignorance of the true position. It would also not be right to hold that merely because this court erroneously answered the first question against the assessee without considering whether the view taken by the High Court on this point was incorrect, the assessee must be precluded from raising the contention that the assessee not being a business concerns of the assessee did not all within the definition of “deemed dividend” under s. 2(6A)(e). …”
21. The above judgement clearly lays down that any part of the judgement of the High Court which is not challenged before the apex court remains unaffected and to that extent it does not become the part of the judgement of the apex court. It has been repeatedly observed by the hon’ble Supreme court that a decision is only an authority for what it actually decides. What is of the essence in a decision is its ratio and not very observation found therein nor what logically follows from the various observations made in it. (State of Orissa vs. Sudhanshu Sekhar mishra, AIR 1968 SC 647). In Ambica Quarry Works vs. State of Gujarat, (1987) 1 SCC 213, it was held that ratio of any decision must be understood in the background of the facts pf that case. It has been said long time ago that a case is only an authority for what it actually decides and not what logically follows it. Similarly, in CIT vs. Sun Engineering Works Pvt. Ltd. (198 ITR 297) it has been held by the apex court that a decision of the Supreme Court takes it colour from the questions involved in the case in which it is rendered and while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision. In of these judgements, it cannot be said that in the case of P. Mariappa Gounder (supra) the hon'ble Supreme Court adjudicated the issue regarding the nature and character of the mesne profit. The judgement of the apex court is restricted only to the issue regarding the year of taxability.
22. The senior DR, Mr. Gupta, has relied on the judgement of hon'ble Supreme Court in the case of Kunhayammed vs. State of KeraJa (245 ITR 360) for the proposition that where there is a dismissal of appeal by the apex court, the decision of the High Court is confirmed and the doctrine of merger applies. It is not necessary for us to adjudicate such contention in the since there was no appeal by the assessee against the opinion of the High Court expressed in the Reference Application at the instance of the assessee. As already mentioned by us in earlier part of the order that there were three Reference Applications before the High Court -one by the assessee and two by the Revenue. ,Only two appeals were filed before the apex court with reference to the opinion expressed by the High Court on the questions referred at the instance of the Revenue. Since no appeal was filed against the opinion expressed by the High Court on the question referred at the instance of the assessee, the question of applying the theory of merger does not arise.
23. The above discussion clearly reveals that judgement of the hon'ble Court in the case of P. Mariappa Gounder (supra) only decides the issue regarding the year of taxability of the mesne profits. That judgement, therefore, cannot be said to be an authority for the proposition that nature of is revenue receipts chargeable to tax. Accordingly, the contention of Revenue that the issue regarding the nature of mesne profits is covered by the aforesaid decision of the hon'ble Supreme Court cannot be accepted.
24. Having answered the question referred to by the hon 'ble President in the present case, we now proceed to dispose off the appeal. The first issue arising in this appeal from Ground Nos. 1, 2, 3 and 5. is whether the sum of Rs. 34,57,01,137/-received by the assessee under the consent decree passed by the hon'ble Supreme Court is in the nature of capital receipt not chargeable to tax or is in the nature of revenue receipt chargeable to tax. Thus it will be appropriate to refer to the facts giving, rise to this appeal. The same are being narrated as below:
a. The assessee is a company promoted by the members of Narang family. It owns various properties including shop nos. 3, 3A, and 4 to 7 on the ground floor in the building known as ‘Beach View' at Warden Road, Mumbai. This property was given by the assessee on leave and license basis to another company promoted by Narang family namely, Narang International Hotels Pvt. Ltd. (NIHPL) for a period of 11 months under an agreement dated 30th February, 1990. Under the agreement, the licensee i.e. NIHPL, could use and occupy the premises for carrying on the business of selling fast food under the name 'Croissants' subject to payment of commission by way of percentage of sales proceeds received by NIHPL.
b. Within a period of few months, the dispute arose between the members of Narang family in respect of the properties owned and held by the individual members of the family as well as through various partnership firms and companies promoted by the members. A family settlement was arrived at on 12.07.1990 which, inter-alia, provided that Rajesh Narang take shall takeover the assessee company namely, Narang Overseas Ltd. both at Bombay and Delhi with al assets and liabilities.
c. A suit (bearing no 8079/90) was filed in the Bombay Civil Court in the year 1990 by NIHPL against the assessee company seeking perpetual injunction to restrain the assessee company from disturbing the possession and the business in the suit shop at Warden Road, Mumbai. During the pendency of suit, another family settlement was arrived at on 3rd July, 1991 which, inter-alia, provided that all the assets of company shall vest in and belong to Rajesh Narang. Further it was provided that the license created in favour of NIHPL in respect of the premises at Warden Road has been mutually cancelled and terminated. However, this settlement also could not be implemented.
d. Subsequently, third family settlement was arrived at on 30th, January, 1992 which, inter-alia, provided that NOPL shall belong exclusively to Rajesh Narang and for his nominees. Further, NIHPL shall pay the arrears of commission to NOPL for the premises occupied by them and they shall continue to pay the commission until the said premises are vacated. It was also agreed that NIHPL shall vacate the said premises on or before 31st M arch, 1992. However this family settlement also could not be implemented.
e. Vide order dated 29th June, 1993, the Bombay Civil Court took cognisance of the family settlement dated 30th January, 1992 and, alia. decreed that NIHPL shall hand over the possession of the shops at Warden Road, Mumbai to NOPL. Aggrieved by this order, NIHPL carried the matter in appeal before the hon'ble Bombay High Court and also applied for stay of the operation of the order and, decree dated 29th June, 1993 passed by Bombay City Civil Coul"t'in Suit No. 8079 of 1990. The hon'ble Bombay High Court passed the following interim order on the said appeal/stay petition of NIHPL:
‘Stay in terms of prayer ‘a’ till disposal of appeal on the appellant depositing Rs. 10,00,000/-within 4 weeks towards arrears and continue to deposit of Rs.l,25,0001month w.e.f 1st August 1993. Appellant to maintain the status quo and not to create third party rights’.
f. Aggrieved by the above order, the assessee company along with its Director Shri Rajesh Narang filed a Letter Patent Appeal praying for payment of arrears and commission as well as payment of mesne profits. On assessee’s prayer for permission to withdraw the amounts so paid by N1HPL, the hon'ble High Court passed the following order on 21't March, 1994:
"Amount deposited by respondent in pursuance of the order dated 24th August 1993, in of order of Chavan J. in first appeal No. 591 of 1993 be paid over to the petitioner on their furnishing security to the satisfaction of the trial court" .
On 28th April, 1994, the hon'bIe High Court passed further orders directing NIHPL to deposit further amount of Rs. 10,00,000/-in the trial court in two weeks towards the arrears of compensation and permitted the assessee to withdraw the sum as also further monthly deposits on the condition that NOPL shall give a written undertaking to the hon'ble High Court by 27th April, 1994 to the effect that NOPL shall not in any manner dispose off or encumber the suit property. On giving the said undertaking, NOPL was permitted to withdraw the UTI Bonds given as security NOPL was also required to make a statement that they shall -give all necessary for renewal of various statutory licenses for running business by NIHPL. NIHPL shall intimate in writing to NOPL the requirements in this respect.
g. On 02.07.1994, Mr. Rajesh Narang, the Director of the assessee company, lodged a suit "number 3578 of 1994 in the Bombay High Court, inter-alia, seeking specific performance and implementation by the defendants named therein of the Family Settlement contained in the diverse writing embodying the Family Settlement. In this suit, Shri Rajesh Narang, inter-alia, petitioned the Court to Order and decree NIHPL.
a. to hand over forthwith quite, peaceful and vacant possession of the shop;
b. To pay arrears of commission with interest;
c. To pay the appellant mesne profits/damages of Rs. 10 lacs per month along with interest thereon for use and occupation of the shop premises; and
d. To withdraw forthwith the first appeal number 591/1993 filed before the Bombay High Court arising out of l30mbay City civil court’s Order in suit number 8079 of 1990.
Besides the above litigation, several other proceedings were pending before various other authorities and courts. Litigation reached a stage where Shri Rajesh Narang and Shri Ramesh Narang had to bring suit of contempt of court against their father Shri Rama Narang. As a result of the contempt petition, the hon'ble Supreme Court considered Shri Rama Narang' as contemnor and issued a notice for award of punishment. However, soon after being held as contemnor, Shri Rama Narang decided to implement the Family Settlements and also to have all suits decreed by a consent decree, including the suit filed by Rajesh Narang before the Bombay High court (Suit No. 3578/1994). Eventually, the Hon'ble Supreme Court vide Order dated 8th January, 2002 decreed all the suits, including the suit filed by Shri Rajesh Narang on 2nd July, 1994, i.e. Suit No. 3578 of 1994, in terms of the of the order. In meeting of the Board of Directors of NIHPL (to give effect to the Minutes of the Consent Order and order of the Honble Supreme Court), inter-alia, the following resolution was passed:
"12. RESOLVED THAT the license created by Narang Overseas Private Limited in favour of the company in respect of premises being flat Nos. 3,3A,5,6 and 7 on the ground floor of Beach View Cooperative Housing Society Limited, Ward Road, Bombay -400 007 stands cancelled with effect 3rd July, 1991, and that accordingly the said license in favour of the company has come to an end from the said date.
FURTHER RESOLVED THAT the company does agree and undertakes to hand over quite, peaceful and vacant possession of the said premises to Narang Overseas Private Limited on or before 1st January, 2002 and that the company agrees and undertakes to simultaneously pay to Narang Overseas Put. Ltd. Rs.2,61, 745/-(rounded off) being arrears of commission for occupation of the said 'premises till 31st March,1992 along with interest @21%per annum till 31..1 December, 2001 amounting to Rs.16,84,487/-and further agrees and undertakes to simultaneously pay damages and mesne profits for wrongful use and occupation of the said premises at the rate of Rs.10,OO,000/-per month from 1992 till 31st December, 2001 along with interest at the rate of 21% per annum amounting to Rs.34,57,01, (less amount already paid through the Court of Rs 10, 00, 000/-).”
Accordingly, the assessee company got vacant possession of the said shop premised and received Rs.33,47 01,137/- on 21st December, 2001 ( as Rs,1,10,00,000/-had been received over the years pursuant to inter order of Bombay High Court per para 6above).
25. The assessee company did not offer the aforesaid amount as income in its return for the year under consideration since it was of the view that the damages/mesne profits received were on capital account and were therefore not liable to tax as income. A note was appended in the return of income filed by the assessee for Assessment Year 2002-03 which reads as under:
“1 As per Narang Family Settlement vacant & free from all encumbrances possession of shop at Beach View was to be handed over on or before 31st March, 1992 & of commission to be .paid to Company by Narang International Hotels Pvt. Ltd. However, due Lo dispute and litigation the same were pending since 1992. The matter has been finally resolved in terms of before Court vide order dated 12th December, 2001 & 8th January, 2002 and accordingly Company received Rs.2,61, 745/of commission for occupation of the said premises till 31st March, 1992 along with interest@21%p,a. December, 2001 amounting to Rs,16,84,487/-. The aforesaid receipt is accounted for in Profit & Loss Account.
2. In of settlement before Supreme Court vide order dated December. 2001 & 8!h January, 2002 the Company has also received damages and mesne profit for wrongful use and occupation of the said premises from April, 1992 December, 2001 along @ 21% p.a. amounting to Rs.34,57,Ol,137/-(less amount already received the Court of Rs.l,10,00,000/-) and implementation of Family Settlement. The said amount being received as damages & mesne profits for wrongful use and occupation of the said shown as 'Capital after adjusting the expenditure to receive the same and implementation of Family Settlement.
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