ACHUTHAN PILLAI & CO. VS COMMISSIONER OF INCOME-TAX, 2000 PTD-KERALA-HIGH-COURT-INDIA 3521 (1998)

Income-tax---

----Capital gains ---Mesne profits do not constitute capital gains---Indian Income Tax Act, 1961, S.45.

A, the managing partner of the assessee-firm was granted a 30 years' lease of 99.68 cents of land in the Willingdon Island effective from. September 23, 1959, by the Cochin Port Trust. Certain buildings were constructed on this land by the lessee---A---who then leased out the buildings to V Ltd. for ten years effective from February 1, 1961, under the lease deed, dated August 18, 1961, on a monthly rent of Rs.2,375. Later, A assigned to the assessee-firm his entire right, title and interest in the leased premises. Some disputes arose between the assessee-firm and V Ltd. and a civil suit was filed. The Court allowed certain reliefs to the assessee. As per the Court decree, V Ltd. was directed to hand over vacant possession of the disputed property to the assessee-firm and pay mesne profits at the rate of Rs.22,070 per month and interest at the rate of 6 per cent per annum from the date of filing the suit till recovery of the amount for V. Ltd. Such mesne profits were brought to tax by the Assessing Officer as revenue receipt. The Tribunal held that it was taxable as a capital receipt. On a reference.

Held, that there was no transfer of any capital asset in favour of V. Ltd. By lease of building by A to V Ltd., only the right to use and possession of the building was transferred. Ownership in the building, that is, the capital asset continued to remain in the lessor, who, later assigned his entire rights to the assessee-firm. From these facts, it was amply clear that there was no transfer of the capital asset within the meaning of section 45(1) of the Income Tax Act, 1961, and, therefore, no capital gains arose.

CIT v. Mrs. Annamma Alexander (1991) 191 ITR 551 (Ker.) rel.

Sevantilal Maneklal Sheth v. CIT (1968) 68 ITR 503 (SC) ref.

Party appeared in person.

P.K.R. Menon and N.R.K. Nair for the Commissioner.

JUDGMENT

OM PRAKASH, C.J.---At the instance of the assessee, the Income- tax Appellate Tribunal referred the following question under section 256(1) of the Income Tax Act, 1961, for the opinion of this Court:

"Whether; on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the capital receipt in respect of mesne profits is subject to tax, as a capital receipt?"

The relevant facts, as stated by the Appellate Tribunal in its order, dated February 4, 1992, are that as per lease deed, dated August 15, 1960, one Achuthan Pillai, the managing partner of the assessee-firm, was granted a 30 years' lease of 99.68 cents of land in the Willingdon Island effective from September 23, 1959, by the Cochin Port Trust. Certain buildings were constructed on this land by the lessee ---Achuthan Pillar--who then leased out the buildings to Voltas Ltd. for ten years effective from February ~1. 196'_ under the lease deed, dated August 18, 1961, on a monthly rent of Rs.2,375. Later, Achuthan Pillai assigned to the assessee-firm his entire right, title and interest in the leased out premises. Some disputes arose between the assessee firm and Voltas Ltd. and then a civil suit (O. S. No. 107 of 1977) was filed before the competent Court of law and vide order, dated October 31, 1980, the Court allowed certain reliefs to the assessee. As per the court decree, Voltas Ltd. was directed to hand over vacant possession of the disputed property to the assessee-firm and pay mesne profits at the rate of Rs.22,070 per month and interest at the rate of six percent. per annum from the date of filing the suit till recovery of the amount from Voltas Ltd.

It is such mesne profits, which was brought to tax by the Assessing Officer as revenue receipt. On appeal, the order of the Assessing Officer was affirmed by the appellate authority. On further appeal, the Appellate Tribunal held as follows:

(12) The further issue services for consideration is the year for which the assessment is to be made. We have already noted that the lease right is a right attached to and forming part of the land and buildings. We also notice from the returns filed by the assessee that he has maintained books with reference to house property income and the previous year adopted by him is the year ended June. The agreement' was entered into on March 18, 1981, in pursuance of which this amount of Rs.4.24 lakhs was payable- The lease-hold right runs with the property and is intimately connected with income derived therefrom. It has been held by the Supreme Court in Sevantilal Maneklal Sheth v. CIT (1968) 68 ITR 503, that capital gains is income derived from property. The assessee has thought fit to disclose property income for the previous year ended June, 1982. it follows that capital gains will also have to be assessed for the same period especially as the transfer of the capital asset took place during the relevant previous year, i.e., on March 18, 1981. We, therefore, find that the capital gains will be assessable to tax for the assessment year 1983-84. We direct the Assessing Officer to make the re-computation accordingly. "

The question for consideration is whether there was transfer of a capital asset and if so whether any capital gains arose therefrom. The fact as found by the Appellate Tribunal is that a civil suit was instituted by the assessee-firm against Voltas Ltd., which was decreed in favour of the assessee. By the decree, Voltas Ltd. became liable to pay mesne profits. On these facts, can it be said that there was transfer of any capital asset within the meaning of section 45(1) of the Income-tax Act,. Section 45(1) clearly provides that any profits or gains arising from the transfer of a capital asset effected in the previous year, shall be chargeable to income-tax under the' head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. From the facts as found by the Appellate Tribunal, we are of the view that there was no transfer of any capital asset in favour of Voltas Ltd. After the lease was executed in favour of Achuthan Pillai, he constructed the building, which was leased out to Voltas Ltd. by the former, who later assigned his rights in favour of the assessee-firm. Voltas Ltd. was sued by the assessee-firm and upon a decree, mesne profits were awarded to the assessee-firm by Voltas Ltd. By lease of building by Achuthan Pillai to Voltas Ltd., only the right to use and possession of the building was transferred. Ownership in the building, that is, the capital asset continued to remain in the lessor, who, later assigned his entire rights to the assessee-firm. From these facts, it is amply clear that there was no transfer of the capital asset within the meaning of section 45(1) and, therefore, no capital gains as such will arise liable to tax.

On these facts, the finding of the Appellate Tribunal that there was transfer of the capital asset, is entirely erroneous in law.

The view, which we have taken is fully fortified by a decision of this Court in CIT v Mr. Annamma Alexander (1991) 191 ITR 551, in which a Division Bench held that the fact that mesne reference to the profits which the 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.

In the result, we answer the aforementioned question in the negative, that is, in favour of the assessee and against the Revenue.

M. B. A./114/FC Reference answered.