My tenant overstayed, I sued, and years later the court decreed mesne profits at a much higher rate. The Assessing Officer has reopened the earlier years and taxed the enhanced figure as annual value in each of them. Can he?
No. The Delhi High Court held that until the decree the assessee's right to the arrears was a contingent and inchoate right, that the arrears received as mesne profits could not be brought to tax for the previous years when they fell due and could be brought to tax only in the year of receipt, and that the reopening under section 147 beyond four years was not sustainable because there was no failure to disclose material facts.
Decided by the High Court (S. Ravindra Bhat J and R.V. Easwar J) on 2012-08-31, reported as ITA 166/2006, ITA 168/2006, ITA 243/2006 and ITA 778/2006 (Delhi High Court), assessment years 1992-93 to 1998-99. It bears on section 22, section 23, section 23(1), section 23(1)(b), section 25B, section 147 of the Income Tax Act 1961, in House Property and Reassessment & Reopening matters.
Two things come out of this and both are still live. First, the timing rule: a landlord's claim for enhanced rent or mesne profits is not income 'received or receivable' for the purposes of section 23(1) merely because it has been claimed, and a decree cannot be related back. That principle comes from the Supreme Court in P. Mariappa Gounder and from Hindustan Housing and Land Development Trust, and it survives the statutory changes. Second, the reassessment point: an assessee who has disclosed the litigation and the legal expenses has not failed to disclose material facts, so the first proviso to section 147 bars a reopening after four years. The statutory vehicle has moved on: section 25B, on which the Revenue relied here as being of later introduction, has itself gone, and section 25A, substituted by the Finance Act 2016 with effect from assessment year 2017-18, now taxes arrears of rent and unrealised rent in the financial year of receipt, allows a deduction of thirty per cent of that amount, and applies whether or not the assessee is the owner of the property in that year. The Court also recorded that the Revenue had never reopened the year of receipt itself, which is the mistake the Department has to avoid and which the taxpayer should not assume will be repeated.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee, a private limited company in the real estate business, derived rental income from a multi-storeyed commercial building let to various tenants. The lease with its tenant Oriental Bank of Commerce was to expire on 31 March 1991; the premises were not vacated and the assessee sued in the Delhi High Court for possession. During the pendency of the suit the bank paid rent regularly at Rs 45,900 per month, which was charged to tax on a due basis, and the assessee's returns disclosed the cost of the civil suit and the advocate's expenses. The suit was decreed in October 1998 and the assessee was paid Rs 27,76,045 as mesne profits towards arrears of rent, the decree being at Rs 75,000 per month from the date of filing of the suit to the date of vacation, with costs. The Assessing Officer reopened the assessments for 1992-93 to 1998-99, alleging that the assessee knew a higher amount than the actual rent was payable, and completed the reassessments on an enhanced annual letting value of Rs 75,000 per month for each year. The Commissioner (Appeals) deleted the additions but upheld the assumption of jurisdiction; on the assessee's cross objections the Tribunal held the invocation of section 147 unsustainable and rejected the Revenue's appeals on merits as well. The Revenue appealed on two questions of law, on the quashing of the reassessment and on whether the excess became due only on the passing of the decree on 14 October 1998.
The questions of law were answered against the Revenue and in favour of the assessee and the appeals were dismissed (paragraph 13). The arrears of rent received by the assessee as mesne profits could not be brought to tax for the previous years when they fell due and could be brought to tax only during the year of receipt; the amount received was liable to tax, in the year of its receipt, as income and not as capital, but the Revenue had not reopened the assessment for the year of receipt (paragraph 13). The reopening of the earlier assessments was not warranted (paragraph 8).
On jurisdiction, the Court adopted the Tribunal's reasoning as unexceptionable: the first proviso to section 147 bars a reassessment beyond four years unless income has escaped assessment by reason of the assessee's failure to disclose fully and truly all material facts, the assessee had explained the heavy legal expenses as the advocate's fee and the cost of the civil suit for possession, and that had not been denied, so there was no such failure; until the decree the right to the arrears was merely a contingent inchoate right and the rent became receivable only on the passing of the decree (paragraph 8). The Court reinforced this with P. Mariappa Gounder, where the Supreme Court described the right of a plaintiff seeking possession and mesne profits, to be calculated after an enquiry, as only an inchoate right, so that the assessee could not be faulted for not quantifying potential future mesne profits (paragraph 8). On the merits the Court set out the Madras High Court's reasoning in P. Mariappa Gounder that mesne profits are a species of taxable income but that the question of accrual cannot rest on a relation-back theory when both the accrual and the amount are unknown quantities, and the Supreme Court's affirmation of that reasoning, which applied CIT v. Hindustan Housing and Land Development Trust Ltd. (paragraph 10). It pointed out that Sadhna Chadha, relied on by the Revenue, in fact favoured the assessee because any rent not relating to the relevant previous year cannot form part of the annual rent for that year (paragraph 11). It noted E. D. Sassoon on the distinction between accrual, arising and receipt (paragraph 12), and followed its own decision in R.J. Wood, which had held that arrears received in a later year could not be spread over the earlier years and had observed that the newly introduced section 25B was clarificatory of the existing law that receipts towards mesne profits should be taxed in the year of receipt (paragraph 13).
the arrears of rent received by the assessee (as mesne profits) could not be brought to tax for the previous years, when they fell due. They could be brought to tax only during the year of receipt.
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Handle my notice → Ask a CA on WhatsAppNo. The Delhi High Court held that until the decree the assessee's right to the arrears was a contingent and inchoate right, that the arrears received as mesne profits could not be brought to tax for the previous years when they fell due and could be brought to tax only in the year of receipt, and that the reopening under section 147 beyond four years was not sustainable because there was no failure to disclose material facts. This was decided by the High Court (S. Ravindra Bhat J and R.V. Easwar J) and bears on section 22, section 23, section 23(1), section 23(1)(b), section 25B, section 147 of the Income Tax Act 1961. It is reported as ITA 166/2006, ITA 168/2006, ITA 243/2006 and ITA 778/2006 (Delhi High Court), assessment years 1992-93 to 1998-99. Two things come out of this and both are still live. First, the timing rule: a landlord's claim for enhanced rent or mesne profits is not income 'received or receivable' for the purposes of section 23(1) merely because it has been claimed, and a decree cannot be related back. That principle comes from the Supreme Court in P. Mariappa Gounder and from Hindustan Housing and Land Development Trust, and it survives the statutory changes. Second, the reassessment point: an assessee who has disclosed the litigation and the legal expenses has not failed to disclose material facts, so the first proviso to section 147 bars a reopening after four years. The statutory vehicle has moved on: section 25B, on which the Revenue relied here as being of later introduction, has itself gone, and section 25A, substituted by the Finance Act 2016 with effect from assessment year 2017-18, now taxes arrears of rent and unrealised rent in the financial year of receipt, allows a deduction of thirty per cent of that amount, and applies whether or not the assessee is the owner of the property in that year. The Court also recorded that the Revenue had never reopened the year of receipt itself, which is the mistake the Department has to avoid and which the taxpayer should not assume will be repeated. If it applies to you, the first step is this: Resist the spreading-back of a decree or a retrospective rent enhancement over earlier years; the amount is taxable in the year it is received or determined, not when the claim was made.
The assessee, a private limited company in the real estate business, derived rental income from a multi-storeyed commercial building let to various tenants. The lease with its tenant Oriental Bank of Commerce was to expire on 31 March 1991; the premises were not vacated and the assessee sued in the Delhi High Court for possession. During the pendency of the suit the bank paid rent regularly at Rs 45,900 per month, which was charged to tax on a due basis, and the assessee's returns disclosed the cost of the civil suit and the advocate's expenses. The suit was decreed in October 1998 and the assessee was paid Rs 27,76,045 as mesne profits towards arrears of rent, the decree being at Rs 75,000 per month from the date of filing of the suit to the date of vacation, with costs. The Assessing Officer reopened the assessments for 1992-93 to 1998-99, alleging that the assessee knew a higher amount than the actual rent was payable, and completed the reassessments on an enhanced annual letting value of Rs 75,000 per month for each year. The Commissioner (Appeals) deleted the additions but upheld the assumption of jurisdiction; on the assessee's cross objections the Tribunal held the invocation of section 147 unsustainable and rejected the Revenue's appeals on merits as well. The Revenue appealed on two questions of law, on the quashing of the reassessment and on whether the excess became due only on the passing of the decree on 14 October 1998. The matter was decided on 2012-08-31 by the High Court (S. Ravindra Bhat J and R.V. Easwar J). On those facts the High Court held as follows. The questions of law were answered against the Revenue and in favour of the assessee and the appeals were dismissed (paragraph 13). The arrears of rent received by the assessee as mesne profits could not be brought to tax for the previous years when they fell due and could be brought to tax only during the year of receipt; the amount received was liable to tax, in the year of its receipt, as income and not as capital, but the Revenue had not reopened the assessment for the year of receipt (paragraph 13). The reopening of the earlier assessments was not warranted (paragraph 8).
On jurisdiction, the Court adopted the Tribunal's reasoning as unexceptionable: the first proviso to section 147 bars a reassessment beyond four years unless income has escaped assessment by reason of the assessee's failure to disclose fully and truly all material facts, the assessee had explained the heavy legal expenses as the advocate's fee and the cost of the civil suit for possession, and that had not been denied, so there was no such failure; until the decree the right to the arrears was merely a contingent inchoate right and the rent became receivable only on the passing of the decree (paragraph 8). The Court reinforced this with P. Mariappa Gounder, where the Supreme Court described the right of a plaintiff seeking possession and mesne profits, to be calculated after an enquiry, as only an inchoate right, so that the assessee could not be faulted for not quantifying potential future mesne profits (paragraph 8). On the merits the Court set out the Madras High Court's reasoning in P. Mariappa Gounder that mesne profits are a species of taxable income but that the question of accrual cannot rest on a relation-back theory when both the accrual and the amount are unknown quantities, and the Supreme Court's affirmation of that reasoning, which applied CIT v. Hindustan Housing and Land Development Trust Ltd. (paragraph 10). It pointed out that Sadhna Chadha, relied on by the Revenue, in fact favoured the assessee because any rent not relating to the relevant previous year cannot form part of the annual rent for that year (paragraph 11). It noted E. D. Sassoon on the distinction between accrual, arising and receipt (paragraph 12), and followed its own decision in R.J. Wood, which had held that arrears received in a later year could not be spread over the earlier years and had observed that the newly introduced section 25B was clarificatory of the existing law that receipts towards mesne profits should be taxed in the year of receipt (paragraph 13). In the words reproduced by the source cited on this page: "the arrears of rent received by the assessee (as mesne profits) could not be brought to tax for the previous years, when they fell due. They could be brought to tax only during the year of receipt." The decision followed or applied P. Mariappa Gounder (Dead) by LRs. v. CIT 1998 (232) ITR 2 (SC) — applied; CIT, Tamil Nadu-V v. P. Mariappa Gounder 1983 (147) ITR 676 (Mad) — set out and endorsed; CIT v. Hindustan Housing and Land Development Trust Ltd. [1986] 161 ITR 524 (SC) — applied through P. Mariappa Gounder; CIT v. R.J. Wood 334 ITR 358 (Del) — followed; CIT v. Ms. Sadhna Chadha, 270 ITR 534 (Del) — relied on by the Revenue but held to favour the assessee; E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27 (SC) — considered.
It was decided by the High Court on 2012-08-31 and is reported as ITA 166/2006, ITA 168/2006, ITA 243/2006 and ITA 778/2006 (Delhi High Court), assessment years 1992-93 to 1998-99. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 22, section 23, section 23(1), section 23(1)(b), section 25B, section 147, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The questions of law were answered against the Revenue and in favour of the assessee and the appeals were dismissed (paragraph 13). The arrears of rent received by the assessee as mesne profits could not be brought to tax for the previous years when they fell due and could be brought to tax only during the year of receipt; the amount received was liable to tax, in the year of its receipt, as income and not as capital, but the Revenue had not reopened the assessment for the year of receipt (paragraph 13). The reopening of the earlier assessments was not warranted (paragraph 8). It arises in House Property and Reassessment & Reopening matters, on section 22, section 23, section 23(1), section 23(1)(b), section 25B, section 147 of the Income Tax Act 1961, and was decided by S. Ravindra Bhat J and R.V. Easwar J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where the reopening is beyond four years, take the first proviso to section 147 first: show that the suit, the claim and the legal expenses were disclosed in the original assessment under section 143(3). For any year from assessment year 2017-18, compute the receipt under section 25A: taxable in the financial year of receipt, thirty per cent deduction, and chargeable even if the property has since been sold. Do not assume the receipt is capital merely because it is called mesne profits or damages; the Court held its character was clearly income, and the assessee here had shown it as capital. Check whether the year of receipt is itself open, because that, and not the earlier years, is where the charge lies.
Validity check could not be completed. Validity check could not be completed; later treatment was not searched. Two statutory changes must be read with it. Section 23(1) was substituted by the Finance Act 2001 with effect from assessment year 2002-03, so the text reproduced at paragraph 10 is not current. Section 25B, referred to by the Court and by the Revenue, was replaced by section 25A as substituted by the Finance Act 2016 with effect from assessment year 2017-18, which now taxes arrears of rent and unrealised rent in the financial year of receipt with a thirty per cent deduction and whether or not the assessee is then the owner. The accrual principle the Court applied comes from the Supreme Court and is not affected by either change; the statutory framework in which it operates is. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Three points on the report. First, at paragraph 10 the judgment reproduces section 23(1) in its pre-Finance Act 2001 form, with clause (b) speaking of 'the annual rent received or receivable' and no clause (c); that was the correct text for assessment years 1992-93 to 1998-99 but it is not the present text, which was substituted with effect from assessment year 2002-03. Second, at paragraph 12 the Court sets out E. D. Sassoon and Co. Ltd. v. CIT and then writes 'The Court held that:' followed by a block quote about Government Department tenants, retrospective enhancement of rent and the West Bengal Premises Tenancy Act; that passage cannot be from E. D. Sassoon (1954) and the report does not identify its source, so it should not be attributed to that decision. Third, paragraphs 8 and 9 reproduce the Tribunal's order and paragraphs 10 and 11 reproduce the Madras High Court, the Supreme Court and Sadhna Chadha; the High Court's own operative conclusions are in the closing part of paragraph 8 and in paragraph 13. The judgment has 13 numbered paragraphs. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The questions of law were answered against the Revenue and in favour of the assessee and the appeals were dismissed (paragraph 13). The arrears of rent received by the assessee as mesne profits could not be brought to tax for the previous years when they fell due and could be brought to tax only during the year of receipt; the amount received was liable to tax, in the year of its receipt, as income and not as capital, but the Revenue had not reopened the assessment for the year of receipt (paragraph 13). The reopening of the earlier assessments was not warranted (paragraph 8).
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