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. On these facts, two issues cropped up in the assessee's income-tax assessments. One was whether the amount of mesne profits in the sum of Rs. 67,093 constituted taxable income in the assessee's hands. The other problem was as to which year's income should this amount be brought to charge for income-tax. On the first question, all the tax authorities, namely, the ITO, the AAC and the Appellate Tribunal, were agreed that mesne profits constituted the assessee's taxable income. On the other question each of the authorities gave a different determination. According to the ITO, mesne profits were properly chargeable in this case in the assessment year 1964-65, since the assessee actually received the mesne profits only during the relevant previous year, which was the financial year ended March 31, 1964. The AAC, however, took the view that the mesne profits had accrued to the assessee in the year in which the trial court, acting on the remand by the Supreme Court, quantified the amount of mesne profits, which was in the previous year ending March 31, 1963, relevant to the assessment year 1963-64. The Tribunal took a third position and held that mesne profits must be held to have accrued the moment the Supreme Court declared the assessee's right thereto by its judgment which came about in the previous year ended March 31, 1959, relevant to the assessment year 1959-60.
At the assessee's instance the following question of law has been referred to us by the Tribunal.
'Whether the mesne profits decreed by the Supreme Court is of an income nature ?'
4. We do not think it should take us long to find the correct answer. A claim for mesne profits is usually directed against one who has deprived the true owner of possession of his property and who has thereby prevented the true owner from enjoying the income or usufruct of the property. When, in such a suit or proceeding, the court awards mesne profits to the true owner, that represents a just recompense to him for the deprivation of the income which ought properly to have come into his hands but for the interference of the person in wrongful possession of the property.
5. The code of Civil Procedure defines mesne profits as that which is person in wrongful possession of property has actually received or might with ordinary diligence have received therefrom. The accent of the definition in s. 2(12) of the Code concentrates more on the methodology of calculation of mesne profits rather than on what the true nature of mesne profits is. As we earlier stated, the rationale of awarding mesne profits is that the trespasser or the person in wrongful possession not only defies the title of the true owner, but also prevents the true owner from enjoying the income or the usufruct of the property in question. When therefore the court decrees mesne profits, that decree is in recognition of the position that the true owner is entitled to the income from the property and the person in wrongful possession is to compensate the true owner in that regard by paying either the actual income from the property or a reasonable estimate of that income. Having regard to these characteristics of mesne profits, there can be no doubt that they are also a species of taxable income. Under the scheme of the I.T. Act, anything which can properly be regarded as income an which is not expressly exempted from taxation under a specific provision of the statute must be regarded as taxable income. We are, therefore, satisfied that the Tribunal and the other authorities were right in their view that the Tribunal and the other authorities were right in their view that mesne profits has to be assessed as taxable income in the hands of the present assessee.
6. Although some decisions were cited at the Bar during the hearing, we do not think it is necessary to dwell at length on all the cases referred to. We may, however, refer to the assessee's own case for certain earlier assessment years, in which a similar, but not identical, issue was decided by this court. At the material time a court receiver was in charge of the tile factory who had been appointed to receive its rents and profits pending the dispute between the assessee and the subsequent purchaser, Kochu Vareed. The question in those assessments was whether the income derived by the receiver from the tile factory can be regarded as taxable income of the assessee. In its judgment, P.Mariappa Gounder v. CIT : 70ITR655(Mad) , this court held that the amount of rents and profits received by the receiver was income and taxable as such under the I.T. Act. This court further held that since the money received by the receiver was ultimately for and on behalf of such person as might be declared by the court as a true owner and since the Supreme Court subsequently upheld the title of the assessee, the profits derived by the receiver must be assessed in the hands of the assessee as his income. It seems to us that for the period during which Kochu Vareed was in possession of the property and with respect to which mesne profits were awarded to the assessee, the position in law must be fortiori.
7. 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.
8. As illustration of courts upholding the assessment of compensation for deprivation of the taxpayer's income, may be cited a decision or two. In Spence v.IRC  24 TC 311 , a seller of shares obtained a decree against the purchaser. The decree set aside the sale on the ground of fraudulent misrepresentation by the purchaser. Under the decree, the shares were the transferred to the seller. The purchaser was also directed to pay to the seller a lump sum which include the amount of the dividends received by the purchaser while the shares stood in his name. It was held that the amount of dividends recovered from the purchaser was assessable as income of the decree-holder. It was pointed out that the decree for compensation was relatable to the dividends which the decree holder had been deprived of by the fraudulent purchaser.
9. In Gobardhandas Jagannath v. CIT : 27ITR225(Patna) , a land belonging to the family of the assessee at Gaya was taken possession of by the Aviation Division of the Central Public Works Department for a number of years. A sum of Rs. 8,272 was paid by that Department as and for their use and occupation of the lands. The question was whether that amount was income taxable in the hands of the family. The Patna High Court held that it was. The court pointed out that the assessee was prevented during the period in question from enjoying the usufruct of the land and was not permanently deprived of the use of the land and that the amount of Rs. 8,272 represented merely the loss of income suffered by the assessee for the period during which the Government Department was in occupation of the land and hence it was rightly treated as bearing the character of income liable to be taxed in the hands of the assessee.
10. Having regard to these considerations our answer to the question raised by the assessee in this court must be rendered in favour of the Department.
11. The other issue for our consideration is which is the account year to which the mesne profits should be related for the purpose of assessment in the present case. According to the Tribunal, since the assessee maintains his accounts under the mercantile system, mesne profits, as income, have got to be assessed in the year of accrual. Passing on this part of the Tribunal's reasoning, we must say the assessment of a given income on the accrual basis has nothing whatever to do with any method of accounting of the concerned assessee. Section 5 of the I.T. Act, 1961, defines the scope of total income which is lent another name for taxable income as including all income which is either received by the assessee or which accrues to the assessee, or is deemed to be received or deemed to accrue under the Act. This section does not say anything about the method of accounting. Section 145 which deals with the method of accounting only refers to income chargeable under the head 'Profits and gains of business or profession.' There is, therefore, nothing in the provisions of the statute on the basis of which we can say that the issue of accrual of income has got to be decided in terms of the method of accounting followed by an assessee in a given case. Broadly speaking, the mercantile system of accounting treats as receipts all amounts which the taxpayer would be entitled to receive in the same way as items of expenditure, under the mercantile system, would relate to amounts which have not actually gone out of the hands of the assessee, but which are subject to a claim or demand of an instant kind. In the cash system of accounting, only cash receipts and cash disbursements would enter into the reckoning. In this sense alone, it may be appropriate to regard the mercantile method of accounting as being devised on the accrual basis. Greater significance, from the fiscal point of view, cannot be given to the system of accounts pursued by the assessee. The question of accrual or non-accrual and the subsidiary question of the time of accrual of income have got to be decided only on fiscal principles and not on the basis of any given accounting method which is in vogue or which might be practised by the assessees. The concept of accrual of income for purposes of income-tax is a concrete concept. Indeed, the I.T. Act does not deal with abstractions. It deals with income in terms of rupees and paise. Income-tax is a tax on total income, which is defined in s. 2(45) of the Act as the total amount of income. Therefore, when for the purpose of income-tax we speak of accrual of income, we cannot speak of accrual in the abstract, or of income in the abstract. Our talk of accrual and of income would make sense only where we deal with accrual in a given period of time or of income of a given amount.
12. In the present case, the Supreme Court while upholding the assessee's claim for specific performance of the contract to purchase the tile factory also upheld the assessee's claim for mesne profits. But the Supreme Court did not and could not say how much was the mesne profits to which the assessee was entitled for the period during which he was deprived of possession. What the Supreme Court was doing was only to settle, in principle, the assessee's right to mesne profits. In the non-concrete sense, therefore, the Supreme Court may be regarded as having upheld the assessee's right to the income. But when it comes to a question of deciding about the accrual of mesne profits, which is concrete conception, it could not be said that they had accrued at any point of time earlier to its actual determination by the trial court in terms of rupees and paise. For, at that point of time, and at no earlier point, mesne profits as a tangible amount, became known, and only when it became known as a sum certain it accrued to the assessee as income.
13. The Tribunal, however, mistook the abstract idea as a concrete one and held that the moment the Supreme Court declared the assessee to be entitled to mesne profits, that very moment the mesne profits had accrued to the assessee as income, overlooking the fact that at that point of time, nobody knew what the mesne profits were. The Tribunal did not pause to consider whether anything at all could be said to accrue at a particular time when how much accrues is not known to anybody at that time. To say that we do not know much is the mesne profits but nevertheless assert that mesne profits have accrued at a given moment of time, out of ignorance, is very much like an Irish Bull an example of which was found in the description of an escaped convict from an Irish prison : 'Age not known but looks older than he really is'. If we do not know how much the mesne profits are, how can we say, with any modicum of confidence, that the mesne profits have already accrued The question of accrual, like the question of receipt, cannot be based on any theory but must rest on the solid rock of actualities. We cannot say that whenever the amount of mesne profits are quantified, that amount must relate back to an earlier point of time when the right to mesne profits itself was declared by a competent court. 'Relation back' theory cannot work and would be quite inappropriate for settling the question of accrual of income, when both the accrual and income are unknown quantities.
14. Mr. K. Srinivasan, the assessee's learned counsel, relied on the decision of the Supreme Court in CIT v. Chunnilal V. Mehta and Sons. P. Ltd. : 82ITR54(SC) . This decision in our ]pinion does not assist the assessee's claim that mesne profits, although not known at the time of the Supreme Court's judgment in his favour must nevertheless be held to have accrued as on that date. In Chunnilal V. Mehta's case : 82ITR54(SC) , the assessee was action gas the managing agent of a company under a managing agency agreement stipulated to last for a term of 21 years. Under the terms of the agreement, the assessee was entitled to a minimum monthly remuneration of Rs. 6,000. The agreement inter alia, provided that in the event of a premature termination of the managing agency, the assessee would be entitled to compensation or liquidated damages equivalent to his monthly minimum remuneration for the unexpired term of the managing agency. The assessee became the managing agent in 1933. He was removed from office by the company in 1951, before the expiry of the contracted period. In a suit filed by the managing agent for damages, compensation was claimed not on the basis of the monthly minimum remuneration, but at a gar higher amount. The court, however, rejected his claim as exorbitant, and limited the compensation on the basis of a term in the agreement determining the compensation on the basis of a term in the agreement determining the liquidated damages as equivalent to the minimum monthly remuneration of Rs. 6,000. This decree was affirmed in appeal in December, 1955. The total amount payable under the decree was Rs. 2,34,000. The question was whether the entire sum was to be assessed in his hands as income which had accrued in the year in which the decree was passed, or whether the assessment has to be made only of just that amount which was equivalent to the liquidated damages every year, following the determination of the managing agency. The Supreme Court relied on the clause in the managing agency agreement which fixed the liquidated damages at Rs. 6,000 per month and held that it was at that figure that compensation had accrued to the assessee moth by moth and year by year. The court observed that this position was not altered by the fact that the assessee had claimed a higher compensation in the suit, and that claim was for a prolonged period under adjudication by a court of law. The Supreme Court, accordingly, held that the compensation must be assessed on the basis of accrual of Rs. 6,000 every moth from the date of termination of the assessee's office. It was urged before the Supreme Court that the assessee in its books of account had shown the entire amount in the profit and loss account only in the year in which the amount was received from the managed company. The Supreme Court held that the accountancy treatment of the amount of compensation was matter of indifference to the question of accrual of income.
15. With respect, the principle laid down by the Supreme Court on the question of accrual of income is unexceptionable. Where the amount of compensation of liquidated damages is not only a definite sum but is already clearly known to the true owner also, the moment the right to compensation is admitted, or declared by a competent court, the amount of compensation as a liquidated sum, would accrue. If it is a periodical amount, it would accrue every year. Whether liquidated damages accrues in this manner, considerations such as postponement of actual receipt or the leisurely crediting of the amount in the books of account will not derogate from the assessment of the amount on the basis of accrual. By way of contrast, however, where the income of the person in unlawful possession is not known to the true owner, mesne profits cannot be a liquidated sum. The present case falls under the latter category. For, mesne profits which are not known to the true owner must invariably be the subject of an inquiry, either as to the actual income or as to a reasonable estimate thereof, as is contemplated under O.20, r.12 of the Code of Civil Procedure. In this case, until the trial court worked out the remand order of the Supreme Court and determined the amount by its order dated December 22, 1952, it could not be said that the assessee was entitled to any amount of mesne profits.
16. Mr. Srinivasan referred to a decision of a Bench of this court in T. N. K. Govindarajulu Chetty v. CIT : 87ITR22(Mad) . In this case, the assessee's lands were compulsorily acquired by the Government. There was a dispute as to the amount of compensation between the assessee and the Government. The Land Acquisition Collector fixed the compensation at Rs. 2,40,000. After reference of the award of compensation to the court, and after passing through successive appeals, the compensation was finally determined by this court at Rs. 5,00,000 which was upheld by the Supreme Court in appeal. Interest was payable on the compensation ultimately fixed. The compensation, together with interest, amounted to Rs. 6,28,715. Part of the interest was paid in the account year ended April 13, 1955, and the rest of it was paid in the account year ended April 12, 1956. The question was, whether the interest could be said to have accrued in the two account years aforesaid or whether it should be held to have accrued year by year in between the date of acquisition and the date of final payment. This court accepted the finding of the Tribunal that the assessee was following the mercantile method of accounting and, therefore, the award of interest on the compensation must be rough to tax on the accrual basis. For the latter proposition this court followed Chunnilal V. Mehta and Sons' case : 82ITR54(SC) . This court held that the interest must be held to have accrued year and not at the time when compensation was paid along with the interest.
17. This decision, in our judgment, closely follows the principle laid down by the Supreme Court. In the Supreme Court case, as we earlier pointed out, a sum of Rs. 6,000 per month was the sum certain fixed as liquidated damages in the managing agency agreement which was the amount that was Ultimately decreed by the court in the assessee's favour, On this basis, the Supreme Court held that the compensation accrued at the known rate of Rs. 6,000 per month. In the case decided by this court in T. N. K. Govindarajulu Chetty v. CIT : 87ITR22(Mad) , the interest in question was payable under the statue at the rate of 6% per annum on the amount of compensation which was withheld from payment to the assessees. The amount of interest, therefore, may be regarded as a certain amount. All that was required was to calculate interest at 6% on the amount of compensation awarded, but withheld. The compensation already awarded was a known quantity and, therefore, 6% on that amount must also be regarded as sum certain. In this sense, therefore, it may be correct to hold that the accrual of interest is not postponed to the date of payment, nut is a yearly phenomenon in terms of the law relating to compensation.
18. In the two decisions, therefore, the concept of accrual of income had been applied only to cases where there was an ascertained sum and also a given period with reference to which the character of income was considers from the point of view of accrual. In neither case, was the court engaged in a philosophic discussion about accrual of income in the abstract.
19. The decision in T. N. K. Govindarajulu Chetty's case : 87ITR22(Mad) , is not alone among cases dealing with interest payable on compensation for compulsory acquisition of land. There are other decisions too in which the interest on compensation was held properly assessable in the year to which they relate and, therefore in the year in which they may be said to accrue. See for instance CIT v.V.Sampangiramaiah : 69ITR159(KAR) and Joyanarayan Panigrahi v. CIT : 93ITR102(Orissa) . In all these cases, there was no difficulty in ascertaining the quantum of interest in the year to which it related, because the amount to compensation was a known figure and the interest remained simply to be worked out by applying the statutory rate of interest on the principal amount awarded. But the position would be different even in the case of interest on the compensation where the compensation itself is a nebulous factor. As an example of the latter type of case may be cited CIT v. Raja S. N.Bhanja Deo : 106ITR748(Orissa) . That was a case where an estate was taken over under the Orissa Estates Abolition Act, 1952, and the compensation because payable. Statutory interest of Rs. 26,007 was paid to the estate owner on the delayed payment. The compensation related to the years 1953-54 to 1964-65. The question was, whether the interest paid on delayed payment of compensation was assessable on the accrual basis at the time the decision was taken to quantify or whether it related to several earlier years to which interest was attributable. The Orissa High Court held that so long as compensation was not quantified, it was difficult to hold that interest was accruing on yearly basis. The court, therefore, held that the total income was assessable during the year of receipt.
20. In our judgment to case such as the present one, the principle of the decision in CIT v. Raja S. N.Bhanja Deo : 106ITR748(Orissa) , would apply, for what Kochu Vareed, as person in unlawful possession earned, and what he knew about the profits of the tile factory was a secret which he kept to himself. The assessee did not know how much was the income. The proceedings had therefore, to go through the whole hog of a judicial inquiry before mesne profits could be ascertained. As it happened, the amount was fixed by the trial court only on December 22, 1962, during the year of account ended March 31, 1963. On principle as well as on authority, therefore, the mesne profits as an amount of income could be said to have accrued, in the income-tax sense of the term, only during the year ended March 31, 1963. Hence, we must uphold the order the AAC bringing to tax the entire amount in the assessment year 1964-65 relevant to the account year ended March 31, 1964, must be held to be erroneous.
21. Our observations last mentioned provide the answer to the following two questions of law referred to this court by the Tribunal at the instance of the Department on the issue as to the year of accrual of the mesne profits :
'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 ?'
22. Having regard to the answers in this reference, we direct the assessee to pay the costs of the Department. Counsel's fee Rs. 500 (one set).