Bombay High Court dissects taxability on 'accrual' concept, when a dispute is under judicial purview

Mesne profits, which are yet to be determined, do not come within the purview of an accrued income for the purposes of Section 4 and 5 of the Income Tax Act till the judgment regarding civil dispute was rendered in this regard.

Consider that rent of a property is Rs 20,000 per month but the landlord files a suit demanding Rs 50,000/- per month along with damages. This Rs 50,000/- becomes a demand for "mesne profits". Section 2 (12) of CPC, 1908 defines and states that, "mesne profits" of property means those profits which the person in wrongful possession of such property received or might with ordinary diligence have received therefrom, together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession.

The Supreme Court, in the case of P. Mariappa Gounder vs. CIT [(1998) 3 SCC 552] held that it is only when the trial court determined the amount of mesne profit, the right to receive the same is accrued in the landlord’s favour and the liability became ascertained only on the date of the trial court determining mesne profit.

For determining the point of time of accrual, two factors are relevant. The first is a qualitative factor and second is a quantitative factor. The qualitative factor is relatable to the terms of the agreement or conduct of the parties for determining when the legal right to receive income emerges. The quantitative factor is relatable to the exact sum in respect of which the qualitative factor of legal right to receive is applied. When both converge, there is a legal right to receive a certain sum of money as income. In order that income may be said to have accrued at a particular point of time, it must have ripened into a debt at that time the Assessee, should have acquired a right to receive payment at that moment, though the receipt itself may take place later.

Thus, it was again held in the case of T.V. PATEL PVT LTD Vs THE DY. COMMISSIONER OF INCOME TAX SPECIAL RANGE-14, MUMBAI [2024-VIL-05-BOM-DT] that if the matter is pending before the judicial forum, till the case is decided finally by the judicial forum, it cannot be said that the Assessee has acquired a right to receive the income for the purposes of Section 5 of the Income Tax Act, 1961.