GST on Mesne profits

The question of whether Goods and Services Tax (GST) applies to mesne profits is complex because it depends on whether the payment is considered a "supply" under the GST law.

Understanding the Context

• What are Mesne Profits? Under Section 2(12) of the Code of Civil Procedure, mesne profits are damages that a person in wrongful possession of a property is liable to pay to the rightful owner. They represent compensation for the deprivation of the use of the property.

• The "Supply" Requirement: For any transaction to be taxable under GST, it must qualify as a "supply" of goods or services made for a consideration in the course or furtherance of business.

Key Considerations for GST Applicability

1. Lack of Contractual "Supply": A central argument against the levy of GST on mesne profits is that these payments are typically awarded by courts as damages for a wrongful act (the unauthorized occupation). Since the owner did not "permit" the use of the property as a commercial service (which would be a supply), there is often no underlying service being provided.

2. Damages vs. Consideration: Similar to the debate regarding liquidated damages, there is a legal view that payments made to compensate for a breach or loss (like wrongful possession) do not constitute consideration for a "service" of "tolerating an act."

3. Judicial/Expert Perspective: Some rulings and expert opinions (such as those referenced in the Suchitra case mentioned in industry analysis) have suggested that where there is no act of "letting" by the owner to the tenant, the sum—even if compensatory—is not taxable as a service under GST.

4. Income Tax vs. GST: It is important to distinguish this from Income Tax. High Courts (e.g., the Delhi High Court in Skyland Builders) have held that mesne profits are revenue receipts and thus taxable as income under the Income Tax Act. However, this does not automatically make them taxable under the GST Act, as the definitions of "income" and "supply" are distinct.

Summary

While the position can be subject to interpretation by tax authorities in specific scenarios, the prevailing view in many legal discussions is that mesne profits—being essentially damages for unauthorized occupation and not a payment for a consensual supply of services—should generally not attract GST.

Summary: Mesne profits are compensatory damages for the wrongful occupation of property. Because they do not typically involve a consensual supply of services by the owner, they are generally not considered a "supply" under GST law and are therefore usually not subject to GST, despite being taxable as income under the Income Tax Act.