Holding

The condition requires payment of 50% of the net profit, not net income, and the term “net profit” must be given its ordinary commercial meaning.

Summary

The State of Maharashtra leased land to Mahila Vikas Mandal for a women's hostel, stipulating that any part used for remunerative purposes required prior approval and payment of 50% of the net profit. The Collector later alleged commercial use and demanded 50% of the net income (Rs 19,03,103) as recovery under Section 267 of the Maharashtra Land Revenue Code, 1966. The appellants argued that the condition required 50% of net profit, not net income, and that no profit existed. The Bombay High Court dismissed the writ petition, accepting the Collector’s demand. On appeal, the Supreme Court held that “net profit” must be understood in its ordinary commercial sense, distinct from income, and remanded the matter to the Collector to determine the actual net profit, allowing the appeal.

Issues considered

Whether the demand for 50% of net income complies with the condition of payment of 50% of net profit in the lease grant.
How the term “net profit” should be interpreted under the Maharashtra Land Revenue Code, 1966.
Whether the Collector’s recovery under Section 267 of the Maharashtra Land Revenue Code is lawful in the present facts.
Whether the High Court erred in dismissing the writ petition challenging the demand.

Legislation cited

Subjects

land leasenet profitMaharashtra Land Revenue CodeSection 267interpretation of contractcommercial userevenue demandwrit petitionlease conditions

Judgment

MAHILA VIKAS MANDAL COLABA AND ORS. A
v.
THE STATE OF MAHARASHTRA AND ANR.

JULY 21, 2005

[ARIJIT PASA YAT AND H.K. SEMA, JJ.] B

Maharahstra Land Revenue Code, J966-Section 267-Grant of land
II
for non-commercial purpose-With condition that if used for commercial
purpose permission for the same to be sought subject to payment of 50% of C
the net profit-Demand of 50% of net income raised alleging violation of the
condition-Writ Petition-Dismissal of-On appeal, held: The condition
stipulated payment of 50% of net profit not net income-Matter remanded to
Collector for determining 'net profit'- 'net profit' has to be adopted as
commercially undertstood.
D
Words and Phrases:

'Profit'-Meaning of in the context of Maharashtra Land Revenue
Code, 1966.

- Respondent-State leased out certain land to appellant No.I. One of the E
conditions for the grant, clearly stipulated that if lessee utilized any area
specifically set up for non-remunerative activities for any remunerative
purposes, it had to take prior approval of the Authorities and if granted, the
same would be subject to payment of 50% or "net profit". Respondent
demanded from appellant No.I, 50% or the net income alleging that the terms
and conditions were violated. Thereafter notice of recovery was issued.~The F
appellant filed Writ Petition which was dismissed by High Court on the ground
that the quantum or amount as demanded was correct and that adequate
opportunity was granted to the appellant to have their say.

In appeal to this Court appellant contended that requirement or the
condition was not payment or 50% orthe net income, but 50% or 'net profit' G
and the materials on record show no profit.

Allowing the appeal and remitting it to the Collector of fresh
adjudication, the Court
753 H
754 SUPREME COURT REPORTS [2005] SUPP. I S.C.R.

A HELD: 1. The condition of the Grant shows that requirement was to pay
50% of"net profit". What would constitute net profit has not been spelt out
in the Grant. Obviously therefore, the expression "net profit" as commercially
understood had to be adduced. (757-B]

2. The fundamental meaning of the expression "profit" is the amount
B of gain made during a particular period. When question arises regarding the
meaning to be assigned to the expression "net profit", the question is to be
determined on the construction of the relevant agreement, which is to be
construed according to the words contained in it and the circumstances in .
>
which it was made. "Income" and "profits" are not synonymous in all cases.
C In certain statutes "income" and "profits" are treated differently. In the
ordinary economic sense the expression "income" includes not merely what
is received or what comes in by exploiting the use of the property but also
what one saves by using it oneself. That which can be converted into income
can be reasonably regarded as giving rise to income. In the popular sens.e the
two words "receipts" and "profit" are very different expressions. Profits are
D pointed out as the surplus by which the receipts exceed the expenditure.
Monies which are not really profits of a business may yet be income. Profit
means the difference between the amount realized and the expenses incurred
in realizing it; The word "profit" has well defined legal meaning, which
coincides with the fundamental conception of profits in general parlance,
E although in mercantile phraseology the word may at times bear meanings
indicated by the special context, which deviate in some respects from this
fundamental significance. (757-C. D, E, F, G, H; 758-A)

Commissioner of Income Tax v. Delhi Flour Mills Company Ltd, (1959)
35ITR15 SC; Bhagwan Dass Jain v. Union of India and Ors. (1981) 2 SCC
F 135 and E.D. Sassoon and Company Ltd. v. Commissioner of Income Tax,
Bombay City, {1955) 1 SCR 313, relied on.

Spanish P~ospecting Company Ltd. (1911) i bh. 92(CA) and Russel v.
Town and Country Bank, (1989) 13 A.C. 418, referred to.

G The King v. B.C Fir and Cedar Lumber Company, AIR (1932) PC 121
and Secretary of State v. Saroj Kumar, AIR (1935) PC 49, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4399 of2005.

From the Judgment and Order dated 3.3.2004 of the Bombay High Court
H in W.P. No. 996 of2003.
MAHILAVIKASMANDALCOLABAv.STATEOFMAHARASHTRA[PASAYAT,J.) 755
Mukul Rohtagi Ms. B. Vijayalakshmi Menon with him for the Appellants. A
V.N. Raghupathy and Ravindra Keshavrao Adsure for the Respondents.

The Judgment of the Court was delivered by

ARIJIT PASAY AT, J. Leave granted. B
Appellants call in question legality of the judgment rendered by a
Division Bench of the Bombay High Court upholding the demand made by
the Collector, Mumbai City from the appellant No. 1. The writ petition filed
by the appellants questioning the demand was dismissed by the impugned
order of the High Court. The demand was made for commercial use of the land C
leased out to the appellant No. I.

Factual position is almost undisputed and needs to be noted in brief.
The Maharashtra State Government in the Revenue at Forest Department,
leased out 2250 square meters of land (plot No. I Queens Barrack Area) to the
appellant No. I for construction of a women's hostel for working women and D
its allied activities. The grant was made for 30 years from the date of handing
over possession and the memorandum dated 18th May, 1984. It was clearly
stipulated in Condition No. (iii) that if lessee utilizes any areas specifically set
up for non-remunerative activities for any remunerative purposes, it has to
take prior approval of the Collector of Bombay and if granted the same will E .
be subject to payment of 50% of the "net profit". Alleging that the appellant
No. I was letting out the premises for commercial purposes and using the
premises for commercial purposes, a demand was made for an amount of Rs.
19,03, I03 stated to be 50% of the net income. It was alleged that there was
violation of the land grant tenns and conditions. In the Notice dated 15.2.2003
the appellants were notified that since there was violation of the tenns and F
conditions of the land grant, action was to be taken and in addition the
defaulted amount i.e. Rs. I9,03,I03 was to be recovered. It was also indicated
that coercive action shall be taken if payment is not made within three days
of the receipt of the notice. Reply was submitted by the appellants on
20.2.2003 stating that there was no violation as alleged, and further the G
demand as raised was without any basis. After receipt of the reply notice of
recovery as land revenue as per Section 267 of the Maharashtra Land Revenue
Code, 1966 (in short the Code) was issued granting 20 days' time for making
payment. Writ petition was filed before the Bombay High Court questioning
legality of the demand. After notice the respondents filed counter affidavit
justifying the a~tion and demand raised. Essentially, two stands were taken H
756 SUPREME COURT REPORTS [2005) SUPP. I S.C.R.

A by the writ petitioner before the High Court. Firstly, it was contented that due •
and proper opportunity was not given to the writ petitioners to present their
case. Secondly, it was submitted that the quantum as demanded has no basis
of computation. The High Court by the impugned judgment held after taking
note of the counter affidavit that the demand was in order. High Court noted
that an amount of Rs. 73,82,055 was received in respect of 690 programmes
B as rental. Aforesaid amount of Rs. 73,82,055 included a sum of Rs. 35,75,850
as security deposit and the balance of Rs. 38,06,205 was earned as income,
and 50% thereof came to Rs. 19,03, 103 which was demanded. It was held that
adequate opportunity was granted to the appellant to have their say. The writ
petition was accordingly dismissed.
c In support of the appeal, learned counsel for the appellants submitted
that the authorities and the High Court have fallen into grave errors by
holding that 50% of the receipts were to be paid. What was required to be
paid was 50% of the "net profit". Materials on rec<?rd show that there was
rio profit.
D
In response, learned counsel for the respondents submitted that
undisputedly the appellants had carried on remunerative activities and received
Rs. 38,06,205 which was earned as income. Therefore, the demand of50%
thereof is in order.

,_., E In order to appreciate rival submissions the condition in the Grant dated
18.5.1984 needs to be noted. The dispute revol~es round Condition No. (iii)
which reads as follows :- /

"The lessees shall utilize the land for construction of two 'buildings,
one for the women'~ hostel providing necessary facilities like recreation,
F library cum reading room, indoor games-etc. and another building with
a built up area of 6000 square feet out of which a portion of 3000
square feet should be allowed to be let out to a bank or showrooms
as permissible under the Development Control Rules for the area and
1500 square feet to be used for diagnostic centre and another 1500
G square feet to be used for Mandal's other activities.

Provided further that the permission to utilize 4500 square feet
built up area for commercial purpose is granted subject to the condition
that the lessees undertake to pay to Govemtnent 50% of the net
income derived by them from the source.
H
MAHILAVIKASMANDALCOLABAv. STATEOFMAHARASHTRA[PASAYAT,J.] 757
Provided further that if the Manda! utilizes any other area A
specifically set apart for its non-remunerative activities for any
remunerative purpose, it shall take prior approval of the Collector of
Bombay, which if granted, will be subject to payment of 50% of the
net profit."

A bare perusal of the condition shows that requirement was to pay 50% B
of "net profit". What would constitute net profit has not been spelt out in
the Grant. Obviously therefore, the expression "net profit" as commercially
understood had to be adopted.

The fundamental meaning of the expression "profit" is the amount of
gain made during a particular period. (See : Spanish Prospecting Company C
Ltd., in Re 1911 (1) Ch. 92 (CA)).

This Court in Commissioner ofIncome Tax v. Delhi Flour Mills Company
Ltd., (l 959) 35 ITR 15 SC held that when question arises regarding the
meaning to be assigned to the expression "net profit", the question is to be D
detennined on the construction of the relevant agreement, which is to be
construed according to the words contained in it and the circumstances in
which it was made.

"Income" and "profits" are not synonymous in all cases. In certain
statutes "income" and "profits" are treated differently. While considering a E
case under the Income-tax Act, 1961 (in short the 'l.T. Act') this Court held
that in the ordinary economic sense the expression "income" includes not
merely what is received or what comes in by exploiting the use of the property
but also what one saves by using it oneself. That which can be converted
into income can be reasonably regarded as giving rise to income (See Bhagwan
Dass Jain v. Union of India and Ors., [1981] 2 SCC 135). F
In the popular sense the two words "receipts" and "profit" are very
different expressions. Profits are pointed out as the surplus by which the
receipts exceed the expenditure (See: Russel v. Town and Country Bank,
(1889) 13 A.C. 418).
G
As observed by the Privy Council in The King v. B.C. Fir and Cedar
Lumber Company, AIR (1932) PC 121, monies which are not really profits of
a business may yet be income. The Privy Council in Secretary of State v.
Saroj Kumar, AIR (1935) PC 49, held that profit means the difference between
the amount realized and the expenses incurred in realizing it. As noted by this H
758 SUPREME COURT REPORTS (2005] SUPP. I S.C.R.

A Court in E.D. Sassoon and Company Ltd. v. Commissioner of Income Tix;
Bombay city, [1955] l SCR 313 the word "profit" has well defined legal
meaning, which coincides with the fundamental conception of profits in general
parlance, although in mercantile phraseology the word may at times bear
meanings indicated by the special context, which deviate in some respects
from this fundamental significance.
~
Above being the position we allow this appeal, set aside the judgment
of the High Court and remit the matter to the Collector for a fresh adjudication.
In order to avoid unnecessary delay, let the appellants appear before the
concerned Collector on 24.8.2005 at 10.30 a.m. withoµt further notice. The
C Collector shall grant opportunity to the appellants to place materials necessary
for the purpose of detennining the net profits, as required under Condition
No. (iii).· The Collector shall on consideration of the materials to be placed
pass necessary orders.

The appeal is allowed to the aforesaid extent without any order as to
D costs.

K.K.T. Appeal allowed.