Smt. Seetha S. Shetty (Appellant) vs Dy. Commissioner of Income Tax (Respondent)
Date of Order: 11-09-2015

ORDER

PER SANJAY GARG, JUDICIAL MEMBER:

This appeal filed by the assessee arise out of the order of the Commissioner of Income-tax (Appeals)-17, [CIT(A)] Mumbai dated 19-12-2012 for the assessment year 2006-07.

2. The short issue raised for determination in this appeal is as to whether the amount received by the assessee from the sale of property, the title of which was acquired by way of adverse possession and which did not involve any acquisition costs, can be subjected to the capital gains tax or not ?

3. Brief facts of the case are that the assessee, a partner in M/s Sandeep Industries, filed her return of income for the assessment year under consideration on 06-10-2006 declaring total income of Rs. 35,53,690. The income declared by the assessee included an amount of Rs. 34,23,165 being capital gains.

3. Subsequently the assessee filed a revised return of income on 31-03- 2008 wherein the capital gain declared in the original return of income was omitted on the ground that there was a mistake in treating the transaction of sale of 1/3 share of interest in land at Goregaon at Rs.50,00,000/- as the same was not liable to tax since the cost of acquisition was nil. It was explained that 62 acres of land was allotted by the Government of Maharashtra to ‘Nagari Nivara Parishad’, a public trust, for construction of houses for the members after the formation of one or more Co-operative housing Societies. The assessee along with two others Shri Bhujang Babu Shetty and Smt. Rathna B. Shelty encroached upon the above piece of land. Nagari Nivara Parishad, the owner of the land filed civil suit Nos.1251, 1252 and 1253 of 1991 against the above stated three persons. A consent decree dated 13.7.1999 was passed by Bombay City Civil Court whereby the said three persons got absolute rights over 2000 sq. meters of land out of the 62 acres of land allotted to the trust ‘Nagari Nivara Parishad’. On the application made by the Shettys, the City Survey Officer also transferred the property in their names. Subsequently, the Shettys entered into a Development Agreement dated 24.8.2005 with M/s Hekunt Real Estates P Ltd and received consideration of Rs.1.20 crores and a flat of 2000 sq. ft. (carpet area) was further to be given to Shettys within 20 months from the date of grant of commencement certificate. The Stamp Duty Authorities determined the value of the property at Rs.2,28,454,000/- whereas the registration was done for a value of R.2.30 crores only. From the bundle of facts narrated above, the AO considered the following issues for determination:

(a) Whether the assessee was liable for capital gains tax on the basis of agreement dated 24.8.2005.

(b) If yes; whether the provision of section 50C were applicable in view of the stamp duty authorities determining the value of transaction at Rs. 2,28.45,000/- .

4. Accordingly, the assessee was asked to file her submissions on the above issues. The assessee reiterated the statement made in the return of income as revised and contended that since the cost of acquisition of the assessee was nil, no capital gain tax was leviable. The assessee in this respect relied upon the following case laws:

(i) CIT vs. B.C. Srinivas Shetty, 128 ITR 294 (SC) (ii) CIT vs. Manoharsinghji P. Jadeja, 281 ITR 19 (Guj.) (iii) Cadell Wearing MSN Co. (P) Ltd. vs. CIT, 249 ITR 285(Bom) 273 ITR (SC) (iv) DCIT vs. Star Chemicals (Bom.) P. Ltd. 110 TTJ 753 (Mum)

5. However the above explanation of the assessee was not acceptable to the assessing officer. According to him, firstly, the case laws relied upon by the assessee pertain to assessment years much prior to A.Y. 1995-96, however, subsequently an amendment has been brought in section 55(2) of the Act which defines “Cost of Acquisition". Before A.Y. 1995-96, the Courts had held that capital gain tax was not chargeable where the cost of acquisition was nil or not ascertainable. The facts of these case laws were completely different from the facts of the assessee, where the cost of acquisition was although nil but it was fully ascertainable. He relied in this respect upon the decision of the Ahmedabad Special Bench in the case of Vijay Singh R. Rathod & Others Vs. ITO, 106 ITD 153 (Ahd) (Special Bench). The Assessing Officer further observed that the assessee had been permitted to sell land to a Developer as owner and accordingly the sale deed had been executed. The possession of the land held by the assessee at the time of sale on 24.8.2005 to M/s. Hekunt Real Estate P. Ltd. was the occupancy right granted to the assesses by the consent decree of Bombay City Civil Court on 13.7.1999 which became the ownership right after her name was entered as owner in the land records. The occupancy rights in these lands, therefore, amount to capital assets within the meaning of section 2(14), the sale whereof was liable to be taxed as capital gain under section 45.

6. After coming to the -conclusion that sale of land by the assessee at Goregaon was liable for Long Term Capital Gain tax, the AO considered the application of section 50C of the Act. He observed that the stamp duty value of the property was Rs. 2,28,45,000/- whereas the deed was registered for Rs. 1.20 crores only. He rejected the contention of the assessee that the value adopted by the Stamp Duty Authorities exceeded the fair market value of the property on the date of transfer. The AO observed that the land in question was situated at a very prized location where it would fetch a much higher price than what was the stamp duty rate which was the average of land prices situated in the area. There was no encumbrance on the land and the developer was given the right to utilize the full potential of the said plot and also to bring in FD-FSI from outside. He further held that there was no justification in sending the matter for valuation to DVO because the rate adopted by the Stamp Duty Officer was actually on the lower side considering the prime location of the property and no adjustment was required to be done in the value of the property adopted by the Stamp Duty Officer. The AO therefore held that though cost of acquisition of the ownership right was nil, yet, the assessee was liable for long term capital gains tax. The Assessing Officer thus adopted the value of Rs. 2,28,000/- as the sale consideration u/s 50C for the purpose of computation of capital gain. The Assessing Officer computed long term capital gain of Rs. 60,78,265. In appeal, the ld. CIT(A) confirmed the order of the AO . The assessee has thus come in appeal before us.

7. We have considered the rival contentions. We find that the issue is covered in favour of the assessee by a number of decisions of the Hon’ble Supreme Court as well of various High Courts of the country. The base decision is in the case of CIT v. B.C. Srinivasa Shetty (1981) 128 ITR 294; (1981) 2 SCC 460 wherein the Hon’ble Supreme Court has held that all transactions encompassed by section 45 must fall within the computation provisions of section 48. If the computation as provided under section 48 could not be applied to a particular transaction, it must be regarded as "never intended by section 45 to be the subject of the charge". The Hon’ble Supreme Court in the case of ‘PNB Finance ltd. vs. CIT (2008) 307 ITR 75’ has reiterated the above proposition of law .In the case of CIT v. B.C. Srinivasa Shetty (supra) the court was considering whether a firm was liable to pay capital gains on the sale of its goodwill to another firm. The court found that the consideration received for the sale of goodwill could not be subjected to capital gains because the cost of its acquisition was inherently incapable of being determined. The principle propounded in B.C. Srinivas Shetty (1981) 128 ITR 294 (SC) has been followed by several High Courts with reference to the consideration received on surrender of inter alia tenancy rights sale of Good Will etc. It was to meet the situation created by the decision in B.C. Srinivas Shetty (1981) 128 ITR 294 (SC) and the subsequent decisions of the High Courts that vide Finance Act, 1994, Section 55 (2) was amended to provide that the cost of acquisition of, inter alia, a tenancy right , good will etc. would be taken as nil.

8. Thus, it may be noted that after the amendment of 1995, certain assets like goodwill, tenancy rights etc. have been charged to tax by specifically providing that if there is no cost incurred by the assessee in this respect, the cost shall be taken as nil. However, we find that vide amendment, particular assets like goodwill, tenancy rights, trade mark etc. have been brought into the ambit of charging section. However, the rights obtained by way of adverse possession have not been included in the provision neither in the charging section 45 nor in the section 48 which provides mode of computation. There is no any provision regarding the charging of capital gains tax on an asset title to which has been acquired in recognition of rights of adverse possession. Even u/s 49, the cost of the asset with regard to certain mode of acquisition, such as by way of gift or will, by succession, inheritance or devolution or on any distribution of assets on the dissolution of a firm, body of AOP or liquidation of company etc.; the rights attained in an asset on account of adverse possession have not been included. Though the Parliament has made an amendment that in certain type of assets like goodwill, tenancy rights etc., the cost of acquisition would be taken as actual cost incurred and if no cost incurred, the same be taken at nil, however the said deeming section is applicable to the assets which have been specifically brought within the purview of the said provision. The assets or the rights which do not find mention in the relevant provision, cannot be brought within the ambit of charging section, in the light of the decision of the Hon’ble Supreme Court. We further find that the issue is now squarely covered by the direct decision of the Hon’ble Bombay High Court in the case of CIT vs. Star Chemicals (Bombay) Pvt. Ltd. (Income Tax Appeal No. 1110 of 2009& Income Tax Appeal No. 1153 of 2009, dated 14th August, 2009) wherein the Hon’ble Court while answering the question of chargeability of capital gains in relation to an asset/title which was acquired by way of adverse possession, has held that the Tribunal was right in holding that for want of acquisition cost, capital gains tax would not arise. Since a direct decision of the Hon’ble jurisdictional Court in relation to the chargeability of capital gain on asset acquired by way of adverse possession is available, hence, the same is binding upon this Tribunal. We therefore hold that no capital gain are chargeable to tax in relation to the asset acquired by way of adverse possession. Appeal of the assessee is allowed and order of the lower authorities is set aside. 9. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 11th September, 2015.