Income Tax Appellate Tribunal - Mumbai
Deputy Commissioner Of Income Tax vs Star Chemicals (Bom) (P) Ltd. on 30 April, 2007
Equivalent citations: (2007)110TTJ(MUM)753
ORDER
S.C. Tiwari, A.M.
1. As common issues are involved in these two appeals filed by the Revenue on 15th Dec, 2003 against the order of the learned CIT(A)-XXVIII, Mumbai dt. 16th Oct., 2003 in the case of the assessee in relation to assessment order under Section 143(3) r/w Section 250 for asst. yr. 1995-96 and by assessee filed on 8th Jan., 2007 against the order of the learned CIT(A)-XXXII, Mumbai dt. 8th Nov., 2006 in the case of the assessee in relation to assessment order under Section 143(3) r/w Section 254 of the IT Act for asst. yr. 1994-95, they have been heard by us together at the request of Revenue and are being disposed of by this common order for convenience.
2. These appeals have chequered history. For asst. yr. 1994-95 the assessee filed return of income declaring total income at Rs. 1,39,97,130 on 30th Nov., 1994. The assessment order under Section 143(3) was made on 20th March, 1997 at total income of Rs. 1,79,08,424. The difference between assessed income and returned income arose on account of an addition of Rs. 75,76,000 made by the AO by way of long-term capital gain on sale of land. While doing so the learned AO rejected the assessee's contention that as the land in question was held under adverse possession its cost of acquisition was nil and therefore it was not chargeable to tax under the provisions of Section 45 of the Act. Aggrieved by the assessment order the assessee filed appeal before the learned CIT(A) who by his order dt. 23rd April, 1998 decided the issue in favour of the assessee. On Department's appeal Tribunal per its order dt. 1st Dec, 2003 restored the matter to the file of the AO for decision afresh. Thereafter the AO made an order under Section 143(3) r/w Section 254 on 31st March, 2006 wherein long-term capital gains of Rs. 75,76,000 was once again assessed. On assessee's appeal the learned CIT(A)-XXXII by the impugned order dt. 8th Nov., 2006 upheld the order of the learned AO and still aggrieved the assessee is in appeal before us.
3. For asst. yr. 1995-96 the assessee filed on 30th Nov., 1995 the return of income declaring total income at Rs. 4,36,56,260 inclusive of long-term capital gains of Rs. 3,10,16,602. The learned AO found that the assessee had sold its lands during the year for the sale consideration of Rs. 659.19 lakhs. Out of this the assessee had offered for tax sale consideration to the extent of Rs. 427.27 lakhs only. As to the balance sale consideration of Rs. 231.92 lakhs the assessee claimed that as there was no cost of acquisition of those lands because the assessee had held them by virtue of adverse possession, the same were not liable to tax under the provisions of capital gains. The AO completed assessment on 27th March, 1998 at total income of Rs. 8,97,79,088. This included assessment of long-term capital gain of Rs. 2,31,92,049 on sale of land claimed under adverse possession. On assessee's appeal the learned CIT(A)-VI, Mumbai by his order dt. 23rd March, 1999 directed the AO to decide the issue afresh. Thereafter the AO made an order under Section 250/143(3) on 29th Jan., 2002 wherein the assessment of long-term capital gain at Rs. 2,31,92,049 was once again repeated. On assessee's appeal the learned CIT(A) has by his impugned order dt. 16th Oct., 2003 accepted the contention of the assessee. Aggrieved the Revenue is in appeal before us in relation to asst. yr. 1995-96.
4. Facts of the case leading to the dispute before us briefly are that by two agreements made on 8th Feb., 1994, the assessee agreed to sell to M/s Hotel Leelaventure Ltd. the following pieces or parcels of land situate at Andheri Kurla Road, Village Marol, Andheri (E):
1st agreement Old Survey No. 135 Hissa No. 7 corresponding to New Cadestral Survey Nos. 1411/12 admeasuring approximately 3,788 sq. mtrs.
2nd agreement (A) Old Survey No. 135 Hissa No. N.A. 4 corresponding to New Cadestral Survey Nos. 1411/3 and 1411/8 admeasuring approximately 1,045.5 sq. mtrs.
(B) Old Survey No. 135, Hissa No. 4 corresponding to New Cadestral Survey Nos. 1411, 1411/1 and 1411/7 admeasuring approximately 1,760.8 sq. mtrs.
(C) Old Survey No. 135, Hissa No. 5 corresponding to New Cadestral Survey Nos. 1411/2, 1411/4, 1411/5 and 1,411/6 admeasuring approximately 694.8 sq. mtrs.
(D) Old Survey No. 135, Hissa No. 6 corresponding to New Cadestral Survey No. 1411/9 and 1411/10 admeasuring approximately 281.9 sq. mtrs.
(E) Old Survey No. 135, Hissa No. 10 corresponding to New Cadestral Survey No. 1411/11 admeasuring approximately 1,164.4 sq. mtrs.
(F) An adjoining piece of land admeasuring approximately 889 sq. mtrs. and situated in the south-west corner of the property.
5. For asst. yr. 1994-95 the assessee submitted during the course of original assessment proceedings that possession of the land in question had been acquired by the assessee by way of adverse possession and therefore there was no cost of acquisition. On such facts the ratio of the judgment of Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty applied. The learned AO referred to recitals in the agreement dt. 8th Feb., 1994 that the vendors had fully explained and the purchasers had satisfied themselves about the right, title and interest of the vendors subject to the ultimate outcome of legal proceedings in BCCC Suit No. 3809 of 1978 and BCCC Suit No. 3889 of 1982. Thus it was clear that the assessee company was incurring legal cost to obtain the title over the land in question. Any expenditure incurred to obtain the title of the land was the cost of acquisition. The learned AO sought to draw a distinction between the legal cost incurred for maintaining title or the expenditure incurred to avoid the litigation and the expenditure incurred for acquiring the right of title itself. The assessee had been holding land by way of adverse possession and therefore the assessee was incurring legal cost as well as other expenses for acquiring the right of title on the land. It could not therefore be said that the assessee had not incurred any cost for acquisition. The learned AO further stated that the assessee was the owner of two lands as reflected in the fixed assets schedule of the balance sheet. The assessee could acquire the land in question by way of adverse possession only because the assessee was the owner of those two lands. Relying upon the judgment of Hon'ble Karnataka High Court in the case of CIT v. P. Mahalaxmi and Ors. (1982) 27 CTR (Kar) 136 : (1982) 10 Taxman 145 (Kar) the learned AO held that the cost of the land in the balance sheet would become the cost of the whole land i.e. land as mentioned in the balance sheet plus land acquired through adverse possession. In that case the Hon'ble Karnataka High Court had further held that the cost of undisputed land was to be spread over as the cost of undisputed land as well as the cost of disputed land for the purpose of capital gains. The learned AO then referred to the amendment brought to the provisions of Section 55(2) w.e.f. 1st April, 1988 and contended that where there was no cost of acquisition the same would be treated as nil and capital gain would be computed accordingly. The learned AO relied upon the judgments also referred to in Mathurdas Mangaldas Parekh v. CIT (1980) 18 CTR (Guj) 390 : (1980) 126 ITR 669 (Guj). Smt. S. Valliammai and Anr. v. CIT and A.R. Krishnamurthy and Anr. v. CIT (1989) 76 CTR (SC) 18 : (1989) 176 ITR 417 (SC) to support his case that in the case of the assessee legal expenses incurred by the assessee would constitute cost of acquisition and or the cost of undisputed land would represent the cost of disputed land as a whole. Based on these arguments the learned AO assessed the entire sale consideration of Rs. 75,76,000 as capital gains chargeable to tax in the hands of the assessee for asst. yr. 1994-95. He observed that the litigation cost incurred by the assessee was not available on record and if brought on record the assessee could claim such expenses deductible from the sale consideration. In the absence of such information the entire sale consideration was treated as long-term capital gains.
6. On assessee's appeal, the learned CIT(A)-XXXVII by his order dt. 23rd April, 1998 upheld the contention of the assessee that in view of the ratio of the judgment of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) no capital gain was chargeable to tax in the hands of the assessee in relation to sale consideration of Rs. 75,76,000 on sale of land held under adverse possession. While doing so he took note of the contentions of the assessee based upon the judgment of Hon'ble Supreme Court in the case B.C. Srinivasa Setty (supra) as also the judgment of Hon'ble Andhra Pradesh High Court reported in CIT v. Markapakula Agamma . The assessee explained that it acquired land by virtue of the legal principles in respect of adverse possession contained in the Indian Limitation Act. Those provisions not only cut off one's right to bring an action for recovery of the property from adverse possession, it also conferred a title by adverse possession. Those principles were based upon lofty considerations such as limitation of time, peace of the community and society in general which would not permit disturbance of a long established factual position. This legal principle was also based on the theory or presumption that the owner had abandoned land to the adverse possession. Thus acquisition of title to land by adverse possession was a well established mode of acquisition. The assessee further explained that it had acquired plots of land being Hissa No. 135/4, 135/5, 135/6 and 135/NA 4 by an agreement dt. 2nd July, 1962. The assessee came to acquire Hissa No. 135/7 corresponding to new CTS No. 1411/12 by adverse possession. The city survey office issued property card in respect of 135/7 in the name of the assessee company. Directorate of Industries by its letter dt. 11th March, 1981 issued an exemption under Section 20 of ULCA for industrial use of that plot by the assessee. The assessee further argued that the AO had not disputed that cost of acquisition of lands as reflected in the assessee's balance sheet did not include any cost of acquisition of Hissa No. 135/7 or CTS No. 1411/12. Reference made by the AO as respect to cost of BCCC suit Nos. 3809 of 1978 and 3889 of 1982 was not justified. Suit No. 3809 of 1978 was not in respect of the impugned land. As to suit No. 3889 that suit had been filed by the assessee company to refrain the defendants from encroaching upon the assessee's land and not to disturb the assessee's peaceful use, occupation, possession and enjoyment of the said land. It was obvious that the said suit had been filed by the assessee company to protect and preserve its title. The AO had himself admitted that there was a difference between the legal cost incurred for maintaining the title or the expenditure incurred to avoid litigation and the expenditure incurred for acquiring the right of title itself. The suit filed by the assessee in No. 3889 of 1982 was of former category and not the latter category of acquisition of the right of title itself. The assessee relied in this respect upon the judgments reported in CIT v. Raman & Raman Ltd. ; Dalmia Jain & Co. Ltd. v. CIT ; Mahabir Parshad & Sons v. CIT (1945) 13 ITR 340 (Lahore) and CIT v. Smt. Lila Ghosh . As to the contention of the learned AO that the assessee had acquired land by adverse possession only because it was the owner of the two pieces of land those two pieces of land enumerated by the AO were situated in Thane and Lote Parsuram while the land in question was situated at Andheri. It was true that the assessee company had other plots of land also at Andheri but they were different from the land in question. The survey numbers and Hissa numbers were entirely different and the property cards were also separate. The judgment of Hon'ble Karnataka High Court in the case of CIT v. P. Mahalakshmi (supra) was not applicable. That case related to compulsory acquisition of land under the Land Acquisition Act. In that case it was held that in the matter of ascertainment and apportionment of the cost of acquisition between the acquired and unacquired portion, the cost of acquisition of the acquired portion should be estimated not on average of the original common cost of acquisition but by placing the corresponding premium on the acquired portion, because it fetched a higher price owing to its advantageous location and also because the portion left behind would not enjoy the same advantage or would give certain disadvantages not originally existing. That decision talked about the apportionment of the cost of acquisition. In the case of the assessee no cost of acquisition was conceived. The assessee placed reliance on the judgment of Hon'ble Bombay High Court in the case of S.V. Lathia v. CIT . The assessee submitted, that in view of the aforesaid judgment even if the assessee's argument was taken to be correct, yet that part of the land which had been acquired by adverse possession for which no cost of acquisition had been incurred was not exigible to capital gain tax. In the case of Lathia (supra) the High Court separated an intangible asset otherwise seemingly indivisible into two parts, i.e. one part for a cost was incurred and another for which no cost was incurred. That being so the same should apply to land which was a tangible asset and was otherwise divisible. As to the reliance placed by the learned AO on visions of Section 55(2) the assessee submitted that the amendment applied to cost of acquisition as respects goodwill, right to manufacture, produce or process any article or thing, tenancy rights, stage carriage permits and loom hours. The said Sub-section did not deal with the title to land acquired by adverse possession. In respect of the assets not enumerated in Section 55(2)(a) the ratio of the judgment of Hon'ble Supreme Court in the case of B.C. Snnivasa Setty (supra) continued to hold good. The judgment of Hon'ble Madras High Court in the case of S. Valliammai v. CIT (supra) relied upon by the learned AO related to the provisions of Section 74(1) of the Estate Duty Act. That judgment only stated that estate duty paid could neither be taken as cost of acquisition nor as cost of improvement. That judgment had no application in the facts of the case of the assessee. Gujarat High Court judgment Mathurdas Mangaldas Parekh v. CIT (supra) was also completely inapplicable to the case of the assessee. That related to betterment charges payable under a town planning scheme. Supreme Court judgment in the case of A.R. Krishnamurty and Ors. (supra) dealt with cost of acquisition of the mining rights underlease: Thus none of the cases relied upon by the learned AO had any bearing on the facts of the case of the assessee. The learned CIT(A) forwarded the detailed submissions of the assessee to the learned AO and called for his remand report. In the remand report the learned AO merely relied on the discussion made in the assessment order. The learned CIT(A) noted that in a number of cases including the jurisdictional High Court, the Courts had decided that in cases of self generated assets like goodwill or where the cost of assets was nil, no tax on capital gains should be charged. A transaction to which the provisions of Section 48 could not be applied was held to be one never intended to be subject to the charge of tax under Section 45(1). In order to overcome the judicial interpretation emanating from the judgment of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) the legislature by the Finance Act, 1987 introduced the provisions of Section 55(2) w.e.f. 1st April, 1988. The provisions of Section 55(2) as applicable to asst. yr. 1994-95 did not cover the cases of no cost of acquisition on account of title by way of adverse possession. Hence the ratio of B.C. Srinivasa Setty (supra) held good in the case of the assessee. The learned CIT(A) therefore directed the AO not to subject the sale proceeds of the impugned land to capital gains tax. Aggrieved by the aforesaid order of the learned CIT(A), the Revenue filed an appeal before the Tribunal being ITA No. 4314/Mum/1998. That appeal was decided by the order of Tribunal, Mumbai Bench ''G", Mumbai dt. 1st Dec, 2003. The Tribunal noted that during the course of assessment proceedings Property Register Card bearing city survey No. 1411/12 (135/7) was not filed and the same was filed for the first time before CIT(A). That card showed assessee as holder in the year 1969. As per the property card the assessee was holding the property free from encumbrances. The Tribunal accepted the proposition that if there is no cost of acquisition, no capital gain can be charged. It noted that the case of Revenue was that the assessee had incurred litigation expenses apropos the acquisition of land. As such there was cost of acquisition, even if it was assumed that the land was received by the assessee without any cost. The Tribunal held that for the purpose of adjudicating the appeal it was necessary to decide how the property was acquired and at what cost. The assessee's submission was that it acquired the property on adverse possession. Under Article 65 of the Limitation Act, 1963, in order to constitute adverse possession there had to be actual possession by a person claiming as of right by himself or by persons deriving title from him. The proof of continuous possession for a period of 12 years was, sine qua non. The possession acquired had to be adequate in continuity, in publicity and in extent to show that it was adverse to the owner. It was necessary that the possession was not by violence, stealth or permission. Hon'ble Tribunal noted that the assessee company was incorporated in 1962 whereas the Property Register Card showed that the assessee was holding the property in 1969 without any encumbrance. For the purpose of Limitation Act there could not be acquisition on adverse possession prior to the completion of 12 years. It was therefore essential to know the title of the assessee. Somehow or the other that aspect escaped the notice of the AO. The AO referred to litig ation expense and that issue was inextricably linked with the issue of adverse possession. It was a legal issue that was required to be examined on the touchstone of Article 65 of the Limitation Act. The Tribunal therefore restored the issue to the file of the AO, with direction to decide it afresh, in accordance with law, after providing adequate opportunity to the assessee of being heard.
7. The AO completed assessment order under Section 143(3) r/w Section 254 of the Act on 31st March, 2006. The learned AO issued a notice to the assessee company. In response the assessee company submitted various details and basically reiterated the stand taken in the earlier round of proceedings. The learned AO found himself not in agreement with the arguments of the assessee. There could not be adverse possession obtained by the assessee company suo motu. It was well settled principle of law that the adverse possession on any property had to be agitated before and settled by a Court of law. Without the sanction of an order of a Court of law, the adverse possession could not be claimed by any person. That would be all the more difficult if the original holder of the property was the State, as in the instant case the property was originally owned by Airport Authority of India. In the case of the assessee, the assessee had acquired the title of land by encroachment without approaching the Civil Courts of Bombay to establish its title by virtue of adverse possession against the original owner. The assessee company had been asked to furnish details of litigation expenses for establishing its adverse possession over the property. The assessee did not furnish details of expenses incurred for establishing the adverse possession over the property. Hence the assessee had taken the plea only with a view to avoid capital gain tax. Under these circumstances the learned AO thought it fit to treat the cost of acquisition as nil. The assessee should furnish the evidence as well as details of legal expenses if he wanted the cost of acquisition to be taken as actual amount of litigation expenses. Based on these reasoning the learned AO assessed the entire sum of Rs. 75,76,000 as long-term capital gain.
8. Aggrieved by the assessment order under Section 143(3) r/w Section 254 dt. 31st March, 2006 the assessee filed appeal before the learned CIT(A). During the course of that appeal the assessee took the plea that order under Section 143(3) made by the learned AO on 31st March, 2006 was barred by limitation. The Tribunal order in ITA No. 4314 of 1998 had been made on 1st Dec, 2003 and thus received during the financial year 2003-04. The AO was therefore required to pass the fresh assessment order on or before 31st March, 2005 in view of the provisions of Section 153(2A) of the Act. The learned CIT(A) agreed with the AO that the Tribunal had neither set aside nor cancelled the whole assessment order and had restored only one particular matter to the file of the AO. Therefore the time limit of one year did not apply to the case of the assessee. The learned CIT(A) therefore has rejected in the impugned order the preliminary objection of the assessee. On merits the assessee submitted that the adjoining plot i.e. the land in question bearing No. 135/7 (1411/12) was lying vacant and the assessee knowingly or unknowingly encroached upon and occupied the same sometime in 1962 or thereabouts. For the first time the survey was undertaken in the year 1968 and because the assessee was in possession of the said plot of land at that point of time, the property card was issued showing the assessee as holder of the said plot. The assessee continued to be in the sole and exclusive possession of the land continuously occupying, using and enjoying the same without any interruption whatsoever and therefore the assessee obtained title to the land on the expiry of the statutory period somewhere in or around 1974. Thus the assessee remained in adverse possession as against the real owner continuously and uninterruptedly for more than 12 years and such action was not by violence, stealth or permission. Under such circumstances the land in question became the property of the assessee without any cost of acquisition. Tribunal by its order dt. 1st Dec, 2003 restored the matter to the AO to determine whether or not the assessee had acquired title by being in adverse possession of the land. The assessee was in continuous possession of the land since 1962 and therefore became the owner of the land on adverse possession somewhere in 1974. Even if for the sake of argument it was assumed that the assessee took possession of the land in 1968 as mentioned in the Revenue records based on survey undertaken in 1968, the assessee acquired the title on adverse possession somewhere by 1980. As to the litigations carried out by the assessee only Suit No. 3889/1982 pertained to the plot of land in question. That suit was filed by the company in the year 1982. From Property Register Card the assessee was in occupation since 1968 at least and therefore the assessee had already become owner of the land by virtue of Article 65 of the Limitation Act prior to Civil Suit No. 3889/82. Therefore no part of the litigation expenditure relating to that suit could be attributed to the cost of acquisition of land. Without prejudice and as an alternative argument the assessee argued that if long-term capital gain was to be charged, in any case, the market value of the property as at 1st April, 1981 should be substituted for the cost of acquisition.
9. The learned CIT(A) held that after the matter was restored to the file of the AO the assessee failed to lead any clinching and conclusive evidence before the AO to substantiate its claim that the land was in adverse possession. The assessee had simply acquired the title of land by encroachment without approaching the Civil Courts of Bombay to establish its title by virtue of possession which was adverse against the original owner. Hence it could not be said that the assessee acquired the land by adverse possession and therefore the AO was justified in computing the capital gains taking the cost of acquisition at nil. As to the alternative contention of the assessee the learned CIT(A) held that the Civil Suit No. 3889/1982 relating to land in question showed that the assessee had not become full and final owner as on 1st April, 1981. Therefore the plea of the assessee to substitute the fair market value of the property as at 1st April, 1981 as cost of acquisition and the indexed cost of acquisition thereof was devoid of any merit. Aggrieved by this order the assessee is in appeal before us.
10. As regards asst. yr. 1995-96 the original assessment order under Section 143(3) was made by the AO on 27th March, 1998. The learned AO found that during the year the assessee had sold various plots of land for the total sale consideration of Rs. 659.19 lakhs. But the assessee company subjected to capital gains tax sale consideration to the extent of Rs. 427.27 lakhs only and for the remaining sale consideration Rs. 231.92 lakhs the assessee contended that it was not exigible to capital gains tax for want of any cost of acquisition as held by Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty (supra). The learned AO asked the assessee to substantiate its contention and in response the assessee made its detailed submissions vide letter dt. 7th Jan., 1998. The assessee claimed acquisition of land by adverse possession without any cost. The learned AO referred to the detailed reasons given by the AO in the assessment order dt. 20th March, 1997 for asst. yr. 1994-95. He found that the facts of the case for asst. yr. 1995-96 were the same as for asst. yr. 1994-95. Various plots of land were sold by the assessee to M/s Hotel Leelaventure Ltd. by two agreements dt. 8th Feb., 1994. Similar plot of land thus sold came for consideration for asst. yr. 1994-95 because the possession of that plot of land had been given during financial year 1993-94 itself. Other plots of land fell to be considered for asst. yr. 1995-96 because the possession of the latter land was given on 9th Nov., 1994. Otherwise facts of the case were same. The learned AO extensively quoted the assessment order for asst. yr. 1994-95. Following the reasoning in the assessment order for that year the learned AO held that the sale consideration of Rs. 2,31,92,049 received by the assessee in relation to the land claimed to have been acquired by adverse possession was chargeable to tax as long-term capital gains. In the absence of details of litigation cost incurred by the assessee to acquire the rights and title on that land not being available on record the cost of acquisition was treated as nil and the entire sum of Rs. 2,31,92,049 was treated as long-term capital gains in the hands of the assessee.
11. Aggrieved by the aforesaid order the assessee filed appeal before the learned CIT(A)-VI, Mumbai who made an elaborate order on 23rd March, 1999 and set aside the matter to the AO for adjudication de novo. The assessee submitted before him that the plot of land bearing old Survey No. 135, Hissa No. 10, corresponding to new cadestral Survey No. 1411/11 and adjoining piece of land was held by the assessee in adverse possession. The city survey office issued the property card in the name of the assessee in 1968. Furthermore the Director of Industries by his letter dt. 11th March, 1981 issued an exemption under Section 20 of Urban Land Ceiling Act to the assessee. The assessee had been in sole and exclusive possession of the lands and had been continuously occupying, using and enjoying the same without any encumbrances whatsoever. The assessee contended that in the circumstances of the case no cost of acquisition at all could be conceived and no cost element could be identified or envisaged. Even the date of acquisition was also not capable of being determined with any degree of accuracy as the assessee had title to it for a very long time. Under such circumstances the computation provisions of the Act relating to capital gains taxes failed and therefore transfer subsequently made by the assessee was not subject to charge of Section 45. Considerable reliance was placed by the assessee on the judgment of CIT v. B.C. Srinivasa Setty (supra). The assessee also referred to the judgment of Hon'ble Andhra Pradesh High Court report in (supra) wherein it was expressly stated that in a case where an assessee became the owner of a capital asset by adverse possession, no capital gains tax could be levied in the absence of cost of acquisition. The assessee objected to the observations of the AO that it was not shown as to how the assessee could become the owner of the land without incurring any expenses. That showed that the AO had not properly appreciated the legal principles contained in the Indian Limitation Act in respect of adverse possession. The assessee further assailed the findings of the AO that it could acquire lands on adverse possession because of two pieces of land disclosed in the fixed assets schedule to the annual accounts of the company for the year ended 31st March, 1994. Hence the cost of acquisition incurred in relation to those two pieces of land should be treated as cost of acquisition of the lands in question as a whole. The assessee submitted that those two pieces of land were as under:
A. Free hold land, Andheri Rs. 6,268 B. Leasehold Rs. 19,03,800
The assessee argued that there was no basis for the AO's finding that the cost of acquisition of lands above mentioned could be presumed to be the cost of acquisition of lands acquired on adverse possession also. Such observations only showed that as per the AO's own admission the assessee had not incurred any cost of acquiring the lands in question. The assessee argued that there was no justification in holding that the assessee could acquire the lands on adverse possession only because he was the owner of two pieces of land reflected in the balance sheet. Those two lands were situated in Thane and Lote Parsuram and had nothing to do with the lands in question situated at Andheri. As to the contention of the AO that legal cost incurred by the assessee should be treated as cost of acquisition of lands in question, the assessee submitted that the AO had relied upon two suits filed by the assessee company being BCCC Suit No. 3889/82 and BCCC Suit No. 3809/78. None of those two suits were concerned with the lands in question. Furthermore those suits were filed by the assessee company to restrain the defendants from encroaching upon the suit plot and not to disturb the assessee's peaceful occupation and enjoyment of the suit plot. It was therefore obvious that those suits were filed by the assessee to protect and preserve its assets. Those suits could not be considered as having been filed by the assessee for the purpose of creating, rectifying or completing the assessee's title over the lands in question. In support of various contentions the assessee relied upon the judgments reported in (1951) 19 ITR 558 (Mad) (supra); (supra); (1945) 13 ITR 340 (Lahore) (supra) and (1993) 113 CTR (Cal) 219 : (supra). The assessee also distinguished the cases relied upon by the AO viz. (supra); (1995) 127 CTR (Bom) 39 : (1995) 214 ITR 691 (Bom) (supra); (supra); (1980) 18 CTR (Guj) 390 : (1980) 126 ITR 669 (Guj) (supra) and (supra). Further the assessee argued that the reliance placed by the AO on the amended provision of Section 55(2) was misplaced because there was no provision made in relation to acquisition of property on adverse possession. The learned CIT(A) forwarded the written submissions to the AO who offered his comments by his report dt. 6th Nov, 1998. The AO in his report submitted that by agreement dt. 8th Feb., 1994 the assessee agreed to sell lands bearing cadestral Survey Nos. 1411, 1411/1, 1411/2, 1411/3, 1411/4, 1411/5, 1411/6, 1411/7, 1411/8, 1411/9, 1411/10 and 1411/11 and adjoining piece of land of 889 sq. mtrs for consideration of Rs. 6,57,19,000. Out of these pieces of land the assessee could not file Property Register Card regarding 1411/11 and the adjoining lands. Thus the assessee failed to lead any evidence to prove that it had indeed become owner of those two properties. Regarding the adjoining pieces of lands, the assessee had not mentioned the survey number. The AO argued that as per the general law, if a person continued to be in peaceful possession of certain immovable property and the original owner did not raise any objection or did not initiate any action to recover the possession after a lapse of time mentioned in the Limitation Act, the true owner lost right of recovering the property and the possession from the party who had occupied it. Thus a party who was in adverse possession of plot of land did not generate any right on property. On the other hand his right of a peaceful possession of property emanated from the bar placed on the true owner from recovering his property. Thus to establish the fact that the assessee had acquired the property on adverse possession, it had got to be established first as to who were the original owners of the property ? On which date the assessee encroached upon and from which date he started enjoying peaceful possession of the property ? When the period of limitation prohibiting true owner from recovering the possession of property ended ? Whether any proceedings at all initiated by anyone to recover the possession or to dispute the title of the assessee over the immovable property ? The assessee had not furnished any information on those aspects. Therefore the claim of the assessee that the property had been obtained by him on adverse possession had not been proved. The learned AO therefore requested that suitable directions may be issued to collect those facts to examine the claim of the assessee. The AO stated that from enquiries made with M/s Hotel Leelaventures Ltd. they filed a reply dt. 6th Nov., 1998 and enclosed a copy of report of M/s Little & Co. solicitors named "Report on Title". As per that report the assessee company did not have marketable title over survey Nos. 1411/11 and 1411/12. Regarding the adjoining land of 889 sq. mtrs, there was no reference in that report. Survey No. 1411/11 was claimed to be sold in asst. yr. 1995-96 and survey No. 1411/12 was claimed to be sold in asst. yr. 1994-95. M/s Little & Co had provided the details of ownership of survey No. 1411/11. As per that report one Shri R.B. Shah had purchased the property by sale deed dt. 26th July, 1956 from Shri J.V Mehta. Shri Shah started his manufacturing activity in 1940. The name of the assessee company figured in Property Register Card since 1969. Assessee filed suit No. 3889/1982 against IAAI, Leela Scottish Lace and Union of India averring that they were the owners of the said land. In the petition assessee was asked for permanent injunction restraining the defendants from encroaching upon the land bearing survey Nos. 1411, 1411/1 to 1411/12. It was pleaded by the defendants that city survey No. 135/10 (1411/11) was acquired by the Government for aerodrome in 1951. The plea of assessee for injunction was refused by the Civil Court and ultimately on the direction of Hon'ble High Court on 27th Oct., 1983 injunction was granted in respect of 135/4 to 135/6 but not in respect of 135/7 and 135/10. Thus no final decision had been reached about the ownership of the plots. The claim of the assessee that it had acquired it on adverse possession had not been proved. In the absence of ownership with the assessee, assessee could not transfer any right. In the absence of any right, amount received from M/s Hotel Leelaventures Ltd. against the surrender of possession could only be casual and non-recurring receipt. The learned AO further argued that the facts of the case of the assessee were different from B.C. Srinivasa Setty (supra). That was the case of self generated asset being goodwill. The case of the assessee was obtaining title by adverse possession. If the assessee had incurred any expenditure on litigation to defend its title to the land encroached upon by it, such expenditure would constitute cost of acquisition. Reliance in that respect was placed by the AO on Tribunal decisions reported in ITO v. S. Kumarswamy Reddiar & Sons (1991) 39 TTJ (coch) 656 and S.M. Subbaraya Pillai v. ITO (1991) 39 TTJ (Mad) 62. The learned AO relied upon the judgment of Hon'ble Andhra Pradesh High Court (supra) and stated that it was held in that decision that the ratio of B.C. Srinivasa Setty (supra) was confined to intangible rights like goodwill and not to tangible assets like immovable property. The assessee was not deliberately filing the particulars as regards cost of improvement by way of perfecting the title in litigation or by way of construction or improvement over the immovable property. Benefit of non-compliance could not be given to the assessee. The learned AO strongly relied upon the provisions of Section 10(3) and the judgment of Hon'ble Allahabad High Court in the case of CIT v. Gulab Chand and the decision of Tribunal, Special Bench in the case of Cadell Weaving Mills Co. (P) Ltd. v. Asstt. CIT (1995) 53 TTJ (Bom)(SB) 538 : (1996) 217 ITR 51 (Bom)(SB)(AT). He argued that the assessee had merely transferred his right to remain in possession. Such right only being personal right, the amounts received by the assessee were a casual and non-recurring respect. The assessee in his reply stated that Property Register Card in respect of land bearing old survey No. 135/10 corresponding to new city survey No. 1411/11 was never asked for by the AO. As regards the adjoining piece of land admeasuring 889 sq. mtrs., the said land had not been surveyed and therefore it could not and did not have any survey number. The assessee argued that it was not correct to state that the party who was in adverse possession did not generate any right of property. It was also incorrect to state that the acquirer of the property by adverse possession had to establish first as to who were the original owners of the property. The assessee had proved on the basis of Property Card and the Urban Land Ceiling certificate that it had become the owner of the subject property. In fact the exact date on which it became owner could not be determined with certainty and therefore the judgment in the case of B.C. Srinivasa Setty (supra) applied with greater force. The assessee argued that by virtue of statutes of limitation the holder of a property in adverse possession acquired a title over the property held in adverse possession. Adverse possession was thus a method of acquisition of title to land. Allowing an uninterrupted possession, in the absence of rebutting circumstances, created a presumption that formal title once existed, even if it could not be found. The assessee had proved its title to the property not only by the Property Card and ULC permission but also title report from M/s Little & Co., solicitors. Thus it was not correct to state that the assessee had not proved the claim that the property in question had been obtained by adverse possession. The assessee further argued that suit in relation to survey No. 1411/11 (135/10) had been filed merely to protect the interest of the assessee because the defendants were attempting to encroach upon the said land. There was nothing in that suit seeking any right over the lands in question. Litigation was not for the purpose of creating or completing the assessee's title. Such expenditure was revenue expenditure and could not be treated as cost of acquisition or cost of improvement. In support of these contentions the assessee relied upon the judgments reported in Sree Meenakshi Mills Ltd. v. CIT (supra), (supra); (supra) and (supra). The assessee argued that its contentions were duly supported by the judgment of Hon'ble Supreme Court in the case of B.C. Snnivasa Setty (supra) by the judgment of Hon'ble Andhra Pradesh High Court (supra) at p. 395, Evans Frnser & Co. Ltd. (In Liquidation) v. CIT (Bom) and CIT v. Alps Theatre . The assessee argued that from the assessment orders the learned AOs had themselves proceeded on the basis that there was no cost of acquisition of the lands in question. Further the assessee argued that the contentions of the AO during the course of appellate proceedings in relation to the provisions of Section 10(3) were incorrect. The judgment of Hon'ble Allahabad High Court in the case of CIT v. Gulab Chand (supra) had been dissented from by the Hon'ble Calcutta High Court in the case of B.K. Roy (P) Ltd. v. CIT . In any case both in the judgment of Hon'ble Allahabad High Court and decision of Tribunal, Special Bench in the case of Cadell Weaving Mills (P) Ltd. (supra) the question was whether a right of tenancy under Bombay Rent Control Act was a transferable right or otherwise. On the basis of those judgments it could not be disputed that the assessee had full transferable rights in respect of subject property as supported by various judgments in respect of adverse possession, the Property Card, the ULC permission and memorandum of title report of the solicitors. The assessee referred to the decision of Tribunal, Bombay Bench in the case of Voltas Ltd. v. Dy. CIT (1998) 64 ITD 423 (Mumbai) to the effect that a capital receipt cannot be subject to tax under Section 10(3) of the Act.
12. The learned CIT(A) considered the rival submissions of the assessee and AO and observed in para 116 of his order dt. 23rd March, 1999 as under:
116.1 have perused the material on record and have given careful thought to the stands and arguments both of the AO and the appellant's counsel. The appellant has attempted to make out a strong case that it was not exigible to capital gains tax on lands held by it through adverse possession. The AO on the other hand has also made strenuous efforts to get to the root of the matter i.e. when and how the appellant came into possession of these lands and who was the owner of these lands and the fate of the litigations involving the appellant, the international airports authority or any other parties/claimants pending in various Courts. In his reports submitted during the course of appellate proceedings, the AO has on more than one occasion requested for time for completing the necessary enquiries to ascertain the full facts so as to enable him to take a proper view on the amounts or heads under which the receipts from transfer of these lands are to be assessed. Therefore, keeping in view the facts that very substantial sums are involved in these transactions whose taxability has to be determined and also keeping in view the AO's remarks that full facts with regard to these transactions have still not been established, I consider it only fair and reasonable to restore this issue to the file of the AO for a thorough inquiry into the facts and circumstances of these transactions and to take a proper and reasoned view on the extent and manner of taxability of these amounts particularly noting the fact that the material to be unearthed involves facts over 30 years old. This ground is, therefore, set aside to be adjudicated upon de novo.
13. Thereafter the learned AO passed on 29th Jan., 2002 an order under Section 250/143(3) of the Act in order to give effect to the aforesaid order of the learned CIT(A)-VI, Mumbai dt. 23rd March, 1999. The aforesaid order is reproduced as under:
Order under Section 250/143(3) of the IT Act, 1961 In view of the CIT(A)s order No. CIT(A)WDCSR. 5/8/98-99 dt. 23rd March, 1999 and in view of the letters of erstwhile Addl. CIT, SR-5 Mumbai dt. 8th Sept., 1999, 13th Sept., 2000, 10th Nov., 2000 and 14th Nov., 2000 and letter of Dy. CIT 3(3) dt. 15th Jan., 2002 the total income of the assessee is revised as under:
Total business as per order under Section 143(3) dt. 27th March, 1998 3,04,39,518 Less : Relief allowed by CIT(A) Commission on excess bonus. 5,28,411 2,99,11,107 Add : Modvat 6,91,555 ___________ Business income 3,06,02,662 Long-term capital gains 5,56,79,513 ___________ 8,62,82,175 Short-term capital gains 32,04,099 Income from other sources 22,92,015 ___________ 9,17,78,289 Less : Deduction under Chapter VI-A
1. Under Section 80M as claimed 10,12,565
2. Under Section 80G as claimed 3,55,500
3. Under Section 80HHC as per annexure 4,71,474
4. Under Section 80-IA ___________ 18.39,539 ___________ Total income 8,99,38,750 Charge tax on LTCG of Rs. 5,56,79,513 and business profit of Rs. 3,42,59,237. Issue revised demand notice/challan accordingly.
14. Aggrieved by the aforesaid order under Section 250 r/w Section 143(3) dt. 29th Jan., 2002 the assessee once again went in appeal before the learned CIT(A). The assessee submitted that the order passed by the AO under Section 250 r/w Section 143(3) was not at all a speaking order and did not give effect to and/or comply with the directions contained in the appellate order dt. 23rd March, 1999 passed by the CIT(A)-VI. The assessee further argued that the AO had no justification to bring to tax sale proceeds of the two pieces of land which the assessee was entitled to under adverse possession. The learned CIT(A) noted that after the issue was restored to the AO for adjudication afresh, the AO had sent letters to the assessee calling for information regarding the two plots of land sold by the assessee. In response to those letters the assessee furnished the details called for by the AO. While doing so the assessee also made specific request to the AO for personal hearing. However the AO repeated the addition in the order dt. 29th Jan., 2002 made under Section 250 r/w Section 143(3) without any discussion. The assessee argued before the learned CIT(A) that no payments were made by the assessee for acquiring the two plots of land in question. The learned AO had not brought on record any details or evidence to show that the assessee made any payments for acquiring those two plots of land. The small expenses incurred later by the assessee on legal charges and maintenance expenses were allowable revenue expenditure and had in fact been allowed in the income-tax assessments of the assessee in various years. They could not therefore be treated as forming cost of acquisition of the plots of land. As the assessee had not made any payments as respects acquisition of the two plots of land and had acquired them by adverse possession only, there was no cost of acquisition as respects those two plots of land. Hence the sale consideration received on transfer thereof was not exigible to capital gains. The assessee argued that there was no dispute in the orders of the AO that the two plots of land had been acquired by the assessee on adverse possession. In fact in the assessment orders the AO had himself recorded that the assessee had acquired the possession of the land by way of adverse possession or encroachment. The case of the AO was that expenditure incurred by the assessee on two suits filed should be treated as cost of acquisition. The learned CIT(A) noted that having regard to the contention of the assessee that there was no cost of acquisition the AO should have made enquiries to find out whether the assessee had paid any amounts for acquiring the above two plots of land. But the order of the AO dt. 29th Jan., 2002 did not contain any discussion. The small items of expenses incurred by the assessee on legal charges and maintenance had been allowed as revenue expenditure in income-tax assessments of the assessee and could not be considered as expenditure incurred for acquiring or perfecting the title of the assessee over the two pieces of land. Such expenses could not form part of cost of acquisition. The learned CIT(A) further accepted that provisions of Section 55(2) did not apply because those provisions did not cover land acquired by adverse possession for which no cost was incurred. The learned GIT(A) noted that apart from the judgment of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra), Andhra Pradesh High Court in (1987) 63 CTR (AP) 108 : (1987) 165 ITR 386 (AP) (supra) and in assessee's own case CIT(A)-XXXVII had by his order dt. 23rd April, 1998 for asst. yr. 1994-95 had held that long-term capital gain could not be charged in relation to the transfer of lands acquired by the assessee on adverse possession. The learned CIT(A) therefore accepted the contention of the assessee and directed for deletion of the addition of Rs. 2,31,92,049. Aggrieved the Revenue is in appeal before us.
15. Revenue's appeal for asst. yr. 1995-96 came up for hearing before us first. During the course of his arguments Shri Arvind Pinto the learned CIT (Departmental Representative) strongly relied upon the submissions of the AO as recorded in the first appellate order for asst. yr. 1995-96 dt. 23rd March, 1999. He argued that in view of the detailed reasons given by the learned AO the assessee's contention that it had acquired the lands in question by way of adverse possession was far from established or proved. The contention of the learned CIT(A) in the second appellate order dt. 16th Oct., 2003 that the AO did not make any enquiry pursuant to the directions of the earlier appellate order dt. 23rd March, 1999 was not of much significance. Even if the matter was restored to the AO by the CIT(A) for further enquiries and investigation and the AO did not make any further enquiry or investigation, it was incumbent upon the learned CIT(A) while deciding the assessee's appeal in the second round to make such enquiries as called for and only then pass an order in the assessee's appeal in the second round. The provisions of Section 250(4) had empowered the learned CIT'(A) to make such enquires and therefore nothing much turned upon the fact that the AO did not make enquiries for which the matter had been restored.
16. The learned CIT (Departmental Representative) further argued that the ratio of the judgment of Hon'ble Supreme Court in the case of BC Srinivasa Setty (supra) could not be applied in relation to assets like land in question. In that judgment Hon'ble Supreme Court was dealing with goodwill which was an intangible asset. Plots of lands were distinctive example of a capital asset and therefore it could not be said that there was no cost of acquisition or that it was not possible to determine the cost of acquisition. The law did not require that there should be necessarily accuracy as regards the income of an assessee to the last digit. If in a given case it was not possible to compute income chargeable to tax at an accurate figure, the AO was entitled to estimate the income to the best of his judgment. In support of these contentions the learned CIT (Departmental Representative) strongly relied upon the judgment of Hon'ble Karnataka High Court in the case of Emerald Valley Estates Ltd. v. CIT . The learned CIT (Departmental Representative) relied upon in this behalf on the decision of Tribunal Delhi in the case of Rajendra Nath Agarwal v. ITO (1992) 41 ITD 206 (Del) also.
17. During the course of hearing before us the learned CIT (Departmental Representative) vehemently argued that cost of litigation incurred by the assessee in relation to the lands in question constituted cost of acquisition in the hands of the assessee. He argued that in the case of the assessee if the lands in question were claimed by another, suit filed by the assessee was in the nature of acquisition of title over the land. A distinction was required to be drawn between the cost incurred merely to protect one's title and the cost incurred by a person to seek declaration of his title or to defend his title against the claim of another. In the case of the assessee there were several suits filed from time to time. That litigation constituted the assessee's cost of acquisition of the lands in question. In support of this contention the learned CIT (Departmental Representative) strongly relied upon the decision of Tribunal, Madras in the case of SAS Hotel Ltd. v. ITO (1983) 4 ITD 297 (Mad). The learned CIT (Departmental Representative) pointed out that apart from litigation the assessee had incurred considerable cost in payments to solicitors such as Little & Co., who certified that the assessee had a marketable title over the lands. Fees paid to solicitors in that connection also constituted cost of acquisition of title over the lands in question by the assessee. The learned CIT (Departmental Representative) pointed out that during the course of assessment proceedings the AOs were prepared to allow the assessee deduction of such cost of acquisition. Cost of acquisition was assumed as nil not because the AOs were of the view that there was no cost at all but because the assessee did not come forward with the necessary details. Had the assessee furnished details and claimed the deductions the same was allowable as cost of acquisition to the assessee. In other words the contention of the assessee that it was a case of nil cost of acquisition was not correct.
18. During the course of hearing before us the learned CIT (Departmental Representative) strongly relied upon the provisions of Section 55(3) of the Act also. He pointed out that even if the assessee did not incur any cost of acquisition, the cost of acquisition incurred by assessee's predecessors would amount to cost of acquisition in the hands of the assessee for the purpose of computation of capital gains. In the event the cost of acquisition incurred by the previous owners could not be ascertained, the provisions of Section 55(3) lay down that fair market value on the date on which the capital asset became the property of the previous owner should be treated as cost of acquisition, The learned CIT (Departmental Representative) argued that cost of acquisition in the case of the assessee may be determined on the basis of the fair market value of the lands in question as on the date when the assessee or his predecessors became owner of the land.
19. Shri Deepak Tralshawala, the learned Counsel for the assessee relied strongly upon the submissions of the assessee before the first appellate authority as recorded in the first appellate order dt. 23rd March, 1999. He pointed out that the argument that the assessee had not established adverse possession was not there when the original assessment orders framed by the AO. He referred to p. 12 of the assessment order for asst. yr. 1995-96 dt. 27th March, 1998. The learned AO had clearly recorded the finding, "In the instant J case the assessee has acquired the possession of the land by way of adverse possession or encroachment". That finding given by the AO in the original assessment order for asst. yr. 1994-95 was verbatim adopted by the AO in the » assessment order dt. 27th March, 1998 for asst. yr. 1995-96 also The learned Counsel argued that dispute raised in this behalf subsequently were inconsistent with the finding of the fact given in the original assessment order. During the course of assessment proceedings for asst. yrs. 1994-95 and 1995-96 the facts of the case had been examined by the AOs at considerable length. After having satisfied themselves about the mode of acquisition of the properties in question being by way of adverse possession the AO had disputed only the claim that there was no cost of acquisition on the ground that expenditure incurred by way of legal cost to obtain/defend the title of the land constituted cost of acquisition of the plots in question in the hands of the assessee. Secondly, the learned AO had held that the cost of acquisition of the other two lands as recorded under the head "Fixed Assets" in the balance sheet should be treated to be cost of acquisition of these two lands as well. Finally the learned AO had argued on the basis of amendment introduced by way of the provisions of Section 55(2) w.e.f. 1st April, 1988. Thus there was no doubt as to the ownership of the assessee as well as the manner in which the assessee came to acquire the lands. The learned Counsel argued that for asst. yr. 1995-96 the learned CIT(A) sent the matter back to the AO because amounts involved were large and because during the course of appellate proceedings the then AO had submitted that full facts with regard to the nature of receipts of the assessee or heads under which the receipts from transfer should be assessed had not come on record. The purpose of restoring the issue to the file of the learned AO was to grant the AO one more opportunity to enquire into the facts and circumstances of the case. Even though the learned CIT(A) had thus set aside the matter to the AO for decision afresh, the AO did not carry out any enquiry worth the name and merely repeated the original assessment order while purporting to give effect to the appellate order of learned CIT(A) dt. 23rd March, 1999. It was not correct to state that the learned CIT(A) in the impugned order for asst. yr. 1995-96 had decided the issue in favour of the assessee for that reason alone. As the AO had not carried out any enquiry in spite of the specific directions given and the purpose for which the matter was restored to him, the learned CIT(A) directed the AO to furnish a remand report and then AO furnished his remand report dt. 31st Jan., 2003 to the learned CIT(A) as placed at pp. 121 to 123 of the paper book. In the remand report the learned AO enumerated at length the various evidence, material and facts and circumstances relied upon by the assessee. After consideration of all aspects the then AO presented the following findings of fact before the learned CIT(A):
As mentioned earlier vide agreement dt. 21st Jan., 1994, these two plots viz. survey No. 1411/11 and plot of 889 sq. mtrs. was sold by the assessee company to Hotel Leelaventure for which consideration of Rs. 231.92 lakhs was received (Rs. 131.51 lakhs and Rs. 100.40 lakhs respectively). The agreement dt. 2nd July, 1962--paper book page No. 52--between partnership firm M/s Star Chemicals and the company M/s Star Chemicals (Bombay) (P) Ltd. for transfer of business and assets do not mention these two plots in question. It is clear that plot No. 1411/11 was under adverse possession of the assessee company since last several years. As regards plot 889 sq. mtrs, there is no clear evidence of the period when adverse possession was obtained nor do to the records indicate that the assessee is owner of this land. This may be perhaps due to reason that plot No. 889 was never surveyed by the land Revenue authority. However the assessee company has been enjoying the possession of this plot as per the report of M/s Little & Co, referred to earlier. Thus the assessee company had adverse possession of both these plots for several years before they were sold to Hotel Leelaventure.
20. The learned Counsel pointed out that from the facts recorded in the remand report it was clear too that the litigation pursued by the assessee company was not for creation or declaration of assessee's title over lands. The only suit that pertained to the lands in question was suit No. 3889/82 that the assessee had filed to prevent International Airport Authority of India who attempted to bore a well on the plot of land and to prevent M/s Lela Scottish Lace (P) Ltd. from encroachment on land in question. Thus no legal cost was incurred by the assessee as regards creation or declaration of assessee's title over the lands. The learned Counsel for the assessee argued that even otherwise in the eyes of law cost of litigation could not be said to be cost of acquisition of immovable property. In support of this contention the learned Counsel strongly relied upon the judgment of Hon'ble Calcutta High Court reported in (1993) 113 CTR (Cal) 219: (1994) 205 ITR 9 (Cal) (supra).
21. The learned Counsel argued that there was absolutely no relevance of the provisions of Section 55(2) relied upon by the AO. He took us through the provisions of Section 55(2) and pointed out that those provisions as applicable to asst. yr. 1995-96 covered only the following:
1. Goodwill of a business;
2. A right to manufacture, produce or process any article or thing;
3. Tenancy rights;
4. Stage carriage permits; and
5. Loom hours.
Hence acquisition of land by adverse possession was totally outside the purview of provisions of Section 55(2).
22. The learned Counsel strongly relied upon the judgment of Hon'ble Gujarat High Court in the case of CIT v. Manohaisinghji P. Jadeja . In that case the property had been acquired by the forefathers of the assessee by conquest. The Hon'ble Gujarat High Court held that as there was no cost of acquisition capital gains was not assessable. Hon'ble High Court also rejected the alternative contention of the Revenue that by virtue of provisions of Section 55 the cost of acquisition should be determined at nil. The learned Counsel particularly took us through the observations of Hon'ble High Court at pp. 35 and 36. He further pointed out that in para 32 of that judgment on p. 36 the Hon'ble Gujarat High Court had emphasised that the importance of the date of acquisition cannot be lost sight of in taking into consideration the scheme of the Act relating to charge of tax on short-term capital gains and long-term capital gains. The learned Counsel argued that the case of the assessee was similar. He too had acquired the lands in question by adverse possession and the date of acquisition too was unascertainable in the case of the assessee.
23. The learned Counsel argued that reliance placed by the learned CIT (Departmental Representative) on the provisions of Section 55(3) was entirely misplaced. That provision was attracted where the property was acquired at cost but the particulars of cost was not available. In the case of the assessee there was no cost of acquisition at all and therefore provisions of Section 55(3) did not come into picture at all. He also placed reliance on the judgment reported in CIT v. H.H. Lokendra Singh .
24. The learned Counsel argued that the reliance placed by the AO on the decisions of Tribunal in the case of Cadell Spinning & Weaving Mills Ltd. (supra) was entirely of no avail. The order of Tribunal, Mumbai Special Bench in that behalf was reversed by the judgment of Hon'ble Bombay High Court reported in Cadell Weaving Mill Co. (P) Ltd. v. CIT and later on by the judgment of Hon'ble Supreme Court reported in CIT v. D.P. Sandu Bros. Chembur (P) Ltd. .
25. The learned Counsel strongly objected to the contention of the learned CIT (Departmental Representative) that the learned CIT(A) should have made enquiry under the provisions of Section 250(4). He argued that in the case of the assessee there was surfeit of enquiry. The Revenue could not drag a case endlessly in the name of fact finding. In the impugned order the learned CIT(A) had not attached much importance to the fact that the AO had not made any further enquiry in the second round. He made the deficiency good by obtaining remand report from the AO. That remand report was after considerable examination of evidences, materials and facts and circumstances of the case and had settled all facts. In view of the remand report of the AO the Revenue should not have come in second appeal before the Tribunal. In that view of the matter ground of appeal No. 2 in Revenue's appeal for asst. yr. 1995-96 also was uncalled for. The learned Counsel relied upon the decision of Tribunal, Mumbai reported in Seth Textiles v. ITO (2003) 80 TTJ (Mumbai) 329 in that respect.
26. In his rejoinder the learned CIT (Departmental Representative) argued that in the case of B.C. Srinivasa Setty (supra) the Hon'ble Supreme Court considered the question whether goodwill could be considered as a capital asset. He referred to para 7 of the judgment. In the case of land there was no doubt that it was a capital asset. Therefore the judgment of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) had no application where the subject matter of transfer was not an intangible asset but a tangible asset.
27. The learned CIT (Departmental Representative) referred to "report on title" from M/s Little & Co. Advocates, Solicitors & Notaries dt. 9th June, 1993 and argued that apart from purchase price paid, from time to time the assessee incurred cost also by way of litigation, fees to solicitors, expenditure incurred for search of title, extracts of land records and so on. It could not therefore be stated that there was no cost of acquisition at all. In support of this contention the learned CIT (Departmental Representative) relied upon the Tribunal decision reported in SAS Hotel Ltd. v. TTO (supra). He argued that even if there was no cost of acquisition, if there was any cost of improvement that would give rise to capital gains.
28. The learned CIT (Departmental Representative) argued that the assessee had been wrongly reading the remand report of the AO dt. 31st Jan., 2000 as vindication of the assessee's stand that lands in question had been acquired on adverse possession. In the remand report the AO had clearly recorded as under:
As regards plot 889 sq. mtrs., there is no clear evidence of the period when adverse possession was obtained nor do the records indicate that the assessee is in adverse possession of the land.
Thus from the remand report it was clear that as regards the second plot the fact of adverse possession had not at all been proved.
29. The learned CIT (Departmental Representative) strongly relied upon the following extract from the search report of the City Survey:
Shri R.B. Shah was running a proprietary concern under the name and style of M/s Star Chemicals. This sole proprietary concern was converted into partnership firm. Mrs Ranchholdas Becharlal Shah [R.B. Shah], Shri Shirish Ranchholdas Shah and Subhash Ranchholdas Shah were partners. The partnership firm was carrying on business under the firm name and style of M/s Star Chemicals on the same premises. This firm was converted into private limited company. Assessee company M/s Star Chemicals (Bombay) Ltd., was incorporated on 11th May, 1962. This company was incorporated with the main object; the acquisition and working of the business of M/s Star Chemicals as a running concern and to takeover the entire business thereof absolutely together with land and building, plant and machinery, furniture and fixture, stock-in-trade, sundry creditors and cash in bank and all other assets belonging to the said business together liabilities thereof, benefits of all existing contracts, licences, concessions and quota rights. Thus, the assessee company acquired and taken over all assets and liabilities and business of M/s Star Chemicals (firm) as a running concern.
Now as pointed out above, plot of land bearing survey No. 135, Hissa No. 10 (City Survey No. 1411/11), area 1164.40 sq. mtrs. was purchased by Shri R.B. Shah, the then sole proprietor of M/s Star Chemicals from M/s Jamnadas Vallabhbai Mehta against the payment of a purchase price and as mentioned in the report on title, a portion of factory building was also extending over its plot of land. All these assets were subsequently taken over by the partnership firm and ultimately by the assessee company, M/s Star Chemicals (Bombay) Ltd.
30. The learned CIT (Departmental Representative) argued that under the Limitation Act Article 65 there could not be adverse possession prior to the completion of 12 years. In the present case the assessee had become owner of land in question in the year 1969 as borne out from Property Register Card. There could be no question of the assessee acquiring ownership rights on adverse possession in 1969 when the assessee company itself was incorporated on 11th May, 1962. Therefore, it could not be said that the assessee was holding the property by way of adverse possession.
31. The learned CIT (Departmental Representative) argued that in the instant case the Tribunal was competent to give certain findings of fact even if not touched upon by the AO or CIT(A). In support of that contention he relied upon the judgment of Hon'ble Delhi High Court in the case of Indian Management Advisors & Leasing (P) Ltd. v. CIT (2007) 207 CTR (Del) 333. He argued that the Tribunal could consider such facts and documents relevant to the issue before it even if the AO and CIT(A) had not gone through those documents. In the case of the assessee the search report of M/s Little & Co. dt. 3rd June, 1993 had given clear finding that the predecessor of the assessee had in his, proprietary capacity paid a sum of Rs. 18,000 by way of purchase price for the land in question. He urged us to act upon that fact even though there was no such contention of the AO in the assessment order or in the remand report to the CIT(A).
32. The learned CIT (Departmental Representative) also referred to the observations of the AO that on verification of annual accounts it was revealed that the assessee was the owner of the plots of lands as under:
1 Freehold land at Andheri Rs. 6,268 2 Leasehold land Rs. 19,03,800 The cost of acquisition of those lands was also a relevant consideration to decide as to whether or not there was cost of acquisition of lands in question.
33. As we heard the Revenue's appeal for asst. yr. 1995-96 first, we have recorded the contentions of the parties and facts of the case in relation to asst. yr. 1995-96 in the foregoing paras. Thereafter at the request of Departmental Representative assessee's appeal for asst. yr. 1994-95 was also consolidated. During the course of hearing it was noticed that except that another piece of land was involved bearing a different old survey number and new cadestral survey number facts of the case and issues involved are by and large the same. As a matter of fact in the assessment order for asst. yr. 1995-96 the AO had entirely adopted the reasoning and findings as given in the assessment order for asst. yr. 1994-95 without adding much thereto. Hence arguments of the parties were the same. The learned Counsel for the assessee however sought our permission to clarify the new argument taken by the learned CIT (Departmental Representative) in his rejoinder as to the purchase price of Rs. 18,000. He took us through the title report of M/s Little & Co. in that behalf and pointed out that the sum of Rs. 18,000 was the purchase price relating to the land bearing survey No. 135, Hissa Nos. NA-4 and 5. The learned Counsel pointed out that the assessee had sold several plots of land to Hotel Leelaventure Ltd. and had paid huge amounts by way of capital gains tax. In relation to old survey No. 135, Hissa Nos. 4, 5, 6 and NA-4 bearing corresponding CTS Nos. 1411, 1411/1, 2, 3, 4, 5, 6, 7, 8, 9, 10 there was no dispute that the assessee had purchased or otherwise acquired those lands on payment of cost. The assessee had offered capital gains in relation to sale consideration of all those plots. It was only in relation to property bearing survey No. 135, Hissa No. 7 corresponding CTS No. 1411/12 and survey No. 135, Hissa No. 10 corresponding to CTS No. 1411/11 and adjoining plot of land admeasuring 889 sq. mts., without any survey number that the assessee as its predecessors had claimed acquisition on adverse possession without any cost of acquisition. It was in respect of those lands only that the assessee had claimed that capital gains was not chargeable.
34. We have carefully considered the rival submissions. In this case the assessee has sold lands bearing several survey numbers or CTS numbers to Hotel Leelaventure Ltd. by two agreements both dt. 8th Feb., 1994. Out of the lands thus sold the assessee has treated the transfer of the land bearing old survey No. 135, Hissa No. 7 or new CTS No. 1411/12 as relating to asst. yr. 1994-95 and the transfer of all other lands as pertaining to asst. yr. 1995-96. According to the assessee the difference of assessment years in this manner arose on account of different dates on which the possession of the lands was handed over to Hotel Leelaventure Ltd. This aspect of the case is not under dispute. Secondly while the assessee sold lands falling under survey No. 135 Hissa Nos. 4, NA-4, 5, 6, 7 and 10 corresponding to new CTS Nos. 1411, 1411/1 to 1411/12 as also the unnumbered piece of land admeasuring 889 sq. mtrs., the dispute in appeals before us is only in respect of the following:
(1) Land bearing survey No. 135, Hissa No. 7 corresponding to new cadestral survey No. 1411/12 (asst. yr. 1994-95).
(2) Land bearing survey No. 135, Hissa No. 10 corresponding to new cadestral survey No. 1411/11 (asst. yr. 1995-96).
(3) An adjoining piece of land, without any survey number, admeasuring approximately 889 sq. mtrs. (asst. yr. 1995-96).
As regards the remaining lands there is no dispute as to the chargeability to capital gains tax thereof between the assessee and the Department.
35. As pointed out the assessments as regards disputed capital gains in the case of the assessee have undergone several stages before the present appeals were filed by the assessee and the Revenue for asst. yrs. 1994-95 and 1995-96, respectively. It is seen that as far as original assessment orders for asst. yrs. 1994-95 and 1995-96 are concerned there is no dispute as to the ownership of the assessee of the lands relating to disputed capital gains tax. It is also not in dispute that if there was no cost of acquisition incurred by the assessee, the sale consideration received by the assessee, subject to the provisions of Section 55(2) cannot be put to capital gains tax as held by Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra). In the case of original assessment orders the reasons given by the AOs for rejection of assessee's contentions are, briefly, as under:
(1) Legal cost incurred by the assessee to obtain or defend the title over the lands in question would constitute cost of acquisition in the hands of the assessee.
(2) The price paid and other costs borne by the assessee in relation to certain other lands owned by the assessee would represent cost of acquisition of the lands pertaining to disputed capital gains as well.
(3) After enactment of provisions of Section 55(2) the sale consideration received by the assessee was chargeable to capital gains tax even if there was no cost of acquisition and in such a case cost of acquisition has to be assumed as nil.
We may point out that the proposition that in the absence of cost of acquisition, sale consideration cannot be subjected to capital gains tax under Section 45 has been upheld in the order of Tribunal in the case of the assessee for asst. yr. 1994-95 (supra) wherein it has been held that if there is no cost of acquisition, no capital gain can be charged.
36. However certain new issues have been raised during the course of proceedings subsequent to original assessment orders; the same are, briefly enumerated, as under:
(1) During the course of first appellate proceedings for asst. yr. 1995-96, the learned AO raised the issue that the assessee was required to establish first as to how he acquired the title on adverse possession and to prove that the assessee had become owner of the lands pertaining to the disputed capital gains tax. The same issue has been raised in Tribunal order for asst. yr. 1994-95 (supra) also.
(2) During the course of hearing before the learned CIT(A) the AO raised an argument that the judgment of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) could be applied only to intangible assets and not when the assets in question are physical assets such as lands.
(3) During the course of first appellate proceedings for asst. yr. 1995-96 the AO also took an alternative plea that if provisions of Section 45 did not apply, provisions of Section 10(3) came into picture and the sale consideration received by the assessee was chargeable to tax as casual and non-recurring receipts.
(4) The exception was also taken to the fact that as regards the adjoining plot of land admeasuring 889 sq. mtrs there was no documentation and in respect of the other two lands the matter being under litigation no final decision had been reached about the ownership of the plots.
(5) The assessee company was incorporated in 1962 and the assessee was shown as owner of land bearing old survey No. 135, Hissa No. 7 in the Property Register Card for the year 1969. In such situation how could the assessee claim to have acquired the title on adverse possession that required a minimum period of 12 years?
(6) The assessee could not claim title by virtue of adverse possession against the original owner without a declaration to that effect by a competent Court of law.
(7) During the course of arguments before us the learned CIT (Departmental Representative) has relied upon the provisions of Section 55(3) of the Act and argued that fair market value on the date on which the lands became the property of the previous owner should be treated as cost of acquisition in the hands of the assessee.
(8) During the course of hearing before us the learned CIT (Departmental Representative) has also disputed the contention of the assessee that no price whatsoever was paid for acquiring possession and title over the lands pertaining to disputed capital gains tax.
37. At first we address the question as to whether the assessee had acquired title over the lands pertaining to disputed capital gains tax on adverse possession. We see no reason to doubt that the assessee did have ownership rights. The assessee has been able to successfully sell his rights for enormous price to Hotel Leelaventures Ltd. Land bearing survey No. 135/7, CTS No. 1411/12 has been sold for Rs. 75,76,000 and land bearing survey No. 135/10, CTS No. 1411/11 along with adjoining piece of land without number admeasuring 889 sq. mtrs have been sold for Rs. 2,31,92,049. Hence in the absence of any evidence or material to the contrary the apparent state of affairs must be true. The assessee's contention that these lands had been acquired by - him on adverse possession has been disputed by the Department mainly on the basis that the assessee, according to them has not proved the fact of acquiring title on adverse possession. In the impugned orders it has nowhere been spelt out that if the assessee did not acquire these lands on adverse possession, how did the assessee acquire the rights that have been transferred to Hotel Leelaventures Ltd. In this case the assessee has been subjected to examination by the AO time and again. For asst. yr. 1994-95 assessment order under Section 143(3) was first completed on 20th March, 1997. During the course of the first appellate proceedings the learned AO had the opportunity to submit his remand report on the written submissions of the assessee before the learned CIT(A). However, the assessment order did not find favour with the learned CIT(A) and the assessee's contention was accepted in the first order of CIT(A) dated 23rd April, 1998. On Revenue's appeal the Tribunal by its order dt. 1st Dec, 2003 restored the matter to the AO so that the AO may find out how the property was acquired and at what cost, if any ? The AO therefore subjected the assessee to assessment proceedings once again and made his order under Section 143(3) r/w Section 254 on 31st March, 2006. As to assessment order for asst. yr. 1995-96 the original assessment was completed on 27th March, 1998. The learned CIT(A) by his order dt. 23rd March, 1999 restored the matter to the AO for a thorough enquiry into the facts and circumstances of the transactions and for adjudication de novo. Thereupon the AO made his order under Section 250 r/w Section 143(3) on 29th Jan., 2002. In assessee's appeal against that order the learned CIT(A) granted the AO further opportunity and a remand report was obtained from him and the impugned order for asst. yr. 1995-96 has been made after taking into consideration the remand report of the AO dt. 31st Jan., 2003. It may be noted here that facts of the case for asst. yrs. 1994-95 and 1995-96 are more or less the same. Thus the Department had ample opportunities and time to make its enquiries into the facts of the case. We find that in the orders and reports of Departmental authorities there is no specific evidence/material relied upon against the assessee's version apart from holding that the assessee had not proved the fact of acquisition of these properties on adverse possession.
38. During the course of first appellate proceedings for asst. yr. 1995-96 the AO argued that how could the assessee become the owner of land without incurring any expenses. He further argued that to establish the fact that the assessee had acquired the property on adverse possession, it had got to be established first as to who were the original owners of the property and on what date the assessee encroached upon the lands in question; when the period of limitation prohibiting the true owner from recovering property ended ? Whether any proceedings at all were initiated by anyone to recover the possession or to dispute the title of the assessee ? We find that the AO had made enquiries from M/s Hotel Leelaventures Ltd., who furnished along with their reply dt. 6th Nov., 1998 a copy of report of M/s Little & Co., solicitors named 'report on title' and accompanying documents. The assessee has relied upon that report and a memorandum on title drafted by M/s Little & Co., advocates and solicitors and signed by both the assessee and M/s Hotel Leelaventures Ltd. on 25th Jan., 1994 prior to the sale agreement dt. 8th Feb., 1994. In this memorandum on title the details and history of the property bearing survey No. 135, Hissa No. 7 corresponding city survey No. 1411/12 has been enumerated as under:
(v) Survey No. 135, Hissa No. 7(City Survey No. 1411/12).
(a) The land admeasuring about one acre 1-1/4 gunthas originally belonged to one Mr. Viswanath Mahadev Tilak prior to his demise on the 28th June, 1937 and on his demise it was inherited by his seven sons, namely, Anand, Janardhan, Sitaram, Hari, Shivram, Purushottam and Gopal Vishwanath Tilak as recited in the deed of conveyance referred to in the recital immediately following.
(b) By a deed of conveyance dated the 4th April, 1938 registered with the Sub-Registrar, Bandra under Serial No. BND/413 of 1938 on the same day, Fatimabai Ali Mahamed Daya purchased the said land from the abovenamed Anand, Janardhan, Sitaram, Hari, Shivaram, Purushotham and Gopal Vishwanath Tilak against the payment of the purchase price of Rs. 3,799.
(c) The said purchase in favour of Fatimabai has been mutated in the record of rights by the Mutation Entry No. on the 31st May, 1938 as per the records in the office of Talathi, Marol Village, Andheri Taluka.
(d) By an Indenture of Lease dated the 1st April, 1949 made between Fatimabai Aii Mahamed Daya of the One Part and Habib Meherali Daya, Noor Mahamed Meherali Daya, Badruddin Meherali Daya and Nizarali Ali Mohamed Daya, therein called 'the Lessees', the said Fatimabai demised unto the said lessees the said land against a monthly rent of Rs. 325 and on the other terms and conditions set out in the said lease
(e) By a declaration made by the said Fatimabai on the 21st April, 1950 before the Presidency Magistrate, Bombay, the said Fatimabai has declared and recorded that on the 1st Feb., 1950, out of natural love and affection and in the presence of her friends Hajibhai Mohamed and Gulamhussein Abdulla as witnesses she had gifted the said land by oral gift in favour of her sons, Nazirali Ahemdbhai, Habib Meherali, Ahmedbhai Noormahomed Meherali and Badruddin Meherali absolutely according to Muslim Law and that the said sons had immediately accepted the gift of the said land and thus became the owners as and from the 1st Feb., 1950.
(f) By a declaration dt. 25th April, 1950 made by the above named two witnesses Hajibhai Mohamed and Gulamhussein Abdulla before the Presidency Magistrate, Bombay declared and recorded that in their presence on the 1st Feb., 1950 the said Fatimabai had made the oral gift of the said land in favour of her aforesaid four sons according to Muslim Law, that the said sons had accepted the gift of the said land, that Fatimabai handed over the possession of the said land to the said donees and that she had also handed over to them a transfer application addressed to the Collector requesting to transfer the said land in the names of her said four sons.
(g) The said oral gift from the said Fatimabai to her four sons is mutated by the Mutation Entry No. 632 dated the 20th May, 1950.
(h) The said land has been in sole and exclusive possession of the predecessors in business of Star and of Star since its incorporation in 1962 and accordingly such predecessors in business of Star and Star have been in sole and exclusive possession of the said land and have been continuously occupying, using, and enjoying the same without any interruption whatsoever and howsoever. However, in the year 1982 Star on inspection of the relevant land records found that record of rights erroneously showed the names of Naziralii Alii Mohamed, Habib Mehrali, Noor Mohammed Meherali, Baddrudin Meherali as the occupants of the said land. As a result Star filed a suit being Suit No. 6693 of 1982 in the Hon'ble City Civil Court at Bombay against Nazirali Ahmedbhai and others seeking declaration that Star was the owner of the said land by adverse possession. In the said suit, with a view to remove defect, if any, in Star's title by adverse possession, a consent decree was ultimately passed on the 24th March, 1983 under which the said Nazirali Ahmedbhai and others admitted and declared that Star had been and was in exclusive possession, use and enjoyment of the said land to the exclusion of the said Nazirali Ahmedbhai and others and thus by obtaining the said consent decree Star improved their title to the said land.
(i) According to the defence pleaded by the defendants in the presently pending Bombay City Civil Court Suit No. 3889 of 1982 hereinafter recited, the said land was acquired under the Land Acquisition Act for the purpose of aerodrome and an award was made by the Land Acquisition Officer on the 12th April, 1951 and that the possession of the said land was handed over by the said Fatimabai as the owner of the said land on the 7th May, 1951 to one K. Hatti on behalf of the Addl. Special Acquisition Officer, Bombay Suburban District, and the said K. Hatti handed over the possession to the Executive Engineer, Bombay Aviation Division of the Government of India from whom the possession was ultimately taken by one P. Singh on behalf of the Bombay Airport though, as stated in (e) and (f) above, the same land had been previously gifted by the same Fatimabai to her four sons who had thereby become the owners thereof.
(j) On International Airport Authority of India (IAAI) being constituted under the International Airport Authority Act, 1971, all the assets, properties, rights and obligations of the Civil Aviation Department of the Government of India became the assets, properties, rights and obligations of IAAI and consequently IAAI has been claiming to be the owner of the said land.
(k) In or about June, 1990 Star on inspection of the land records discovered that the name of the Santacruz Aerodrome had been under Mutation Entry No. 2430 entered in pencil in the relevant revenue records on the 31st Aug., 1988 on the basis of some letters LAQ/71 B-M dt. 4th May, 1951 and LAQ/71 B-M dated the 12th April, 1951 and LAQ/71 B BPN/MR dated the 16th June, 1951. By its letter dated the 8th June, 1990 addressed to the Tahsildar, Andheri (West) Bombay, Star has protested about the said entry and has called upon the Tehsildar not to transfer/effect any such Mutation Entry in the record of rights unless the issues raised in the hereinafter recited pending proceedings in the Hon'ble Bombay City Civil Court were finally disposed of and decided.
(1) In any event Star (since its incorporation in 1962 and its predecessors in business much prior to that year) have been in sole and exclusive possession of the said land and have been continuously occupying, using and enjoying the same without any interruption whatsoever and howsoever and Star is thus seized and possessed of or otherwise well and sufficiently entitled to the said land by virtue of adverse possession.
Similarly the details and history of property bearing survey No. 135, Hissa No. 10 corresponding to city survey No. 1411/11 has been enumerated as under:
(vi) Survey No. 135 Hissa No. 10(City Survey No. 1411/11)
(a) By a Deed of Conveyance dated the 22nd Jan., 1945 registered with the Sub-registrar of assurances at Bombay under Sr. No. 393 on the 25th Jan., 1945 Mr. Jamnadas Vallabhdas Mehta purchased the said land admeasuring about seven gunthas from Mr. Alfred D'Mello against the payment of the purchase price of Rs. 2389-12-0 as mutated in the record of rights under the Mutation Entry No. 641 dated the 20th Oct., 1950.
(b) The Mutation Entry No. 975 dated the 27th March, 1961 erroneously indicates that Mr. R.B. Shah had by a sale deed dated the 26th July, 1956 purchased the said land from the said Mr. Jamnadas Vallabhdas Mehta, but there is no such sale deed or any other document in respect of this land registered with any authority. However, the said land has been along with adjoining pieces of land in sole and exclusive possession of Mr. R.B. Shah, the predecessor in business of Star and accordingly in the 7/12 Extract, Ranchhodlal B. Shah was being shown as the occupant of the said land.
(c) However, in or about June, 1990 Star on inspection of the land records discovered that the name of the Santacruz Aerodrome had been under Mutation Entry No. 2430 entered in pencil in the relevant revenue records on the 31st Aug., 1988 on the basis of LAQ/71 B-M dt. 4th May, 1951 and LA71 B-M dt. 12th April, 1951 and LAQ/71 B BPN/MR dated the 16th June, 1951. By its letter dated the 8th June, 1990 addressed to the Tahsildar, Andheri (West) Bombay, Star has protested about the said entry and has called upon the Tahsildar not to transfer/effect any such Mutation Entry in the record of rights unless the issues raised in the hereinafter recited pending proceedings in the Hon'ble Bombay City Civil Court were finally disposed of and decided.
(d) To the best of the knowledge of Star, Mr. R.B. Shah had commenced his manufacturing activities in 1940s and a portion of a factory building built by Mr. R B Shah extended/extends over the said land.
(e) According to the defence pleaded by the defendants in the presently pending Bombay City Civil Court Suit No. 3889 of 1982 hereinafter referred to the said land was also acquired under the Land Acquisition Act for the purpose of aerodrome under a Government notification, Revenue Department, dated the 25th Aug., 1947 and the possession of the said land was handed over by the above named Jamnadas V. Mehta as the owner of the said land on the 10th May, 1931 to the Land Acquisition Officer, Bombay Suburban District, Bombay, who handed over the possession to the Civil Aviation Department who, in turn, handed it over to the Bombay Airport.
(f) As stated hereinabove, IAAI has been claiming to be the owner of the said land by virtue of the said International Airport Authority Act, 1971.
(g) In any event Star (since its incorporation in 1962 and its predecessors in business much prior to that year) have been in sole and exclusive possession of the said land and have been continuously occupying, using and enjoying the same without any interruption whatsoever and howsoever and Star is thus seized and possessed of or otherwise well and sufficiently entitled to the said land by virtue of adverse possession.
The unnumbered adjoining piece of land admeasuring 889 sq. mtrs has been enumerated in the following words:
(vii) Adjoining piece of land admeasuring approximately 889 sq. mtrs. by adverse possession.
Star (since its incorporation in 1962 and its predecessors in business much prior to that year) have been in sole and exclusive possession of land admeasuring approximately 889 sq. mtrs. or thereabout and which portion of land is situated on the southwest corner of Star's property and they have been continuously occupying, using and enjoying the same without any interruption whatsoever and howsoever and Star is accordingly seized and possessed of or otherwise well and sufficiently entitled, to the same by adverse possession.
It is thus seen that the parties did furnish to the AO such details and history of the lands pertaining to disputed capital gains tax as available on record. We are unable to appreciate the arguments of the Revenue that the assessee did not furnish necessary details and did not establish its claim of acquisition of lands on adverse possession. After these details had been furnished and brought on the record of the AO, the AO was required to either accept the claims of the assessee or to give cogent reasons as to why the averment of the assessee in this behalf is not correct or otherwise not acceptable. Mere refusal to accept the explanation is not enough.
39. As the matter stands before us the Revenue has after long drawn proceedings starting from 30th Nov., 1994 when the assessee filed its return of income for asst. yr. 1994-95 until the hearing given by us has not done much apart from disbelieving the assessee. There is hardly any material/evidence against the claims of the assessee in spite of each of the two assessment years under scrutiny of the AOs on more than one occasion nor any cogent reasons have been given to displace the evidence and material relied upon by the assessee in support of his contentions. We may point out-here -that the issue germane to dispute before us is whether there is any cost of acquisition incurred by the assessee as respects the lands pertaining to disputed capital gains tax. The assessee's consistent stand since 1994 has been that no cost was incurred. This contention of the assessee has not been assailed by the Revenue in spite of several rounds of proceedings spanning over more than a decade. As to the reference made by the learned CIT (Departmental Representative) to the purchase price of Rs. 18,000 the learned Counsel for the assessee has rightly clarified that the said purchase price related to the land bearing survey No. 135, Hissa No. NA-4 and 5 and not the lands pertaining to disputed capital gains tax before us. There is of course an enumeration in the Mutation Entry No. 975 dt. 27th March, 1961 that Mr. R.B. Shah had by a sale deed dt. 26th July, 1956 purchased land under survey No. 135, Hissa No. 10 city survey No. 1411/11 from Mr. Jamnadas Vallabhdas Mehta. The contention of the assessee is that there is no such sale deed and there is no other document in respect of this land. The said land along with adjoining piece of land bearing no survey number admeasuring 889 sq. mtrs. came to the possession of Shri R.B. Shah and accordingly in the 7/12 extract Ranchhodlal B. Shah was being shown as the occupant of the same land but not because of having purchased those lands for any cost from any person whatsoever. Another argument that has been given against the assessee's contention is that the assessee company was incorporated in 1962 and the name of the assessee has been mentioned in Property Register Card in the year 1969 and obviously the assessee company could not have been in adverse possession of the property for a period of 12 years prior to the year 1969. The contention of the assessee in this respect is that the business was earlier carried on in the same name as proprietory concern of one Mr. R.B. Shah and thereafter the business was carried on as a partnership firm and eventually the business was taken over by assessee company. All along the name of the business remained as M/s Star Chemicals. The lands in question were with Mr. R.B. Shah long before the assessee company came into existence. Be that as it may, if not in the year 1969 the assessee company certainly held the lands in question in adverse possession to the actual owner for more than 12 years at the point of time the same were sold to M/s Leelaventure Ltd. by sale agreement dt. 8th Feb., 1994. A period much longer than 12 years had elapsed by then and if at all there was any imperfection in the title of the assessee as in the year 1969 the same was removed by efflux of time when the lands in question were finally sold in the year 1994.
40. In view of the discussion in the foregoing paras we hold that there is no effective case against the assessee's claim of having acquired the lands pertaining to the disputed capital gains tax on adverse possession. We therefore hold that the question as to charge to capital gains tax in relation to these lands has to be determined on the basis that these lands were acquired by the assessee on adverse possession without payment of any purchase price or any other consideration to the previous owner.
41. The next major contention of the Revenue is that even if the assessee acquired the, lands pertaining to the disputed capital gains tax on adverse possession, it cannot be said that there is no cost of acquisition. It has been argued in the orders of authorities below as well as by the learned CIT (Departmental Representative) during the course of hearing before us that admittedly the assessee was involved in certain litigation and the cost of litigation incurred by the assessee to assert or affirm its title over the lands amounted to cost of acquisition incurred by the assessee to acquire the title over the lands. In the same breath the learned CIT (Departmental Representative) has argued that other expenditure incurred by the assessee such as fee paid to solicitors for report on title expenditure incurred in relation to revenue records would all amount to cost of acquisition incurred by the assessee and therefore it was not correct to say that there was no cost of acquisition of the lands in question. We find that during the course of proceedings leading to these appeals the AO has relied upon the judgments (supra); (1980) 18 CTR (Guj) 390 : (1980) 126 ITR 669 (Guj) (supra); (supra); (supra) and (supra). During the course of hearing before us the learned CIT (Departmental Representative) has added the decision of Tribunal, Madras reported in (1983) 4 ITD 297 (Mad) (supra). The assessee has on his part placed considerable reliance on the judgments (Mad) (supra); (supra); (1945) 13 ITR 340 (Lahore) (supra) and (supra). As to the judgments relied upon by the Revenue we find that in the case of Mathurdas Mangaldas Parekh v. CIT (supra) the issue related to the betterment charges of Rs. 60,390 paid by the assessee to Ahmedabad Municipal Corporation. The Tribunal rejected the contention of the assessee that the said amount should be treated as cost of improvement and allowed as deduction within the meaning of Section 48(ii) of the Act. On assessee's reference Hon'ble High Court allowed the deduction. It is seen that in that case there was no dispute as to the fact that the assessee had acquired the lands at certain cost of acquisition. The dispute was whether the betterment charges also could be allowed as deduction by way of cost of improvement in addition to cost of acquisition of lands incurred by the assessee. There is nothing in that judgment that may be construed as an authority for the proposition that even in a case where the ownership rights over certain land is acquired on adverse possession without any cost of acquisition, litigation expenses should be treated as cost of acquisition of such lands. We do not find this judgment of any assistance to the contentions of the Revenue.
42. In the case of Smt. S. Valliammai v. CIT (supra) the question considered by Hon'ble Madras High Court under Section 256(2) was whether in computing the capital gains on the sale of the properties proportionate estate duty paid on the death of previous owners in respect of the properties sold should be deducted. The Hon'ble High Court held that in the case before them the assessee's title to the capital assets was already full and complete and the asset as such was not improved in any manner as a result 'of the payment of estate duty. Merely because estate duty had not been paid on the estate passing on death, the assessee's title to the estate was not in anyway imperfect or incomplete. The Hon'ble High Court therefore did not accept the assessee's contention that the payment of estate duty would amount to cost of any improvement. This case also therefore, renders no assistance to the case of the Revenue. Considerable reliance has been placed by the Revenue on the judgment of Hon'ble Karnataka High Court in the case of CIT v. P. Mahalakshmi (supra) in that case the assessee was owner of property No. 7/3, Sankey Road, Bangalore. Portions of the property abutting the main road were acquired by the corporation. The assessee was paid compensation @ Rs. 100 per sq. yd. in relation to the acquired land and in addition the assessee was awarded compensation @ Rs 10 per sq. yd. in respect of unacquired portions of the property towards damage sustained by the owners by reason of the acquisition injuriously affecting that property. The dispute arose as to whether the damages thus awarded were to be included for the purpose of computation of capital gains chargeable to tax. The Hon'ble High Court held that while it was true that in computing the compensation paid for. the acquired portion, the injuries affected on the unacquired portion had been taken into account but the fact remained that it was compensation paid for the property acquired. Therefore the assessee was not entitled to claim that what was awarded by way of damages was not a part of the full consideration or that it should be deduction as a "Capital loss" in respect of the unacquired land. Here also we do not see any authority for the proposition that cost of litigation incurred by an adverse possessor should be treated as cost of acquisition of the land acquired on adverse possession.
43. In the case of A.R. Krishnamurthy and Anr. v. CIT (supra) the assessee had granted a mining lease to an allied concern for a period of 10 years. The lessee had to pay a premium or salami of Rs. 5 lakhs in addition to the payment of a royalty of Rs. 12 per hundred cubic feet of clay extracted subject to a minimum of Rs. 60,000 per annum. The AO construed the lease deed as transferring leasehold interest in the land in favour of the allied concern and proceeded to bring it to the charge of capital gains tax. The AO assessed the market value of the entire land at Rs. 8 lakhs and computed 5/8 of the entire land as having been transferred by the assessee. The Hon'ble Supreme Court considered the question whether there was a transfer of a capital asset within the meaning of Section 45 and whether the cost of leasehold rights was capable of valuation The Hon'ble Supreme Court held that there was transfer of a capital asset and the value of leasehold rights in the cost of acquisition of land was determinable. The Hon'ble Supreme Court quoted with approval the observations of Viscount Simon in Gold Cost Selection Trust Ltd. v. Humphrey (1949) 17 ITR 19, 26 (HL)(Supp), "Valuation is an art, not an exact science. Mathematical certainty is not demanded, nor indeed is it possible". In the course of the judgment the Hon'ble Supreme Court considered the arguments of the assessee based on the judgment of the apex Court in B.C. Srinivasa Setty (supra) and held as under:
In view of our finding on the first contention, the second contention does not survive. The value of leasehold rights in the cost of acquisition of land being determinable, the computation provisions under the Act are applicable and Section 45 would be attracted. In CIT v. B.C. Srinivasa Setty , the question was whether the transfer of the goodwill of a newly commenced business can give rise to a capital gain taxable under Section 45 of the Act. This Court answered the question in the negative. Referring to the charging section and the computation provisions under the Act, this Court held that none of those provisions suggest the inclusion of an asset under the head "Capital gain", in the acquisition of which no cost at all can be conceived. Goodwill generated in an individual's business was held to be an asset in which no cost element can be identified or envisaged. It was also held that the date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains and in the case of self generated goodwill, it is not possible to determine the same. The third reason for holding that the goodwill generated in a newly commenced business cannot be described as an 'asset' within the terms of Section 45 of the Act was that it is impossible to determine its cost of acquisition. None of the three reasons given by this Court in B.C. Srinivasa Setty's case (supra) are applicable in the present case. We have held that the cost of acquisition of leasehold rights can be determined. The date of acquisition of the right to grant lease has to be the same as the date of acquiring the freehold rights. The ratio of B.C. Srinivasa Setty's case (supra) is thus not attracted to the question involved in the present case. We, therefore, do not find any force in the second contention also.
After careful consideration we find that issue considered by Hon'ble Supreme Court in the case of A.R. Krishnamurthy and Anr. (supra) is not one of no cost of acquisition at all. That was a case in which it was argued that cost of acquisition of leasehold interest transferred was not ascertainable. Hon'ble Supreme Court held that cost of acquisition of leasehold rights was determinable from out of the price paid by the assessee for acquisition of the absolute ownership of the property. We therefore do not see any bearing of that case upon the issues before us in the case before us the assessee has not argued that cost of acquisition is not ascertainable. The argument is that there is no cost of acquisition at all.
44. In the case of S.V. Lathia v. CIT (supra), the partnership firm sold the entire business and received a sum of Rs. 2,75,000 ascribed to goodwill. It was an admitted position that the assessee had paid a sum of Rs. 20,000 to P.J. Kumbhani, the then partner in the erstwhile partnership for acquiring share of Kumbhani in the goodwill of the business. Hence the cost of acquisition so far as the share of Kumbhani in goodwill was available. In this view of the matter the Tribunal upheld the assessment of capital gains at Rs. 2,55,000. Relying upon the judgment of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) the Hon'ble Bombay High Court held that the Tribunal erred in assessing the entire sale consideration to capital gains tax and only the proportionate sale consideration attributable to Kumbhani's share that had been acquired on cost of acquisition could be subjected to capital gains tax. The Hon'ble Supreme Court upheld capital gains tax on Rs. 1,17,500 only. This judgment affirms the principle laid down in the case of B.C. Srinivasa Setty (supra) relied upon by the assessee. It does not advance the case of the Revenue any further.
45. In the case of SAS Hotel Ltd. v. YTO (supra) the issue was whether in determining actual cost for the purposes of short-term capital gains expenses like legal fees incurred in connection with purchase of land, interest on borrowed capital, urban land tax. Corporation tax will form part of cost of acquisition. That case is also not of much assistance to the Revenue because the issue before the Tribunal was whether the legal fees, etc. would add to the cost of acquisition. The Tribunal did not consider the issue as to whether in the absence of any other cost of acquisition, legal fees incurred in itself would constitute cost of acquisition for the purposes of the provisions of Section 48 of the Act.
46. As against the cases as aforesaid relied upon by the Revenue the assessee has during the course of proceedings before the authorities below as well as during the course of hearing before us relied upon the judgments (Lahore) (supra), (supra); (supra) and . We now proceed to briefly consider the judgments relied upon on behalf of the assessee.
47. In the case of Mahabir Prashad & Sons v. CIT (supra), the Hon'ble High Court considered the question as to whether the expenditure incurred by that assessee in defending the pre-emption case is capital expenditure or revenue expenditure. The Hon'ble High Court applied the test laid down by Viscount Cave in British Insulated & Helsby Cables Ltd. v. Atherton (1926) AC 205 (HL) i.e. whether expenses were incurred in acquiring a new capital asset or in improving or altering an existing capital asset. The expenditure incurred for defending a pre-emotion suit did not create a new capital asset and therefore it was not a capital expenditure. The underlying principle of this judgment is that while defending a suit filed against the ownership claim of an assessee, an assessee only protects what he already has and does not acquire any additional asset or advantage. Hence we find this judgment contrary to the contention of the Revenue that cost of litigation incurred by the assessee in relation to lands in question would constitute cost of acquisition of that immovable property.
48. In the case of CIT v. Raman & Raman Ltd. (supra) the assessee was carrying on the business of plying transport buses. A dispute arose as regards the ownership of certain buses and the assessee incurred some expenditure to defend its title over the buses. The contention of Revenue was that the buses related to a new route which was never run by the assessee. The acquisition of the new route was a new business started by the assessee and the money spent in perfecting the title of those new buses for carrying on a new business was capital expenditure. The Hon'ble High Court held that the expenditure did not create any new asset nor did alter the character of the capital asset that had been acquired by the assessee. The expenditure incurred to defend the title over an existing asset did not result in any capital expenditure. This judgment also supports the contention of the assessee that cost of litigation to defend an existing asset cannot be considered as part of the cost of acquisition of that asset.
49. In the case of Dalmiya Jain & Co. Ltd. v. CIT (supra) the assessee in that case incurred expenditure in relation to Murli Hills owned by the State of Bihar that were being claimed by one Kalyanpur Lime Co. The assessee was in possession of the Murli Hills as an agent of the Government with the understanding that Murli Hills will be leased out to the assessee if he succeeded in litigation. The Hon'ble Supreme Court held that the assessee did not initiate the proceedings. It merely defended the claim made against it. Therefore the expenditure could not be said to have been incurred for acquisition of any new asset. This judgment also supports the contention of the assessee that any expenditure incurred to defend existing proprietary rights did not amount to cost of acquisition of those rights.
50. During the course of hearing before us the learned Counsel for the assessee placed considerable reliance upon the judgment of Hon'ble Calcutta High Court in the case of CIT v. Smt. Leela Ghosh (supra). In that case the assessee inherited on the death of her husband a property that was under lease. The lessee did not give possession to that assessee even after expiry of the lease. That assessee filed a suit for eviction and mesne profits. The suit was decreed in favour of that assessee and the decree was finally affirmed by the Supreme Court. That assessee applied for execution of the decree and while the execution of the decree and the quantum of mesne profits were pending, Government of West Bengal requisitioned the demise property. That assessee filed a writ petition against the requisition and that writ petition was disposed on consent terms between that assessee and the Government of West Bengal. That assessee received compensation amounting to Rs. 11 lakhs for acquisition of the premises and also mesne profits of Rs. 2 lakhs for the use of occupation of the said premises by the erstwhile tenant. While there was no dispute as regards the sum of Rs. 11 lakhs, the AO sought to assess the mesne profits of Rs. 2 lakhs as revenue receipt. The Tribunal held that that assessee received the sum of Rs. 2 lakhs by transferring her right to receive the mesne profits. That right being a capital asset gave rise to capital gains tax. The Tribunal rejected the plea of that assessee that in view of the judgment of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) there was no cost of acquisition as regards the amount received in lieu of mesne profits. The Tribunal distinguished the decision in Srinivasa Setty's case (supra) on the ground that it was not a case of transfer of goodwill. The Tribunal also held that it was possible to determine the cost of acquisition being the amount spent by that assessee towards the stamp duty and other legal expenses incurred for obtaining the decree. The Hon'ble Calcutta High Court held as under:
The next question is whether the aforesaid capital receipt is liable to capital gains tax. As indicated, the Tribunal held that the decision of the Supreme Court in CIT v. B.C. Srinivasa Setty , has no application in the facts and circumstances of this case. In our view, the Tribunal fell into an error. The amount spent by the assessee towards stampduty and/or other legal expenses incurred in obtaining the decree cannot be said to be the cost of acquisition. Whether a person in a litigation would be successful in his claim and would get a decree or not does not depend upon the incurring of legal expenses and/or payment of Court fee. The expenses incurred for the purpose of securing justice or for vindication of legal rights cannot be considered as the cost of acquisition of such rights themselves which are the subject matter of legal proceedings. Legal proceedings do not create any new or different rights. The Court only recognises the existing right or claim of the party concerned in the litigation and gives judicial recognition thereto. Expenses incurred for obtaining such judicial recognition of a right cannot amount to cost of acquisition of such right itself. In our view, therefore, no part of the said sum of Rs. 2 lakhs can be charged to capital gains tax, since there is no cost of acquisition involved in this case. The principles laid down by the Supreme Court in CIT v. B.C. Srinivasa Setty (supra) are clearly applicable in the facts and circumstances of this case. In our view, no cost of acquisition can be envisaged in respect of the right to receive mesne profits already vested in the assessee having regard to her ownership of the property in question. Even otherwise, we find that there is no assignment of the decree for mesne profits in this case. The State Government acquired the said premises under the Land Acquisition Act, 1894 and by reason of such acquisition, the said property vested in the State Government free from all encumbrances No final decree in respect of mesne profits was passed in favour of the assessee, in terms of the order passed by this Court on 29th Feb., 1980 the State Government reserved the right to itself for getting an assignment from the assessee in respect of the final decree for mesne profits, if any, passed against M/s Technician Studios (P) Ltd. for then use and occupation of the said property. In fact, after the order of acquisition was passed by the State Government, even the preliminary decree for mesne profits obtained by the assessee was rendered infructuous. In these circumstances, it cannot be held that the assessee had made any capital gains On the transfer of a capital asset.
51. On consideration of the matter we find this judgment of Hon'ble Calcutta High Court as a clear authority against the argument of the Revenue that expenditure incurred by the assessee in order to defend its possession over the lands should be construed the cost of acquisition incurred by the assessee as respects the lands pertaining to disputed capital gains tax.
52. We now address to the third major argument of Revenue that the judgment of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) has application only when assets involved are intangible assets such as goodwill. Reliance has been placed by the learned CIT (Departmental Representative) on the judgment of Hon'ble Karnataka High Court in the case of Emerald Valley Estates Ltd. (supra). In that case the question was whether capital gains could be charged on sale of shade trees that had been grown on the coffee estate together with shade trees purchased by the assessee for a total consideration of Rs. 31,51,456. That assessee contended that shade trees grown in the coffee estate did not constitute a capital asset for the purpose of the provisions of Section 45. Secondly, it was argued that since that assessee had not specifically paid any price for the standing trees purchased as a part of the coffee estate it should be presumed that the assessee had incurred no cost of acquisition at all on the trees in question On these facts the Hon'ble Karnataka High Court observed that the judgment of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) pertained to an intangible capital asset. However in the case of that assessee while that assessee and the seller had not indicated the price paid or received by them in respect of each item of property comprising the estate that changed hands between them, it could not be said that the standing trees was the asset in respect of which no cost of acquisition could at all be envisaged or conceived. Unlike goodwill it was not possible to say that no cost of acquisition could at all be conceived or envisaged in respect of a capital asset like the shade trees purchased as a part and parcel of an yielding coffee estate. Thus in that case since a lump sum payment was made for entire coffee estate, Hon'ble Karnataka High Court held that a portion of the lump sum price was attributable to standing trees that on removal could fetch considerable price to the owner. We do not see in that judgment an authority that the ratio of Srinivasa Setty (supra) applies only to intangible capital assets and not to tangible capital assets. The direct authority against such a bald proposition lies in the judgment of CIT v. Marka Pakula Agamma (supra). In that judgment, the Hon'ble Court have inter alia observed as under:
The levy of tax on capital gains under Section 45 of the IT Act is intertwined with the mode of computation envisaged under Section 48 of the Act. The mode of computation provided under Section 48 comprises a two fold dimension, namely, the expenditure incurred in connection with transfer and cost of acquisition of the asset added by the cost of improvement. The profits or gains contemplated under Section 45 as a sequel to transfer is the surplus amount realised over and above the cost of acquiring the asset. In the event of the absence of cost of acquisition, the question of accrual of gain does not arise and the levy of tax professing to be capital gain levy is in essence a levy on a capital asset. The charging section under Section 45 loses its vitality in the absence of cost "of acquisition of asset as the cost of acquiring the asset constitutes the bedrock for exigibility to levy of capital gains. This approach as to the presence of cost of acquisition controlling the charging section is concretised by Section 49. It is obvious that Section 49 takes care of arriving at the cost of acquisition by insertion of deeming provision for the assets in respect of which the assessee did not incur any expenditure or pay consideration in terms of money. For the assets enumerated in Section 49, there would not have been any cost of acquisition but for the deeming provision whereby the cost of acquisition of an asset is considered to be the cost for which the previous owner acquired it. Thus, Section 49 by implication furnishes a clue to the interpretation to Section 48. The deemed cost of acquisition is confined to the assets particularised in Section 49 only and in all other assets, the actual cost of acquisition is the substratum for the levy of capital gains. If there is no cost of acquisition, there is no gain and consequently there is no capital gains tax. Thus, the charging section takes colour from the computation as both the provisions are integrated and seek to levy tax regarding an asset in the acquisition of which it is possible to envisage cost.
Further at p. 395 in the judgment of Jeevan Reddy J. as he then was, there is clear reference to the cases of adverse possession in the following words:
Take a case, where an assessee becomes the owner of a capital asset (land or building) by adverse possession. The cost of acquisition in such a case is 'nil', so no capital gains tax can be levied upon him--according to the judgment of the Supreme Court--when that asset is sold by him or is acquired from him.
We further find that the learned Counsel for the assessee has rightly relied, in this behalf, upon the judgment of Hon'ble Gujarat High Court in the case of CIT v. Manohaisinghji P. Jadeja (supra). We therefore reject the contention of the Revenue that the ratio of Srinivasa Setty (supra) applies to an intangible asset only and not where capital asset in question is a tangible asset like lands.
53. During the course of hearing before us the learned CIT (Departmental Representative) made an attempt to argue that the lands pertaining to disputed capital gains tax were indeed purchased by the predecessor of the assessee on payment of purchase price. He sought to rely on the provisions of Section 55(3) also in that behalf. The learned Counsel for the assessee has rightly pointed out that the assessee did purchase considerable lands bearing CTS Nos. 1411, 1411/1, 1411/2, 1411/3, 1411/4, 1411/5, 1411/6, 1411/7, 1411/8, 1411/9 and 1411/10 on payment of price. It was only in relation to CTS No. 1411/11 and CTS No. 1411/12 and unnumbered adjoining plot of land admeasuring 889 sq. mtrs that the case of the assessee was that there was no cost of acquisition or purchase price either by the assessee himself or his predecessors. This contention of the assessee remains unassailed before us.
54. The learned CIT (Departmental Representative) has argued that the remand report of the AO dt. 31st Jan., 2003 submitted to the learned CIT(A) during the course of second round of appeal for asst. yr. 1995-96 did not support the case of the assessee so far as unnumbered plot of land admeasuring 889 sq. mtrs was concerned. The learned CIT (Departmental Representative) has omitted to consider the last sentence of the para extracted by us in para 19 of this order where there is clear finding that the assessee had acquired both the plots viz. plot No. 1411/11 as well as unsurveyed unnumbered plot admeasuring 889 sq. mtrs on adverse possession for several years before the same were sold to Hotel Leelaventure Ltd.
55. In the original assessment orders for asst. yrs. 1994-95 and 1995-96 the AOs relied upon the provisions of Section 55(2) that came in force w.e.f. 1st April, 1988. Reliance on those provisions was placed by the learned CIT (Departmental Representative) also during the course of arguments before us. During the course of hearing before us the learned Counsel for the assessee has rightly pointed out that the provisions of Section 55(2) as applicable to asst. yr. 1995-96 do not cover immovable property acquired on adverse possession We have enumerated the arguments of the learned Counsel in this respect in para 21 of this order with which we entirely agree.
56. In the original assessment orders for asst. yrs. 1994-95 and 1995-96 the AOs had taken the stand that the two plots of land appearing in the fixed asset schedule to the balance sheet had certain cost of acquisition and that cost of acquisition should be treated as encompassing the lands relating to disputed capital gains tax also. The assessee has repeatedly informed that freehold land at Andheri acquired at Rs. 6,268 and another leasehold land acquired for Rs. 19,03,800 were not lands in the vicinity of lands in question before us viz. CTS Nos. 1411/11, 1411/12 and unsurveyed unnumbered plot of land admeasuring 889 sq. mtrs. One of the two lands was situated in Thane and another at Lote Parsuram. These repeated assertions of the assessee have not been controverted by Revenue at any stage nor before us.
57. In the assessment order under Section 143(3) r/w Section 254 made on 31st March, 2006 the AO has taken a stand that there cannot be a title on adverse possession unless agitated before and settled by a Court of law. We do not see much force in such contentions. It is important to bear in mind that in these appeals we are not much concerned with the title of the assessee but with the question as to the cost of acquisition of whatever title the assessee had. It is not in dispute that the assessee has been paid the sum of Rs. 75.76 lakhs in relation to land bearing survey No. 1411/12 and the sum of Rs. 231.92 lakhs in relation to land bearing survey No. 1411/11 and unsurveyed unnumbered plot of land admeasuring 889 sq. mtrs for the title the assessee had as respects those lands. Even if the assessee did not have perfect title, it cannot be disputed that the assessee has sold the rights claimed by him in relation to those lands. The moot question is whether or not the assessee has incurred any cost of acquisition ? The quality of the title of the assessee is not germane to the issue before us, cost of acquisition is germane issue. At this point we may add that as far as the assessee is concerned his case is duly supported by Property Register Card in respect of two out of the three plots of land as well as ULCA exemption under Section 20. It is also important to bear in mind that the assessee has been able to ward off the attempts of both International Airport Authority of India as well as Leela Scottish Lace to claim their rights upon those lands.
58. We are now left with the argument of the Revenue that if provisions of Section 45 cannot be applied, the lands should be taxed under the provisions of Section 10(3). This has been the usual approach of the Revenue in relation to most cases covered by the ratio of Hon'ble Supreme Court judgment in B.C. Srinivasa Setty's case (supra). Here it is of utmost importance to remember that Section 10(3) is not a charging provision. It is essentially a provision to define incomes which do not form part of total income. It does not have any chemistry to bring to tax what are in the eyes of law capital receipts of an assessee. If there is a capital receipt it may be taxed under the provisions of Section 45 only or it should go untaxed altogether. There is nothing in Section 10(3) to bring to tax all capital receipts that cannot be taxed under the provisions of Section 45(1). If a receipt can be properly considered as capital receipt in the hands of the recipient it would be outside the scope of Section 10(3) for that reason alone. Authority for this proposition may be seen in the judgments of Hon'ble Calcutta High Court in the case of B.K. Roy (P) Ltd. v. CIT (supra); Hon'ble Bombay High Court in the case of Cadell Weaving Mill Co. (P) Ltd. (supra); and Hon'ble Supreme Court in the case of Union of India v. Cadell Weaving Mill Co. (P) Ltd. .
59. In view of the above discussion in the foregoing paras we uphold the contention of the assessee that sum of Rs. 75.76 lakhs received by the assessee in relation to land bearing old survey No. 135, Hissa No. 7 corresponding to new cadestral survey No. 1411/12 and the sum of Rs. 231.92 lakhs received by the assessee in relation to old survey No. 135, Hissa No. 10 corresponding to new cadestral survey No. 1411/11 and an adjoining unsurveyed unnumbered piece of land admeasuring approximately 889 sq. mtrs cannot be brought to assessment for want of cost of acquisition in the hands of the assessee. Accordingly we allow assessee's appeal for asst. yr. 1994-95 and dismiss the appeal filed by the Revenue for asst. yr. 1995-96.