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(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. 

  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.