TMI Blog2007 (4) TMI 703X X X X Extracts X X X X X X X X Extracts X X X X ..... sment order under s. 143(3) was made on 20th March, 1997 at total income of ₹ 1,79,08,424. The difference between assessed income and returned income arose on account of an addition of ₹ 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 s. 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 s. 143(3) r/w s. 254 on 31st March, 2006 wherein long-term capital gains of ₹ 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 vs. B.C. Srinivasa Setty [1981] 21 CTR (SC) 138 ; [1981] 128 ITR 294 (SC) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land as a whole. Based on these arguments the learned AO assessed the entire sale consideration of ₹ 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 ₹ 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 vs. Markapakula Agamma [1987] 63 CTR (AP) 108 : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e right of title itself. The assessee relied in this respect upon the judgments reported in CIT vs. Raman Raman Ltd. [1951] 19 ITR 558 (Mad); Dalmia Jain Co. Ltd. vs. CIT [1971] 81 ITR 754 (SC); Mahabir Parshad Sons vs. CIT [1945] 13 ITR 340 (Lahore) and CIT vs. Smt. Lila Ghosh [1993] 113 CTR (Cal) 219 : [1994] 205 ITR 9 (Cal). 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 vs. 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 unacquire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yable under a town planning scheme. Supreme Court judgment in the case of A.R. Krishnamurty 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 s. 48 could not be applied was held to be one never intended to be subject to the charge of tax under s. 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 s. 55(2) w.e.f. 1st April, 1988. The provisions of s. 55(2) as applicable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the AO. The AO referred to litigation 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 art. 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 s. 143(3) r/w s. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 possess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax for want of any cost of acquisition as held by Hon'ble Supreme Court in the case of CIT vs. 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 yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 6,268 B. Leasehold ₹ 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1411/9, 1411/10 and 1411/11 and adjoining piece of land of 889 sq. mtrs for consideration of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 vs. S. Kumarswamy Reddiar Sons [1991] 39 TTJ (coch) 656 and S.M. Subbamya Pillai vs. ITO [1991] 39 TTJ (Mad) 62 . The learned AO relied upon the judgment of Hon'ble Andhra Pradesh High Court reported in [1987] 63 CTR (AP) 108 : [1987] 165 ITR 386 (AP) (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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. vs. CIT [1967] 63 ITR 207 (SC), [1971] 81 ITR 754 (SC) (supra), [1945] 13 ITR 340 (Lahore) (supra); [1951] 19 ITR 558 (Mad) (supra) and [1993] 113 CTR (Cal) 219 : [1994] 205 ITR 9 (Cal) (supra). The assessee argued that its contentions were duly supported by the judgment of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) by the judgment of Hon'ble Andhra Pradesh High Court [1987] 63 CTR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 s. 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession. 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 speCITic request to the AO for personal hearing. However the AO repeated the addition in the order dt. 29th Jan., 2002 made under s. 250 r/w s. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 s. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 s. 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 spit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel 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 s. 55(2) relied upon by the AO. He took us through the provisions of s. 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 s. 55(2). 22. The learned counsel strongly relied upon the judgment of Hon'ble Gujarat High Court in the case of CIT vs. Manoharsinghji P. Jadeja [2005] 199 CTR (Guj) 223 : [2006] 281 ITR 19 (Guj). In that case the property had been acquired by the forefathers of the assessee by conqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugned 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 vs. 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 subj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, 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 art. 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 Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 18,000. He took us through the title report of M/s Little Co. in that behalf and pointed out that the sum of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquisition incurred by the assessee, the sale consideration received by the assessee, subject to the provisions of s. 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 s. 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 s. 45 has been upheld in the order of Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quisition 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 ₹ 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 ₹ 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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 titlel 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her aforesaid four sons according to Muslim Law, that the said sons had accepted the CITt 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 CITt 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 Alli 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'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 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. (l)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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, 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 accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 76 CTR (SC) 18 : [1989] 1761TR 417 (SC) (supra) and [1995] 127 CTR (Bom) 39 : [1995] 214 ITR 691 (Bom ) (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 reported in [1951] 19 ITR 558 (Mad) (supra); [1971] 81 ITR 754 (SC) (supra); [1945] 13 ITR 340 (Lahore ) (supra) and [1993] 113 CTR (Cal) 219 : [1994] 205 ITR 9 (Cal) (supra). As to the judgments relied upon by the Revenue we find that in the case of Mathurdas Mangaldas Parekh vs. CIT (supra) the issue related to the betterment charges of ₹ 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 s. 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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 Anr. vs. 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 ₹ 5 lakhs in addition to the payment of a royalty of ₹ 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 ₹ 8 lakhs and computed 5/8 of the entire land as ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld 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 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 vs. CIT (supra), the partnership firm sold the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt 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. vs. 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 vs. Raman Raman Ltd. (supra) the assessee was carrying on the business of plying transport buses. A dispute arose as regards the ownership of certain bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 11 lakhs for acquisition of the premises and also mesne profits of ₹ 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 ₹ 11 lakhs, the AO sought to assess the mesne profits of ₹ 2 lakhs as revenue receipt. The Tribunal held that that assessee received the sum of ₹ 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 acquisitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d cost of acquisition of the asset added by the cost of improvement. The profits or gains contemplated under s. 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 s. 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 s. 49. It is obvious that s. 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 s. 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, s. 49 by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gued 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 s. 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 s. 55(2) as applicable to asst. yr. 1995-96 do not cover immovable property acquired on adverse possession We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pts 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 s. 45 cannot be applied, the lands should be taxed under the provisions of s. 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 s. 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 s. 45 only or it should go untaxed altogether. There is nothing in s. 10(3) to bring to tax all capital receipts that cannot be taxed under the provisions of s. 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 s. 10(3) for that reason alone. Authority for this proposition may be seen in the judgments o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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