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Income Tax Appellate Tribunal, KOLKATA BENCH “B” KOLKATA
Before: Shri Mahavir Singh & Shri Waseem Ahmed
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
Both appeals filed by different assessee are arising out of separate orders of Commissioner of Income Tax (Appeals)-XIV/II Kolkata dated 27.02.2008 and 31.12.2012. Assessment was framed by ITO Ward- 30(3)/ACIT,CC-XXIV Kolkata u/s 143(3)/147 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide their orders dated 27.12.2006 & 27.02.2006 for assessment year 2003-04 respectively.
& 281/Kol/13 A.Y. 2003-04 Smt. Yashod Deora Sri Pradeep Kumar Deora Page 2
These two sets of appeal of different assessee being husband and wife for the same assessment year (2003-04), common issue are involved, therefore we heard together and deem it fit to dispose of by this common order.
Before crept out this specific grievances of assessee, we deem fit to take note of the back ground of the case. We take up assessee’s appeal in .
There was a residential flat in Mumbai bearing address Flat No. 1 Turf View, Hornby Vellard Estate, Worli, Mumbai (hereinafter) known as disputed flat. The flat was owned by M/s Mahabir Loather Boards Pvt. Ltd. (MLBPL for short) and this disputed flat was occupied by Mrs. Yashod Deora along with her husband Sri Pradeep Kumar Deora who was then Director/employee in MLBPL having address at 67/69 M.K. Mark Dariyanagar, House, marine Lines, Mumbai-400002, M/s Percept Advertising limited. (PAL in short) had purchased the disputed flat from MLBPL by virtue of a purchased deed dated 25.02.1997. Since the disputed flat was occupied by Mr. P.K.Deora therefore M/s Percept Advertising Ltd. entered into a settlement deed on 18.04.1997. By virtue of said settlement deed, Ms Percept Advertising Ltd., was to pay a sum of ₹50 lakh and Mr. P.K.Deora agreed to surrender the right of the said disputed flat. Mr. P.K.Deora agreed to vacate the disputed flat on 30.09.1998 and also agreed to pay monthly compensation of ₹5,000/- till the date of vacation of the disputed flat. However Mrs. Yashod Deora did not vacate the disputed flat even after the expiry of the agreement dated 30.09.1997 as per the deed of settlement. M/s. Percept Advertising Ltd. filed an application (No.74 of 1998) before the Competent Authority division for the eviction of the disputed flat from Mr. P.K. Deora and Mrs. Yashod Deora.
Mr. P.K.Deora has disclosed ₹50 lakh in the balance-sheet for A.Y 5. 1998-99 under head ‘sundry creditor’ for that year, the assessment was ITA No.835/Kol/08 & 281/Kol/13 A.Y. 2003-04 Smt. Yashod Deora Sri Pradeep Kumar Deora Page 3 framed of Mr. P.K.Deora u/s.1 43(3) of the Act, wherein the AO disallowed sum of ₹50 lakh and added it to the income of assessee u/s. 68 of the Act. Mr. P.K.Deora filed an appeal before Ld. CIT(A) against the AY 1998-99 who upheld the action of Assessing Officer. Against the order of Ld. CIT(A), Mr. P.K.Deora filed an appeal before Tribunal and Tribunal deled the addition made my AO and subsequently confirmed by Ld. CIT(A) u/s.68 of the Act vide order dated 25.10.2005 in to 310/Kol/2005 by observing as under:- “Since the assessee has proved the identity, creditworthiness and genuineness of the transactions in terms of section 68 of the I.T Act and in the absence of any contrary material brought on record by the revenue to show that the assessee has filed to discharge his burden at any stage, we are of the view that the addition made by the AO u/s 68 and sustained by the Ld. CIT(A) is not sustainable in law. As regards the taxability of the amount of Rs.50 lakhs under the head capital gains, we find that since it is an advance without giving any possession and that to under dispute and also the entire amount of Rs.50 lakhs has been shown by the assessee in his capital account as on 31.03.2003 and also offered for taxation, therefore, we are of the view that from this point of view also the said amount is not taxable in the hands of the assessee for the year under consideration. Accordingly, the addition of Rs.50 lakhs made by the AO and sustained by the CIT(A) is directed to be deleted.”
Now in the relevant year under consideration assessee has transferred the sundry creditor liability of ₹50 lakh which was arising as a result of settlement with Ms/ Percept Advertisement Ltd. to its capital account. It was also found that another ₹5 lakh was also transferred to capital account of assessee which was received from M/s Percept Advertisement Ltd. for further settlement. This case was taken up for scrutiny assessment u/s. 143(3) of the Act. On question by AO to assessee regarding the source of ₹55 lakh the assessee explained the entire facts of the case as stated aforesaid and argued that said compensation received by assessee for an amount ₹55 lakh is not subject to tax under the Income Tax Act as the said disputed flat was occupied by assessee neither on account of ownership nor on account of any tenancy. The said property stand occupied by assessee under forceful possession. & 281/Kol/13 A.Y. 2003-04 Smt. Yashod Deora Sri Pradeep Kumar Deora Page 4 Therefore, the said receipt has to be considered to be a capital nature, therefore not liable to tax. The said amount received on account of vacating the said property held under forceful possession is not covered by any provision of capital gains for charging of income tax under the Act. The said amount would have been chargeable if the same had been received in order to vacate the property if the assessee had been a tenant thereof. But the assessee had occupied the said premises forcefully and there is no provision under the Act for charging such capital receipt. However, AO has disregarded the claim of assessee stating that there was a lawful eviction notice filed by M/s Percept Advertisement Ltd. Had there been any forceful possession, then matter would have gone to police and not for a lawful settlement. The assessee was allowed to stay in the said flat in the capacity of director of MLBPL. Besides there was an agreement with certain value of ₹55 lakh for handing over the peaceful possession of said disputed flat and this is nothing but valiant question for tenancy right. In view of above, AO has held the transaction as chargeable income under the head of ‘income from other sources’ and added the sum of ₹55 lakh to the income of assessee by way of making protective assessment..
Since the husband and wife both were staying in that disputed flat therefore AO has framed the assessment by enhancing income of both couple (assessee and his wife) for an amount of ₹55 lakh each under the head ‘protective assessment’ concept in order to avoid any unforeseen loss to the Revenue. So the income of both couple (assessee) enhanced by an amount of ₹55 lakh respectively.
Aggrieved assessee preferred appeal before Ld. CIT(A) who upheld the action of AO by observing as under:- “6. I have considered the submission of the appellant and perused the assessment order. I have also gone through the relevant documents filed in the course of assessment proceedings and the remand proceedings. The facts of the case have already been discussed as & 281/Kol/13 A.Y. 2003-04 Smt. Yashod Deora Sri Pradeep Kumar Deora Page 5 above. On careful consideration of the facts and in law, I find no force in the submission of the appellant that the receipt of Rs.55 lakhs from Percept Advertising Ltd, credited in the appellant’s capital account was a capital receipt and not liable to tax. From the assessment order, it is observed that the AO held that the appellant’s wife, Mrs. Yasod Deora was the licensee of the flat No 1, Turf View, Hornby Vellard Estate, Worli, Mumbai and the appellant was staying in the said flat in the capacity of her husband and director of Mahavir Leather Board Pvt. Ltd., It appears that the aforesaid observation was made by the AO on the basis of eviction petition filed by Percept Advertising Ltd., before the Competent Authority, appointed under section 31B of the Bomaby Rent Act, 1947. Otherwise, there is no evidence that Smt. Yashod Doera was a licensee of the said disputed flat. In the course of remand proceedings, the appellant filed the evidence that he was the Managing Director of the company named as Kedia Distelleries Limited, 160, Kanchan Bagh, Indore. It is stated by the appellant that the flat under disputed at Mumbai was given by the said company to reside in the capacity of a director. That, in the month of June, 1996, he resigned from the directorship of Kedia Distelleries Ltd., In the light of the above facts, I am of the opinion that, initially it cannot be said that the flat was under forceful possession of the appellant because he had occupied the flat in the capacity of director of Kedia Distelleris Ltd., and the said company allowed him to occupy the same. The owner company, i.e. Mahavir Leather Board Pvt. Ltd., sold the flat to percept Advertising Ltd., and hence thereafter the appellant was required to vacate the flat because he was no more the director of the company which allowed him to occupy the flat. However, he did no vacate the flat and hand over the possession to the present owner. In order to get the peaceful vacant possessions of the flat, the present owner entered into an agreement with Mr. & Mrs. Deora and paid a sum of Rs.50 lakhs which was deposited by the appellant in his bank account and showed the amount in his balance sheet as on 31.03.1998 under the head liabilities. Even after receiving the amount of Rs.50 lakhs and expiry of grace period allowed to them to vacate the flat, Deoras did not hand over the vacant possession to Percept Advertising Ltd., This was nothing but the breach of agreement. Therefore, the present owner approached the Competent Authority to get possession of is flat. Subsequently, Mr. and Mrs. Deora approached Percept Advertising Ltd., in writing, that they shall hand over the vacant and peaceful possession of the flat upon paying them a total compensation of Rs.55 lakh. In the said letter, Deoras confirm having earlier received sum of Rs.50 lakhs as an adhoc and advance payment. Consequently, Percept Advertising Ltd. paid another sum of Rs.5 lakhs which was deposited by the appellant in his bank account and handed over the possession of the flat to Percept Advertising. Thus, the final settlement of dispute was made in the year under consideration i.e. AY 2003-04. The appellant transferred and credited & 281/Kol/13 A.Y. 2003-04 Smt. Yashod Deora Sri Pradeep Kumar Deora Page 6 the sum of Rs.55 lakhs in his capital account but did not offer the same for tax for the reasons that the receipt was capital in nature. It is observed that in the course of assessment proceedings as well as the appellate proceedings, the appellant has repeatedly argued that the receipt of Rs.55 lakhs was not for the surrender of tenancy right because neither the appellant nor his wife were the tenant of the flat. The sum was received to vacate the forceful unauthorized possession and under the Income tax Act there is no provision to tax the sum received to vacate forceful unauthorized possession of a capital asset. According to the appellant the sum of Rs.55 lakhs was received to extinguish a capital right i.e. the right to possessions of the property. However, I am not inclined to agree with the contention of the appellant because if he had unauthorized and forceful occupation of the flat, who created the right of possession of the flat in his favour? If, he had neither the ownership of the flat nor had the legal right to stay therein, how he may have the legal right to possessions thereof, so that to say that the receipt of Rs.55 lakhs was the capital receipt. It is not like that anyone can forcefully occupy one’s property and demand compensation to vacate the illegal possession and later on say that the receipt is capital receipt. In fact, it is nothing but windfall for the appellant and the receipt is definitely liable to tax as casual receipt under the head “income from other sources”, if not as capital gain. I am of the opinion that the income is taxable substantively in the hands of the appellant because he was staying in the flat in the capacity of director of Kedia Distelleries Ltd., and did not vacate the flat after resigning from that company. Further, the entire receipt of Rs.55 lakhs was received by him, deposited in his bank account and also credited in his capital account. Therefore, the receipt is taxable in the hands of app on substantive basis and not in the hands of his wife Yashod Deora. In view of above, it is held that the receipt of Rs.55 lakhs is taxable in the hands of appellant as income from other sources/capital gain. The addition of Rs.55 lakhs made by the AO is confirmed. The ground nos. 1, 2 and 3 are dismissed.”
Being aggrieved by this order of Ld. CIT(A) assessee preferred second appeal before us by raising following grounds:- “1. The orders passed by the lower authorities are arbitrary, erroneous, without proper reasoning, invalid and bad in law.
2. On the facts and in the circumstances of the case, the learned CIT(A) erred din holding that the receipt of Rs.55 lakhs is taxable in the hands of the appellant on substantive basis as income from other sources/capital gain.
& 281/Kol/13 A.Y. 2003-04 Smt. Yashod Deora Sri Pradeep Kumar Deora Page 7 3. On the facts and in the circumstances of the case, the learned CIT(A) erred in not appreciating that the receipt of the sum of Rs.55 lakhs by the appellant from M/s Percept Advertising Ltd. was for surrendering the right of forceful occupation of the flat no.1 Turf View, 3rd floor, Hornby Vellard Estate, Worli, Mumbai, and therefore, it did not come under the purview of either taxable capital receipt or income from other sources.
4. On the facts and in the circumstances of the case, the learned CIT(A) erred in passing a vague order by holding that the receipt of Rs.55 lakhs by the appellant is taxable in his hands as income from other sources/ capital gain, neglecting to take into account the fact that the rates of taxes from ‘income from other sources’ and ‘capital gains’ are different.
On the fats and in the circumstances of the case, the learned CIT(A) erred in confirming the addition of Rs.55 lakhs on erroneous reasoning.”
Shri Ravi Tulsiyan, Ld. Authorized Representative appearing on behalf of assessee and Shri David Z. Chawngthu, Ld. Departmental Representative appearing on behalf of Revenue.
We have heard rival contentions of both the parties and perused the materials available. Ld. AR submitted written submissions along with paper book running pages from 1 to 28 and stated that it is clear case of adverse possession of the disputed flat by Mr & Mrs. Deora. None of them was having the right of possession of the flat neither as a Director or employee of M/s Mahavir Leather Board Pvt. Ltd. In fact the husband was allowed to reside in the flat on account of his directorship in Kedia Distilleries Ltd. The assessee and her husband have no knowledge regarding the arrangement between M/s Mahavir Leather Board Pvt. Ltd. and M/s Kedia Distilleries Ltd., Ld. AR further stated that it is correct that as his wife, the assessee was also co-occupying the said flat but she never had any legal right therein. Ld. AR submitted that so far as in the present case the assessee as alleged by AO (although without adducing any evidence in support of his claim), obtained rightful possessions of the flat concerned as a licensee holds no merit. Indeed, the purchaser of the flat viz., M/s Pecept Advertising Lt., had to bring a legal action by way o making an application before a judicial body viz., the Competent Authority, & 281/Kol/13 A.Y. 2003-04 Smt. Yashod Deora Sri Pradeep Kumar Deora Page 8 Konkan Division, Mumbai, for recovering the said possession from the assessee. As per the true facts of the case also, the husband of the assessee had acquired the right to possess the property as a director of M/s Kedia Distilleris Ltd., and the wife acquired the right to reside in the flat on account of being her husband. Therefore, this was a valuable right acquired and also enjoyed by her which required a legal action by km/s percept Advertising Ltd., to take away the right. Finally, both the parties arrived at a mutual settlement for delivery of the possession by the assessee on payment of a sum of Rs.55 lakhs to the husband of the assessee by the other party. This settlement was also approved of and ratified by the Competent Authority. Hence, it can be seen that the right of possession of the flat was a legal right which had to be extinguished by not only a process of law but also substantial payment by the other party. Hence, it must be held that the said right of possessions was not only a ‘property’ as enunciated in the various judicial decisions cited above but it was also a valuable property having a substantial money value. Therefore, the right of possession must be considered to be a ‘capital asset’ for the purpose of Income Tax Act and especially for section 45 of the Act. Even the AO has treated the said right as a capital asset and has charged the amount received by the husband of the assessee as capital gains in the hands of the assessee. It can also be seen that under the settlement arrived at with the purchaser company, the assessee and her husband relinquished their above right of possessions of the disputed flat. There was also an extinguishment of the said right. Hence, in accordance with the different clauses of Sec.2(47) of the Act, there was a ‘transfer’ of the capital asset of the assessee during the year under consideration. Any profit or gain arising out of this transfer is, thus, liable to be assessed to tax under the head ‘capital gains’ as has been done by the AO. However, this capital gain is required to be computed for tax purpose in accordance with the computation provisions of Sec. 48 of the Act. It may, however, be clearly seen that there was no cost of acquisition of the right of possessions of the said disputed flat, as the assessee did not spend anything for obtaining the said possession. Hence, the mechanism for & 281/Kol/13 A.Y. 2003-04 Smt. Yashod Deora Sri Pradeep Kumar Deora Page 9 Computation of capital gain with reference to ‘cost of acquisition’ of the asset transferred cleaerlyfails. The ultimate result is, thus, that the above mentioned ‘capital gains’ is not exigible to income tax, as has been held by the Hon'ble Supreme Court in the case of Srinivasa Setty (B.C) 128 ITR 294 (SC) and repeated by the Hon'ble Supreme Court in case of PNB Finance Ltd. 220 CTR 110. On the other hand, Ld. DR vehemently relied on the orders of authorities below.
We find that AO has made the protective assessment in the hands of husband-and-wife with a view to avoid the loss to the Revenue which may occur in future and AO has held the compensation received by assessee as the relinquishment of right of the property and Ld. CIT(A) has confirmed the action of AO by observing that in case it is not such a transaction which is to be taxed under the head “capital gains” but definitely income as per the provision of “income from other source” and which is chargeable to tax. However, we find that this ITAT Mumbai of “E” Bench has decided the matter in favour of assessee which was involving the same facts of the present case and the relevant extract of the ITAT Mumbai para-7-8 in dated 11.09.2015 is reproduced below:- “7. We have considered the rival contentions. We find that the issue is covered in favour of the assessee by a number of decisions of the Hon'ble Supreme Court as well as various High Courts of the country. The base decision is income CIT v. B.C. Srinivasa Shetty (1981) 128 ITR 294; (1981) 2 SCC 460 wherein the Hon'ble Supreme Court has held that all transactions encompassed by section 45 must fall within the computation provisions of section 48. If the computation as provided under section 48 could not be applied to a particular transaction, it must be regarded as “never intended by section 45 to be the subject of the charge”. The Hon'ble Supreme Court in the case of “PNB Finance Ltd. vs. CIT (2008) 307 ITR 75’ has reiterated the above proposition of law. In the case of CIT v. B.C. Srinivasa Shetty (supra) the court was considering whether a firm was liable to pay capital gains on the sale of its goodwill to another firm The court found that the consideration received for the sale of goodwill could not be subjected to capital gains because the cost of its acquisition was inherently incapable of being determined. The principle propounded in B.C. Srinivas Shetty (1981) 128 ITR has been followed by several High Courts with reference to the ITA No.835/Kol/08 & 281/Kol/13 A.Y. 2003-04 Smt. Yashod Deora Sri Pradeep Kumar Deora Page 10 consideration received on surrender of inter alia tenancy rights sale of Good Will etc. It was to meet the situation created by the decision in B.C. Srinivas Shetty (1981) 128 ITR 294 (SC) and the subsequent decisions of the High Courts that vide Finance Act, 1994, Section 55(2) was amended to provide that the cost of acquisition of, inter alia, a tenancy right, good will etc. would be taken as nil.
8. Thus, it may be noted that after the amendment of 1995, certain assets like goodwill, tenancy rights etc. have been charged to tax by specifically providing that if there is cost incurred by the assessee in this respect, the cost shall be taken as nil. However, we find that vide amendment, particular asses like goodwill, tenancy rights, trade mark etc. have been brought into the ambit of charging section. However, the rights obtained by way of adverse possession have not been included in the provision neither in the charging section 45 nor in the section 48 which provides mode of computation. Here is no any provision regarding the charging of capital gains tax on an asset title to which has been acquired in recognition of rights of adverse possession. Even u/s. 49, the cost of the asset with regard to certain mode of acquisition, such as by way of gift or will, by succession, inheritance or devolution or on any distribution of assts on the dissolution of a firm, body of AOP or liquidation of company etc.; the rights attained in an asset on account of adverse possession have not been included. Though the Parliament has made an amendment that in certain type of assets like goodwill, tenancy rights etc., the cost of acquisition would be taken as actual cost incurred and if no cost incurred, the same be taken at nil, however the said deeming section is applicable to the assets which have been specifically brought within the purview of the said provision. The assets or the rights which do not find mention in the relevant provision, cannot be brought within the ambit of charging section, in the light of the decision of the Hon'ble Supreme Court. We further find that the issue is now squarely covered by the direct decision of the Hon'ble Bombay High Court in the case of CIT vs. Star Chemicals(Bombay) Pvt. Ltd. (Income Tax Appeal No. 1110 of 2009 & Income Tax Appeal No. 1153 of 2009, dated 14th August, 2009) wherein the Hon'ble court while answering the question of chargeability of capital gains in relation to an asset/title which was acquired by way of adverse possession, has held that the Tribunal was right in holding that for want of acquisition cost, capital gains tax would not arise. Since a direct decision of the Hon'ble jurisdictional court tin relation to the chargeability of capital gain on asset acquired by way of adverse possession is available, hence, the same is binding upon this Tribunal. We therefore hold that no capital gain are chargeable to tax in relation to the asset acquired by way of adverse possession. Appeal of the assessee is allowed and order of the lower authorities is set aside.”
ITA No.835/Kol/08 & 281/Kol/13 A.Y. 2003-04 Smt. Yashod Deora Sri Pradeep Kumar Deora Page 11 In view of the above, we find that there was no tenancy right available with the assessee which is, in fact, chargeable under the Income Tax Act under the head “income from capital gains”. However, in the present case, assessee was having adverse charge on the property and charge of tax on such transaction has nowhere been definite under the Act. Therefore, we are holding that this transaction out of purview of tax. In our considered view, we reverse the orders of authorities below and delete the addition made by Assessing Officer and subsequently confirmed by Ld. CIT(A). This ground raised by assessee is allowed.
10. In the result, assessee’s appeal is allowed. Coming to assessee’s appeal in ITA No.835/Kol/2008.
11. Since the issue is common in assessee’s appeal in and taking a consistent view we allow assessee’s appeal and this ground raised by assessee is allowed.