2015 (10) TMI 2107 - AT - Income Tax

Adverse possession property sale not subject to capital gains tax

Smt. Seetha S. Shetty Versus Dy. Commissioner of Income Tax, Cir. 17 (2), Mumbai

The Tribunal ruled in favor of the assessee, holding that the amount received from the sale of property acquired by adverse possession without any ... Capital gains tax - whether the amount received by the assessee from the sale of property, the title of which was acquired by way of adverse possession and which did not involve any acquisition costs, can be subjected to the capital gains tax or not ? - Held that:- The issue is now squarely covered by the direct decision of in the case of CIT vs. Star Chemicals (Bombay) Pvt. Ltd. (2009 (8) TMI 1143 - BOMBAY HIGH COURT) wherein while answering the question of chargeability of capital gains in relation to an asset/title which was acquired by way of adverse possession, has held that the Tribunal was right in holding that for want of acquisition cost, capital gains tax would not arise. Since a direct decision of the Hon’ble jurisdictional Court in relation to the chargeability of capital gain on asset acquired by way of adverse possession is available, hence, the same is binding upon this Tribunal. We therefore hold that no capital gain are chargeable to tax in relation to the asset acquired by way of adverse possession. - Decided in favour of assessee. Issues:Determination of capital gains tax on amount received from the sale of property acquired by adverse possession without acquisition costs.Analysis:1. The appeal concerned the assessment year 2006-07, where the main issue was whether the amount received from the sale of property acquired by adverse possession without any acquisition costs would be subject to capital gains tax.2. The assessee, a partner in a company, initially declared capital gains in the return of income but later revised it, claiming that the transaction was not taxable due to the nil cost of acquisition. The property in question was acquired through adverse possession, and the assessee relied on various case laws to support their position.3. The Assessing Officer (AO) rejected the assessee's explanation, emphasizing that the cost of acquisition was ascertainable even though it was nil. The AO argued that the possession rights granted by the court decree constituted capital assets, making the sale taxable under section 45 of the Income Tax Act.4. Additionally, the AO applied section 50C to determine the property value for capital gains computation, disregarding the assessee's contention that the stamp duty value exceeded the fair market value. The AO adopted the stamp duty value as the sale consideration, leading to the assessment of long-term capital gains tax.5. The assessee appealed the AO's decision, citing Supreme Court and High Court judgments that supported the non-taxability of assets acquired through adverse possession. The Tribunal noted that post-amendment, certain assets like goodwill were explicitly charged to tax at nil cost of acquisition, but adverse possession rights were not included in the provision.6. Relying on a direct decision of the Bombay High Court, the Tribunal held that assets acquired by adverse possession were not subject to capital gains tax due to the absence of acquisition costs. As a result, the appeal of the assessee was allowed, and the lower authorities' order was set aside.7. The Tribunal's decision was based on the legal principle that assets acquired through adverse possession, not explicitly covered under tax provisions, cannot be taxed for capital gains. The judgment highlighted the importance of specific legislative provisions in determining the taxability of different types of assets, emphasizing the need for clarity in the law.8. Ultimately, the Tribunal's ruling favored the assessee, providing clarity on the tax treatment of assets acquired through adverse possession and reinforcing the significance of legislative intent in determining tax liabilities.