Possessory rights settlement payment held outside capital gains and income from other sources where no taxable asset was identified.

A settlement payment for vacating a disputed flat and surrendering an adverse possessory claim was held not taxable as capital gains because the Income-tax Act specifically taxes only certain recognised rights, and it does not expressly bring a right acquired by adverse possession within the capital gains charging and computation scheme. The Tribunal applied the principle that a receipt cannot be taxed as capital gains unless it falls within the charging provision and can be computed under the Act. It also rejected taxation as income from other sources, holding that the sum was intrinsically linked to surrender of the possessory claim and not a separate taxable source. The addition was deleted in favour of the assessee.

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Issues: Whether the sum of Rs. 55 lakhs received for vacating the disputed flat and surrendering the possessory right was taxable as capital gains or income from other sources, or whether it was outside the charge of tax for want of a legally taxable capital asset and cost of acquisition.

Analysis: The receipt arose from a settlement by which the assessee and her husband gave up their possessory claim over the flat. The record showed that the assessee's right was not a tenancy right but a right traced to occupation in the capacity of a director and, on the assessee's case accepted by the Tribunal, an adverse possessory right. The Tribunal noted that the Act specifically brings certain rights such as goodwill and tenancy rights within the capital gains machinery, but it does not specifically provide for taxation of rights acquired by adverse possession. Applying the settled principle that a transaction cannot be charged to capital gains unless it falls within the charging provision and the computation provisions can operate, the Tribunal held that the present receipt could not be taxed as capital gains. The alternative view that the amount was taxable as income from other sources was also rejected on the same footing, as the receipt was linked to surrender of the possessory claim and not to a separate taxable source.

Conclusion: The receipt of Rs. 55 lakhs was held to be outside the purview of tax and the addition was deleted in favour of the assessee.

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