2006 (10) TMI 174 - AT - Income Tax

Land Rights Converted to Capital Assets Under Tax Law, Subject to Capital Gains Tax; Tribunal Partly Allows Appeals.

Vijaysinh R. Rathod. Versus Income-tax Officer, Ward - 3, Vapi.

Vijaysinh R. Rathod. Versus Income-tax Officer, Ward - 3, Vapi. - ITD 106, 153 TTJ 107, 593, Issues Involved:1. Whether the possession of land as Alwara is a capital asset within the meaning of section 2(14) of the Income-tax Act, 1961.2. Whether the sale of such land is liable to capital gain under section 45 of the Act.3. Determination of the cost of acquisition for the purpose of computing capital gains.4. Applicability of the Supreme Court's decision in B.C. Srinivasa Shetty's case.5. Whether the occupancy rights granted under the Dadra & Nagar Haveli Land Reforms Regulation, 1971, are equivalent to tenancy rights or ownership rights.Issue-wise Detailed Analysis:1. Whether the possession of land as Alwara is a capital asset within the meaning of section 2(14) of the Income-tax Act, 1961:The Tribunal examined the nature of Alwara rights and their transformation under the Dadra & Nagar Haveli Land Reforms Regulation, 1971. It was found that the Alwara rights, which were initially granted by the Portuguese administration, were replaced by occupancy rights under the new regulation. The Tribunal concluded that these new occupancy rights are indeed capital assets within the meaning of section 2(14) of the Act.2. Whether the sale of such land is liable to capital gain under section 45 of the Act:The Tribunal held that the sale of occupancy rights, which replaced the Alwara rights, constitutes a transfer of a capital asset. Consequently, any gains arising from such a sale are chargeable to capital gains tax under section 45 of the Act.3. Determination of the cost of acquisition for the purpose of computing capital gains:The Tribunal discussed the difficulty in determining the cost of acquisition of the land, as the original Alwara rights were granted without any cost. However, it was noted that the Dadra & Nagar Haveli Land Reforms Regulation, 1971, provided a mechanism for determining compensation for Alwara holders who did not wish to acquire new occupancy rights. This indicated that the cost of acquisition could be ascertained. The Tribunal directed that the fair market value as on 1-4-1981 should be adopted as the cost of acquisition for computing capital gains.4. Applicability of the Supreme Court's decision in B.C. Srinivasa Shetty's case:The Tribunal considered the applicability of the Supreme Court's decision in B.C. Srinivasa Shetty's case, which held that if the cost of acquisition is not ascertainable, the asset cannot be subjected to capital gains tax. However, the Tribunal distinguished the present case by noting that the cost of acquisition could be ascertained using the compensation mechanism provided in the Dadra & Nagar Haveli Land Reforms Regulation, 1971. Therefore, the decision in B.C. Srinivasa Shetty's case was not applicable.5. Whether the occupancy rights granted under the Dadra & Nagar Haveli Land Reforms Regulation, 1971, are equivalent to tenancy rights or ownership rights:The Tribunal analyzed the provisions of the Dadra & Nagar Haveli Land Reforms Regulation, 1971, and concluded that the occupancy rights granted under the regulation were superior to tenancy rights and amounted to ownership rights. These rights allowed the holders to sell, mortgage, lease, or exchange the land, subject to certain conditions. The Tribunal noted that the assessees had been treated as owners by the local administration, which further supported the conclusion that the occupancy rights were equivalent to ownership rights.Conclusion:The Tribunal held that the possession of land as Alwara, which was transformed into occupancy rights under the Dadra & Nagar Haveli Land Reforms Regulation, 1971, constitutes a capital asset. The sale of such land is liable to capital gains tax under section 45 of the Act. The cost of acquisition should be determined based on the fair market value as on 1-4-1981. The decision in B.C. Srinivasa Shetty's case was not applicable, as the cost of acquisition could be ascertained. The occupancy rights were found to be equivalent to ownership rights, not tenancy rights. The appeals were partly allowed, with directions to compute capital gains accordingly.