Adverse possession and capital gains: possession under a sale agreement did not mature into ownership, and valuation was partly reduced.

Possession under an agreement to purchase land was held to be permissive and incapable of maturing into adverse possession without clear, continuous hostile assertion to the knowledge of the true owner. A contract for sale created no interest in immovable property, and protection under part performance was only defensive. On that basis, ownership was treated as passing only on execution of the registered sale deed, so the gains were characterised as short-term capital gains. The valuation adopted for computing capital gains was also moderated, with the sale price reduced for computation purposes and the assessee receiving only partial relief.

---

---

Issues: (i) Whether the assessee became the owner of the land before execution of the registered sale deed by adverse possession so that the gains on sale of plots were long-term capital gains; (ii) Whether the sale price adopted for computation of capital gains required further reduction.

Issue (i): Whether the assessee became the owner of the land before execution of the registered sale deed by adverse possession so that the gains on sale of plots were long-term capital gains.

Analysis: The assessee had entered into an agreement to purchase the land and thereby acknowledged the vendor's title. Under section 54 of the Transfer of Property Act, 1882, a contract for sale does not create any interest in the property, and any protection under section 53A of the Transfer of Property Act, 1882 is only a defensive equity available against the transferor or persons claiming under him. Such possession remains permissive unless adverse title is clearly asserted to the knowledge of the true owner for the statutory period. The finding of the Land Reforms Tribunal was not binding on the Revenue or on the Tribunal and operated only inter partes. The subsequent registered sale deed executed in 1979 was inconsistent with the plea that title had already been perfected by adverse possession.

Conclusion: The assessee became owner only on execution of the registered sale deed dated 8-6-1979, and the gains were short-term capital gains. The Revenue succeeded on this issue.

Issue (ii): Whether the sale price adopted for computation of capital gains required further reduction.

Analysis: The authorities had adopted different figures for the sale value of the plots. Considering the circumstances of the sale and the comparable material, the figure adopted by the appellate authority was found to be excessive, but the assessee's figure was not accepted in full. A moderated valuation was considered appropriate for computation.

Conclusion: The sale price was reduced to Rs. 22.50 per sq. yard for computing the short-term capital gains, giving the assessee partial relief on this issue.

Final Conclusion: The characterization of the gains as short-term was upheld, while the valuation was further reduced for computation purposes, resulting in a mixed outcome with overall relief being only partial to the assessee.

Ratio Decidendi: Possession referable to an agreement of sale is permissive and does not mature into adverse possession without clear, continuous assertion of hostile title to the knowledge of the true owner; a contract for sale creates no interest in immovable property, and part-performance rights are merely defensive.

---