2015 (12) TMI 1836 - AT - Income Tax

Capital gain - 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 - Addition u/s 68 - adverse possession of the disputed flat - protective assessment - assessee has transferred the sundry creditor liability which was arising as a result of settlement with Ms/ Percept Advertisement Ltd. to its capital account - HELD THAT - 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 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 1981 (2) TMI 1 - SUPREME COURT and PNB FINANCE LTD. 2008 (11) TMI 7 - SUPREME COURT 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 - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of Rs. 55 lakh received for vacating a disputed flat.
2. Classification of the receipt as capital gains or income from other sources.
3. Legality of protective assessments made on both husband and wife.
4. Determination of the nature of possession (forceful or lawful) and its implications on taxability.

Detailed Analysis:

1. Taxability of Rs. 55 Lakh Received for Vacating a Disputed Flat:
The assessee received Rs. 55 lakh from M/s Percept Advertising Ltd. for vacating a disputed flat. The assessee argued that this amount was not taxable under the Income Tax Act as it was received for vacating a property held under forceful possession, not under any tenancy or ownership rights. The Assessing Officer (AO) disagreed, treating the receipt as taxable income under the head "income from other sources."

2. Classification of the Receipt as Capital Gains or Income from Other Sources:
The AO assessed the Rs. 55 lakh as income from other sources, while the assessee contended it was a capital receipt, not liable to tax. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the receipt was taxable either as income from other sources or capital gains. The Tribunal, however, found that the right of possession was acquired through adverse possession, which is not explicitly covered under the Income Tax Act for capital gains tax. Citing precedents, the Tribunal concluded that the receipt was not taxable as capital gains due to the absence of a cost of acquisition.

3. Legality of Protective Assessments Made on Both Husband and Wife:
The AO made protective assessments on both the husband and wife to avoid potential revenue loss. The CIT(A) confirmed the substantive assessment in the husband's hands, as he was the one who received and deposited the Rs. 55 lakh. The Tribunal found this approach unnecessary given the nature of the receipt and ruled in favor of the assessee, deleting the addition.

4. Determination of the Nature of Possession (Forceful or Lawful) and Its Implications on Taxability:
The CIT(A) observed that the assessee initially occupied the flat as a director of Kedia Distilleries Ltd. and continued to stay without legal rights after resigning. The Tribunal, however, accepted the assessee's argument of adverse possession, noting that the right of possession was valuable and required legal action and compensation to extinguish. This right was deemed a capital asset, but due to the lack of a cost of acquisition, the capital gains tax was not applicable.

Conclusion:
The Tribunal ruled that the Rs. 55 lakh received by the assessee for vacating the flat was not taxable under the Income Tax Act. The receipt was considered a capital receipt arising from the extinguishment of a right acquired through adverse possession, which does not fall under the purview of taxable capital gains or income from other sources due to the absence of a cost of acquisition. Consequently, the Tribunal allowed the appeals, reversing the decisions of the lower authorities and deleting the additions made by the AO.