2006 (10) TMI 174 - AT - Income Tax

Transfer of a capital asset - Chargeable as capital gain - Scope of occupancy right granted under D NH Regulation,1971 u/s 4 of the Regulation - Whether, the possession of land as Alwara is a capital asset within the meaning of section 2(14) of the Act and the sale whereof is liable to capital gain u/s 45? - HELD THAT - The Supreme Court decision in the case of Mysore Minerals Ltd. 1999 (9) TMI 1 - SUPREME COURT , though this case was rendered in respect of depreciation, fact remains that ownership has to be looked from a wider perspective, in the cases before us, assessees enjoyed unhindered possession and use of land, exercised their right of sale, which was duly accepted by the revenue authorities, sale deed was accordingly allowed to be executed and registered, all these put together, clearly leads to an inescapable conclusion that assessees may be owners of the land. We have perused order of Tribunal in Shri Navroz J. Wadia's case in which Alwara rights are held to be tenancy rights and by applying therefore provisions of section 55(2) gains have been held to be liable for tax. In our considered opinion, the Tribunal has not appreciated a very vital fact that Alwara right ceased to exist way back in 1971. What was to be adjudicated was not the nature of Alwara rights, but the rights conferred on these assessees as per new Land Reforms Regulations in lieu of extinguishment of Alwara right. In our view Tribunal has adjudicated about the nature of Alwara right which may not be very relevant to the issue. A plain reading of aforesaid provisions clearly reveals that tenant under this provision does not include erstwhile Alwara-right or the persons who has been given occupancy right u/s 4(2) of D NH Land Reforms Regulation, 1971, therefore, erstwhile Alwara-right who have been granted occupancy right under new regulations are not be treated as tenant. In view thereof, we find merit in the arguments of learned counsel that the holding of the assessees cannot be held as tenancy. Be that as it may with regard to the rights to these assessees under OA 1963 or D NH Regulations, 1971, they are the rights of property and on transfer of the same a capital gain tax would arise u/s 45 of the Act. The assessees, however, wants shelter of the decision of the Supreme Court in the case of B.C. Srinivasa Shetty 1981 (2) TMI 1 - SUPREME COURT and contend that as there was no cost of acquisition, property cannot be subject to capital gain tax. In our opinion the possession of land held by assessees' is not as Alwara right holder but on occupancy rights as per D NH Land Reforms Regulation, 1971. The occupancy rights in these lands, therefore, amount to be capital assets within the meaning of section 2(14), the sale whereof is liable to be taxed as capital gain u/s 45. In consideration of above facts, circumstances, arguments and case laws, it is clear that assessees have sold capital asset as owners of land in question, cost of acquisition is clearly ascertainable, which is to be substituted by fair market value as on 1-4-1981 as prayed to be opted. The cost of acquisition in the hands of the forefathers of the assessee being the previous owner, if cannot be ascertained, is to be the fair market value on the date on which capital assets became property of the previous owner and in that case also the assessees would be entitled to substitute the fair market value as on 1-4-1981 u/s 55(2) of the Act and that has to be allowed as a deduction with benefit of indexation cost as aforesaid. In either of the situation, the result would be same. We, accordingly, hold that the sale of Occupancy right is the transfer of capital asset and would be chargeable to capital gain tax subject to deduction of the market value of the rights as on 1-4-1981 with benefits of indexation cost as aforesaid. In the result, the appeals stand partly allowed.

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.

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