1987 (3) TMI 161 - AT - Income Tax

Summary

Issues Involved:
1. Determination of the cost of acquisition for computing capital gains.
2. Application of adverse possession in acquiring property.
3. Validity of the compromise decree in establishing ownership.
4. Relevance of the fair market value as on specific dates.

Detailed Analysis:

1. Determination of the Cost of Acquisition for Computing Capital Gains:

The primary issue was whether the cost of acquisition for computing capital gains should be based on the expenses incurred by the assessee or the cost to the previous owner. The CIT(A) rejected the assessee's claim that the asset had no cost of acquisition, noting that the nature of the asset (a house property) made it possible to envisage a cost. The CIT(A) referenced the Delhi High Court decision in Addl. CIT vs. Mohan Lal Jain, which held that the cost of acquisition could be the cost in someone's hands, not necessarily the assessee's. The CIT(A) concluded that the cost of acquisition should be the cost to the previous owner, Haji Mohd. Yousuf, or the fair market value as of January 1, 1964, at the assessee's option. The Tribunal upheld this approach, directing the ITO to allow the assessee to exercise the option for substituting the fair market value as on January 1, 1964, as the cost of acquisition.

2. Application of Adverse Possession in Acquiring Property:

The assessee's ownership claim was based on adverse possession. The CIT(A) accepted that the assessee became the owner due to adverse possession after the expiration of the 12-year limitation period. The Department contended that the assessee became the owner only on January 30, 1974, following the High Court's compromise decree. However, the Tribunal confirmed the CIT(A)'s finding that the title of the assessee and his co-owners was based on adverse possession and limitation, noting that the Department had not provided sufficient material to prove otherwise.

3. Validity of the Compromise Decree in Establishing Ownership:

The compromise decree from the High Court on January 30, 1974, was crucial in establishing ownership. The plaintiffs and defendants agreed that the defendants had acquired ownership by adverse possession. The Department argued that the compromise decree was the basis for the assessee's legal ownership. The Tribunal found no merit in the Department's contention, emphasizing that the parties in the suit had acknowledged the defendants' ownership through adverse possession.

4. Relevance of the Fair Market Value as on Specific Dates:

The CIT(A) directed the ITO to consider the fair market value as on January 1, 1964, for computing capital gains, allowing the assessee to exercise this option. The Department argued that the fair market value as on January 1, 1974, was irrelevant, but the Tribunal upheld the CIT(A)'s direction. The Tribunal also dismissed the assessee's cross objection, which sought to determine the cost of acquisition based on the market value as on October 29, 1967, or July 21, 1974, confirming that the fair market value as on January 1, 1964, was appropriate.

Conclusion:

Both the appeal by the Revenue and the cross objection by the assessee were dismissed. The Tribunal confirmed the CIT(A)'s approach in determining the cost of acquisition and upheld the application of adverse possession in establishing ownership. The fair market value as on January 1, 1964, was deemed relevant for computing capital gains, and the ITO was directed to proceed accordingly.