Bachhraj Factories Pvt Ltd Vs ITO (ITAT Mumbai)- in regard to 14 bighas, the assessee was found to be a trespasser. The law does not recognize the rights of a trespasser. Ordinarily, it is said that the possession is the nine point of ownership. The possessor has got right over the property and his right cannot be challenged by any one except the true owner. Undoubtedly, for some time, the assessee was the possessor of the land and building. But from the facts culled out from the records, it cannot be concluded that the possessory rights of the assessee bear any legal recognition. Unless such rights are protected by law to associate the word ‘right’ with the said type of possession will be a misnomer, since right is a legally protected interest.

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCH ‘B’ MUMBAI

M/s. Bachhraj Factories Pvt. Ltd., Vs. ITO

ITA No.55/Mum/2009
Assessment year-2004-05

O R D E R

PER ASHA VIJAYARAGHAVAN (JM)

This  appeal  filed  by  the  assessee  is  directed  against  the  order dated  25.9.2008  passed  by  the  ld.  CIT(A)-XXVII,  Mumbai  for  the Assessment Year 2004-05.

2.  The brief fact of the case is that during the course of assessment proceedings,  the Assessing  Officer  found  that  the assessee had shown ITCG  on  sale  of  land  at  Ujjain  amounting  to  Rs  11,05,556/-  The assessee  was  asked  to  furnish  details  of  capital  gain  on  sale  of  land alongwith  cost  of  the  land  and  also  to  explain  as  to  whether  the  sale value has been  taken as per the provisions of sec. 50C of the IT Act. In response,  the  assessee  filed  details  of  the  sale  of  land  alongwith  the copies  of  the  MOU.    As  regards  the  valuation  as  per  provisions  of  sec 50C,  it was submitted that the property has neither been conveyed nor the  Document  whereby  the  assessee  has  transferred  its  rights  has been  executed  for  the  purpose  of  payment  of  stamp  duty  and therefore  the  provisions  of  sec  50C  cannot  be  applied.    It  is  also submitted  that  it  was  not  possible  to  convey  the  said  land  in  view  of the  status  quo  direction  of  the  Courts  and  the  transfer  has  not  been registered.    The  Assessee  has  merely  entered  into  a  MOU  and  the capital gains  have been offered in the year under consideration in view of the  provision  of sec 2(47) by which a part  performance of  a contract contemplated  in  sec  53A  of  the  transfer  of  property  act  is  deemed  to amount  to  a  transfer.    Therefore  the Assessee  submitted  that  sec 50C is  not  applicable  as  the  stamp  valuation  authority  has  not  adopted  or assessed  any  value  of  the  property  for  the  purpose  of  payment  of stamp duty. The AO observed that the property has not been conveyed and  the Assessee has merely entered into a MOU. Hence, the Assessee was  asked  to  explain  the  treatment  of  capital  gains  given    to  the receipt  of  moneys  alleged  to be  in  consideration  of  the Ujjain  Property and  to  show  cause  why  the same  should  not  be  taxed  under  the  head Income from other sources. The Assessee in response stated that it has sold  the  property  alongwith  with  their  rights  title  and  interest  in  the said  property  and  the same  constitutes  a  capital  asset.   The  AO noted that  as  admitted  by  the Assessee  there  has  been  litigation as  regards the right to  the property that has  been pending  for last 35 years and it has  been  in  possession  of  the  property  and  as  such  the  same constitute a capital asset.

3.  Regarding  the  litigation  about  the  said  property,  the  assessee submitted  that  the  S.C.  vide  order  dated  7.9.1989  had  observed  that since  the  civil  suits  have  already been  filed  before  the Civil  Court, the Civil Court  shall  investigate  the  matter  and  decide  the  issue  of  title  to  the  land.    The  Civil  Court  in  one  suit  in  respect  of  plot  of  land  of  14 bighas  has  decided  in  favour  of  the  Assessee  and  the  Ujjain  Municipal Corpn.  has  preferred  an  appeal  before  the  High  Court  of  M.P.  against the said  order.  The  other  suit  in  respect  of  plot  of  27 bighas  has  been decided  against  the  assessee  and  the  assessee  has  preferred  an appeal  before  the  high  court  of  MP.    The  Court  has  passed  an  interim order directing the parties to maintain status quo and both the appeals are pending for disposal till  date.   The  Assessee  further submitted  that the  purchasers  have  purchased  the  property  on  as    is  where  is  basis and  no  person  would  pay  an  amount  of  Rs  2,28,00,000/-  without getting  any  benefit.  The  purchasers  have  paid  the  price  for  acquiring whatever  rights  title  and  interest  the  Assessee  had  in  the  Ujjain property.  The Assessee has stated that possession of the said property was  given  to  the  purchasers  vide  letter  dated  16.12.2003    during  the previous  year  relevant  to the AY  under consideration and therefore the sale proceeds received on transfer of  the Ujjain property is to be taxed under  the  head  capital  gains  and  not  under  the  head  ‘Income  from other sources’.

4.  The assessee stated that in case of the sale proceeds received as per MOU in connection with the transfer of right title and interest in the Ujjain property does not constitute a transfer of any capital  assets then the  amount  received  cannot  automatically  be  treated  as  a  casual  or non  recurring  receipt    taxable  under  the  head  Income    from  other sources  and  the amount received  would  have    to be  treated as  capital receipt not exigible to tax.

5.  The  AO  examined  the assessee’s  submission  and noted  that  the facts  of  the  case  are  that  the  assessee  had  purchased  the  land somewhere in 1962 from Seth Nazar Ali. The land was a leasehold land given  to  Seth  Nazar  Ali  by  the  Govt.  of  M.P.  for  establishing  a  factory  and  the  condition  of  the  lease  was  that  if  for  any  reason  it  was  not possible to run a ginning or cloth  factory the property shall revert  back to  the  government.  This  property  was  taken  over  by  the  Addl. Collector,  Ujjain  as  the  terms  of  the  grant  of  the  said  property  were violated and no  compensation  was paid  to the Assessee.   The property comprised  of  2  plots  of  land  of  27  Bighas  and  14  Bighas  respectively. The  acquisition  of  the  plot  of  27  bighas  was  made  as  the  land  was given  for  running  a  cloth  factory  and  there  was  a  stipulation  in  the agreement  that  in  the  eventuality  of  the  cloth  factory  being  stopped, the land    shall  be reverted to  the  government.     The  plot  of  14  bighas was  acquired  on  the  ground  that  the  assessee  company  was  a  more trespasser.  The Assessee  company has disputed the acquisition of the said  land  and  as  stated  by  the  Assessee  himself  the  appeals    filed  by the  Assessee  and  the  Ujjain  Municipal  Corporation  are  pending  in  the High  Court  of  MP  The  question  therefore  arises  as  to  whether  the Assessee  at all  had  any saleable right in the property. The title  of  Seth Nazar  Ali,  the  above  facts  would  reveal  also  was  not  absolute  as  he had  only  a  limited  right  in  the  said  property  which  was  subject  to certain  encumbrances  and therefore  he  could  not  be said  to  have  any absolute  ownership  under  the  general  law  or  even  under  sec  27(iii)  of the IT Act not to mention that he had no  right to transfer any valid  title even by executing  a  registered  deed.  As  regards the 14 bighas of land it has  been acquired  treating the Assessee as a trespasser and  the law does  not  recognize  the  rights  of  a  trespasser  .  Though  the  Assessee claimed  to be the possessor of the land and buildings for  some  time, it cannot  be  concluded  that  the  possessory  rights  bear  any  legal recognition. The rights are legally  protected  interests and  to associate the word right with the said type of possession will be a misnomer.

6.    The AO quoted certain relevant paragraphs from the MOU signed by the Assessee with the alleged purchaser. This  memorandum  of  understanding  (MOU)  mainly  records  in principle  the    basic  terms  which  have  been  agreed  between  the parties hereto  regarding  sale  by  BFPL  of   the  said  property  more particularly described in the 2ND schedule hereunder written on as Is  where  is  basis    and  by  itself  is  not  to  be  or  should  not  be constructed as an agreement for sale of the said property. It  is  also    expressly  agreed  and  declared  that  the  purchaser shall  not  be  entitled  to    the  possession  of  the  said  property  or any  part  thereof  until  such  time as the transaction  is   completed and  proper conveyance Is executed in favour of the purchaser by BFPL. It shall be the responsibility of the purchaser to proceed with or prosecute the said litigation in such manner as it may deem fit and proper or to settle the same with the Chief Secretary, State of Madhya Pradesh and Ujjain Municipal Corpn. Before the High Court of MP at Indore and Ujjain District Court respectively or any other appropriate court or forum where such litigations are being fought out entirely at its own costs charges and expenses.

7.   From  the  above  the  AO  observed  that  the  MOU  is  not  to  be constructed  as  an  agreement  for  sale  and  that  the  purchaser  is  not entitled  to possession of the said property till  such time  conveyance is executed  in  his  favour.  The  Assessee  has  himself  stated  that  it  is  not possible  to  convey  the  said  land  in  view  of  the status  quo  direction  of the  Courts.    Sec  53A  of  Transfer  of  property  Act  1882  defines  part performance  as  where  any  person    contracts  to  transfer  for consideration  any  immovable  property  by  writing  signed  by  him  or  on his  behalf  from  which  the  terms  necessary  to  constitute    the  transfer can  be ascertained with  reasonable certainty and the transferee  has in part  performance of  the  contract  taken  possession    of  the  property  or any  part  thereof  or  the  transferee  being    already  in  possession continues  in  possession  in  part  performance  of  the  contract  and  has done  some  act  in  furtherance  of  the  contract  and  the  transferee  has performed  or  is    willing  to  perform    his  part    of  the  contract.    In  the instant  case  the  Assessee  has  received    the  money  but    as  found above  cannot  give  clear possession  of  the  property  The  letters   giving possession  filed  by  the  Assessee    are  only  self  serving  as  when  the Assessee does  not have a clear title to the said property no possession valid  in  law  can  be  given.  There  is  therefore  no  part  performance  as stated  by  the  Assessee.    The  assessee’s  argument  that    no  prudent person  will  pay  an  amount  as  Rs.  2,28,00,000/-  without  getting  any benefit    does  not  hold  good  as that  is  the  fact  in  this  case.    It  is clear from  para  2.3  of  the  MOU  that    the  purchaser  will  proceed  with  the litigations in  the  Court or  settle  the  same  with  the  MP  government and in the event of the purchaser  being successful he will enjoy the benefit arising from the transaction.

8.  Section  45  of  the  I.T.  Act  defines  capital  gains  to  be  profits  or gains arising from  the transfer of  a capital  asset and sec 2(47) defines transfer  in  relation  to  a  capital  asset  to  include  the  sale  exchange  or relinquishment  of  the  asset  or  the  extinguishment  of  any  rights therein.  The  capital  gain  will  only  arise  if  there  is  transfer  of  an  asset and  as  such  existence  of  the  asset  is  a  must.  In  the  instant  case  as discussed above the clear right   title of  the  assessee  over the property at  Ujjain  has  not  been  proved.  It  is  clearly  born    out  of  the  assessee’s records  that  the  covenants  contained  in  the  original  lease  executed between the  said Shri Nazar  Ali  and  the Government of M.P have been flouted  leading  to  the  re  possession  of  the  impugned  property  by  the government.  The  fact  that  there  is  litigation  regarding  the  trespass  to the property  by the assessee, whether with an understanding   with the said  Nazar Ali or not, cannot  judicially be  said  to have  been decided to confer  any  right  to  the  property  in  favour  of  the  assessee.  What  sec 2(47)  or  sec  2(14)  of  the  I.T  Act  contemplates  is  only  a  legal  right  to the  asset  in  the  first  place.    Then  and  only  then  can  one  look  to  the deeming effect of  ‘transfer, sale, exchange or extinguishment’  of  such right.  As  regards  the  transfer  of  the  right  subject  to  the  condition  that the  purchaser  would  prosecute  the  pending  litigation  again  cannot  be said  to be an answer to the question whether there is a transfer of any asset  much  less whether  there  is  any  asset  at  all  in  possession  of  the Assessee.    This  is  so  because  the  accused  is  the  assessee  and  that status  cannot  be  shifted  to  any  other  person  except  by  moving  any interlocutory  petition  by  such  other  person.  The  Assessee  has  not brought out any such fact in this case.

9.  The  AO  also  observed  that  the  above  position  would  reveal  that there is no asset in the possession of the assessee as of date and there is also no factual or legal transfer of any asset as alleged by it.

10.  As regards the  argument  that the amount involved is in any case a  capital  receipt  not  exigible  to  tax  is  not  tenable  because  for  the consideration  being termed as a capital receipt  there must be  either  a tangible  or  intangible  asset  which  in  both  the  cases  should  exist.  The assessee  has  not  traced  the  receipt  to  any  tangible  asset  except  by merely  stating  so.    Even  in  the  case  of  any  intangible  asset  the essential indicia  is that the  assessee  holds  a  right therein.  In  this case the assessee has failed to indicate any such right to any such asset.

11.   The  I.T  Act  does  not  stipulate  anywhere  that  the  income  or receipt  sought  to  be  brought  to  tax  should  be  legal  or  genuinely sourced.  All  what  the  Act  envisages  is  that  if  a  person  earns  taxable income the same should be taxed as per the charging  provisions of the act.    If  the  assessee  should  resist  such  a  levy  it  I  the  duty  of  the Assessee  to  prove  that  the  amount  did  not  fall  within  the  charging provisions  of  the  act.    Having  offered  under a fictitious head  as  capital gain the Assessee  has admitted that the amount in question is exigible to  income  tax.  The  only  factual  position  us  that  the  assessee  has physically received  Rs.  2,28,00,000/-  and  now to  say  that  the  same is  a capital  receipt  not  exigible  to  income  tax  amounts  to  a  volte  face which does not fit in any alternative situation under the law. To exempt this  receipt  from  any  charging  provision  of  this  act  there  must  be  a specific  section available under  the  act  to which  also  the  assessee  has not pointed  out. Sec 14  specifies specific heads of income and  that the last  thereof  is  other  sources  which  is  residuary  in  nature.  Since  the assessee’s  receipt  does  not  fit  in  any  other  heads  it  has  to  essentially fall  in  the  category  of  other  sources.  In  these  circumstances,  the amount  of  Rs.   2,28,00,000/-  is  neither  a  capital  receipt  nor  a  casual income  but  is  indeed  exigible  to  income  tax  as  income  from  other sources.  Accordingly,  the  AO  taxed  the  amount  of  `.2,28,00,000/- under the head “ Income from other sources.”

12.  On  appeal  before  the  Ld.CIT(A),  the  assessee  reiterated  its  submission made before the AO which is as under:

Briefly  the  Assessee  submitted  that  the  company  had purchased  land  at  Ujjain  during  the    year  1962.    The  said  land was  acquired  by  the  Govt.  of  MP  in  the  year  1979-80.    The Company  filed  two  separate  suits  before  the  District  Court  of Ujjain of which  one was decided in  favour  of  the  company. Ujjain Municipal  Corporation  has  filed  an  appeal  against  the  order  of the District Court which is still pending. The company’s other Suit against  the  said  acquisition  was  dismissed  by  the  District  Court of  Ujjain.  The  Company  has  filed  an  appeal  against  the  order  of the  District  Court  and  has  obtained  status  quo  order  from  the Madhya  Pradesh    High  Court,  Indore  bench,  which  is  pending for final  disposal.    This  property  was  written  off  in  the  books  of account  in  the  same  year  1979-80  since  no  compensation  was received  there  against.  The  Company  in  terms  of  Memorandum of Understanding (MOUs) executed on 23 October  2003 agreed  to  transfer  the  said  land  on  as  is  where  is  basis  to  Mahakal Infrastructure Pvt. Ltd  and Mahakal Projects P. Ltd. The parties to the  MOUs  have  further  agreed  by  way  of  execution  and acceptance of a binding irrevocable Power of Attorney that under no circumstances and on no account whatsoever will either party have  a  right  to  terminate  this  deal  which  effectively  concludes the sale transaction  between the  two parties.   In  view  of what is stated  above  and  since  the  Company  has  handed  over possession  of  the  land  it  has  accounted  for  the  income aggregating  to  Rs  22,800,00,000/-  of  which  Rs  22,500,000/-  has already been received.

More  than  30%  of  the  front  side  of  the  said  property  has been  encroached  by  the  State  Government  Ujjain  Municipal Corporation and a  Fire Brigade  Station  has also been established by the  State  Government on  the  said  land.   The  said  property is under litigation  since more than  35 years  and  the  company does not  have  a  clear  title  to  the  said  property  on  the  date  of execution  of  the  MOUs.    Therefore  it  cannot  convey  the  said property  in    favour  of  the  transferees  and  consequently  the MOUs  are  on  as  is  where  is  basis.  In  view  of  the    fact  that  the High  Court has issued a status quo on the said property, the  said property  cannot  be  adjudicated  nor  conveyed  and  accordingly section 50C is not applicable.

While explaining the transaction as a transaction leading to capital gains the Assessee relied on the following decisions.

1.  CIT Mumbai ciy-1 vs Tata Services Ltd 22 ITR 594(Mumbai)

2. A.R. Krishnamurthi vs CIT 176 ITR 417 (SC)

3. CIT vs Ashoka Marketing Ltd 164 ITR 664 (Cal)

Relying  on  these  decisions  the  Assessee  submitted  that  this property   was  originally  purchased from  Shri Nazar  Ali sometime in  the  year  1962  and  since  then  the  Assessee  has  acquired  this property  till  litigation  started  in  1976.  It  is  a  fact  that  this property  was  given  in  Nazar  Ali  by  the  Madhya  Pradesh  State Government  for  the  purpose  of  establishing  a  factory  and  it  is   also  a  fact  that  if  on  by  event    such  factory  could  not  be established the property shall revert back  to the government.   In view of non fulfillment  of  the conditions the  MP  Government had taken over the property in  the  year  1979  leading to the litigation  in  Civil  Court.    The  Assessee  has  disputed  the  acquisition  of  the said  land  and  the court  cases are  pending  before  the  High  Court of P in any event the Assessee claimed to be the possessor of the land  and  buildings  thereon  for  sometime  enjoying  the  property and  same  has  subsequently  been  transferred  to  Mahakal Infrastructure  P.  Ltd  and  Mahakal  Projects  Pvt.  Ltd.,  in  terms    of MOU  executed  on  23.10.2003.    Since  the  Assessee  has  handed over the possession of the  land and since the sale proceeds have been  received  by  the  Assessee  the  same  is  offered  for  taxation under  the  head  Capital  Gains.    In  view  of  the  provisions  of  sec 2(47) and provisions contemplated  under sec 53A of the Transfer of  property  Act.    The  Assessee  however    admitted  that  as  the said  properties  were  under  litigation  since  many  years  and  the Assessee  does  not  have  a  clear  title  to  the  said  property  on  the date  of  exclusion  of  MOUs  it  cannot  convey  the  said  property  in favour  of  transfers  and  consequently  the  MOU  as  is  where  is basis.  In  view  of  the  above  facts  the  Assessee  urged  that  it  has rightly  offered  the  amount  of  sale  proceeds  for  taxation  under the head capital gains.”

13.  The  Ld.  CIT(A)  rejected  the  contentions  of  the  assessee observing as under:

“I  have  gone  through    the  facts    of  the    case  and  also  the assessment  order.  I  have  also  perused  the  submission  made  by  the  appellant.  I  have  noted  that  during  the  year  under consideration  the  appellant  in  its  return  of  income  had  shown LTCG  on  sale  of  land  at  Ujjain  amounting  to  Rs  11,05,556/-  This land was claimed to have been  purchased by  the  appellant  from Shri  Nazar    Ali  sometime  in  the  year  1962.    This  land  was originally government land and the same was given to Shri Nazar Ali  by  the  government  of  MP  for  establishing  a  factory  with  the condition  that  if  for  any  reason  it  was  not  possible  to  run  a ginning  or  cloth  factory,  the  pr operty    shall  revert  back  to  the government.   As Shri  Nazar  Ali  failed to set  up  and  run  a  factory as aforesaid the land  was  taken over  by  the  Additional  Collector, Ujjain as the term of the grant of the said property were violated. From the facts  of the case and materials on record, I have noted that    the  property  comprises  of  two  plots  of  land  of  27  bighas and 14 bighas respectively.

The  plot  of  27  bighas  was  originally  given  to  Nazar  Ali  for running  the  factory.  The  other  plot  containing  14  bighas  have been  acquired  by  encroachment.  In  the  event  of  acquisition  of the  said  plots  by  the  State  Government  the  appellant  filed appeals  before  the  High  Court  of  MP  and  the  matter  is  still subjudice.  In  view  of  litigation  in  the  Court  of  law  and  in  view  of the facts brought on record both by the appellant and the AO it is to  be  decided  whether  the  appellant  has  the  absolute  right  or clear  title  of  the  land  in  question,  The  AO  while  examining  the facts  of  the case has given  his  finding  that  while  taking  over the possession  of  the  land  from  Shri  Nazar  Ali  by  the  appellant  the appellant  could  not  be  said  to  have  acquired  title  as  the  vendor i.e.  Shri  Nazar  Ali  did  not  have  absolute  ownership  of  the  land given  to  him  by  the  State  Government  of  MP.  The  AO  has  also examined  the  issue  leading  to  the  aforesaid  fact  as  to  whether the appellant   at all only  any  saleable right in  the  property.   The title of  Shri  Nazar  Ali on  this  plot of  land  was  not  absolute  as  he had  only a limited right in the said  property  which was subject to certain encumbrances   and therefore Nazar Ali would not be said to  have  any  absolute  ownership  under  the  general  law  or  even u/s 27(3) of the IT  Act.  Thus Shri Nazar Ali did  not have any right to  transfer  any  valid  title  even  executing  a  registered  deed.  As has  already  been  stated  the  land  in  dispute  contains  two  plots, one  plot  has  been  given  by  the  State  Government  to  Nazar  Ali and  another  plot  obtained  by  the  appellant  through encroachment, The AO found that in both the cases the appellant cannot  be  said  to  be  the  legal  owner  of  the  plots  as  there  is  no legal recognition to such possession of land.  From the findings of the  AO  and  facts  on  record  I  therefore  find  that  the  land  in question  though  in  possession  of  the  appellant  does  not  belong to  the  appellant  as  there  was  no clear  title.  In the case  of  CIT  vs Podar  Cement  P.  Ltd  226  ITR  625  (SC)  the  Hon’ble  Apex  Court had  held    that  one  of  the  most  important  rights  of  an  owner  is the  right  to  exclude  others.    The  property  right  is  essentially  a guarantee  of  the  exclusion  of  other  persons  from  the  use  or handling  of  the  thing.    To  acquire  possession  of  a  thing  it  is necessary to exercise such physical control over the thing as the thing is capable of  and to evince the intention to exclude others. It would thus be seen that  where the possession of  a property  is acquired with a right  to exercise such necessary control over the property  acquired  which  it  is  capable  of,  it  is  the  intention  to exclude others which evinces an element of ownership.

In  view  of  the  above  position  I  am  inclined  to  accept  the finding of the AO which has been broadly discussed hereinabove. I  also  agree  with  the  AO  that  the  facts  and  the  position  of  the  cases would reveal that  there is no asset in the possession of theappellant  as  of  date  and  there  is  no  factual  or  legal  transfer  of any  asset  as  claimed  by  the  appellant.  Significantly  in  this regard,  the  appellant  itself  admitted  that  the  property  in question  was  written  off  in  the  books  of  accounts  in  the  year 1979-80  thereby  confirming  the  non  existence  of  assets  in  the hands   of the appellant.  On this fact itself the appellant’s case is distinguishable  from the  cases  relied   on   by the  appellant. Even  coming  to the  argument  that  the amount  involved is in  any case a  capital  receipt  not  exigible  to  tax  is  also  not  tenable  because for  the  consideration  being  termed  as  a  capital  receipt  there must  be  either  a  tangible  or  intangible  asset  which  in  both  the cases  should    exist.    It  is  also  a  fact  that  the  IT  Act  does  not stipulate  anywhere  that  the  income  or  receipt  sought  to  be brought to tax should be legal or genuinely sourced.  The AO  has rightly stated that all what the Act envisages is that if the person earns  taxable  income  the  same  should  be  taxed  as  per  the charging  provisions    of  the  Act.    The  only  factual    position  as pointed  out  is  that  the  assessee  has  physically  received  Rs 2,28,00,000/-  and  as  the  same  is  not  a  capital  receipt  against any    asset  belonging  to  the    appellant,  is  to  be  taxed  in  the hands  of  the  appellant.    Sec.  14  specifies  different  heads  of income  and  the  last  thereof  is  income  from  other  sources  which is  residuary  in  nature.    Since  the  appellant’s  receipt does  not  fit in any  other  heads the AO has rightly taxed  the  same under the  head  “Income  from  other  sources”.    Accordingly,  addition  and taxation  of  Rs  2,28,00,000/-  made  by  the  AO  is  upheld.    This ground is dismissed.”

14.  Aggrieved  the  assessee  is  on  appeal  before  us  and  raised  the following grounds:

“1.  On  the  facts  and  in  the  circumstances  of  the  case  and  in law,  the  CIT(A)  erred  in  upholding  the  action  of  the  ITO  in taking  an  amount  of  Rs.   2,28,00,000/-  received  by  the appellant on sale of property at Ujjain.

2.  The Ld. CIT(A) erred in holding that there is no transfer of a capital asset in the case of the appellant.

3  The  Ld.  CIT(A)  erred  in  holding  that  there  is  no  part performance  of  the  contract  u/s.  53A  of  the  Transfer  of Property Act, 1882.

4. The  Ld.  CIT(A)   erred  in  observing  that  the  land  in  question though  in possession of the  appellant does not belong  to the appellant  as  there  was  no  clear  title  and  that  there  is  no asset in  the possession of the appellant as of date  and  there is no  factual  or  legal  transfer  of  any  asset  as  claimed  by the appellant.

5. The  Ld.  CIT(A)  erred  in  holding  that  since  the  appellant’s receipt  does  not  fall  under  a  specific  head,  it  has  to essentially  be  brought  to  tax  under  the  residuary  head ‘Income from Other sources’.

6. The  Ld.  CIT(A)  erred  in  rejecting  the  alternative  contention that  the  receipt  was  not  of  income  nature  and  was  a  capital receipt on  the  ground that there must be either a  tangible or intangible  asset  for  a  receipt  to  be  termed  as  a  capital receipt.

7. On the facts and in the circumstances of the case and  in law, the  CIT(A)  erred  in  upholding  the  action  of  the  ITO  in disallowing an amount of Rs.  10,46,836/- u/s. 14A.

8. Without prejudice to the  above  grounds of  appeal, and in the alternative,  the  CIT(A)  erred  in  not  giving  any  findings  in respect of following grounds of appeal. Without prejudice to the  above  grounds of  appeal, and in the alternative,  the  appellant  prays  that  if  at  all  any  expenses are attributable to earning dividend income, then.

(a) Mumbai  office  expenses  attributable  towards  the ginning  and  pressing  activities  ought  not  to  be attributed towards earning dividend income.

(b) Out  of  the  Mumbai  office  expenses  of  Rs.   38,11,820/- expenses aggregating to Rs.  1,10,561/- as shown in para 1.5  of  the Statement of  facts which  have already  been disallowed  while  computing the business  income ought not  to  be  considered  for  apportionment  towards dividend income.

9. On the facts and in the circumstances of the case and  in law, the  CIT(A)  erred  in  upholding  the  action  of  the  ITO  in disallowing  an amount of  Rs.  9,045/-  in  respect of  Employees’ contribution to Provident Fund u/s. 2(24)(x) r.w.s. 36(1)(va).”

15.   The  assessee  had  purchased  the  land  in  1962  from  Seth  Nazar Ali.  This  land  was  lease  hold  land  given  to  Seth  Nazar  Ali  by government  of  Madhya  Pradesh  for  establishing  a  factory.    As  he  did not  establish  a  factory  the  property  was  taken  over  by  Additional Collector,  Ujjain  and  no  compensation  was  paid  to  the  assessee.    The property  comprised  of  2  plots  of  land  of  27  Bighas  and  14  Bighas respectively.  The plot of land of 27 Bighas was acquired on the ground that  the  assessee not put to  use as stipulated  by  the  Government.  The other  plot  of  14  Bighas  was  acquired  on  the  ground  that  the  assessee was  merely a  trespasser. The assessee had disputed  the  acquisition of said  land and the same was pending in the Civil Court.   The Civil Court in  the  suit  for  14  Bighas  had  decided  the  issue  in  favour  of  the assessee  and  the  other  suit  in  respect  of  27  Bighas  has been decided against the assessee.   Both government and the assessee preferred an appeal  before  the  High  Court  of  Madhya  Pradesh.    The  Court  has passed  an  interim  order  directing  the  parties  to  maintain  status  quo and even till date it would appear that the two suits are pending before the  High  Court.    In  the  meanwhile,  the  assessee  had  entered  into  an agreement  assigning his  rights  to third party for  a consideration of  Rs. 2,28,00,000/-.  The  issue  is  whether  the  amount  received  by  the Assessee constitutes capital receipt.

16.  We  find  that  a  similar  issue  had  come  up  before  the co-ordinate Bench  in  ITA No. 905/M/86  for  A.Y.  1981-82  vide  order  dt.  28.12.1993. In  that  case,  when  the  property  was  acquired  by  the  Additional Collector,  Ujjain,  the  assessee  had  claimed  capital  loss.    In  this connection the Tribunal held as under:

“We have heard the rival submissions in the light of material placed before us and precedents relied upon. The assessee purchased the property from the heirs of late Seth Nazarali in terms of a registered conveyance executed on 10^th Sept., 1962. The property comprised of two plots of land of 27 bighas and 14 bighas respectively and the building is constructed thereon.

The plot admeasuring 27 bighas was acquired by the M.P.Govt under the Land Revenue code vide the order of the Additional Collector dated 30th Jan., 1980. The acquisition was made as because originally the land was given by the Gwalior State to Seth Nazarali for running a cloth factory and there was a stipulation that in the eventuality the cloth factory being stopped, the land shall be reverted to the Government.

The land admeasuring 14 bighas and building thereon was acquired under the Land Revenue Code vide the order of the Thasildar (Nazul) dated 22nd March, 1980 on the ground that the company was a mere trespasser.

The possession of the land was taken over before 31st March, 1980 and no compensation was awarded to the assessee. The assessee preferred an appeal to the District Court against the order of the Additional Collector and filed a petition in the High Court against the order of the Thasildar. It made a prayer for re-acquiring the land and building or for grant of compensation.

While computing the total income, the assessee computed long term capital loss in respect of the aforesaid Ujjain property at Rs.5,42,098/-. Subsequently, vide letter dated 16th Jan, 1984 it substituted the fair market value of the said property as on 1st Jan1964 for the original cost and the capital loss in respect of the aforesaid property was re-computed at Rs.15,60,000/- and after setting off the long term capital gain on sale of other assets amounting to Rs.2,04,156/- and an amount of Rs.13,55,844/- was carried forward under Sec.74(1)(ii) of the Act.

The Assessing Officer disallowed the long term capital loss in respect of the aforesaid property on the ground that the assessee did not accept the order of the District collector/Tahsildar in respect of the acquisition of the said property and has filed an appeal there against. The ld. C.I.T.(Appeals) disallowed the capital loss in respect of the aforesaid property on the ground that title of late Seth Nazarali was not absolute and he could not confer a valid title even by executing a registered deed. Further, it has been stated by the Ld. CIT (A) that the question of computing capital gain or capital loss would depend on the outcome of the legal proceedings, pending before the Court.

In the case of Dollar Company (supra), the Hon’ble Madras High court has held that the right to compensation arose in the year in which the transaction of acquisition took place and what happened subsequently is only a quantification thereof. In the case of Topandas Kundanmal (supra) the Hon’ble Gujarat High court has held that if the nature of the receipt of the compensation amount is found to be in the nature of capital gains, the right to such income would accrue in the year in which the transfer is effected as laid down in Sec.45 of the Act. In the case of Ismallia Co-operative Housing Society Ltd. (supra), the Hon’ble Bombay High court has held that having regard to the consent terms, it must be held that the assessee had a right or interest in the plot of land. That right or interest ceased when the said plot was acquired in 1954 long before the commencement of the previous year relevant to the assessment year 1971- 72. The assessee obtained the right to get compensation and the amount of the compensation was determined when the consent decree was entered into in 1970. The transfer of the capital asset took place long before the previous year in question. Hence, the compensation amount was not liable to capital gains tax for the assessment year 1971-72.

We have noticed that in the cases cited by Shri Dastur, government acquired the property for public purpose and the question was in relation to the exact year of the accrual of income but the facts of the present case are different. The very title of the assessee is in dispute. In relation to plot admeasuring 27 bighas, the land was acquired on the ground that the property in question was granted to Seth Nazarali with specific condition that the property will be used for running of ginning or cloth mill and in the eventuality of violation of conditions laid down in the lease deed, the property shall be reverted to the government. Regarding plot of land admeasuring 14 bighas the property was acquired as the assessee was treated as a mere trespasser.

On these premises, the question arises whether the assessee had any right in such land and whether the extinguishment of such rights give rise to capital loss. We are reminded the famous dictum of law; ‘nemo debet qua non habet’. The idea inculcated in the dictum is nobody can confer better right than he himself has. We find that the land was granted on lease with a specific condition. The ownership of Seth Nazarali was not absolute. It was subject to certain encumbrances. Ownership is a right over a determinate thing, indefinite in point of user, unrestricted in point of disposition and unlimited in point of duration. The right of Seth Nazarali was restricted in point of disposition. The grant was for a specific purpose. It is abundantly clear from the records that the government found that purpose for which the grant was made got frustrated. Consequently, the land was acquired. Similarly, in regard to 14 bighas, the assessee was found to be a trespasser. The law does not recognize the rights of a trespasser. Ordinarily, it is said that the possession is the nine point of ownership. The possessor has got right over the property and his right cannot be challenged by any one except the true owner. Undoubtedly, for some time, the assessee was the possessor of the land and building. But from the facts culled out from the records, it cannot be concluded that the possessory rights of the assessee bear any legal recognition. Unless such rights are protected by law to associate the word ‘right’ with the said type of possession will be a misnomer, since right is a legally protected interest.

Coming to the context of ‘right’, we find that it is laid down in a well known dictum; ‘vbi jus ibi remedium’. This means wherever there is right, there is remedy and by resorting to the court of appropriate jurisdiction grievance can be redressed. A trespasser has got no remedy before any court of law.

Sec.45 of the Act provides for the computation of capital gains, it uses the word “transfer” of a capital asset in order to result in capital gains. Further, in Sec.2(47), it has defined “transfer”, in relation to a capital asset, to include “the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law”. Firstly, it has specifically included “extinguishment of any rights” or “compulsory acquisition” of the asset within the definition of transfer for the purposes of Sec.45 to 55; and secondly, it has made the definition an “inclusive” definition. This definition gives an artificially extended meaning to the term by including within its scope and ambit two kinds of transactions which would not ordinarily constitute “transfer” in the accepted connotation of that word, namely, relinquishment of the capital asset and extinguishment of any right in it. The net is thus cast very wide and not only any profits or gains arising from every act by which property may pass from one person to another but also that arising specially from the sale, exchange or relinquishment of a capital asset or the extinguishment of any rights therein or the compulsory acquisition thereof was subjected to tax under Sec.45. The capital gains tax is attracted u/s.45 by “transfer” and nor merely by extinguishment of rights however brought about. Whatever the mode by which the transfer was brought about, the existence of the asset during the process of transfer is, sine……. Unless the asset existed, in fact, there could not be a transfer of it. The extinguishment of a right or count of its or their transfer in order to attract the provisions of Section 45.

When we examine the facts from this angle, we find it difficult to say that any transfer as alleged took place giving rise to capital gain or capital loss. We, however, do not express any opinion on this aspect, since the matter is subjudice. In our opinion, the approach of the Ld. CIT(A) was most pragmatic. The question of computing capital gain or capital loss would depend on the outcome of the legal proceedings. In view of this, we are unable to accept the prayer made by Shri Dastur. We uphold the order of the Ld. CIT (Appeals).

In the result, appeal of the assessee stands dismissed”

Respectfully  following  the  decision  of  the  co  ordinate  Bench  on the same issue, it  is  not  possible for us to  decide on the  issue  whether the  assessee  has  assigned  any  interest  in  immovable  property, because we are not certain  whether he has  any right in the immovable property. Further if there is a capital loss arising from acquisition of the property  by  the  Government  in  an  earlier  year,  there  cannot  be  a capital  gains  on  transfer  of  the  same  property  in  a  subsequent  year. The  character  of  the  compensation  received  can  be  determined  only when the assessee’s rights in the immovable property are determined.

17.  In the circumstances, respectfully following the decision of the co  ordinate  Bench,  we  set  aside  the  issue  to  the  files  of  the  AO,  to  redo the  assessment  afresh,  on  the  basis  of  the  outcome  of  the  litigation regarding  the  ownership  of  the  property.  This  ground  raised  by  the assessee is all owed for statistical purposes.

18.  Ground  No.  2  raised  in  this appeal  is  against  the  confirmation of disallowance u/s. 14A  at Rs.  10,46,836/-.

19,  The facts are that the assessee had not incurred any expenditure for  earning exempt income.   In the return  of income,  the  assessee  had not  disallowed  any  expenditure  u/s.  14A.    During  the  course  of assessment  proceedings,  the  assessee  was  asked  to  furnish  details  of expenses  incurred  for  earning  exempt  income  and  why  the  same should not be disallowed u/s. 14A.

20.  The  assessee  vide  letter  dt.  13.10.2006  gave  detailed submissions  explaining  that  no  expenses  were  incurred  to  earn  the dividend  income  and  no  notional  expenses  ought  to  be  attributed  to earning  dividend  income.    The  assessee  also  submitted  a  statement showing  breakup  of  expenses  for  the  Mumbai  office  and  the  Wardha factor.

21.  In  para  4  of  the  assessment  order  passed  u/s.  143(3),  the disallowance  under  Sec.  14A  has  been  computed  at  Rs.   10.46,836/- being  proportionate  expenditure  on  earning  dividend  income, estimated as follows:

Expenses of Mumbai Office	Dividend income
	Total income
38,11,820	1,27,91,876
	4,65,78,773
=	Rs.  10,46,836/-

22. Further in the assessment order, out of the Mumbai office expenses of `. 38,11,820/-, the following amounts have already been disallowed while computing the business income.

	Particulars	Amount .
(a)	Investment written off	5,186
(b)	Loss on sale of UnIts	538
(c)	Disallowance u/s. 43B Leave encashment	1,01,229
	Municipal tax	3,608
		1,10,561

 

The  above  addition  of  Rs.   10,46,836  has  also  been  made  while computing book profit u/s. 115JB.

23.  The Ld. CIT(A) held as follows:

“I  have  gone  through  the  facts  of  the  case,  submission made and also the assessment  order.   It  is  a fact  that in  the A.Y. 2001-02,  in  appellant’s  case  the  Tribunal  has  deleted  the additions  made  by  the  AO  u/s.  14A  of  the  I.T.  Act.    However,  I cannot agree with the appellant that the facts and circumstances and  the  method  of  addition  is  the  same    this  year  also.    In  the .A.Y.  2001-02,  the  AO  made  an  adhoc disallowance  of  5%  of  the total  expenditures.    However,  in  this  year  the  AO  has  given  a finding that the appellant derived  income from different sources, but common books of accounts are maintained and therefore the expenses have to be  apportioned between the different heads of income.  This principle has been upheld by the S.C. in the case of Waterfall  Estates  Ltd.  (219  ITR  563).    While  proceeding  to disallow  part of the  e4xpenditure  u/s. 14A of  the  I.T.  Act,  the AO has  also  relied  on  the  decision  reported  in  89  ITD  14  (Cal)  and also  in  the  case  of  Southern  Petrochemical  Industries  (3  SOT 157)  Chennai.    As  the  AO  has  given  a  finding  that  the  appellant has derived income from different sources, but common books of accounts  are  maintained  thereof,  not  furnishing  details  of  such expenditure  pertaining  to  tax  free  dividend  income.    I  find  this year AO is justified in disallowing an amount of Rs.  10,46,836/- u/s. 14A on a proportionate  basis.  This ground is dismissed.”

24.  Aggrieved, assessee is in appeal before us.

25.  We  have  heard  the  rival  submissions  and  perused  the  relevant material  on  record.    It  is  noted  that  the  question  of  making res integra disallowance u/s. 14A is no  more in view of the judgment  of the  Hon’ble  Bombay  High  Court  in  Godrej  &  Boyce  Ltd.  Mfg.  Co.  Vs DCIT (2010)  238  ITR  81 (Bom)  holding that  the  provisions  of  Sec. 14A are  applicable  in  circumstances  as  are  prevailing  presently  and  the disallowance  has  to  be  worked  out  by  the  AO  on  some  ‘reasonable basis’  and  not  Rule  8D.    Under  such  circumstances,  we  set  aside  the impugned  order  and  restore  the  matter  to  the  file  of  the  AO  for deciding  the  quantum  of  disallowance,  as  per  the  afore-noted judgment,  after  allowing  a  reasonable  opportunity  of  being  heard  to the assessee.

26.  Ground  No.  3  raised  in this  appeal  is against  the  disallowance of Rs.  9,045/-  being  employees’  contribution  to  Provident  Fund  u/s. 2(24)(x) r.w.s. 36(1)(va).

27.  Before the  Ld. CIT(A) the assessee submitted that  the  AO  did not appreciate  the  fact  that  as  mentioned  in  Annexure  3  of  the  Tax  Audit report  the    amount  of  Rs.   9,045/-  had  been  tendered  by  the  assessee and  cleared by the bank on 13.1.2004  i.e. well before the due date but was  returned  by  the  bank  on  21.1.2004  because  of  a  totaling  error pursuant to which the assessee  paid the amount  on 24.1.2004 within 3 days and accordingly the said amount should not have been disallowed by  the  AO.  The  assessee  also  stated  in  the  alternative  that  the  said amount  ought  to  have  been  allowed  as  a  deduction  since  it  has  been paid during the relevant previous year.

28.  The Ld. CIT(A) held as follows:

“I have gone  through  the facts  of the case  and  submission made  and  I  have  noted that  there was  a  delay of  depositing the P.F.  contribution  by  the  appellant.    The  provision  of  Sec. 36(1)(va)  r.w.s.  2(24)(x) is very specific and if  any assessee  fails to deposit employee’s  contribution  to P.F.  within the due date,no deduction is allowable.   In view of the above provision,  I find the AO  is  justified  in  disallowing  Rs.   9,045/-  u/s.  36(1)(va)  r.w.s. 2(24)(x) of the I.T. Act.  This ground is dismissed.”

29.  The  Supreme  Court  in  the  case  of  CIT  Vs  Alom  Extrusions  Ltd (319  ITR  306)  and  the  decision  of  the  Delhi  High  Court  in  the  case  of CIT  v  AIMIL  Ltd (229  CTR  418)  wherein it  has been  held  that  payment of  employees’  contribution  made  before  the  due  date  for  filing  of  the return  cannot  be  disallowed  u/s  43B.  Therefore,  we  remit  the  issue  to the file  of  the  AO  to  decide  in  the  light  of  the  Supreme  Court  decision (supra).

28.  In  the  result,  the  appeal  filed  by  the  assessee  is  allowed  for statistical purposes.

Order pronounced  on this 20 day of May, 2011